Deck 13: Monopoly

Question 1

Reference: Ref 13-1 (Figure: Maximum Willingness to Pay) Refer to the figure. What is the maximum price that the consumer is willing to pay for 100 units?

A) $100
B) $80
C) $75
D) $90

Answer 1

A

Question 2

(Figure: Monopolist Profits) Refer to the figure. Which of the following answers correctly indicates the profit earned by this monopolist, at the profit-maximizing quantity?

A) the area A + B
B) the area A - B
C) the area (A + B) - MC
D) area A

Answer 2

D

Question 3

Which of the following statements about monopoly power is correct?

A) Monopoly power is the power attained solely by single firm monopolists.
B) Monopoly power is the power to raise price above average cost without facing new entry of firms.
C) Monopoly power is granted by the government to monopolists.
D) Firms attaining monopoly power always set the price at the maximum.

Answer 3

B

Question 4

When comparing a monopoly with a competitive industry:

A) monopoly quantity and monopoly price will be lower than that of a competitive firm.
B) monopoly quantity will be higher, and monopoly price will be lower, than that of a competitive firm.
C) monopoly quantity will be lower, and monopoly price will be higher, than that of a competitive firm.
D) monopoly quantity and monopoly price will be higher than that of a competitive firm.

Question 5

A profit-maximizing monopolist's total profit can be found by calculating:

A) MR - MC.
B) TR - TC.
C) AR - AC.
D) MC - MR.

Question 6

Reference: Ref 13-1 (Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit-maximizing quantity?

A) 125
B) 110
C) 100
D) 75

Question 7

Reference: Ref 13-1 (Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit that the monopolist is earning?

A) $10,000
B) $5,500
C) $4,500
D) There is not enough information to answer the question.

Question 8

For a monopolist, MR is always less than P because:

A) when a monopolist lowers the price to sell more units, it must lower the prices of all units sold.
B) MR is always less than P regardless of what type of firm we are discussing.
C) marginal revenue is always lower for the next unit sold.
D) when a monopolist needs to sell more units, it must lower marginal revenue in order to do so.

Question 9

Reference: Ref 13-2 (Table: Profit-Maximizing Monopolist) Refer to the table. When this monopolist sells 8 units, its average cost and marginal cost levels are:

A) $2.63 and $2 respectively.
B) $2.56 and $4 respectively.
C) $2.56 and $2 respectively.
D) $2.63 and $4 respectively.

Question 10

Which of the following is not a reason that monopolies arise?

A) patents
B) economies of scale
C) excess competition
D) control of natural resources

Question 11

Which of the following is always TRUE for monopolies?

A) MR > D
B) P > MR
C) P > AC
D) TR > TC

Question 12

What is the profit maximization condition for a monopolist?

A) MR > MC
B) MR = MC
C) AR = MC
D) AR = D

Question 13

Which of the following is TRUE for monopolists?

A) They charge a price below average cost, which guarantees above normal profits.
B) Their marginal revenue increases with output.
C) They maximize profits by producing at the midpoint of their demand curve.
D) They produce all units of output for which marginal revenue is greater than or equal to marginal cost.

Question 14

When a pharmaceutical company discovers a new drug, patent law gives it market power by guaranteeing:

A) partial ownership of the right to sell the drug for an unlimited number of years.
B) partial ownership of the right to sell the drug for a limited number of years.
C) sole ownership of the right to sell the drug for a limited number of years.
D) sole ownership of the right to sell the drug for an unlimited number of years.

Question 15

GlaxoSmithKline owns a government grant of temporary monopoly rights on Combivir, the AIDS drugs, due to:

A) patents.
B) laws preventing entry of competitors.
C) economies of scale.
D) innovation.

Question 16

Reference: Ref 13-2 (Table: Profit-Maximizing Monopolist) Refer to the table. For the quantity of 6 units, this monopolist's average cost and average revenue levels are:

A) $2.71 and $10 respectively.
B) $2.83 and $11 respectively.
C) $2.71 and $2 respectively.
D) $2.83 and $2 respectively.

