Question 1

Which of the following is true of a profit-maximizing competitive firm in the short run?

Accepted Answer

A)  The firm produces at the point where price is equal to marginal cost. 
B)  The firm produces at the point where average cost is at its minimum point. 
C)  The demand curve faced by each firm in the industry is downward sloping. 
D)  The firm always makes a zero economic profit. 
E)  The firm suffers a deadweight loss. 
A)  The firm produces at the point where price is equal to marginal cost. 
B)  The firm produces at the point where average cost is at its minimum point. 
C)  The demand curve faced by each firm in the industry is downward sloping. 
D)  The firm always makes a zero economic profit. 
E)  The firm suffers a deadweight loss. A

Question 2

How useful is the Lerner index as a measure of monopoly power?

Accepted Answer

The Lerner index is given by L = (P - MC)/P. For a profit-maximizing monopolist, the Lerner index is equal to the inverse of the industry's price elasticity of demand. It is a useful measure of the degree to which monopoly raises price above marginal cost. However, it does not take into account the monopolist's volume of production, and so does not measure the actual magnitude of monopoly profits.

Question 3

The demand curve faced by individual firms under monopolistic competition is:

Accepted Answer

A)  perfectly elastic. 
B)  perfectly inelastic. 
C)  downward-sloping. 
D)  upward-sloping. 
E)  the same as the market demand curve. 
A)  perfectly elastic. 
B)  perfectly inelastic. 
C)  downward-sloping. 
D)  upward-sloping. 
E)  the same as the market demand curve. C

Question 4

Why do monopolistically competitive firms have a tendency to advertise much more than perfectly competitive firms?

Accepted Answer

Product differentiation, a key feature o

Question 5

Which of the following is likely to take place if regulators split a natural monopoly into two smaller firms?

Accepted Answer

A)  The number of firms in the market will increase but the market price will be unchanged. 
B)  The output in the industry will increase. 
C)  The cost of production in the industry will increase. 
D)  The market demand curve will become flatter. 
E)  The total industry profits will increase. 
A)  The number of firms in the market will increase but the market price will be unchanged. 
B)  The output in the industry will increase. 
C)  The cost of production in the industry will increase. 
D)  The market demand curve will become flatter. 
E)  The total industry profits will increase.

Question 6

A monopolist maximizes profit by producing:

Accepted Answer

A)  on the inelastic portion of the demand curve 
B)  at the level where average cost is minimized 
C)  at the point where the cost of producing the last unit of output equals price. 
D)  at the output level where marginal revenue equals marginal cost 
E)  at the level where the deadweight loss is minimized. 
A)  on the inelastic portion of the demand curve 
B)  at the level where average cost is minimized 
C)  at the point where the cost of producing the last unit of output equals price. 
D)  at the output level where marginal revenue equals marginal cost 
E)  at the level where the deadweight loss is minimized.

Question 7

The demand curve for a monopolistically competitive firm slopes downward because:

Accepted Answer

A)  the demand for the product drops to zero after a slight price increase. 
B)  competing firms produce differentiated products. 
C)  there is a very little brand loyalty towards a single firm's product. 
D)  customers are not influenced by advertising. 
E)  buyers are not sensitive to changes in the price of the product. 
A)  the demand for the product drops to zero after a slight price increase. 
B)  competing firms produce differentiated products. 
C)  there is a very little brand loyalty towards a single firm's product. 
D)  customers are not influenced by advertising. 
E)  buyers are not sensitive to changes in the price of the product.

Question 8

Kiwi Inc. dominates the wholesale chicken market in New Zealand. Its production cost is: long-run average cost [LAC] = long-run marginal cost [LMC] = $2 per pound and demand is given by P = 6 - 2Q, where P denotes price per pound and Q denotes output (in millions of pounds).
(a) Determine Kiwi's output and price (presuming it faces no other competitors).
(b) Over the last five years, a Southeast Asian nation has dramatically increased its exports of chicken to New Zealand. That nation’s cost structure (with lower labor costs and higher shipping costs) is the same as Kiwi’s. Find the long-run output and price under perfect competition.
(c) New Zealand lawmakers have decided to enact a $1 per pound tariff on all chicken imports. What is the new equilibrium price? Suppose that imports fall to QI = .5 million pounds, what is Kiwi’s output? Compute consumer surplus and Kiwi’s profit. How has the tariff affected total welfare?

