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Izmir University of Economics

Department of Economics
Econ 101 - Principles of Microeconomics

PROBLEM SET 9

PART 1 - MULTIPLE CHOICE

1 - ) Which of the following is the precise term given to an industry in which single firms
have some control over the price of their output?
a. An imperfectly competitive industry
b. A pure monopoly
c. A perfectly competitive industry
d. Government franchises

2 - ) Which of the following is considered a barrier to entry?


a. Government franchises
b. Ownership of a scarce factor of production
c. Economies of scale and other cost advantages
d. Patents
e. All of the above

3 - ) A monopoly is an industry with


a. many firms each too small to impact the market price of its output.
b. a small number of firms each large enough to impact the market price of its output..
c. many firms each able to differentiate their product.
d. a single firm in which the entry of new firms is blocked.

4 - ) Market power refers to a firm’s ability to


a. raise price without losing all demand for its product.
b. charge any price it likes.
c. sell any amount of output it desires at the market-determined price.
d. monopolize a market completely.

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Izmir University of Economics
Department of Economics
Econ 101 - Principles of Microeconomics

5 - ) Refer to the graph below. Which of the following statements is true? In this graph,

a. a monopoly and a competitive firm both would produce 4,000 units, but the monopoly
would charge a higher price of $4.
b. a monopoly would produce 2,500 units and charge $4, while a competitive industry
would produce the 4,000 units and charge $3.
c. a monopoly and a competitive industry would produce the same amount, 2,500 units,
but only the monopoly would charge a higher price of $4.
d. a monopoly would produce less output but also charge a lower price than the
competitive firm would.

6- ) If this monopolist is producing the profit-maximizing quantity and selling it at the profit-
maximizing price, the firm's profit will be

a. $80.
b. $84.
c. $88.
d. $132.

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Izmir University of Economics
Department of Economics
Econ 101 - Principles of Microeconomics

7 - ) Relative to a competitively organized industry, a monopoly produces ______ output,


charges _________ prices, and earns __________.
a. more; higher; economic profits
b. less; lower; economic profits
c. less; lower; only a normal profit
d. less; higher; economic profits

Figure 13.9

8 - ) Refer to Figure 13.9. The amount of consumer surplus under monopoly equals area
a. AFE.
b. GAB.
c. BEC.
d. AFC.

9 - ) Refer to Figure 13.9. If Ohio Edison is forced to produce the efficient level of electricity
a. the net social gain equals area BEC.
b. the monopolist loses profits equal to FABE.
c. consumers gain consumer surplus of AFC.
d. All of the above

10 - ) Which of the following are examples of Pareto-efficient changes?


a. Cindy trades her laptop computer to Bob for his old car.
b. Competition is introduced into the electric industry and electricity rates drop. A study
shows that benefits to consumers are larger than the lost monopoly profit.

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Izmir University of Economics
Department of Economics
Econ 101 - Principles of Microeconomics

c. A high tax on wool sweaters deters buyers. The tax is repealed.


d. A federal government agency is reformed, and costs are cut 23 percent with no loss
service quality.

11 - ) Each instance that follows is an example of one of the four types of market failure. In
each case, identify the type of market failure and defend your choice briefly.
a. An auto repair shop convinces you that you need a $2,000 valve job when all you
really need is an oil change.
b. Everyone in a neighborhood would benefit if an empty lot were turned into a city park,
but no entrepreneur will come forward to finance the transformation.
c. A bar opens next to your apartment building and plays loud music on its patio every
night until 4:00 AM.
d. The only two airlines flying direct between St. Louis and Atlanta make an agreement
to raise their prices.

PART II – ESSAY QUESTION

1- ) The following diagram shows the cost structure of a monopoly as well as a market
demand.

a. What is the profit maximizing output level and price? What is total revenue of this
monopoly? Decide and show whether this monopoly makes profit or loss?

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Izmir University of Economics
Department of Economics
Econ 101 - Principles of Microeconomics

b. What would be the profit maximizing output level and price if this industry were perfectly
competitive?

c. What is the difference between monopoly and perfect competition regarding price and
quantity? Which market is better for consumer and why?

2 - ) Explain price discrimination and perfect price discrimination.