Question

QUESTION 1

If a monopolist only charges one price, then we can conclude that:

A. Consumer surplus is the same as under perfect competition

B. Consumer surplus is lower than under perfect competition

C. Consumer surplus is same under any market structure

D. Consumer surplus is higher than under perfect competition

QUESTION 2

Suppose you are considering buying the only major league baseball team in a major US city. Currently, the team prices all seats at a single monopoly price and makes the monopoly profit. Could you change the pricing to increase profits? (Assume costs do not change under any of the following.)

A. Yes. Lower the price significantly and more people will attend the games raising revenue and, in turn, profit.

B. Yes. Charge different prices for each seat (or similar seats).

C. No. Charing a higher price would cause fewer people to attend the games and lower revenue and, in turn, lower prices.

D. No. The monopoly price is the highest price and highest profit that can be obtained.

QUESTION 3

Greedy Cable Company has two types of potential service offerings. The first is basic cable and local channels (Offering 1). The second has specialty channels that have lower appeal (Offering 2). Greedy knows that there are two types of customers: Type 1 value Offering 1 at $100 a month and Offering 2 at $30 a month Type 2 value Offering 1 at $80 a month and Offering 2 at $35 a month There is no marginal cost to add channels to an offering and there is a sufficient mix of both types of customers to make selling both offerings worthwhile. If Greedy sells separate offerings à la carte it must charge the same price to all customers for each offering but Greedy is allowed to sell the services as one package for one price. Suppose Greedy sells these two packages separately and maximizes revenues how much revenue (per customer) and consumer surplus (per customer type) is there in this market per month?

A. Greedy receives $110 per customer and Type 1 customers receive $20 in consumer surplus and Type 2 gain $5

B. Greedy receives $90 per customer and Type 1 customers receive $10 in consumer surplus and Type 2 gain $25

C. Greedy receives $115 per customer and Type 1 customers receive $15 in consumer surplus and Type 2 gain $0

D. Greedy receives $130 per customer and Type 1 customers receive $0 in consumer surplus and Type 2 customers receive $20 in consumer surplus

QUESTION 4

Greedy Cable Company has two types of potential service offerings. The first is basic cable and local channels (Offering 1). The second has specialty channels that have lower appeal (Offering 2). Greedy knows that there are two types of customers:

Type 1 value Offering 1 at $100 a month and Offering 2 at $30 a month

Type 2 value Offering 1 at $80 a month and Offering 2 at $35 a month

There is no marginal cost to add channels to an offering and there is a sufficient mix of both types of customers to make selling both offerings worthwhile.

If Greedy sells separate offerings à la carte it must charge the same price to all customers for each offering, but Greedy is allowed to sell the services as one package for one price.

Suppose Greedy sells the services in a package and maximizes revenues how much revenue and consumer surplus (per customer type) is there in this market per month?

A. Greedy receives $90 per customer and Type 1 customers receive $10 in consumer surplus and Type 2 gain $25

B. Greedy receives $130 per customer and Type 1 customers receive $0 in consumer surplus and Type 2 customers receive $20 in consumer surplus

C. Greedy receives $115 per customer and Type 1 customers receive $15 in consumer surplus and Type 2 gain $0

D. Greedy receives $110 per customer and Type 1 customers receive $20 in consumer surplus and Type 2 gain $5

QUESTION 5

Consider a natural monopoly with two types of customers one with elastic demand and the other with inelastic demand. To minimize the amount of deadweight loss, one approach is to:

A. All different prices to each customer type based on the demand elasticity

B. Force the monopoly to set a single fixed price for all customers.

C. Set the price at marginal cost for the inelastic customer and average total cost for the elastic customer.

D. Set the price at average total cost for each customer type

Answer 1

1) Monopolist produces at the point where MR equals MC and charges price equal to the demand curve. This reduces the consumer surplus. HEnce the answer is B. Consumer surplus is lower than under perfect competition.

2) A. Yes. Since demand is inelastic so by Lowering the price significantly and more people will attend the games raising revenue and, in turn, profit.

3) Greedy receives $115 per customer and Type 1 customers receive $15 in consumer surplus and Type 2 gain $0

4) A. Greedy receives $90 per customer and Type 1 customers receive $10 in consumer surplus and Type 2 gain $25

5) D. Set the price at average total cost for each customer type as the average cost is downward sloping in natural monopoly.