Accepted Answer

The new price is $2 + $1 = $3. Total dem

Question 9

In a perfectly competitive market, industry demand is: P = 850 - 2Q, and industry supply is: P = 250 + 4Q (Supply is the sum of the marginal cost curves of the firms in the industry).
(a) Determine price and output under perfect competition.
(b) Now suppose that all the firms collude to form a single monopoly cartel. Given that there is no change in the demand or cost conditions of the industry, what price and total output would the cartel set? Compare the monopoly outcome with the competitive outcome calculated earlier.

Accepted Answer

The cartel, which behaves like a monopol

Question 10

In the long run, the economic profit earned by a firm under monopolistic competition:

Accepted Answer

A)  is positive because firms produce with excess capacity. 
B)  is zero because of price wars among a small number of firms. 
C)  is zero because of free entry and exit possibilities in the market. 
D)  is positive because of advertising and product differentiation by the firms. 
E)  is positive because of collusive behavior between firms. 
A)  is positive because firms produce with excess capacity. 
B)  is zero because of price wars among a small number of firms. 
C)  is zero because of free entry and exit possibilities in the market. 
D)  is positive because of advertising and product differentiation by the firms. 
E)  is positive because of collusive behavior between firms.

Question 11

Which of the following is a characteristic of a firm that is a natural monopoly?

Accepted Answer

A)  The firm's average costs decline over all levels of output. 
B)  The firm's elasticity of supply is very low. 
C)  The firm does not incur any sunk costs. 
D)  The firm faces a horizontal demand curve. 
E)  The firm makes zero economic profit. 
A)  The firm's average costs decline over all levels of output. 
B)  The firm's elasticity of supply is very low. 
C)  The firm does not incur any sunk costs. 
D)  The firm faces a horizontal demand curve. 
E)  The firm makes zero economic profit.

Question 12

In comparing monopolistic competition to perfect competition, the major difference lies in:

Accepted Answer

A)  the number of firms in each industry. 
B)  the typical firm size in each industry. 
C)  the degree of entry barriers in each industry. 
D)  the demand curves faced by individual firms in each industry. 
E)  the long-run profits of firms in each industry. 
A)  the number of firms in each industry. 
B)  the typical firm size in each industry. 
C)  the degree of entry barriers in each industry. 
D)  the demand curves faced by individual firms in each industry. 
E)  the long-run profits of firms in each industry.

Question 13

A monopolist produces and sells 400 units at a price of $40 per unit. The monopolist's marginal cost is equal to $15 and average cost is equal to $23. The monopolist's profit is:

Accepted Answer

A)  $6,800. 
B)  $8,000. 
C)  $10,000. 
D)  $16,000. 
E)  None of these are correct. 
A)  $6,800. 
B)  $8,000. 
C)  $10,000. 
D)  $16,000. 
E)  None of these are correct.

Question 14

Unlike perfectly competitive markets, monopolistically competitive markets:

Accepted Answer

A)  have significant barriers to entry. 
B)  face declining average costs at all levels of output. 
C)  have fewer firms. 
D)  produce differentiated products. 
E)  Answers face declining average costs at all levels of output and produce differentiated products are both correct. 
A)  have significant barriers to entry. 
B)  face declining average costs at all levels of output. 
C)  have fewer firms. 
D)  produce differentiated products. 
E)  Answers face declining average costs at all levels of output and produce differentiated products are both correct.

Question 15

The basic objective of a cartel is to:

Accepted Answer

A)  maximize profit for the largest, most influential members. 
B)  increase the total consumer surplus in the market. 
C)  produce the highest output level possible. 
D)  secure monopoly profits for its members. 
E)  successfully practice price discrimination in the market. 
A)  maximize profit for the largest, most influential members. 
B)  increase the total consumer surplus in the market. 
C)  produce the highest output level possible. 
D)  secure monopoly profits for its members. 
E)  successfully practice price discrimination in the market.

Question 16

Under patent protection, a firm has a monopoly in the production of a high-tech component. Market demand is estimated to be P = 100 - .2Q. The firm's economic costs are given by AC = MC = $60 per component.
(a) Determine the firm's output and price.
(b) After the firm’s patent expires, predict the new market output and price. Compute the resulting change in consumer surplus. Calculate the net welfare gain. Assume that competing suppliers have the same economic costs as the original producer.

Accepted Answer

After the patent expires, the market sho

Question 17

Explain why monopolies are economically inefficient.

