Deck 10: Monopolistic Competition and Oligopoly

Question 1

Which of the following is (are) true?

A) A monopoly firm is a price taker.
B) MR > P if the demand curve is downward sloping.
C) MR = MC is a profit-maximizing rule for any firm.
D) All of the above are true.

Answer 1

MR = MC is a profit-maximizing rule for any firm.

Question 2

Conditions that prevent the entry of new firms in a monopoly market are:

A) barriers to entry.
B) terms of sale.
C) labor market stipulations.
D) production controls.

Answer 2

barriers to entry.

Question 3

Monopoly is important to study because it:

A) avoids all real-world problems and complexities.
B) avoids most real-world problems and complexities.
C) is a theoretical model used for analysis.
D) is a realistic model of many different markets.

Answer 3

is a theoretical model used for analysis.

Question 4

An industry that contains a firm that is the only producer of a good or service for which there are no close substitutes and for which entry by potential rivals is prohibitively difficult is:

A) a duopoly.
B) a monopoly.
C) an oligopoly.
D) perfect competition.

Question 5

Which of the following is (are) true concerning monopoly?

A) It is at the opposite end of the spectrum from a perfectly competitive firm.
B) A monopoly has no rivals.
C) A monopoly does not need to worry about other firms entering the industry.
D) All of the above are true.

Question 6

A firm that faces a downward-sloping demand curve is a:

A) price setter.
B) quantity minimizer.
C) quantity taker.
D) price taker.

Question 7

The power a firm has to set is own price is called:

A) competition.
B) discrimination.
C) legislative control.
D) monopoly power.

Question 8

A monopoly is a market characterized by:

A) a product with no close substitutes.
B) a single buyer and several sellers.
C) a large number of small firms.
D) a small number of large firms.

Question 9

A monopoly is likely to _______ and _______ than otherwise equivalent competitive firms.

A) produce more; charge more
B) produce less; charge more
C) produce more; charge less
D) produce less; charge less

Question 10

A monopoly is a market characterized by:

A) a single seller.
B) a product with many close substitutes.
C) a large number of small firms.
D) a small number of large firms.

Question 11

A natural monopoly exists whenever a single firm:

A) is owned and operated by the federal or local government.
B) is investor owned but granted the exclusive right by the government to operate in a market.
C) confronts economies of scale over the entire range of production that is relevant to its market.
D) has gained control over a strategic input of an important production process.

Question 12

The two theoretical extremes of the market structure spectrum are occupied on one end by perfect competition and on the other end by:

A) monopoly.
B) duopoly.
C) oligopoly.
D) monopolistic competition.

Question 13

The demand curve for a monopoly is:

A) the sum of all the firm supply curves in the monopoly's industry.
B) the industry demand curve.
C) horizontal because no one can enter.
D) perfectly elastic.

Question 14

A type of firm that usually has a natural monopoly in most of its markets is a(n):

A) electric utility.
B) major automobile producer.
C) major retail establishment.
D) commercial airline.

Question 15

A natural monopoly is most likely to result if a single firm:

A) is the only seller in a community.
B) is investor-owned, but is granted the exclusive right by the government to operate in a market.
C) experiences economies of scale over a wide range of output.
D) has gained control over a strategic input of an important production process.

Question 16

A monopoly:

A) takes the market price as given.
B) determines its own price, given its demand curve.
C) achieves nearly the same resource allocation efficiency as perfect competition, because it competes in the general marketplace for dollars.
D) is characterized by A and B.

Question 17

Most electric, gas, and water companies are examples of:

A) unregulated monopolies.
B) natural monopolies.
C) restricted-input monopolies.
D) sunk-cost monopolies.

Question 18

A monopoly is a market structure characterized by:

A) a single buyer and several sellers.
B) a product with many close substitutes.
C) a large number of small firms.
D) barriers to entry and exit.

Question 19

A monopolist is a:

A) price taker.
B) price setter.
C) cost maximizer.
D) quantity taker.

Question 20

The two theoretical extremes of the market structure spectrum are occupied on one end by monopoly and on the other end by:

A) duopoly.
B) oligopoly.
C) perfect competition.
D) monopolistic competition.

Question 21

A sunk-cost monopoly is most likely to result if a single firm:

A) is the only seller in a small town or community.
B) is investor owned, but granted the exclusive right by the government to operate in a market.
C) experiences long-run increasing economies of scale over a wide range of output.
D) has made extensive investments in advertising to establish brand-name recognition among consumers.

Question 22

If you are the only seller of gasoline in a smaller town or community, your monopoly would result from:

A) sunk costs.
B) location.
C) economies of scale.
D) government restrictions.

