Question
Select the best answer for questions 1 and 2 1. A monopoly is characterized by a. Many suppliers and many consumers b. Many suppliers but
Select the best answer for questions 1 and 2
1. A monopoly is characterized by a. Many suppliers and many consumers b. Many suppliers but only one consumer c. A price that exceeds the marginal cost of production d. Zero profits for most situations e. The price being set within a competitive market for the good being produced
2. A typical single-price monopolist has decided to produce 100 units of the good it supplies. Which of the following is most likely to be false at this level of output? a. No other firms supply this particular good b. The marginal revenue of the 100th unit is equal to the price of the 100th unit c. There is some consumer surplus generated for purchasers of the good d. Consumers will pay a price equal to the maximum the monopolist can charge for 100 units, while being sure to sell all units e. The monopolist will earn a positive economic profit
3. The firm PHARMACO has just started producing a new prescription drug called NEWDRUG. There are no other similar drugs on the market and PHARMACO has exclusive rights to produce NEWDRUG. PHARMACO estimates that the initial demand for NEWDRUG can be estimated as P = 1000 - 0.5Q where P is the price measured in dollars per unit and Q is the quantity measured in units of the drug. PHARMACO believes the marginal cost of producing each unit of the drug will be equal to 0.25Q where Q is the quantity of the drug produced. Using the graph paper below (or using your own graph paper), answer the following questions. a. Draw the demand curve, making sure to label the curve. b. Draw the marginal revenue curve, making sure to label the curve. c. Draw the marginal cost curve, making sure to label the curve. d. Using your diagram and assuming the monopoly will operate, determine the profit maximizing level of output for the monopolist and briefly explain your method. e. Using your diagram, determine the profit maximizing price for the monopolist and briefly explain your method. f. Shade the consumer surplus that results from the profit maximizing actions of the monopolist. Calculate the size of consumer surplus, making sure to show all of your supporting work. Quantity (units of NEWDRUG) Price ($ / unit) 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 1100 1000 900 800 700 600 500 400 300 200 100
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