Question 17

Reference: Ref 13-2 (Table: Profit-Maximizing Monopolist) Refer to the table. When this monopolist is producing 9 units:

A) its marginal cost is below the marginal revenue level.
B) its average revenue is greater than the price it receives for the product.
C) it could increase its profit by raising the price and selling fewer units.
D) it is producing at the socially optimal level.

Question 18

If the demand curve for a firm is a straight line with negative slope, which of the following is the shortcut to finding the MR?

A) The demand curve starts below the marginal revenue curve and cuts the marginal revenue curve halfway down its length.
B) The marginal revenue curve starts at the same point as the demand curve, and has twice the slope of the demand curve.
C) The marginal revenue curve is parallel to the demand curve with the same slope.
D) The marginal revenue curve starts at the same point as the demand curve and has a slope of 0.

Question 19

Reference: Ref 13-2 (Table: Profit-Maximizing Monopolist) Refer to the table. The profit-maximizing quantity for this monopolist is ________ units

A) 7
B) 8
C) 9
D) 10

Question 20

Which of the following statements is TRUE?

A) Market power is the ability to raise price and sell more units of a good.
B) Market power may result from government regulations and patent protection.
C) A monopoly is a firm without market power.
D) All of the answers are correct.

Question 21

(Table: Monopolist) Refer to the table. What is the monopolist's profit-maximizing level of output?

A) 3
B) 4
C) 5
D) 6

Question 22

Typical evidence for the existence of market power would be market prices:

A) below production costs.
B) equal to production costs.
C) above production costs.
D) varying with market supply and demand conditions.

Question 23

Monopoly power is best described as:

A) the ability to charge the profit-maximizing price.
B) the ability to produce the profit-maximizing output level.
C) the ability to earn economic profits without causing new firms to enter the market.
D) the ability to produce where marginal revenue intersects halfway between the origin and the demand curve.

Question 24

Which of the following statements is TRUE?

A) If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling more units at a lower price per unit.
B) If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling fewer units at a higher price per unit.
C) When a monopolist produces where MR = MC it always earns a positive economic profit
D) A monopolist is guaranteed monopoly profits.

Question 25

Reference: Ref 13-3 (Figure: Monopoly Profits) Refer to the figure. What is the monopolist's price and output level?

A) P = $3.00; Q = 40
B) P = $16.50; Q = 40
C) P = $6.00; Q = 40
D) P = $6.00; Q = 80

Question 26

To maximize profit a monopolist will produce the level of output where:

A) marginal revenue is equal to average cost.
B) average revenue is equal to marginal cost.
C) marginal revenue is equal to marginal cost.
D) average revenue is equal to average cost.

Question 27

Suppose that a monopolist can sell five units of output at a price of $5 or six units of output at a price of $4. What is the marginal revenue of the sixth unit?

A) $24
B) $49
C) -$1
D) $4

Question 28

If the quantity demanded for a hand-carved pineapple is 2 at a price of $16, and the quantity demanded will increase to 3 if the seller lowers the price to $14, what is the seller's marginal revenue from selling 3 units of pineapple?

A) 8
B) 24
C) 10
D) 14

Question 29

Reference: Ref 13-3 (Figure: Monopoly Profits) Refer to the figure. The monopolist earns a profit of:

A) $630.
B) $420.
C) $540.
D) $480.

Question 30

Reference: Ref 13-4 (Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by producing at output equal to:

A) Q1.
B) Q2.
C) Q3.
D) Q4.

Question 31

Assuming the same cost structure, a competitive market produces ________ output at ________ prices than a monopoly market.

A) less; lower
B) more; lower
C) less; higher
D) more; higher

Question 32

A monopolist can sell 300 units of output for $29.00 per unit. Alternatively, it can sell 301 units of output for $28.25 per unit. The marginal revenue of the 301st unit of output is:

A) -$196.75.
B) -$0.75.
C) $196.75.
D) $28.25.

Question 33

The marginal revenue curve is a straight line beginning at the same point on the:

A) horizontal axis as the demand curve but with half of the slope.
B) vertical axis as the demand curve but with half of the slope.
C) horizontal axis as the demand curve but with twice the slope.
D) vertical axis as the demand curve but with twice the slope.