Question 23

A firm that confronts economies of scale:

A) at lower levels of output and then encounters diseconomies of scale at higher levels of output is a natural monopoly.
B) over the entire range of outputs demanded is called a natural monopoly.
C) at any particular level of output is called a natural monopoly.
D) has a continually rising long-run average cost curve.

Question 24

A location-based monopoly is most likely to result if a single firm:

A) is the only seller in a small town or community.
B) is investor owned, but granted the exclusive right by the government to operate in a market.
C) experiences long-run increasing economies of scale over a wide range of output.
D) has gained control over a strategic input of an important production process.

Question 25

Microsoft holds patents on Windows, but another source of its monopoly power identified in the book is:

A) the network effects associated with the standards set by Windows.
B) its willingness to use catalog sales as its primary form of retail sales.
C) its exclusive franchise from the government.
D) its restricted ownership of silica, the principle ingredient in manufacturing computer chips.

Question 26

Barriers to entry are characteristics of a particular market:

A) in which the industry can make it so difficult for entry that only a few firms can do so, and this leads to monopoly power.
B) that block new firms from entering.
C) which include economies of scale, location advantages, and high sunk costs.
D) all of the above are true.

Question 27

Suppose that your firm has spent several decades establishing a well-known brand name through advertising. If other firms are prevented from entering your industry because of high advertising expense, your monopoly would result from:

A) sunk costs.
B) location.
C) economies of scale.
D) government restrictions.

Question 28

If your farm has the only known source of a rare cocoa bean needed to make chocolate-covered peanuts, your monopoly would result from:

A) sunk costs.
B) location.
C) restricted ownership of inputs.
D) government restrictions.

Question 29

An expenditure that has already been made that cannot be recovered is a(n):

A) sunk cost.
B) accounting outlay.
C) indirect expense.
D) economy of scale.

Question 30

The Aluminum Company of America gained monopoly power because:

A) of its strategic location.
B) the considerable finances required to enter into the aluminum industry kept other firms out.
C) it had exclusive ownership of a resource required to produce aluminum.
D) it had been granted an exclusive franchise by Congress to sell aluminum in the United States.

Question 31

Which of the following is (are) true?

A) Firms constantly seek out the market power that monopoly offers.
B) Economic profits invite continuing attempts to break down the economic barriers that a monopoly may have.
C) Technological change and the pursuit of profit work against the entrenched power of monopolies.
D) All of the above are true.

Question 32

An expenditure that has already been made and cannot be recovered is called a _______ cost.

A) nonretrievable
B) floating
C) sunk
D) diseconomy of scale

Question 33

A monopoly can be temporary because of:

A) high barriers to entry.
B) privileges granted by the government.
C) economies of scale.
D) technological change.

Question 34

Situations in which the more users of a product there are, the more useful the product becomes are called:

A) network effects.
B) monopolies.
C) conglomerates.
D) exclusive franchises.

Question 35

Suppose that you build a high-speed, magnetically powered transportation system from New York to Los Angeles. High fixed costs resulting from the enormous quantity of capital used in this system enable decreasing average cost for any conceivable level of demand. Your monopoly would result from:

A) sunk costs.
B) location.
C) economies of scale.
D) government restrictions.

Question 36

A government-restrictions monopoly is most likely to result if a single firm:

A) is the only seller in a small town or community.
B) is investor-owned, but granted the exclusive right by the government to operate in a market.
C) experiences long-run increasing economies of scale over a wide range of output.
D) has gained control over a strategic input of an important production process.

Question 37

A restricted-input monopoly is most likely to result if a single firm:

A) is the only seller in a small town or community.
B) is investor owned, but granted the exclusive right by the government to operate in a market.
C) experiences long-run increasing economies of scale over a wide range of output.
D) has gained control over a strategic factor of production.

Question 38

If a firm possesses monopoly power, it means that:

A) the firm can set its own price based on its output decision.
B) the firm's demand curve is always elastic.
C) the firm is necessarily a monopoly.
D) A and C are true.

Question 39

A monopoly can be temporary because of:

A) high barriers to entry.
B) privileges granted by the government.
C) economies of scale.
D) economic profits, which attract rivals.

Question 40

If your local government gives you the exclusive right to sell breakfast bagels in your community, your monopoly would result from:

A) sunk costs.
B) location.
C) economies of scale.
D) government restrictions.

Question 41

Because monopoly firms are price setters:

A) they can only sell more by lower price.
B) they charge all the market will bear.
C) they sell more at higher prices than at lower prices.
D) they take the market-determined price as given and sell all they can at that price.

