Managerial Economics – Tutorial – Monopoly & Monopsony

Hint: Tutorial questions are comprehensive. However, the respective lecturers should utilize
the questions based on the depth of the knowledge acquisition by students.
Essay Analytical Questions (Advance Questions)

1. In a recent court case, an expert witness defined a monopoly as a firm that can "raise price
without reducing its total revenue." What does this imply about the elasticity of demand? Would
this definition hold for a profit-maximizing monopoly? Explain

2. Consider a town with a single movie theater, and that movie theater faces a downward sloping
demand curve for its tickets. The movie theater has a fixed number of seats available for each show
but the marginal cost of filling a seat is zero. Why might it be in the movie theater's interest to not
to sell out every show even though the marginal cost of selling additional seats is virtually zero?
(A graph will help your answer).

3. A monopolist faces the (inverse) demand for its product: p = 50 - 2Q. The monopolist has a
marginal cost of 10/unit and a fixed cost given by F.
a. Assume that F is sufficiently small such that the monopolist produces a strictly positive level
of output. What is the profit-maximizing price and quantity?
b. Compute the maximum profit for the monopolist in terms of F.
c. For what values of F will the monopolists profit be negative?

4. West Coast Gas, Inc., is a natural gas supplier. The firm faces the demand schedule shown in
the table above and cannot price discriminate. The company's fixed cost is $1,000 per month and
its marginal cost is constant at $10 per thousand of cubic feet. The government imposes a marginal
cost pricing rule on the company.
a) What is the price of natural gas supplied by West Coast Gas? How many cubic feet does the
company sell? What is the firm's economic profit per month?
b) How does the regulation affect total surplus?
c) Is the regulation in the social interest? Explain.

5. West Coast Gas, Inc., is a natural gas supplier. The firm faces the demand schedule shown in
the table below and cannot price discriminate. The company's fixed cost is $1,000 per month and
its marginal cost is constant at $10 per thousand of cubic feet.
a) Draw the demand curve faced by West Coast Gas and the marginal revenue curve. Draw the
company's marginal cost and average cost curves.
b) Is West Coast Gas a natural monopoly? Why or why not?
c) What are the firm's profit-maximizing output and price? What is the firm's economic profit
per month?
d) If West Coast Gas maximizes its profit, does it also maximize total surplus? Why or why not?
What is the deadweight loss (if any)?

Price Quantity demanded

(dollars per thousand (thousands of cubic
cubic feet) feet per day)
10 80
30 60
50 40
70 20
90 0

6. Anastasia's Gold Mines, a single-price monopoly, faces the demand schedule shown in the first
table below and has the cost schedule shown in the second table above.
a) Calculate Anastasia's marginal revenue schedule. In a figure, draw the demand curve and the
marginal revenue curve.
b) Calculate Anastasia's marginal cost and average total cost schedules. In the same figure that
you drew the demand and marginal revenue curves, draw the marginal and the average total cost
curves.
c) What are Anastasia's profit-maximizing output and price? What is Anastasia's economic profit?
Explain your answer.
d) Does Anastasia's Gold Mines use resources efficiently? Explain your answer.

Price Quantity Quantity

(dollars per demanded produced Total cost
ounce) (ounces per day) (ounces per (dollars per day)
100 100 day)
200 80 9 6,000
300 60 20 7,200
400 40 40 8,800
500 20 60 10,800
600 0 80 13,200
100 16,000

7. Suppose a monopoly producer is also a monopsonist in the labor market. Demand for the output
is p = 100 - Q. The production function is Q = L, and the labor supply curve is
w = 10 + L. How much labor does the firm hire? What wage is paid?

8. The SSS Co. has a patent on a particular medication. The medication sells for $1 per daily dose
and marginal cost is estimated to be a constant at 20¢. Assuming linear demand and marginal cost
curves, use this information to estimate the deadweight loss from monopoly pricing if the firm
currently sells 1,000 doses per day. Can this loss be justified?
Multiple Choice Questions

1. At an output level of 100, a monopolist faces MC = 15 and MR = 17. At output level q = 101,
the monopolist faces MC = 16 and MR = 15. To maximize profits, the firm
A) should produce 100 units.
B) should produce 101 units.
C) The firm cannot maximize profits.
D) The firm is not a monopoly.
Answer: A

2. If the inverse demand function for a monopoly's product is p = a - bQ, then the firm's marginal
revenue function is
A) a.
B) a - (1/2)bQ.
C) a - bQ.
D) a - 2bQ.

3. The above figure shows the demand and cost curves facing a monopoly. The monopoly
maximizes profit by selling
A) 0 units.
B) 25 units.
C) 50 units.
D) 75 units.
4. The above figure shows the demand and cost curves facing a monopoly. The monopoly
maximizes profit by setting price equal to
A) $100.
B) $200.
C) $300.
D) $400.

5. The above figure shows the demand and cost curves facing a monopoly. Maximum profit
equals
A) $0.
B) $100.
C) $1,000.
D) $2,500.

6. The ability of a monopoly to charge a price that exceeds marginal cost depends on
A) the price elasticity of supply.
B) price elasticity of demand.
C) slope of the demand curve.
D) shape of the marginal cost curve.

7. If the demand for a firm's output is perfectly elastic, then the firm's Lerner Index equals
A) zero.
B) one.
C) infinity.
D) one-half.

8. If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then
the firm's Lerner Index equals
A) 58/16.
B) 16/42.
C) 58/42.
D) 42/58.

9. Which of the following would be most able to act like a monopsonist?

A) a hospital in a small isolated town
B) a hospital in a very big city
C) a law firm in Washington, D.C.
D) a computer software firm in Silicon Valley

10. Relative to a competitive labor market, monopsony

A) is also efficient.
B) creates a deadweight loss because it pays an excessive wage.
C) creates a deadweight loss because the wage is below the marginal revenue product of labor.
D) creates a deadweight loss because the wage is above the marginal revenue product of labor.