Question 34

In a graph showing a straight-line market demand curve, the marginal revenue curve is:

A) a straight line that begins at the same point as the demand curve on the y-axis but with twice the slope.
B) a straight line that begins at the origin but with twice the slope of the demand curve.
C) the same straight line as the demand curve.
D) There is not enough information to complete the statement.

Question 35

To maximize profit, the monopolist increases output:

A) until it is using full manufacturing capacity.
B) until marginal cost is equal to marginal revenue.
C) to the same amount it would produce if the firm was competitive, but maximizes price.
D) as long as the marginal revenue curve is higher than the demand curve.

Question 36

A firm with monopoly power is able to set a markup price that is:

A) lower than prices on similar goods sold by competitive firms.
B) the same as the prices on similar goods sold by competitive firms.
C) higher than prices on similar goods sold by competitive firms.
D) the maximum price a market participant will pay for similar goods.

Question 37

Figure: Maximize Monopoly Profits Reference: Ref 13-4 (Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by charging a price equal to:

A) P1.
B) P2.
C) P3.
D) P4.

Question 38

GlaxoSmithKline (GSK) maximizes profit by producing a quantity of 800 pills where marginal cost is $2 and average cost is $4. Consumers are willing to pay as much as $10 per pill when the quantity supplied is 800 pills. What is the maximum amount of profit that GSK can earn under these conditions?

A) $3,200
B) $4,800
C) $6,400
D) $8,000

Question 39

When a monopolist decreases the price of its good, consumers:

A) buy the same amount of the good as before.
B) buy more.
C) buy less.
D) may buy more or less, depending on the price elasticity of demand.

Question 40

If a monopolist faces a straight-line downward sloping demand curve, the price of the units it sells is always:

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

Question 41

A monopoly is able to mark up the price above marginal cost:

A) when the demand is more price-elastic.
B) when the demand is less price-elastiB.
C) when there is more marginal revenue per unit solC.
D) at will regardless of price-elasticity.

Question 42

A firm would prefer that its product demand curve is:

A) perfectly elastic.
B) elastic.
C) inelastic.
D) horizontal.

Question 43

When a good has relatively few substitutes:

A) demand for the good is elastic.
B) monopolists will tend to increase their markup for the good.
C) monopolists will tend to decrease their markup for the good.
D) producers will be able to "steal" all of the consumer surplus from consumers.

Question 44

A consumer is ________ likely to be sensitive to price if the purchase ________ covered by insurance.

A) more; is
B) less; is
C) less; is not
D) None of the answers is correct.

Question 45

Reference: Ref 13-5 (Figure: Monopoly Markup) Refer to the figure. Consumer surplus under monopoly is represented by:

A) triangle abc.
B) triangle cef.
C) square bcde.
D) triangle adf.

Question 46

With health insurance, medical treatments are paid by someone other than the patient, which will make consumers with serious diseases relatively:

A) insensitive to the price of pharmaceuticals.
B) sensitive to the price of pharmaceuticals.
C) insensitive to the premium of health insurance.
D) sensitive to the premium of health insurance.

Question 47

Which of the following statements is correct?

A) A monopolist's marginal cost is greater than its price.
B) The more inelastic the demand curve, the greater the monopolist's markup.
C) The monopolist's profit is equal to P(Q - MR).
D) The position of the marginal revenue curve on the y-axis reflects consumer demand elasticity.

Question 48

The "You can't take it with you" effect potentially increases market power for pharmaceuticals if consumers who are dying of disease are also:

A) more inclined to spend their money on medicine than to save it.
B) more inclined to bequeath their money than spend it on medicine.
C) relatively sensitive to the price of life-saving pharmaceuticals.
D) relatively sensitive to how they spend money.

Question 49

A) 40.
B) 65.
C) 80.
D) 100.

Question 50

Which of the following statements is TRUE?

A) Consumer surplus under competition is greater than consumer surplus under monopoly.
B) Producer surplus under competition is greater than producer surplus under monopoly.
C) Total surplus under monopoly is greater than total surplus under competition.
D) Deadweight loss is greater in markets where monopoly power is less significant.

