Econ 101 Section 3– Principles of Microeconomics

Instructor: C. Burkart

Exam #11  [40 points total]

November 9, 2005

Questions 1 to 9 are worth 2 points each.  Clearly circle the one best answer to each question.  You will not receive credit if your answer choice is unclear or ambiguous.

1.        If an airline wants to practice price discrimination so as to enhance its profit levels, it will

1. charge higher fares to those with a less elastic demand.
2. charge higher fares to those with a more elastic demand.
3. charge everyone the same fare.
4. determine a fare for each passenger according to the costs of serving them.

2.        If a monopolist engages in price discrimination, it is with the goal of

1. improving goodwill with the public.
2. increasing profit.
3. lowering cost.
4. making the demand for its good less elastic.

3.        Public ownership of a natural monopoly is intended to do all of the following EXCEPT

1. create an efficient outcome.
2. increase demand for the good.
3. eliminate the deadweight loss.
4. protect consumer interests.

4.        One difference between monopoly and perfect competition is that

1. a monopolist seeks to maximize profit; a perfect competitor does not.
2. the MR curve for a perfect competitor is downward-sloping, and for a monopolist it is horizontal.
3. the MR curve for a monopolist is downward-sloping, and for a perfect competitor it is horizontal.
4. a perfect competitor seeks to maximize profit; a monopolist does not.

5.        Which of the following is NOT an example of a barrier to entry?

1. an innovative product
2. economies of scale
3. a patent
4. a copyright

6.        Suppose an industry initially had been perfectly competitive and then became a monopoly.  Which of the following would occur?

1. Producer surplus would decrease
2. The deadweight loss would be eliminated.
3. Consumer surplus would increase.

d.        Consumer surplus would decrease.

7.        The monopolist's marginal revenue curve is downward-sloping because

1. he operates in the range where MC is downward-sloping.
2. his total revenue declines as he sells more.
3. the monopolist must lower his price in order to sell more.

d.       he operates in the range where ATC is downward-sloping.

8.        To persist, a monopoly must

1. be a natural monopoly.
2. be protected by a barrier against the entry of other firms.
3. be regulated.
4. set its price so as to eliminate the deadweight loss.

9.        Monopoly is a type of

1. pricing strategy.
2. price discrimination.
3. business strategy.
4. market structure.

Question 10 [17 pts.] Bill, Ben, and Brad have just made a documentary movie about people igniting the methane contained in flatulence.  They are thinking of making the movie available for download on the Internet, and they can act as a single-price monopolist if they choose to.  Each time the movie is downloaded, their ISP charges them $4 for the bandwidth.  Use this table to answer the following questions:

a.       Calculate the total revenue and marginal revenue per download and enter them in the table.  NOTE: You do not need to enter total cost, marginal cost, or profit, but you can use that space if you find it useful.

b.       Bill wants as much total revenue as possible.  Which price would he choose? _____$4_______ How many downloads would be sold? _____6_______

c.       Ben wants to maximize profit.  Which price would he choose? ____$6_____ How many downloads would be sold? _____3_____

d.       Brad wants to charge the efficient price (i.e. the price that would result under perfect competition).  Which price would he choose? ____$4______ How many downloads would be sold? _____6_______

Question 11 [5 pts.] Currently, Texas Tea Oil Co. is the only local supplier of home heating oil in Frigid, Alaska.  This winter residents were shocked that the cost of a gallon of hearing oil had doubled and believed that they were the victims of market power.  State whether each of the following statements either supports or undermines that conclusion.

There is a national shortage of heating oil, and Texas Tea could procure only a limited amount: _undermines_

Last year, Texas Tea and several other competing local oil-supply firms merged into a single firm: _supports_

The cost to Texas Tea of purchasing heating oil from refineries has gone up significantly: _undermines_

Recently, some non-local firms have begun to offer heating oil to Texas Tea’s regular customers at a price much lower than Texas Tea’s: _supports_

Texas Tea has acquired an exclusive government license to draw oil from the only heating oil pipeline in the state: _supports_