Question from Past Microeconomics Qualifying Exam[]
Spring 1999- Section I, Question eight, George Mason University
True, False, Uncertain. Determine whether or not each of the following statements are true or false. Explain your reasoning briefly in a paragraph or two. (The explanation is often more important than the answer given). Include a carefully labeled diagram or game matrix if it helps to clarify your answer.
A monopoly firm that can produce its output at zero marginal cost is indifferent between all positive output levels if it faces a linear demand curve.
Answer[]
A monopoly will produce where MC = MR. Since MC = 0, this implies that the monopoly will produce where MR = 0 as well. With a linear demand curve, the MR curve decreases at twice the rate of the demand curve, and equal zero midway down the demand curve. Therefore, the firm will produce where demand is unit elastic and MR = 0.
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