Question 42

In 1999, a judge declared that Microsoft was a monopolist. Assuming that it was maximizing its profits at its chosen level of output, we may conclude that the absolute value of the price elasticity of demand for its systems was:

A) less than 1.
B) equal to 1.
C) greater than 1.
D) There is insufficient information upon which to make a determination.

Question 43

A firm that faces a downward-sloping demand curve:

A) is a perfectly competitive firm.
B) is a price taker.
C) has some monopoly power.
D) cannot sell more at lower prices.

Question 44

(Exhibit: Demand, Elasticity, and Total Revenue) At point A on the demand curve in Panel (a), the price elasticity of demand is:

A) greater than -1.
B) equal to -1.
C) less than -1.
D) none of the above.

Question 45

(Exhibit: Demand, Elasticity, and Total Revenue) If price is lower than P, an increase in price (but not above P) will result in:

A) a decrease in TR.
B) an increase in TR.
C) no change in TR.
D) none of the above, necessarily; it depends on the quantity sold.

Question 46

A horizontal demand curve exists for:

A) a monopoly, but not for a perfectly competitive firm.
B) a perfectly competitive firm, but not for a monopoly.
C) both a monopoly and a perfectly competitive firm.
D) either a monopoly or a perfectly competitive firm, depending on the costs of production.

Question 47

A downward-sloping demand curve exists for:

A) a monopoly, but not for a perfectly competitive firm.
B) a perfectly competitive firm, but not for a monopoly.
C) both a monopoly and a perfectly competitive firm.
D) either a monopoly or a perfectly competitive firm, depending on the costs of production.

Question 48

The demand curve facing a monopolist is:

A) downward sloping.
B) vertical.
C) horizontal.
D) upward sloping.

Question 49

The demand curve for a monopoly is:

A) downward sloping, and therefore the monopoly is a price setter.
B) inelastic throughout its entire range.
C) downward sloping and therefore the monopoly is a price taker.
D) horizontal at the market-determined price.

Question 50

The demand curve facing a monopolist is always:

A) the same as the industry's demand curve.
B) perfectly elastic.
C) unit elastic.
D) perfectly inelastic.

Question 51

(Exhibit: Demand, Elasticity, and Total Revenue) When price is P and quantity is Q in Panel (a), which of the following is (are) true?

A) An increase in price will increase total revenue.
B) A decrease in price will increase total revenue.
C) P x Q is the maximum amount TR can be.
D) B and C are true.

Question 52

(Exhibit: Demand, Elasticity, and Total Revenue) At the level of output indicated by point A in Panel (a):

A) marginal revenue is zero.
B) average revenue is at its maximum.
C) total revenue is zero.
D) none of the above is true.

Question 53

The demand curve facing a monopolist is:

A) horizontal, the same as that facing a perfectly competitive firm.
B) downward sloping, the same as that facing a perfectly competitive firm.
C) upward sloping, the same as that facing a perfectly competitive firm.
D) downward sloping, unlike the horizontal demand curve facing a perfectly competitive firm.

Question 54

(Exhibit: Demand, Elasticity, and Total Revenue) If price is higher than P, a decrease in price (but not below P) will result in:

A) an increase in TR.
B) a decrease in TR.
C) no change in TR.
D) none of the above, necessarily; it depends on the quantity sold.

Question 55

(Exhibit: Demand, Elasticity, and Total Revenue) In Panel (a), Curve C is:

A) the average revenue curve.
B) the slope of the total revenue curve.
C) the change in quantity divided by the change in total revenue.
D) the marginal cost curve.

Question 56

In the Case in Point on the Ambassador Bridge, the owner has _____ fares presumably because the demand for use of this bridge is _____.

A) increased; elastic
B) increased; inelastic
C) decreased; elastic
D) decreased; inelastic

Question 57

The demand curve facing a price setter:

A) is vertical.
B) is horizontal.
C) is upward sloping.
D) is downward sloping.

Question 58

The Case in Point on the Ambassador Bridge suggests that the source of monopoly power in this case is:

A) location.
B) substantial sunk costs.
C) government licensing
D) both A and B above.

Question 59

In 1999, a judge declared that Microsoft was a monopolist. Assuming that it was maximizing its profits at its chosen level of output, we may conclude that if Microsoft was to increase its price its total revenue would have:

A) risen
B) fallen
C) remained unchanged
D) insufficient information upon which to make a determination.

Question 60

The demand curve for a monopoly is:

A) the MR curve above the AVC curve.
B) the MR curve above the horizontal axis.
C) the entire MR curve.
D) none of the above.

Question 61

(Exhibit: Demand, Elasticity, and Total Revenue) In Panel (a), which of the following is true?

