Deck 8: Market Structure: Monopoly and Monopolistic Competition

Question 1

Which of the following statements regarding a monopolist is false?

A) The marginal revenue curve lies below the demand curve for the monopolist's output.
B) Unlike a perfectly competitive firm, a monopolist faces little or no competition.
C) The monopolist sets price equal to marginal cost to maximize profits.
D) The monopolist may or may not earn positive economic profits.

Answer 1

C

Question 2

All of the following are possible characteristics of a monopoly except:

A) there is a single firm.
B) the firm is a price taker.
C) the firm produces a unique product.
D) the existence of some advertising.

Answer 2

B

Question 3

Assume that when price is $20, quantity demanded is 9 units, and when price is $19, quantity demanded is 10 units. Based on this information, we can conclude that over the price range from $19 to $20, demand is price:

A) elastic.
B) unit elastic.
C) inelastic.
D) cannot be determined.

Answer 3

A

Question 4

Assume that when price is $20, quantity demanded is 9 units, and when price is $19, quantity demanded is 10 units. Based on this information, what is the marginal revenue resulting from an increase in output from 9 units to 10 units?

A) $20
B) $19
C) $10
D) $1

Question 5

Assuming instead that the market depicted in Figure 8.1 is perfectly competitive, the equilibrium price and output would be:

A) P₂ and Q₂.
B) P₁ and Q₁.
C) P₄ and Q₁.
D) P₃ and Q₁.

Question 6

Which of the following statements about barriers to entry is false?

A) They restrict entry into industries in which positive economic profits are being made.
B) They are somewhat lessened by the existence of patents.
C) They may be due to legal impediments such as licenses.
D) They may be due to a single firm controlling access to a natural resource or production process.

Question 7

Which of the following is not true when a monopoly market is in equilibrium?

A) Consumer well being would be improved if less resources were allocated to the industry in which the monopoly operates.
B) Price > MC.
C) Price > MR.
D) Price = Average Revenue.

Question 8

If an industry is characterized by economies of scale:

A) barriers to entry are usually not very large.
B) long-run average costs of production increase as the quantity the firm produces increases.
C) capital requirements are small due to the efficiency of the large-scale operations.
D) the costs of entry into the market are likely to be substantial.

Question 9

In comparing monopoly to a perfectly competitive market, which of the following is false?

A) Market price will be higher under monopoly.
B) Equilibrium quantity will be higher under perfect competition.
C) Consumers will be worse off with the monopoly.
D) Employment will be higher under monopoly.

Question 10

If there are barriers to entry into a market, it is possible for the existing firms) to earn positive economic profits. All of the following explain this except:

A) new firms cannot enter to take advantage of the profits.
B) resource immobility.
C) it is possible for a firm in this situation to charge any price it wants and thus preclude anyone else from entering.
D) competition does not erode profits the way it would under perfect competition.

Question 11

Use Figure 8.1, which represents the situation faced by a monopolist, to answer the following questions.
Figure 8.1
The firm depicted in Figure 8.1 is:

A) earning a positive economic profit.
B) incurring an economic loss and should shut down.
C) incurring an economic loss but it should continue to operate in the short run so long as price exceeds average variable costs.
D) earning a zero economic profit.

Question 12

Which of the following barriers to entry into a market is most beneficial from society's perspective?

A) Economies of scale.
B) Ownership of an essential productive resource.
C) Brand loyalties.
D) Consumer lock -in and switching costs.

Question 13

All of the following are strategies a firm with market power can adopt to increase it profits over time except:

A) mergers with, and acquisitions of, competing firms.
B) erecting barriers to entry.
C) setting price equal to the marginal costs of production.
D) influencing the regulatory process.

Question 14

Suppose a monopolist is producing a level of output such that MR > MC. What should the firm do to maximize its profits?

A) The firm should do nothing  it wants to maximize the difference between MR and MC in order to maximize its profits.
B) The firm should hire less labor.
C) The firm should increase price.
D) The firm should increase output.

Question 15

Which of the following barriers to entry is is most likely to result in the creation of of new products and production processes?

