Deck 9: Monopoly

Question 1

The monopolist's demand curve is:

A) identical to the market demand curve.
B) identical to the marginal revenue curve.
C) below the marginal revenue curve.
D) a horizontal line at the market price.

Answer 1

A

Question 2

An industry is said to be a natural monopoly when:

A) legal barriers limit entry into the market.
B) diseconomies of scale are present in the market.
C) the market demand for the product supplied by a firm is inelastic.
D) long-run average cost continues to decline as the quantity of output increases.

Answer 2

D

Question 3

Which of the following distinguishes a natural monopoly from monopoly caused by ownership of a vital resource?

A) The natural monopoly has a marginal cost curve above its average cost curve at all levels of output, whereas the marginal cost in other monopolies is above average cost.
B) The natural monopoly does not require any government intervention because it is only efficient to have one large firm supplying the market, but other monopolies do require government intervention to maintain efficiency.
C) The natural monopoly has a downward-sloping long-run average cost curve as opposed to a U-shaped long-run average cost curve.
D) The natural monopoly occurs with naturally occurring products like gold and diamonds, whereas other monopolies occur with man-made products.

Answer 3

C

Question 4

Which of the following is true under natural monopoly?

A) The marginal cost curve will be above the average cost curve.
B) The monopolist will set price equal to marginal cost and will earn economic profits.
C) Economies of scale exist.
D) Output is produced under conditions of constant cost.

Question 5

A monopoly is:

A) a seller of a highly advertised and differentiated product in a market with low barriers to entry in the long run.
B) the only seller of a good for which there are no good substitutes in a market with high barriers to entry.
C) the only buyer of a unique raw material.
D) the producer of a product subsidized by the government.

Question 6

A monopolist faces a downward-sloping demand curve because:

A) the demand for its product is inelastic.
B) the industry demand curve is horizontal.
C) resource prices increase as the monopolist expands output.
D) the entire market demand curve is the monopolist's demand curve.

Question 7

Which of the following is not associated with the monopoly market structure?

A) many sellers
B) a single seller
C) a unique product
D) impossible entry into the market

Question 8

Why can a monopoly earn economic profits in the long run?

Question 9

A natural monopoly is a market where:

A) a single firm has control over a vital natural resource.
B) many smaller firms can produce the entire market output at the same per-unit cost as could one large firm.
C) a single large firm can produce the entire market output at a lower per-unit cost than a group of smaller firms.
D) many smaller firms can produce the entire market output at a lower per-unit cost than could one large firm.

Question 10

Which of the following factors is not a barrier limiting the entry of potential competitors into a market?

A) legally enforced patent rights
B) an inelastic demand for a product
C) economies of scale
D) ownership of a vital resource

Question 11

What is a natural monopoly? Why is government justified in regulating a natural monopoly?

Question 12

Alcoa had a monopoly in the U.S. aluminum market from the late nineteenth century until the end of World War II. Which barrier to entry was the source of Alcoa's monopoly power?

A) ownership of a vital resource
B) government franchises and licenses
C) patents and copyrights
D) economies of scale

Question 13

Which of the following firms best fits the definition of a monopoly?

A) General Motors
B) Exxon Mobil
C) Local electric utility
D) AT&T

Question 14

For a monopolist:

A) price equals average total cost.
B) price is above marginal revenue.
C) marginal revenue equals zero.
D) marginal cost equals zero.

Question 15

Which of the following describes the monopoly market structure?

A) few firms operating as price takers
B) single firm operating as a price taker
C) single firm that is a price maker
D) many firms that are price makers

Question 16

Which of the following best explains why the monopolist's marginal revenue is less than the selling price?

A) To sell more units, the monopolist must reduce price on all units sold.
B) As the monopolist expands output, the average total cost will decline.
C) The monopolist charges each consumer the highest possible price.
D) When a firm has a monopoly, consumers have no choice other than to pay the price set by the monopolist.

Question 17

Why do economies of scale and monopoly power exist with network goods?

A) Many small firms must develop to serve all of the consumers willing to pay for access to the network good, so their costs are driven down.
B) Network goods require a group of sellers working together and this cooperation reduces the firms' cost per unit.
C) Just as the value of a network good decreases to each user as the total number of users increases, so does the long run average cost decrease as output increases.
D) As the number of people connected to a network increases, the greater the benefits each person gets and the smaller the cost per unit to supply.

Question 18

A monopolist always faces a demand curve that is:

A) perfectly inelastic.
B) perfectly elastic.
C) unit elastic.
D) the same as the entire market demand curve.