Question 51

Which of the following effects would generally make demand curves more inelastic?

A) "You can't take it with you" effect
B) "Other people's money" effect
C) Both effects
D) Neither effect

Question 52

Reference: Ref 13-5 (Figure: Monopoly Markup) Refer to the figure. The deadweight loss attributable to monopoly is:

A) triangle abc.
B) triangle cef.
C) square bcde.
D) triangle adf.

Question 53

A monopolist sells in two different markets and charges the same price of $10 in both markets. In Market A, the demand curve is described by Qd = 50 - 2P. In Market B, the demand curve is described by Qd = 60 - P. If the monopolist lowers prices by $1 in the market with the more elastic demand and raises prices by $1 in the market with the more inelastic demand curve, how much does its total revenue change by?

A) -$33
B) $459
C) $767
D) $308

Question 54

A monopolist can raise its price further above marginal cost, the more ______ its ______ is.

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

Question 55

The economic inefficiency of a monopolist can be measured by the:

A) excess profit generated by monopoly firms.
B) poor quality of service offered by monopoly firms.
C) number of consumers who are unable to purchase the product because of its high price.
D) deadweight loss involved relative to a competitive firm.

Question 56

(Figure: Monopoly Markup) Refer to the figure. The monopolist's markup is: Figure: Monopoly Markup

A) a - b.
B) b - d.
C) d.
D) a - d.

Question 57

Under monopoly, the portion of the outgoing consumer surplus that is not transferred to the monopoly firm or still considered consumer surplus is:

A) known as deadweight loss.
B) the key to making the moral case against monopoly.
C) transferred to the government.
D) available to third parties who benefit from sales of the monopolist's output.

Question 58

Reference: Ref 13-5 (Figure: Monopoly Markup) Refer to the figure. Consumer surplus under competition is represented by:

A) triangle abc.
B) triangle cef.
C) square bcde.
D) triangle adf.

Question 59

When the demand curve for the profit-maximizing monopolist's product is relatively inelastic:

A) it cannot raise the price of the product above the marginal cost of the product.
B) raising the product's price will lower the total revenue for the product.
C) the product does not have good substitutes.
D) All of these choices are correct.

Question 60

A monopolist increased output by 100 units, but cut prices by $20 to sell this additional output at $1,000 per unit. What is TRUE about marginal revenue?

A) MR totals $2,000
B) MR totals $100,000
C) MR totals -$2,000
D) MR cannot be calculated with the information given.

Question 61

Nobel Prize-winning economic historian Douglass North argues that:

A) monopolies have been the leading cause of slow growth in developing nations.
B) economic growth was slow until patent laws were created to protect innovation.
C) economic growth would improve if the government created more natural monopolies.
D) corruption may actually lead to increases in innovation and development of new products.

Question 62

One way that has been suggested to eliminate deadweight loss from monopoly power without reducing incentives to innovation is to:

A) have government pay monopolists to reduce their output.
B) have government pay monopolists to acquire the patent rights.
C) have government eliminate the patent system.
D) require that the patent-owners allow competitors to use their innovations.

Question 63

Suppose that the government decided to reduce pharmaceutical patent protection by requiring companies to sell their drugs at marginal cost. What are the likely consequences of such a policy?

A) There would be an increase in consumer surplus.
B) The deadweight loss in the market would decline.
C) The future supply of new drugs would decrease.
D) All of these statements are correct.

Question 64

In a monopoly market:

A) the lack of competition causes the price of the product to equal average cost.
B) a firm maximizes profits by producing the level of output that minimizes average cost.
C) the additional revenue from selling one more unit of output usually is greater than the price.
D) the lure of above-normal profits may give a firm an incentive to develop new products and technologies.

Question 65

Many people argue that the U.S. government should control pharmaceutical prices. What would most likely happen as a result of this policy?

A) Lower prices would mean lower profits and hence less incentive for firms to engage in research and development of new drugs.
B) Government price controls on pharmaceuticals would lead to an increased standard of living.
C) The number of new drugs would increase as firms would compete for new markets.
D) Demand for pharmaceuticals would increase as a result of the lower prices.