A) Patents.
B) Licenses.
C) Ownership of an essential raw material.
D) Significant economies of scale.

Question 16

Which of the following statements is correct?

A) The monopolist's supply curve is its MC curve.
B) The monopolist's supply curve is that section of its MC curve that lies above its AVC curve.
C) The monopolist's supply curve is that section of its MC curve that lies above its MR curve.
D) The monopolist does not have a supply curve.

Question 17

Suppose a monopolist is producing a level of output such that MR > MC. Which of the following best describes what will happen as the firm moves to its profit-maximizing equilibrium?

A) Marginal revenue will rise and marginal cost will fall.
B) Marginal cost and marginal revenue will both rise.
C) Marginal revenue will fall and marginal cost will rise.
D) Marginal cost and marginal revenue will both fall.

Question 18

Which of the following conditions holds for a monopolist, but not for a perfect competitor, at the profit-maximizing level of output?

A) Price = average revenue.
B) Marginal revenue = marginal cost.
C) Price > marginal cost.
D) Profit = AR-ATC) x Q.

Question 19

Use Figure 8.1, which represents the situation faced by a monopolist, to answer the following questions.
Figure 8.1
For the firm in Figure 8.1, the profit-maximizing loss-minimizing) price and level of output are:

A) P₂ and Q₂.
B) P₁ and Q₁.
C) P₄ and Q₁.
D) P₃ and Q₁.

Question 20

In its effort to maximize economic profit, a firm characterized as a price setter must determine:

A) only the price it should charge.
B) only the quantity it should produce.
C) both the price it should charge and the quantity it should produce.
D) neither the price it should charge and the quantity it should produce as these are both determined by forces beyond the firm's control.

Question 21

When the cross price elasticity between good X and other related goods is positive and very low, firm X can be assumed to have:

A) minimal market power.
B) moderate market power.
C) a significant amount of market power.
D) virtually no market power.

Question 22

The requirement that certain professionals possess a license in order to work in a particular market has the effect of reducing the supply of those services, which in turn causes:

A) price and the profits of firms in the market to increase.
B) price and the profits of firms in the market to decrease.
C) price to increase and the profits of firms in the market to decrease.
D) price to decrease and the profits of firms in the market to increase.

Question 23

In order to use lock-in as a competitive strategy, firm managers should be prepared to do all of the following except:

A) invest in a given base of customers by giving concessions initially.
B) avoid selling complementary products and access to the customer base.
C) be the first to bring a new type of product to market.
D) use loyalty programs as part of an entrenchment strategy.

Question 24

All of the following are considered input barriers to entry except:

A) control of a key raw material by a single firm.
B) the ability to obtain financing for capital projects at more favorable rates than potential competitors.
C) the fact that workers in a particular industry belong to a union.
D) a patent on a specialized type of capital that is needed to produce a particular product.

Question 25

Assume that for a particular firm's output price = $80, marginal cost = $30, average total cost = $25. This information suggests that the firm in question has:

A) no market power.
B) very little market power.
C) a fair degree of market power.
D) absolute market power.

Question 26

Which of the following statements regarding the creation of brand loyalty to create and maintain market power is false?

A) Brand loyalty efforts often focus on creating perceived, as opposed to real, differences among products.
B) Brand loyalty can be enhanced by improving the level of service associated with a particular product.
C) One study showed that, in the case of competing beers, brand loyalty has relatively little to do with price.
D) Brand loyalty is determined primarily by real differences in competing products.

Question 27

Which of the following statements regarding patents is false?

A) Patents can help firms gain market power through innovation and then act as a barrier to entry.
B) A firm that has market power as a result of a patent may be more likely to innovate than a perfectly competitive firm.
C) Patents encourage the production of information, which might otherwise be under supplied.
D) Patents can last for an indefinite time period.

Question 28

Which of the following is not a type of "lock-in" that acts as a barrier to entry into a particular market?

A) Pricing at or below the average cost of production.
B) Purchases of durable goods.
C) Loyalty programs.
D) Specialized suppliers.

