Course - Managerial Economics
IIM BANGALORE
PROBLEM SET 6
TOPIC: Monopoly, Monopolistic Competition and Price
Discrimination
Multiple-Choice Questions\Conceptual Questions
1. A grocery store that offers one can of soup for $0.35 and three cans for $1.00 is engaging
in
a) first-degree price discrimination.
b) second-degree price discrimination.
c) The answer cannot be determined without additional information
2. A firm will realize the highest level of profit if it is able to engage in
a) first-degree price discrimination.
b) second-degree price discrimination.
c) The answer cannot be determined without additional information
1. For a profit maximizing monopoly, equilibrium condition is
a. P = MR = MC
b. P > MR = MC
c. P > MR > MC
2. Which of the following is LEAST likely to be a monopoly?
a. the sole owner of an occupational license
b. a pharmaceutical company with a patent on a drug
c. a store in a large shopping mall
d. the holder of a public franchise
3. For a monopoly, the industry demand curve is the firm's
a. profit function.
b. marginal revenue curve.
c. supply curve.
d. demand curves
4. Apollo, a highly profitable shoe company, has market power. It’s selling 15 million shoes
per year. The marginal cost of making extra shoes is quite low and doesn’t change much
if they produce more shoes. Apollo’s marketing experts conclude that if they increased
prices by 20%, profits would rise. For Apollo, is MC=MR, is MC>MR, or is MC
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a. MC=MR
b. MC>MR
c. MC < MR
5. When firms in an industry produce differentiated products
a. short-run economic profit will always be positive
b. the demand curves facing firms will always be perfectly elastic
c. the demand curves facing firms will always be downward-sloping
6. The demand curve facing a monopolistically competitive firm is typically
a. perfectly elastic
b. more elastic than the demand curves facing either monopolists or perfect
competitors
c. more elastic than the demand curves facing monopolists, but less elastic than the
demand curves facing perfect competitors
7. For the below mentioned market scenarios, identify whether the relevant strategy is First-
Degree (imperfect), or Second-Degree price discrimination. Also, briefly explain your
conclusion.
S.no. Scenario Type of Price Explanation
Discrimination
1 A car dealer negotiate and offer discounts to the
buyers. For instance, based on how a buyer in
dressed.
2 Uber pricing is based on your data: credit card you
use, where you live, the phone you’re using, and
your ride history.
3 A consumer who buys a 24-pack of soft drink cans
at the supermarket generally receives a discount
(per can) over the shopper who buys a single can.
Numerical Questions
8. Use the following information to answer the next four questions. The demand curve for a
monopolist is given by P = 100 − Q, while the monopolist’s marginal cost is P = 3Q. At the
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profit-maximizing level of output for the monopolist, the average total cost of production
is equal to $70.
i. This monopolist’s MR curve can be written as
a. MR = 100 − Q.
b. MR = 200 − Q.
c. MR = 100 − (1/2)Q.
d. MR = 100 − 2Q.
ii. For this monopolist the profit-maximizing level of output is equal to and the market price
for this
output is ____
a. 20 units; $80
b. 25 units; $75
c. 20 units; $60
d. 50 units; $50
iii. Profits for this monopolist equal
a. $400.
b. $10.
c. $200.
d. $20.
iv. The deadweight loss associated with this monopoly
a. cannot be calculated from the information given.
b. is unimportant, since the monopoly is protected from competition due to the
existence of effective barriers to entry.
c. equals $50.
d. equals $25.
9. Monopoly sells its product to N = 10 identical consumers each of whom has individual
demand P = 30 - 2q, where q is quantity demanded by a single consumer at price P. The
firm has constant marginal cost MC = 5 and no fixed cost.
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a) Suppose the firm cannot price discriminate. Derive aggregate market demand P(Q),
where Q is the quantity demanded by all consumers at price P. Set up firm's profit function
and profit-maximizing quantity 𝑄𝑀 and price 𝑃𝑀 . Calculate firm's profit, and deadweight
loss. Demonstrate on a diagram.
b) Give definition of first-degree price discrimination. Calculate quantity produced and
profits, if firm employs this pricing strategy.
10. Suppose the following table describes the market demand schedule for a monopoly.
a. Draw a graph of this market demand schedule for the monopoly.
b. Compute the firm’s total revenue and marginal revenue figures for the table below.
c. Draw the monopolist’s marginal revenue curve on the graph you drew in part (a) of this
problem.
d. Write an equation for this monopolist’s market demand curve and for its MR curve.
Compare these two equations. What is true about the y-intercept of these two equations?
What is the relationship between the slope of the demand curve and the slope of the MR
curve?
e. If the firm’s marginal cost is constant and equal to $200, what is this monopolist’s profit-
maximizing level of output and what price will this monopolist charge for this good? Label this
quantity and this price on your graph.