Question 19

Suppose a single firm can produce 100 units at an average cost of $15. If two firms produce 50 units each, the total cost rises to $2,500. Which of the following is true about this market?

A) The demand for this product will be higher if there are two firms producing the product than if there is only one.
B) It is more efficient to have two firms so they each have a competitor.
C) Neither firm can make a profit.
D) It is a natural monopoly.

Question 20

Which barrier to entry results in the creation of a natural monopoly?

A) legal barriers like government franchises
B) economies of scale
C) ownership of a vital resource
D) patents and copyrights

Question 21

If marginal cost exceeds marginal revenue, a profit-maximizing monopolist will:

A) restrict output to increase the price even higher.
B) raise price and expand output to increase profit.
C) lower price and expand output to increase profit.
D) attempt to maintain this position because it is consistent with profit maximization.

Question 22

Exhibit 9-5 Demand and cost data for a monopolist

Refer to Exhibit 9-5. The demand schedule and cost schedule for a monopolist are provided. Which output level maximizes profit?

A) 2.
B) 6.
C) 4.
D) 7.

Question 23

If marginal costs increase, a monopolist will:

A) decrease price and increase output.
B) decrease both price and output.
C) increase price and decrease output.
D) increase both price and output.

Question 24

To maximize its profit, a monopoly should choose a price where demand is:

A) elastic.
B) inelastic.
C) unitary elastic.
D) vertical.

Question 25

For a monopolist with a downward-sloping demand curve,

A) when the price is equal to zero, marginal revenue is equal to zero.
B) the coefficient of price elasticity of demand is zero.
C) as price increases, marginal revenue decreases.
D) as price decreases, marginal revenue decreases.

Question 26

Exhibit 9-2 Demand and cost information for a monopoly

The marginal revenue of the second unit of output in Exhibit 9-2 is:

A) 10.
B) 20.
C) 30.
D) 40.

Question 27

Exhibit 9-7 Monopolist
​

According to the information provided in Exhibit 9-7, if the Rudd Ice Company is a monopoly and is currently charging a price of $10, what would you advise Rudd to do?

A) Stay where he is currently operating because he is charging the profit-maximizing price.
B) Increase price and increase output.
C) Decrease price and increase output.
D) Increase output and hold price constant.

Question 28

Exhibit 9-6 Monopoly
​

When the monopolist is maximizing total profit in Exhibit 9-6, the average total cost of producing that output level is:

A) $4.
B) $6.
C) $7.
D) $8.

Question 29

Exhibit 3  Demand and cost curves for GeneTech, a monopolist  with a patented vaccine

In Exhibit 9-3, what is the maximum hourly profit that GeneTech can earn from its vaccine?

A) $1,500.
B) $3,000.
C) $4,500.
D) $10,500.

Question 30

A monopolist earning economic profit in the short run determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit?

A) Raise price and lower output.
B) Lower price and lower output.
C) Raise price and raise output.
D) Lower price and raise output.

Question 31

Exhibit 9-4 Demand and cost curves for a monopolist
​

As shown in Exhibit 9-4, in order to maximize its profit (or minimize its loss), how much output should the monopoly produce?

A) 2 units per hour.
B) 4 units per hour.
C) 6 units per hour.
D) 8 units per hour.

Question 32

Exhibit 3  Demand and cost curves for GeneTech, a monopolist  with a patented vaccine

In Exhibit 9-3, how much vaccine should GeneTech produce to maximize its profit?

A) 300 doses per hour.
B) 400 doses per hour.
C) Between 400 and 500 doses per hour.
D) 500 doses per hour.

Question 33

A monopoly firm can sell its fourth unit of output for a price of $250. To sell more than five units, it must expect to receive a price:

A) equal to $250.
B) greater than $250.
C) less than $250.
D) equal to $340.

Question 34

Exhibit 9-5 Demand and cost data for a monopolist

By calculating the data provided in Exhibit 9-5, how much is the profit if the firm decides to produce 7 units?

A) 0.
B) 24.
C) 16.
D) 12.

Question 35

Exhibit 9-7 Monopolist
​

According to the information provided in Exhibit 9-7, if the Rudd Ice Company is a monopoly and is currently charging a price of $6, what would you advise Rudd to do?

A) Stay where he is currently operating because he is charging the profit maximizing price.
B) Increase price and decrease output.
C) Decrease price and increase output.
D) Increase output and hold price constant.