Question 29

Which of the following statements regarding the requirement that a firm be granted a license to operate in a particular market is false?

A) Advocates of licensing maintain that the practice is necessary to maintain quality of service.
B) One of the economic effects of a license requirement is to constrain the available supply of the affected good or service.
C) The requirement that they be licensed ensures that the affected firms will be able to earn a positive economic profit.
D) Relaxing certain licensing requirements should increase the supply of the affected good or service.

Question 30

Which of the following contributed to the reputation for poor service Home Depot acquired between 2001 and 2006?

A) A shift toward hiring more part-time workers.
B) The imposition of a salary cap that drove often many experienced workers.
C) The move of a large percentage of workers to overnight stocking positions which meant fewer employees on the floor during business hours.
D) All of the above.

Question 31

Which of the following statements regarding generic drugs and name-brand pharmaceuticals is false?

A) Pharmaceutical companies have spent large amounts of time and money in their attempts to reduce competition from generic drugs.
B) Generic drugs have the same chemical content as the corresponding branded drug.
C) On average, a generic drug can reduce U.S. sales of a branded drug by as much as 50 percent in the first six months.
D) Pharmaceutical companies need only to renew the patents they have on certain drugs to protect them from competition by generic drugs.

Question 32

All of the following are considered to be problems associated with the use of concentration ratios to measure market power except:

A) the market definitions used in their construction may be arbitrary.
B) two different markets with the same concentration ratio may have very different distributions of market share among firms used to calculate the concentration ratio.
C) consideration of exports and imports generally causes concentration ratios to be overstated.
D) concentration ratios are often based on national statistics and may not reflect substantial concentration in a market at a more localized level.

Question 33

The Lerner Index is a measure of market power that focuses on:

A) the ratio of the price of a firm's product to the price elasticity of demand for the product.
B) the share of the market controlled by the X largest firms in the market.
C) the sum of the squares of the market share of each firm in an industry.
D) the difference between a firm's product price and its marginal costs of production.

Question 34

The measure of market power that focuses on the share of the market controlled by the X largest firms in the market is known as:

A) the Lerner Index.
B) the Herfindahl-Hirschman Index.
C) the Minimum-Efficient Scale Index.
D) a concentration ratio.

Question 35

Which of the following barriers to entry can best explain the continued success of a product that has been shown to be, in some way, harmful to the health of consumers?

A) Patent.
B) Consumer lock -in.
C) Brand loyalty.
D) Ownership of an essential resource.

Question 36

The term "network externality" refers to a barrier to entry that exists because:

A) the value of the product to a consumer depends on the number of consumers using the product.
B) a group of firms has divided the market into interconnected shares controlled by each firm.
C) several firms are able to network with each other and control the market.
D) consumers are unable to network, i.e., cooperate, with each other to control market price.

Question 37

Which of the following is not a barrier to entry that is created by government?

A) Economies of scale.
B) Licenses.
C) Regulatory restrictions.
D) Patents.

Question 38

All of the following are measures of market power except the:

A) Lerner Index.
B) Minimum-Efficient Scale Index.
C) four-firm concentration ratio for an industry.
D) Herfindahl-Hirschman Index.

Question 39

Assume that for a particular firm's output price = $80, marginal cost = $30, average total cost = $25. Based on this information, the firm's Lerner Index is equal to:

A) 0.313.
B) 0.375.
C) 0.6.
D) 0.625.

Question 40

All of the following are cited as potential explanations for the decrease in demand for Kleenex-brand facial tissues except:

A) consumers switching to substitute products.
B) market entry by lower-priced private brands.
C) advances in cold therapies.
D) the failure of the producer of Kleenex tissues to develop any new and innovative products.

Question 41

Which of the arguments Staples and Office Depot made in defense of their proposed merger would be least defensible on economic grounds?

A) There would be substantial economies of scale.
B) The two firms were in competition with all other office supply stores, not just office supply superstores.
C) The history of low pricing by the two stores meant that they would not raise prices in the future after they merged.
D) Entry into the office supply market is relatively easy.

Question 42

Which of the following is the best example of a monopolistically competitive market?

