Deck 5: Perfect Competition and Monopoly

Question 1

The outcome in perfect competition is regarded as efficient because firms produce where average total cost is at a _ and price is _ _ marginal cost.

A) maximum; equal to
B) minimum; below
C) maximum; below
D) minimum; equal to

Answer 1

D

Question 2

When a product or service is used by everyone in the market and all users benefit from having access to other users , this is an example of:

A) network economies
B) web economies
C) network diseconomies
D) net economies

Answer 2

A

Question 3

The extent to which a monopolist can exercise market power is limited by:

A) the price elasticity of supply
B) the ease with which consumers can substitute other products for the monopolist's product
C) the income elasticity of demand
D) the costs of producing the product and the technology that is available

Answer 3

B

Question 4

Assume the surfboard manufacturing industry is perfectly competitive. If some firms in the industry are earning supernormal profits, firms will the industry and the market price will .

A) exit; fall
B) exit; rise
C) enter; fall
D) enter; rise

Question 5

Most real world firms tend to be:

A) perfectly competitive
B) oligopolistic
C) pure monopolies
D) imperfectly competitive to varying degrees

Question 6

If a natural monopoly is broken up into smaller competing firms, the price of the product:

A) will increase because the monopolist no longer has to worry about keeping rivals from entering the industry
B) will decrease because smaller firms are price takers
C) will decrease because competition has increased
D) will increase because the smaller competing firms will face higher average costs of production than the natural monopolist will

Question 7

The Las Vegas Shampoo Company has a monopoly over the production of a special hair growth shampoo. The Las Vegas Shampoo Company will find it profitable to reduce output as long as marginal revenue:

A) is greater than marginal cost
B) equals marginal cost
C) is positive
D) is less than marginal cost

Question 8

Suppose we know that a monopolist is maximising its profits. Which of the following is a correct inference? The monopolist has:

A) maximised the difference between marginal revenue and marginal cost
B) maximised its total revenue
C) equated marginal revenue and marginal cost
D) set price equal to its average cost

Question 9

The Las Vegas Shampoo Company has a monopoly over the production of a special hair growth shampoo. The Las Vegas Shampoo Company will find it profitable to increase production as long as marginal cost:

A) is less than marginal revenue
B) equals marginal revenue
C) is greater than marginal revenue
D) is positive

Question 10

When _ _ close substitutes exist, a monopolist has power to raise price.

A) no; infinite
B) more; more
C) fewer; less
D) more; less

Question 11

An industry that realises such large economies of scale in producing its product that single- firm production of that good or service is most efficient is called:

A) a natural monopoly
B) an economies of scale monopoly
C) a fixed- cost monopoly
D) a government franchise monopoly

Question 12

Barriers to entry into a monopoly industry include:

A) lower costs for an established firm
B) economies of scope
C) ownership of or control over key inputs
D) all of the above

Question 13

Which of the following is not an assumption of the perfectly competitive model?

A) freedom of entry and exit
B) many firms
C) market participants have perfect knowledge
D) each firm sells a product that is slightly different to that sold by its competitors

Question 14

The closest example of a perfectly competitive industry is:

A) petrol stations
B) fresh vegetables
C) fast foods
D) beer

Question 15

The amount of output that a monopolist supplies depends:

A) on both its average cost curve and the demand curve that it faces
B) only on the demand curve
C) on both its marginal cost curve and the demand curve that it faces
D) only on the marginal cost curve

Question 16

A monopoly differs from perfect competition primarily because:

A) in a monopoly, firms sell identical products
B) in a monopoly there are relatively few barriers to entry
C) in perfect competition, firms can differentiate their products
D) in a monopoly, there are very high barriers to entry

Question 17

Oz Gas has a monopoly over local gas supply. If Oz Gas is producing where marginal revenue is less than marginal cost:

A) the firm must be earning zero profit
B) the firm is maximising profits
C) the firm could increase profits by increasing output
D) the firm could increase profits by reducing output

Question 18

Assuming no differences in costs between a monopoly firm and perfectly competitive industry, the latter would be preferred due to:

A) lower prices and less output
B) higher prices and less output
C) lower prices and more output
D) higher prices and more output

Question 19

Because of a patent, XYZ plc is the only manufacturer of milk cartons with a special pourer. XYZ plc can earn supernormal profit on the sale of milk cartons with these pourers:

A) in the long run but not the short run because the monopolist will face competition in the short run
B) in the short run but not in the long run because new firms will enter the industry in the long run
C) in the long run because entry into the industry by new firms is blocked
D) only in the long run because government regulations prevent monopolists from earning supernormal profits in the short run

Question 20

E- commerce is introducing more competition to markets by:

A) greater information on product availability and quality
B) making larger markets available
C) introducing greater price transparency
D) all of the above

Question 21

A firm in a perfectly competitive market has no control over price because:

A) the government imposes price ceilings on the products produced in perfectly competitive industries
B) there are barriers to entry into the industry
C) every firm's product is a perfect substitute for every other firm's product, and there are a very large number of firms in the industry
D) the market demand for products produced in perfectly competitive industries is perfectly elastic

Question 22

At the profit- maximising output level for a monopolist, price is typically:

A) less than marginal revenue
B) equal to marginal revenue
C) greater than marginal cost
D) equal to marginal cost

Question 23

For a monopolist to sell more units of output:

A) the price of the last unit sold must be decreased
B) the price of all units sold must be reduced
C) the other competing firms must sell fewer units
D) demand must become more elastic

Question 24

Assume the surfboard manufacturing industry is perfectly competitive. If some firms in the industry are making a loss, firms will the industry and the market price will .