Accepted Answer

A monopoly is inefficient because it cha

Question 18

Most people believe that monopolies always have excessive profits, yet some unregulated monopolies might have very low earnings.
(a) Why might a monopoly have little or no economic value? Explain.
(b) If you were given a chance to enter a perfectly competitive industry, or a monopolistic industry, which would you choose? Explain

Accepted Answer

The perfectly competitive firm

Question 19

Regulatory authorities tend to be concerned about barriers to entry. Why are barriers so important?

Accepted Answer

Economists see entry barriers as the pri

Question 20

The profit margins for fast food firms like Wendy's have fallen because of an increase in competition from similar fast food chains and microwaveable food available in supermarkets. Based on this information, which of the following is true?

Accepted Answer

A)  The elasticity of demand for Wendy's fast food is relatively inelastic. 
B)  Wendy's operates as a monopoly firm in the fast food market. 
C)  The fast food market is monopolistically competitive. 
D)  Wendy's fast food is an inferior good for most consumers. 
E)  There are strategic entry barriers in the fast-food market. 
A)  The elasticity of demand for Wendy's fast food is relatively inelastic. 
B)  Wendy's operates as a monopoly firm in the fast food market. 
C)  The fast food market is monopolistically competitive. 
D)  Wendy's fast food is an inferior good for most consumers. 
E)  There are strategic entry barriers in the fast-food market.

Which of the following is true of a profit-maximizing competitive firm in the short run?

How useful is the Lerner index as a measure of monopoly power?

The demand curve faced by individual firms under monopolistic competition is:

Why do monopolistically competitive firms have a tendency to advertise much more than perfectly competitive firms?

Which of the following is likely to take place if regulators split a natural monopoly into two smaller firms?

A monopolist maximizes profit by producing:

The demand curve for a monopolistically competitive firm slopes downward because:

In the long run, the economic profit earned by a firm under monopolistic competition:

Which of the following is a characteristic of a firm that is a natural monopoly?

In comparing monopolistic competition to perfect competition, the major difference lies in:

A monopolist produces and sells 400 units at a price of $40 per unit. The monopolist's marginal cost is equal to $15 and average cost is equal to $23. The monopolist's profit is:

Unlike perfectly competitive markets, monopolistically competitive markets:

The basic objective of a cartel is to:

Explain why monopolies are economically inefficient.

Regulatory authorities tend to be concerned about barriers to entry. Why are barriers so important?

The profit margins for fast food firms like Wendy's have fallen because of an increase in competition from similar fast food chains and microwaveable food available in supermarkets. Based on this information, which of the following is true?

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Cost Analysis

Perfect Competition

Oligopoly

Game Theory and Competitive Strategy

Regulation, Public Goods, and Benefit-Cost Analysis

Decision Making Under Uncertainty

The Value of Information

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Linear Programming

Auctions and Competitive Bidding Available Online

Filters

Exam 8: Monopoly

Which of the following is true of a profit-maximizing competitive firm in the short run?

How useful is the Lerner index as a measure of monopoly power?

The demand curve faced by individual firms under monopolistic competition is:

Why do monopolistically competitive firms have a tendency to advertise much more than perfectly competitive firms?

Which of the following is likely to take place if regulators split a natural monopoly into two smaller firms?

A monopolist maximizes profit by producing:

The demand curve for a monopolistically competitive firm slopes downward because:

In the long run, the economic profit earned by a firm under monopolistic competition:

Which of the following is a characteristic of a firm that is a natural monopoly?

In comparing monopolistic competition to perfect competition, the major difference lies in:

A monopolist produces and sells 400 units at a price of $40 per unit. The monopolist's marginal cost is equal to $15 and average cost is equal to $23. The monopolist's profit is:

Unlike perfectly competitive markets, monopolistically competitive markets:

The basic objective of a cartel is to:

Explain why monopolies are economically inefficient.

Regulatory authorities tend to be concerned about barriers to entry. Why are barriers so important?

The profit margins for fast food firms like Wendy's have fallen because of an increase in competition from similar fast food chains and microwaveable food available in supermarkets. Based on this information, which of the following is true?

Introduction to Economic Decision Making

Optimal Decisions Using Marginal Analysis

Demand Analysis and Optimal Pricing

Estimating and Forecasting Demand

Production

Cost Analysis

Perfect Competition

Oligopoly

Game Theory and Competitive Strategy

Regulation, Public Goods, and Benefit-Cost Analysis

Decision Making Under Uncertainty

The Value of Information

Asymmetric Information and Organizational Design

Bargaining and Negotiation

Linear Programming

Auctions and Competitive Bidding Available Online

Filters