Question 66

Which of the following correctly defines a monopoly that has economies of scale?

A) a single firm operating in a market
B) a single firm that can supply the market at a lower cost than two or more firms
C) a single firm that controls the production of a natural resource
D) a single firm that produces the efficient and socially optimal quantity in a market

Question 67

Which of the following statements is correct? Once a patent expires: I. monopoly profits increase. II. deadweight loss is eliminated. III. generic equivalents appear quickly.

A) I and III only
B) III only
C) II and III only
D) I and II only

Question 68

If a pharmaceutical company discovering a new drug is not granted a patent to retain its monopoly power on the drug:

A) innovation in the pharmaceutical industry will increase.
B) the number of new drugs is likely to increase.
C) more pharmaceutical companies will engage in discovering new drugs.
D) research and development in discovering new drugs will decrease.

Question 69

Economist Michael Kremer offered a unique solution to the problem of deadweight loss created by monopolies that have control of an innovation. What solution did he propose that would leave the drive to innovate uncompromised?

A) The government should buy out the innovation created by the monopoly.
B) The government should sell a patent to the monopoly that creates the innovative technology.
C) The government should buy out the rights of the patent from the monopoly.
D) The government should place a price control on the monopoly's product.

Question 70

High prices charged by monopolists will cause the monopolists':

A) gains to exceed the consumer losses.
B) gains to be less than the consumer losses.
C) losses to exceed the consumer gain.
D) losses to be less than the consumer gain.

Question 71

One of the great lessons of economics is that:

A) higher prices lead to less demand and increased innovation by firms.
B) monopolies may increase efficiency if properly constructed by the government.
C) good institutions channel self-interest toward social prosperity, whereas poor institutions channel self-interest towards social destruction.
D) corruption may increase efficiency if it leads to increased innovation.

Question 72

When a monopolist maximizes social surplus, it produces at an optimal Q where:

A) AR = MC.
B) MR = MC.
C) D = AC.
D) AR = AC.

Question 73

A) abd.
B) acdf.
C) bcdf.
D) def.

Question 74

Which of the following statements is TRUE? I. Competitive markets channel the self-interest of business leaders toward social prosperity. II. Political structures often channel self-interest toward social destruction. III. Many monopolies are government-created.

A) I and III
B) I and II
C) II and III
D) I, II, and III

Question 75

Which of the following statements is TRUE?

A) Monopolized economies lead to more poverty and less economic growth.
B) Competitive market economies lead to higher prices for everyone.
C) Social prosperity is typically the result of government- created monopolies.
D) Business leaders in the United States are more self- interested than business leaders in lesser-developed nations.

Question 76

Which of the following statements is correct?

A) Patents are one way of preventing monopoly.
B) If pharmaceutical patents are enforced, the number of new drugs will decrease.
C) Monopoly profit encourages firms to research and develop new drugs.
D) Competition creates incentives for the invention of new drugs.

Question 77

Modern theories of economic growth emphasize that monopolies:

A) are always detrimental to economic growth due to the deadweight loss they inflict on markets.
B) may be beneficial to growth in less-developed countries, but only lead to higher prices in well-developed market economies.
C) may sometimes be necessary for economic growth.
D) only exist because of corruption and government interference in markets.

Question 78

In a purely monopolized environment where each monopolist succeeds at raising its price, the result would be:

A) demand is lower for all goods and profits fall.
B) higher prices spread throughout the economy resulting in increased poverty.
C) higher prices lead to increased competition.
D) wages increase as well, leading to higher incomes across the population.

Question 79

A monopolist's TC function and MC functions are as follows: TC = 20 + 4Q and MC = 4. This monopolist can be said to have which of the following characteristics?

A) It must be producing at the socially optimal level of output.
B) It is a natural monopoly.
C) The marginal cost curve rises at an increasing rate.
D) It is one of two firms in the industry.

Question 80

When a regulated monopolist maximizes social surplus, it produces at an optimal Q where:

A) P = MC.
B) MR = MC.
C) D = AC.
D) AR = AC.