A) enter; rise
B) exit; fall
C) exit; rise
D) enter; fall

Question 25

A monopoly firm determines the price it will charge by:

A) finding the point on the marginal revenue curve that corresponds to the profit- maximising level of output
B) finding the point on the average total cost curve that corresponds to the profit- maximising level of output
C) finding the point on the demand curve that corresponds to the profit- maximising level of output
D) finding the point on the marginal cost curve that corresponds to the profit- maximising level of output

Question 26

Relative to a perfectly competitive industry, a monopoly:

A) produces less output, charges lower prices and earns economic profits
B) produces less output, charges lower prices and earns only a normal profit
C) produces more output, charges higher prices and earns economic profits
D) produces less output, charges higher prices and earns economic profits

Question 27

A perfectly elastic demand curve implies that, ceteris paribus:

A) a firm can sell more by lowering its price
B) if a firm raises its price even a bit above the market price, it will sell nothing at all
C) the price a firm charges is irrelevant since it will sell the same amount regardless of the price charged
D) a firm can raise its price and not lose all its customers

Question 28

If you were running a firm in a perfectly competitive industry you would spend most of your time making decisions about:

A) design
B) advertising
C) production
D) pricing

Question 29

The assumption of free entry in perfect competition implies that:

A) the government regulates the number of firms that are allowed in an industry
B) a perfectly competitive firm can never earn a profit
C) firms will always earn a profit since new firms can enter the industry at any time they like
D) if firms in an industry are making supernormal profits, new firms are likely to enter the industry

Question 30

Philippa grows lettuces commercially. This is a perfectly competitive business and Philippa faces a perfectly elastic demand curve. If she wants to try to increase revenues she should:

A) do nothing, there is nothing she can do to increase revenues
B) keep the price the same but produce more to increase sales
C) raise the price of her lettuces to make more per sale
D) lower the price of her lettuce to try to sell more

Question 31

The fast food industry is not considered perfectly competitive because:

A) the firms do not all sell an identical product
B) entry and exit are strictly regulated by the government
C) there are a very large number of firms
D) firms spend a large amount of money on advertising

Question 32

A market is defined as perfectly contestable if:

A) entry to it is costly, but exit from it is costless
B) entry to it is costless, but exit from it is costly
C) entry to it and exit from it are both costless
D) entry to it and exit from it are both costly

Question 33

A pure monopoly is an industry with a single firm that produces a product for which there are:

A) no close substitutes and in which no significant barriers to entry exist
B) many close substitutes and in which there are significant barriers to entry
C) many close substitutes and in which no significant barriers to entry exist
D) no close substitutes and in which there are significant barriers to entry

Question 34

Which type of barrier to entry allowed BHP to maintain a monopoly in the Australian steel industry for many years?

A) ownership of a scarce factor of production
B) legal controls
C) a patent
D) diseconomies of scale

Question 35

Economists place real world firms into four different market structures based on:

A) the degree of control firms in an industry have over price
B) the degree of freedom of entry and exit into an industry
C) whether or not firms in an industry sell identical products
D) all of the above

Question 36

Which of the following is NOT a decision over which a perfectly competitive firm has control?

A) how much of each input to use
B) what price to charge
C) how to produce
D) how much to produce

Question 37

The imposition of a tax on all firms in a perfectly competitive industry will result in:

A) an increase in price in the long run
B) no change in price or output in the short run
C) a reduction in the number of firms operating in the industry
D) all of the above

Question 38

Above- normal profits cannot be sustained in perfectly contestable markets because of:

A) the threat of 'hit and run' competition
B) the presence of a large number of competing firms
C) the lack of sunk costs and hence the absence of economies of scale
D) none of the above

Question 39

Firms in perfect competition determine their profit- maximising level of output by:

A) accepting the market determined price and finding the corresponding profit- maximising quantity where MR =MC
B) accepting the market determined quantity and finding the corresponding profit- maximising price where MR =MC
C) accepting the market determined price and quantity
D) finding the profit- maximising price and quantity where total revenue and total cost are equal

Question 40

E- commerce is a good example of a very competitive market because:

A) there are many firms
B) low start- up costs generally make entry easy
C) e- commerce increases available information
D) of all of the above

Question 41

What is a contestable market?