Question 36

At a price of $5, 24 units of the good would be sold; at a price of $7, 25 units of output would be sold. The marginal revenue of the 25th unit of output is:

A) $14.
B) $55.
C) $6.
D) $175.

Question 37

Exhibit 9-2 Demand and cost information for a monopoly

Refer to Exhibit 9-2. Using the rule that focuses on the marginal approach to maximizing profits, the monopolist maximizes profit by choosing price equal to:

A) $40.
B) $20.
C) $10.
D) $30.

Question 38

Exhibit 9-4 Demand and cost curves for a monopolist
​

As shown in Exhibit 9-4, in order to maximize its profit (or minimize its loss), what price should the monopoly charge for its product?

A) $60 per unit.
B) $90 per unit.
C) $120 per unit.
D) $150 per unit.

Question 39

A monopoly:

A) can increase price and increase output at the same time.
B) can charge any price it wants and still sell all of its output.
C) can sell any output it produces provided it accepts the market price.
D) must lower price in order to increase output.

Question 40

Exhibit 9-1 Monopolist's demand curve
​

In Exhibit 9-1, the marginal revenue curve corresponding to the monopolist's demand curve would be a straight line drawn between points:

A) A to B.
B) A to D.
C) C to B.
D) C to D.

Question 41

Economists do not think price discrimination is unfair because

A) people with higher incomes should pay higher prices than those with lower incomes.
B) if the prices charged to some buyers get too high, those who are able to buy at lower prices will just resell their purchases to the people facing the high prices.
C) economists are concerned with efficiency rather than fairness.
D) more buyers are able to purchase the good with price discrimination, some buyers pay a lower price than if there were a single price, and sellers earn higher profit than if there were a single price.

Question 42

Which of the following correctly describes price discrimination?

A) Selling different products to different people for the same price.
B) Selling different products to identical people for different prices.
C) Selling the same product to different people for different prices.
D) Selling the same product to the same person for the same price.

Question 43

Suppose a monopolist and a perfectly competitive firm have the same cost curves. The monopolistic firm would:

A) charge a lower price than the perfectly competitive firm.
B) charge a higher price than the perfectly competitive firm.
C) charge the same price as the perfectly competitive firm.
D) refuse to operate in the short run unless an economic profit could be made.

Question 44

An example of price discrimination is the price charged for:

A) an economics textbook at a campus bookstore.
B) gasoline.
C) a piece of art sold at an auction.
D) a postage stamp.

Question 45

A price-discriminating monopoly charges the lowest price to the group that:

A) has the most elastic demand.
B) purchases the largest quantity.
C) engages in the most arbitrage.
D) is least responsive to price changes.

Question 46

Ricky and Anita are 10 year-olds who have a lemonade stand on a busy beach and would like to practice price discrimination. They know that they are the only sellers of lemonade on the beach and that adults have a less elastic demand for lemonade than kids so they decide to sell their lemonade for $0.25 to kids and $0.50 to adults. Will their price discrimination be successful? Why or why not?

A) Yes, they have all of the necessary criteria to successfully price discriminate.
B) Yes, the only necessary conditions is that they know the relative elasticities of the market segments.
C) No, the kids who buy their lemonade can practice arbitrage.
D) No, Ricky and Anita are price takers.

Question 47

What are the conditions for price discrimination?

Question 48

Which of the following scenarios demonstrates price discrimination?

A) Bananas at the grocery store are sold for $0.69 per pound.
B) Tickets to a play are sold for $15 for students and $25 for adults.
C) General admission concert tickets are sold for $40.
D) Strawberries are sold for $2.00 per quart in the early summer and $5.00 per quart in the winter.

Question 49

Suppose that a study of changes in admission prices reveals that when the price of admission to the museum increases by 10%, adults reduce their ticket purchases by 10%, senior citizens reduce their ticket purchases by 20%, college students reduce their ticket purchases by 25%, and children reduce their ticket purchases by 30%. If the cost of having a person visit the museum is the same regardless of whether the person is an adult, senior citizen, college student, or child, which of the following pricing schemes is the most likely to be used by the museum and why?

A) The museum will set one price of $12 for everyone because that is the most fair.
B) $8 for children, $10 for college students, $12 for senior citizens, and $15 for adults because the museum can earn higher profits by charging the highest price to those with the least elastic demand and the lowest price to those with the most elastic demand.
C) $8 for children, $10 for college students, $12 for senior citizens, and $15 for adults because the museum can earn higher profits by charging the lowest price to those with the least elastic demand and the highest price to those with the most elastic demand.
D) $15 for children, $12 for college students, $10 for senior citizens, and $8 for adults because the adults are most likely to visit and the children are least likely to visit.

