Practice Questions for Experiment 7
1. A monopolist is currently selling 90 units of output at a price of $20 per
unit. It could sell one additional unit of output if it reduced its price to
$19.95 per unit. What would be the marginal revenue generated by this
additional unit of output?
a) $19.95
b) $15.45
c) $10
d) $20
e) $4.50
2. The Paramount movie theatre has a seating capacity of 270. On any given
night, there are 180 people who would potentially attend a movie at the
Paramount. There are 80 people who are willing to pay up to $15 to attend a
movie at the Paramount, and there are an additional 100 people who are willing
to pay up to $5 to attend a movie at the Paramount. The total cost (including
movie rental, labor, and rent on the theatre) to the theatre owners of showing a
movie at the Paramount is $800 per night. This cost is the same no matter how
many people watch the movie. If they must charge the same price to all buyers,
what price should the owners of the Paramount charge for movie tickets in order
to maximize their profits?
a) $15
b) $5
c) $4.44
d) $10
e) $8.89
THE NEXT FIVE QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: A monopolist
faces a demand curve described by the equation P=505-15Q, where P is the price
that the monopolist charges for each unit of output and Q is the number of units
of output that the monopolist can sell at that price. The monopolist's total
costs are 25Q and its marginal cost is 25.
3. Which of the following equations describes the monopolist's profits as a
function of the amount of output that he sells? (In these equations, the symbol
QQ represents Q times Q; in other words, Q squared, or Q raised to the second
power.)
a) 505-15Q-25
b) 505-30Q
c) 480Q-15QQ
d) 505Q-15QQ-15
e) None of the above.
(Hint: Profits equal revenues minus total costs.)
4. Which of the following equations describes the monopolist's marginal revenue
(MR) curve?
a) MR=505-15Q
b) MR=505-25Q
c) MR=520+25Q
d) MR=505-30Q
e) MR=530-40Q
5. On a graph where the vertical axis represents dollars and the horizontal
axis represents units of output, the monopolist’s marginal cost curve is:
a) an upward-sloping line through the origin with slope 25.
b) a horizontal line at a height of $25.
c) a vertical line at a quantity of 21.
d) an upward-sloping line through the origin with slope 50.
e) a vertical line at quantity 16.
6. In order to maximize his profits, how many units of output should the
monopolist sell?
a) 32
b) 16
c) 166.67
d) 83.33
e) 40
(Hint: For what quantity does marginal revenue equal marginal cost?)
7. What is the deadweight loss associated with the monopolist’s profit-
maximizing output level?
a)$880
b)$1050
c)$1920
d)$2500
e)$3625
THE NEXT THREE QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: Suppose that
there is a monopoly supplier of massages who can produce massages at a constant
marginal cost of $3 per massage. Also suppose that this monopolist is able to
perfectly price discriminate. The massage market has 8 consumers, each of whom
will buy at most one massage. The distribution of buyer values (or buyer
reservation prices) is as follows:
Buyer Value Number of Buyers
$2 4
$4 1
$6 3
8. How many massages will the monopolist supply to maximize his profits?
a) 2
b) 3
c) 4
d) 5
e) 8
9. What will be the monopolist’s profit?
a) $9
b) $10
c) $18
d) $22
e) $30
10. What is the deadweight loss associated with this monopoly?
a) $0
b) $1
c) $2
d) $3
e) $4
11. At his current level of production, a monopolist’s revenues will rise by
$25 if he sells one less unit of output. This implies that the monopolist:
a) can increase his profits by increasing output.
b) can increase his profits by decreasing output.
c) is on the elastic portion of his demand curve.
d) should exit the industry.
e) none of the above.
THE NEXT THREE QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: Bill Barriers,
the president of MightySoft, is trying to decide how to price a new piece of
software called DoorKnobs. MightySoft spent $100,000 to develop this software
and is the only firm that can sell it. The marginal cost of producing and
distributing a copy of DoorKnobs is $10 per customer. Each demander will buy at
most one copy of DoorKnobs. There are three types of demanders in this market.
Type A demanders are willing to pay up to $210 for a copy of DoorKnobs, Type B
demanders are willing to pay up to $110 for a copy of DoorKnobs, and Type C
demanders are willing to pay up to $60 for a copy of DoorKnobs. In this market,
there are 1,500 Type A demanders, 500 Type B demanders, and 1,000 Type C
demanders.
12. If MightySoft must charge the same price to all buyers, what price will
maximize its profits?
a) $200
b) $210
c) $110
d) $100
e) $60
13. At this price, how much profit will MightySoft make from DoorKnobs?
a) $300,000
b) $200,000
c) $150,000
d) $100,000
e) $50,000
14. Now suppose that MightySoft’s market research team discovers that all Type
B and Type C demanders own copies of a competing software product, and none of
the Type A demanders own this competing product. MightySoft can reliably
determine who owns a copy of the competing product, but this is the only
information it has regarding the type of each demander. Therefore, MightySoft
can charge different prices for DoorKnobs to those who do and do not own copies
of the competing product. In addition, MightySoft is able to prevent resale of
DoorKnobs from one seller to another. Under these circumstances, what should
MightySoft do to maximize its profits?
a) Set a price of $210 for DoorKnobs, but offer a $50 discount to anyone who
owns a copy of the competing product.
b) Set a price of $210 for DoorKnobs, but offer a $150 discount to anyone who
owns a copy of the competing product.
c) Set a price of $160 for DoorKnobs and offer no discounts.
d) Set a price of $210 for DoorKnobs and offer no discounts.
e) Set a price of $160 for DoorKnobs, but offer a $100 discount to anyone who
owns a copy of the competing product.
15. Suppose that the elasticity of demand for coffee is -3 in Seattle and -6 in
Los Angeles, and that the marginal cost of a pound of coffee is constant at $2.
In this situation, a price-discriminating monopolist should:
a) charge a price for coffee that is 25% higher in Los Angeles than in Seattle.
b) charge a price for coffee that is 25% higher in Seattle than in Los Angeles.
c) charge a price for coffee that is 50% higher in Los Angeles than in Seattle.
d) charge a price for coffee that is 50% higher in Seattle than in Los Angeles.
e) charge the same price for coffee in both cities.
Correct Answers:
1. b
2. a
3. c
4. d
5. b
6. b
7. c
8. c
9. b
10. a
11. b
12. b
13. b
14. b
15. b