Exercise session 6

1.      Suppose that Veronika is the only producer of the Trdelnik in Brno. The (inverse) demand
function for the Trdelnik is given by P(Q)=55-2*Q. Veronika’s cost function is TC(Q) = 100 –
5*Q+Q^2.

a.      Determine the marginal revenue as a function of Q.

b.      If Veronika maximizes her profit, what price does she charge? How much profit she gets?

c.       Calculate the consumer surplus.

d.      If instead Veronika decides to maximize total social surplus, what price does she charge?
Calculate the profit at this price.

e.      Calculate the deadweight loss if profit is maximized.


2.      Suppose that the distributor charges Cinema City 40 CZK per ticket sold to rent the movie
“Johnny English Strikes Again”. Suppose that the cinema can seat a maximum of 200 people. Suppose
that the demand to see the movie is given by P(Q)=100-Q in the afternoon and P(Q)=200-Q in the
evening.

a.      calculate the profit maximizing price in the evening and the afternoon, and the number of
people who attend each screening.

b.      what is the amount of revenue paid to the movie distributor? Calculate the profit of the
cinema.

c.       suppose that the distributor instead asks the cinema owner for a flat fee of 10 000 CZK to
show the movie (no charge per ticket). Determine whether or not the cinema owner would prefer this
arrangement.

d.      what is the efficient price for admission in the afternoon and the evening?

3. A monopoly firm can sell 150 units of output for $10 per unit. Alternatively, it can sell 151
units of output for $9.90 per unit. The marginal revenue of the 151st unit of output is

a. -$5.10.

b. -$0.10.

c. $2.45.

d. $5.90.


4.      Why might economists prefer private ownership of monopolies over public ownership of
monopolies? Explain.

5.      For each question, state clearly whether you find the statement to be true, false, or
uncertain. Then provide a clear explanation.

(a)     Hockey is a public good.

(b)   The free-rider problem tends to get worse as the number of beneficiaries from a public good
rises.

(c)    Because drivers of cars have their own life on the line, they will exert the efficient level
of care when driving.

(d)   Assuming you and I benefit from a public good, your marginal benefit for the last unit
consumed must equal my marginal benefit from the last unit consumed, for efficiency to hold.


6.      A monopoly operated in a market with (inverse) demand 𝑃(𝑄)=20−𝑄. The marginal cost is 10.

(a)    Find the monopoly’s optimal output and price

(b)   Compute the deadweight loss (DWL) due to the monopoly.


           7.   If a non-discriminating monopolist decides to lower its price to sell one more unit
of its product, then

a.

  total revenue rises by an amount equal to the price

b.

  some revenue is lost to the extent that units previously sold at a higher price now sell for a
  lower price; however, the additional unit sold brings in new revenue

c.

  marginal revenue increases when total revenue increases

d.

  the net effect on total revenue is typically zero since the price must fall

e.

  the net effect on total revenue is typically negative since the price must fall


8. Suppose that a non-discriminating monopolist lowers its price from $75 to $70 in order to sell
more output. Marginal revenue will

a.

  equal $75

b.

  equal $70

c.

  be between $75 and $70

d.

  be less than $70

e.

  be greater than $75

9. What is the total profit (or loss) for the (single-price) monopolist shown in Figure?

a.

profit of cbgf

b.

loss of fcbg

c.

profit of egbd

d.

loss of edcf

e.

profit of edcf



10.  The Figure shows a single-price monopolist. The maximum level of profit that could be achieved
is:



                                               Price


                                             Quantity

                                               Total

                                               Cost

                                               $100

                                                 1

                                               $150

                                                $90

                                                 2

                                               $180

                                                $80

                                                 3

                                               $220

                                                $70

                                                 4

                                               $300

                                                $60

                                                 5

                                               $400

                                                $50

                                                 6

                                               $550



a.

  -$20

b.

  $20

c.

  $300

d.

  $280

e.

  $40


11. Suppose that for a monopolist, MR = MC = $10 and P = $15 at the profit-maximizing level of
output. At this level of output, the firm

a.

  is earning a profit

b.

  will shut down if AVC > $15

c.

  is making $5 profit on each unit sold

d.

  will shut down if ATC > $15

e.

  is losing $5 per unit produced


12. If a firm earns zero economic profit in the long run, then it

a.

  must be in a perfectly competitive market

b.

  must be in a monopolistically competitive market

c.

  cannot be in a monopolistically competitive market

d.

  could be in any of the four major market structures

e.

  is not in an oligopoly


13. If a monopolistically competitive firm engages in a successful advertising campaign resulting
in above positive economic profits then in the long run that firm will

a.

continue to earn positive economic profits because successful advertising is one of the barriers to
entry

b.

earn zero economic profits because the government will begin to regulate the industry



c.

earn negative economic profits because it won’t be able to advertise indefinitely

d.

earn zero economic profits because other firms will also begin to advertise

e.

continue to earn positive economic profits because most monopolistically competitive firms can earn
economic profits in the long run