A) The wheat market.
B) The electricity market.
C) The restaurant market.
D) The market for automobiles.

Question 43

Assume the managers of the two major firms in an industry agree to set the price of their output at a fixed level so as to discourage new entrants into the market. This would be considered a violation of the:

A) Sherman Act of 1890.
B) Clayton Act of 1914.
C) Federal Trade Commission Act of 1914.
D) Celler-Kefauver Act of 1950.

Question 44

Which of the following is characteristics is common to both monoply and monopolistic competition?

A) Ease of entry into the industry.
B) Firms are price setters.
C) A relatively large number of sellers.
D) Long-run economic profit equals 0.

Question 45

Which of the following values of the Lerner Index indicates the greatest amount of market power?

A) 0.313.
B) 0.375.
C) 0.6.
D) 0.625.

Question 46

Assume it is announced that a large number of new competitors have entered the market for mountain bikes, each offering a different model. Based on this information, this industry is best characterized as:

A) perfectly competitive.
B) a monopoly.
C) monopolistically competitive.
D) an oligopoly.

Question 47

Assume the firms in a monopolistically competitive industry initially are earning positive economic profits. Which of the following will not occur over time?

A) The firms' economic profits will be reduced.
B) New firms will enter.
C) Demand for the existing firms' output will become more inelastic.
D) The number of substitutes available in the industry will increase.

Question 48

The monopolistically competitive seller's demand curve will tend to become more elastic the:

A) smaller the number of sellers.
B) greater the degree of product differentiation.
C) larger the number of close competitors.
D) more significant the barriers to entering an industry.

Question 49

The Justice Department is most likely to oppose a proposed merger on the basis of the Herfindahl-Hirschman Index when the post-merger HHI is:

A) less than 100.
B) less than 1000.
C) between 1000 and 1800.
D) greater than 1800.

Question 50

Because firms produce a differentiated product, each of the firms in a monopolistically competitive market faces a demand curve that is:

A) perfectly elastic.
B) perfectly inelastic.
C) downward sloping.
D) perfectly elastic or perfectly inelastic depending on whether the firm's output is a luxury or a necessity.

Question 51

The federal law that prohibits, among other things, price discrimination that lessens competition, the use of tie-in sales, and mergers between firms that reduce competition is the:

A) Sherman Act of 1890.
B) Clayton Act of 1914.
C) Federal Trade Commission Act of 1914.
D) Celler-Kefauver Act of 1950.

Question 52

The federal law that prohibits, among other things, "unfair" competition and created the Federal Trade Commission is the:

A) Sherman Act of 1890.
B) Clayton Act of 1914.
C) Federal Trade Commission Act of 1914.
D) Celler-Kefauver Act of 1950.

Question 53

All of the following are characteristics of long-run equilibrium for firms in a monopolistically competitive market except:

A) price equals marginal cost.
B) price equals average total cost.
C) marginal cost equals marginal revenue.
D) price exceeds the minimum of average total cost.

Question 54

The Sherman Antitrust Act:

A) prohibits conspiracies in restraint of trade.
B) allows the formation of trusts so long as they are public enterprises.
C) allows a group of firms to form a trust only if it is done to take advantage of economies of scale.
D) prevents the military from using armored vehicles on the public streets.

Question 55

The Herfindahl-Hirschman Index is a measure of market power that focuses on:

A) the ratio of the price of a firm's product to the price elasticity of demand for the product.
B) the share of the market controlled by the X largest firms in the market.
C) the sum of the squares of the market share of each firm in an industry.
D) the difference between a firm's product price and its marginal costs of production.

Question 56

Which of the following measures is used by the Justice Department to evaluate the competitive effects of proposed mergers?

A) The Lerner Index.
B) The eight-firm concentration ratio for an industry.
C) The four-firm concentration ratio for an industry.
D) The Herfindahl-Hirschman Index.

Question 57

Which of the following would be least likely to lead the Justice Department and the FTC to block a proposed horizontal merger?

