Monopoly doubts

[Homer Simpson]

1) If the LMC curve is below the MR curve at the point of output for a monopolist that is making profit, then the firm has

a.   too large a plant size.
b.   too small a plant size.
c.   insufficient knowledge about plant size until he knows his short-run marginal cost.
d.   insufficient knowledge about plant size until he knows his demand curve.

2) Suppose that an excise tax is imposed on the monopolist’s product.    If the monopolist’s marginal cost is
horizontal in the relevant range, which of the following statements must be true?

a.   The price will increase by an amount less than the tax
b.   The price will increase by an amount equal to the tax.
c.   The price will increase by an amount greater than the tax.
d.   The price may either increase or decrease.
e.   An excise tax will have no effect on the price-output decision of a monopolist.

3)If a monopolist had no costs, the best possible price would be where demand is

a.   infinitely elastic.
b.   relatively (but not perfectly) elastic.
c.   unit elastic.
d.   relatively (but not completely) inelastic.
e.   completely inelastic.

4) If a monopolist has only fixed costs and chooses that output at which marginal cost equals price, it will

a.   earn positive economic profits.
b.   earn zero economic profits.
c.   incur a loss equal to its variable costs.
d.   incur a loss equal to its fixed costs.
e.   cannot tell from the information given.

5) If a monopoly is unable to cover its short-run variable costs, it should

a.   shut down.
b.   raise price.
c.   lower price.
d.   increase output.
e.   reduce output.

[kangkan]

question A .. he has too small a plant size..draw the LMC and SMC....it will become apparent

[kangkan]

2)e....since he is a monoploist..if he cud have raised profit by altering output..he wud have done it already

[kangkan]

5)a shut down

[kangkan]

4)d since mc=0 ..if he sells at p=mc .he will sell at zero..if he makes q uinits....revneu will be 0 and c(q)=F..hence loss= F

[econ14]

hey kangkan can u plz explain q.A....not able to get the intuition..

[Homer Simpson]

Kangkan, please explain 1 again. not getting the point.

[econ14]

2) Suppose that an excise tax is imposed on the monopolist’s product.    If the monopolist’s marginal cost is
horizontal in the relevant range, which of the following statements must be true?

a.   The price will increase by an amount less than the tax
b.   The price will increase by an amount equal to the tax.
c.   The price will increase by an amount greater than the tax.
d.   The price may either increase or decrease.
e.   An excise tax will have no effect on the price-output decision of a monopolist.

i think its (a) plz conform

[Homer Simpson]

Sandeep, could you explain the reasoning?

[econ14]

[phelps.phan]

I get
2) a (MC is horizontal. When quantity tax is imposed, MC shifts upward, but the demand curve is having some slope, so the shift in price is not equivalent to the shift in MC)
3) c
5) a (increase o/p and lower price are synonymous. Similarly decrease o/p and raise price. Which leaves us with a)

[econ14]

@ phelps.phan plz explain q(3) why (c)?

[phelps.phan]

Hi Sandeep,
Assume a inverse demand fn p(q)=a-bq, MR=a-2bq
MR=MC=> q=a/2b and p=a/2 (since MC=0)
Now find elasticity of the demand fn at this price and quantity. You'll get 1.

[econ14]

thanx phelps

[kangkan]

Hi.....here it is..let the SAC1 be the short run cost curve for plant size fixed at K*..we are given that MR curve is above the LMC..this can happen only to the right of the point y*..here y* is the point at which the SAC1 curve and LAC curve will coincide(page 393 varian)....hence,the person was producing in excess of the optimum output for his given plant size ..hope this pictre hekps

[Dreyfus]

Sandeep...y r taking equilibrium price at the intersection of Mr mc?
This condition is only for equilibrium output nt price....

[kangkan]

@phelps...for question 3 ..i have got same ans..P*=a/2 and Q*=q/2b....so R*= a/4b right?..in case of zero mc,should it means that maximum profit is a/4b^2....so smaller the value b,higher will be the equlb output?..hence, b should be infinity..

[kangkan]

ok ok..i get it..demand curve is given

[econ14]

no vaibhav it is extended to AR curve to get the price

[econ14]