Question 42

A profit- maximising monopolist will produce that output level where:

A) marginal revenue is zero
B) marginal revenue equals marginal cost
C) marginal cost is minimised
D) price equals marginal cost

Question 43

A firm's supply curve under perfect competition in the short run will be equal to:

A) the upward- sloping portion of its AC curve
B) the upward- sloping portion of its AVC curve
C) the upward- sloping portion of its MC curve above its AC curve
D) the upward- sloping portion of its MC curve above its AVC curve

Question 44

What are the main disadvantages of a monopoly?

Question 45

What are the main advantages of a monopoly?

Question 46

The short- run supply curve in perfect competition is:

A) equivalent to the average total cost curve
B) equivalent to the marginal cost curve above average variable cost
C) equivalent to the average variable cost curve
D) equivalent to the marginal cost curve

Question 47

Complete the statements below.
In a perfectly competitive firm in the long run:
Statement
a() Profit maximisation occurs at the point where price is equal to:
b() Average revenue is equal to:
c() The efficient output level occurs at minimum:
Answer

Question 48

In a perfectly competitive industry, the market demand curve is:

A) downward sloping
B) perfectly inelastic
C) upward sloping
D) perfectly elastic

Question 49

What are sunk costs?

Question 50

What characteristics can e- commerce give rise to that resemble the perfectly competitive model?

Question 51

Explain how a contestable industry can cause a firm that has a monopoly to act as if it is in a competitive market.

Question 52

What is 'supernormal profit' and can it be experienced by a perfectly competitive firm?

Question 53

A market is not contestable if:

A) entry to it and exit from it are both costly
B) entry to it is costly, but exit from it is costless
C) entry to it and exit from it are both costless
D) entry to it is costless, but exit from it is costly

Question 54

A monopoly industry becomes contestable if:

A) the government deregulates the industry
B) the existing firm is faced with the threat of competition from a new entrant
C) the existing firm must compete with a new entrant
D) the government regulates the industry

Question 55

You live in a small town and there is only one Indian restaurant in the town. The next nearest Indian restaurant is 30 kilometres away. Is this Indian restaurant a monopoly?

A) no, because there are close substitutes for the Indian restaurant such as other restaurants in town and Indian food sold in the local supermarket
B) no, because there are Indian restaurants in other towns
C) yes, because it is the only Indian restaurant in the town
D) yes, because the demand curve facing the Indian restaurant is downward sloping

Question 56

From society's point of view, a monopolist produces too little because:

A) price is less than marginal cost
B) price is less than average cost
C) price exceeds marginal cost
D) price exceeds average cost

Question 57

Complete the statements below.
Statement
a() In a perfectly competitive industry there are always:
b() In a monopoly industry there are always:
c() A contestable market is characterised by:
Answer

Question 58

Assume that the wheat industry is a perfectly competitive industry. The market demand curve for wheat is and each individual wheat producer's demand curve is _ .

A) horizontal; horizontal
B) downward sloping; downward sloping
C) downward sloping; horizontal
D) horizontal; downward sloping

Question 59

Explain the link from market structure to conduct to performance.

Question 60

Which ONE of the following applies to a profit- maximising monopoly but not to a profit- maximising perfectly competitive firm?

A) Average revenue equals price.
B) The most profitable output is where marginal cost equals marginal revenue.
C) Marginal cost equals average cost at the output where the latter is at the minimum.
D) Marginal revenue is not equal to average revenue.

Question 61

A contestable market will always have large sunk costs.

Question 62

The possibility of earning supernormal profit through monopoly power provides an incentive for research and development.

Question 63

Explain the difference between the slope of a demand curve for a perfectly competitive industry and the slope of a demand curve for a firm within a perfectly competitive industry.

Question 64

What are the characteristics of the stock market that make it close to a perfectly competitive market?

Question 65

Market power allows a firm to determine price and output level.

Question 66

Because the marginal revenue curve for a monopolist lies below its demand curve, the profit- maximising price of the monopolist will be above marginal cost.

Question 67

Economies of scale act as a barrier to entry to a monopoly industry, but economies of scope do not.

Question 68

For a firm to be a natural monopoly, economies of scale must be realised at a level of output that is close to total demand in the market.

Question 69

The profit- maximising level of output for a monopolist is the one at which marginal revenue equals marginal cost.

Question 70

What is the connection between perfect competition and the public interest?

Question 71

Since the monopolist is the sole producer of a good, it can never incur a loss.

Question 72

The absence of barriers to entry is characteristic of perfectly competitive markets.

Question 73

A monopoly market can also be a contestable market.

Question 74

The Internet can host markets that resemble perfect competition.

Question 75

A monopolist faces a demand curve that is horizontal at the profit- maximising price.

Question 76

Perfectly competitive industries are characterised by an undifferentiated product.

Question 77

The demand curve facing a perfectly competitive industry is perfectly elastic.

Question 78

The demand curve for a monopoly firm is often more inelastic than that for a perfectly competitive industry.

Question 79

Explain why perfectly competitive firms are price takers.

Question 80

The profit- maximising output for firms in perfect competition is where marginal revenue equals marginal cost.