A) A finding that the resulting firm might be able to unilaterally affect price and output.
B) A finding that the potential for entry into the market by new firms would be adversely affected.
C) A finding that the potential for coordination among sellers in the market would be enhanced.
D) A finding that resulting cost savings and efficiencies would offset any increase in market power.

Question 58

Microsoft enjoyed the benefit of several barriers to entry, including all of the following except:

A) lock in and switching costs.
B) patents and copyright protection.
C) input barriers.
D) network externalities.

Question 59

The federal law that prohibits, among other things, conspiracies in restraint of trade, monopolization, or combinations or conspiracies to monopolize is the:

A) Sherman Act of 1890.
B) Clayton Act of 1914.
C) Federal Trade Commission Act of 1914.
D) Celler-Kefauver Act of 1950.

Question 60

The Clayton Act:

A) was passed in 1985 over the objections of then President Reagan.
B) outlaws racial discrimination in the practice of business.
C) outlaws the ownership of stock by the U.S. government unless it is in public enterprises.
D) outlaws price discrimination unless based on cost differences.

Question 61

Suppose the firms in a monopolistically competitive market are incurring economic losses. What will happen to move the market to its long-run equilibrium?

A) More close substitutes will appear in the market until economic profits are zero.
B) The firms that dropped out of the market will reenter once the level of economic losses is zero.
C) Firms will continue to exit the market until economic losses are equal to zero.
D) The demand functions of all the firms remaining in the market will become relatively more elastic.

Question 62

Barriers to entry serve to limit the number of firms that operate in a particular market and, as such, reduce the amount of total profit earned in the market.

Question 63

Patents and copyrights create incentives for individuals to create information that might not be produced otherwise.

Question 64

The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.

Question 65

Barriers to entry reduce the likelihood that price-setter firms will see their positive economic profits competed away over time.

Question 66

A price-setting firm prefers to operate in the inelastic portion of its demand curve because total revenue increases when price is increased.

Question 67

The term "price setter" refers to a firm that faces a downward-sloping demand curve and must therefore set the combination of output and price that will maximize the firm's profits.

Question 68

Because barriers to entry limit the amount of competition in various markets, government policy should be designed to reduce or eliminate such barriers wherever possible.

Question 69

Price will always exceed marginal cost for the profit-maximizing monopolist, or any price-setter firm for that matter.

Question 70

So long as a monopolist finds itself in the situation where price is greater than average fixed cost at the profit-maximizing loss-minimizing) level of output, the firm should continue to operate to minimize its losses.

Question 71

Because a price setter has control over both the level of output it produces and the price it charges, it can select from a number of different combinations of output and price levels that will maximize its profits.

Question 72

Any firm that operates in an imperfectly competitive market faces a downward-sloping demand curve for its product.

Question 73

Although monopoly and perfect competition result in different market outcomes, the fact that firms in both market structures work to maximize their profits ensures that resources are allocated efficiently in both situations.

Question 74

For a monopolist to earn a positive economic profit, price has to exceed average total cost at the level of output at which marginal revenue equals marginal cost.

Question 75

Price will be higher and output will be lower under monopoly than under perfect competition with the same demand and cost conditions.

Question 76

Even if production of a good is characterized by economies of scale, consumers of the good would be best served by having a large number of small firms produce the good because of the effects of increased competition.

Question 77

Suppose the firms in a monopolistically competitive market are earning positive economic profits. What will happen to move the market to its long-run equilibrium?

A) The firms' demand curves will become less elastic.
B) The demand curves faced by firms in the market will shift to the right.
C) More close substitutes will appear in the market.
D) Some firms will exit the market if they can't cover all of their fixed and variable costs.

Question 78

Consumers lose when a market is served by a monopolist to the extent that units of output for which the price consumers are willing to pay exceeds the marginal costs of production are not produced.

Question 79

Economies of scale can benefit consumers to the extent that the costs of production incurred by the firms in the industry are lower than they would otherwise be. At the same time, the price-setting power of those firms is increased, which could hurt consumers.

Question 80

Licensing requirements for doctors, which are intended primarily to maintain the quality of persons who work in the profession, have no the effect on the profits of those individuals because the number of competitors is so large.