A) Between points A and M, the price elasticity of demand is elastic.
B) Between points F and A, the price elasticity of demand is inelastic.
C) At any price other than P, total revenue will be greater.
D) All of the above statements are false.

Question 62

A demand curve that is downward sloping will ensure that:

A) P = MR.
B) P > MR.
C) P < MR.
D) P = MC.

Question 63

In the _______ range of demand, total revenue _______ with an increase in price.

A) elastic; increases
B) elastic; does not change
C) inelastic; increases
D) inelastic; does not change

Question 64

Which of the following is (are) true?

A) If MR = 0, the price elasticity of demand is also equal to zero .
B) If MR < 0, the price elasticity of demand must be between zero and -1.
C) If MR > 0, then the price elasticity of demand is in the elastic range.
D) B and C are true.

Question 65

The marginal revenue curve for a price setter will always:

A) bisect any horizontal line drawn between the vertical axis and the demand curve.
B) bisect any vertical line drawn between the horizontal axis and the demand curve.
C) lie above and to the right of the demand curve.
D) be less steeply sloped than the demand curve.

Question 66

A demand curve that is linear and downward sloping:

A) means that marginal revenue is equal to price.
B) means that total revenue is always upward sloping.
C) will result in a marginal revenue that is greater than price.
D) has a price elasticity of demand that is equal to -1 when marginal revenue is equal to zero.

Question 67

For a demand curve that is linear and downward sloping, if P > MR, the price elasticity of demand is:

A) elastic.
B) inelastic.
C) equal to -1.
D) none of the above is necessarily true.

Question 68

In the _______ range of demand, total revenue _______ with an increase in quantity.

A) elastic; decreases
B) elastic; does not change
C) inelastic; decreases
D) inelastic; does not change

Question 69

A monopoly firm will never operate in the _______ range of the _______ curve.

A) inelastic; supply
B) elastic; demand
C) inelastic; demand
D) elastic; supply

Question 70

In the _______ range of demand, total revenue _______ with an increase in price.

A) elastic; decreases
B) elastic; does not change
C) inelastic; decreases
D) inelastic; does not change

Question 71

Suppose that a monopolist increases production from 10 units to 11 units. If the market price declines from $20 per unit to $19 per unit, marginal revenue for the eleventh unit is:

A) $1.
B) $9.
C) $19.
D) $20.

Question 72

Marginal revenue for a monopolist is:

A) equal to price.
B) greater than price.
C) less than price.
D) equal to average revenue.

Question 73

(Exhibit: Demand, Elasticity, and Total Revenue) As price is reduced from point F to P in Panel (a), total revenue will:

A) decrease.
B) increase.
C) stay the same.
D) at first increase and then decrease.

Question 74

Marginal revenue is _______ in the _______ range of the demand curve, _______ in the _______ range of the demand curve and _______ where demand is unit price elastic.

A) positive; positive, negative, negative; greater than zero
B) negative; inelastic; positive; elastic; zero
C) positive; inelastic; negative; positive; zero
D) negative; positive; positive; negative; less than zero

Question 75

(Exhibit: Demand, Elasticity, and Total Revenue) At point G in Panel (b), which of the following is (are) true?

A) Profit is maximized.
B) To maximize profit, the firm should not produce any more or less.
C) The quantity is the same as the quantity when MR = 0.
D) All of the above are true.

Question 76

In the _______ range of demand, total revenue _______ with an increase in quantity.

A) elastic; increases
B) elastic; does not change
C) inelastic; increases
D) inelastic; does not change

Question 77

Suppose that a monopolist increases production from 10 units to 11 units. If the market price declines from $30 per unit to $29 per unit, marginal revenue for the eleventh unit is:

A) $1.
B) $9.
C) $19.
D) $29.

Question 78

(Exhibit: Demand, Elasticity, and Total Revenue) Panels (a) and (b) show that:

A) when a demand curve is downward sloping, P < MR.
B) a firm will never maximize profits by producing a quantity where the demand curve is in the inelastic range.
C) when TR is at a maximum, marginal revenue is negative.
D) all of the above are true.

Question 79

Which of the following is (are) true?

A) A profit-maximizing monopoly firm will select a price and quantity in the inelastic range of its demand curve.
B) A profit-maximizing monopoly firm will select a price and quantity in the elastic range of its demand curve.
C) Any firm will maximize profits by producing the quantity of output where MR > MC.
D) B and C are true.

Question 80

In the _______ range of demand, total revenue _______ with an increase in quantity.

A) elastic; decreases
B) elastic; does not change
C) inelastic; increases
D) unit elastic; does not change