Mic Tut 8

The fundamental cause of monopoly is

• incompetent management in competitive firms.

• the zero-profit feature of long-run equilibrium in competitive markets.

• advertising.

• barriers to entry.

If a monopoly lowers its price, its

• total revenue must increase.

• total revenue must decrease.

• marginal revenue must increase.

• marginal revenue must decrease.

Deadweight loss

• measures monopoly inefficiency.

• exceeds monopoly profits.

• equals monopoly profits.

• equals monopoly revenues minus profits.

To maximize total surplus with a monopoly firm, a benevolent social planner would

• choose the level of output where MR = MC.

• choose the level of output where MR intersects the demand curve.

• choose the level of output where MC intersects the demand curve.

• allow the free market system to determine the level of output.

"Monopolists do not worry about efficient production and minimizing costs since they can just pass along any increase in costs to their consumers." This statement is

• false; price increases will mean fewer sales, which may lower profits.

• true; this is the primary reason why economists believe that monopolies result in economic inefficiency.

• false; the monopolist is a price taker.

• true; consumers in a monopoly market have no substitutes to turn to when the monopolist raises prices.

One problem with government operation of monopolies is that

• a benevolent government is likely to be interested in generating profits for political gain.

• monopolies typically have rising average costs.

• the government typically has little incentive to reduce costs.

• a government-regulated outcome will increase the profitability of the monopoly.

One problem with regulating a monopolist on the basis of cost is that

• by focusing on costs, the regulators ignore profits.

• it does not provide an incentive for the monopolist to reduce its cost.

• a monopolist's costs, by definition, are higher than costs of perfectly competitive firms.

• a monopolist is still able to generate excessive economic profits.

Most firms have

• no monopoly pricing power.

• some monopoly pricing power.

• absolute monopoly pricing power.

• the ability to earn monopoly profits.

Mega Media Cable TV is able to purchase an exclusive right to sell a premium sports channel in its

market area. Let's assume that Mega Media pays $100,000 a year for the exclusive marketing rights to the

sports channel. Since Mega Media has already installed cable to all of the homes in its market area, the

marginal cost of delivering the sports channel to subscribers is zero. The manager of Mega Media needs

to know what price to charge for the sports channel service to maximize her profit. Before setting price,

she hires an economist to estimate demand for the sports channel. The economist discovers that there are

two types of subscribers who value premium sporting channels. First are the 3,000 die-hard sports fans

who will pay as much as $150 a year for the new channel. Second, the premium sports channel will

appeal to about 20,000 occasional sports viewers who will pay as much as $25 a year for a subscription to

it.
If Black Box Cable TV is able to price discriminate, what would be the maximum amount of profit it could generate?

• $950,000

• $850,000

• $400,000

• $350,000

Perfect price discrimination describes a situation in which the monopolist

• knows the exact willingness to pay of each of its customers.

• charges exactly two different prices to exactly two different groups of customers.

• maximizes consumer surplus.

• experiences a zero economic profit.