Question 50

Monopolists are criticized because they are inefficient. What is meant by this statement?

A) Monopolists could use their resources better elsewhere.
B) Monopolists don't innovate enough to control pollution.
C) Monopolists produce a large quantity of waste.
D) Monopolists usually don't produce at the minimum of the ATC.

Question 51

Exhibit 9-8 Profit maximizing for a monopolist
​

As shown in Exhibit 9-8, if the monopolist produces the profit-maximizing output, total revenue is the rectangular area:

A) OQAP₁.
B) OQ₂BP₂.
C) OQ₃CP₃.
D) OQ₂DP₄.

Question 52

Kayla and Kevin are friends who go together to a used textbook seller who has two copies of the biology book that they both need for their class this semester. The cost to the seller of acquiring the books was $25 each and no other students will need this book. Kayla states that she is willing to pay $40 for the book, while Kevin says he is willing to pay $80. Which of the following describes the most likely conclusion to this scenario?

A) The seller will sell the books to both Kayla and Kevin for $80 each because Kevin's higher value exceeds Kayla's willingness to pay.
B) The seller will sell the books to both Kayla and Kevin for $40 each because if they tried to charge Kevin a higher price, Kayla would engage in arbitrage.
C) The seller will sell one book to Kayla for $40 and one book to Kevin for $80 because this market meets all three requirements for price discrimination.
D) The seller will sell the books to both Kayla and Kevin for $25 each because that is how much the seller paid for the books.

Question 53

Which of the following does not represent an arbitrage transaction?

A) Traders buy silks where they are abundant and cheap, and haul them along a trail to another place where they would be quite scarce and valued.
B) An investor buys a stock when the company is new and relatively unknown and then sells the stock for a much higher price when the company is well-known and profitable.
C) Someone buys a block of Final Four tickets and scalp them at the game.
D) A boat manufacturer buys the electrical components for its boats from the lowest cost supplier and then sells the boats to consumers.

Question 54

Which of the following is not a necessary condition for effective price discrimination?

A) The seller must be able to separate buyers based on their elasticities.
B) The seller must not be a price taker.
C) Consumers must not be able to resell the products to other consumers.
D) Consumers must tell the seller how much they are willing to pay for the product.

Question 55

The act of buying a commodity in one market at a lower price and selling it in another market at a higher price is known as:

A) buying long.
B) selling short.
C) a tariff.
D) arbitrage.

Question 56

Price discrimination requires:

A) a firm to be a competitive firm.
B) a firm to be able to segment its customers based on different price elasticities of demand.
C) arbitrage.
D) that the product can be easily resold.

Question 57

An example of price discrimination is the price charged for:

A) coffee.
B) college admission.
C) cashmere sweaters.
D) cough syrup.

Question 58

The monopolist, unlike the perfectly competitive firm, can continue to earn an economic profit in the long run because of:

A) collusive agreements with competitors.
B) price leadership.
C) cartels.
D) extremely high barriers to entry.

Question 59

Suppose there are four buyers all considering purchasing round-trip airfare from Boston to Miami with the following price elasticities of demand for this purchase: Buyer A: 1.5, Buyer B: 0.7, Buyer C: 1.0, Buyer D: 2.3. If the airline knows of these elasticities and practices price discrimination, which buyer will pay the highest price for the airfare?

A) Buyer A
B) Buyer B
C) Buyer C
D) Buyer D

Question 60

The strategy underlying price discrimination is to:

A) charge higher prices to customers who have better access to substitutes.
B) charge everyone the same price but limit the quantity they are allowed to buy.
C) increase total revenue by charging higher prices to those with the most inelastic demand for the product and lower prices to those with the most elastic demand.
D) reduce per-unit costs by charging higher prices to those with the most elastic demand and lower prices to those with the most inelastic demand.

Question 61

At the level of output where the marginal cost and marginal revenue curves intersect, two firms demand curves pass above their average total cost curve. One firms is a monopoly and the other is perfectly competitive. Which statement is true for both firms?

A) The firms are making an economic profit.
B) Price equals marginal revenue.
C) Price equals marginal cost.
D) Entry of new firms is expected in the market.

Question 62

In contrast to a perfectly competitive firm, a monopolist operates in the long run

A) at a price higher than marginal cost.
B) with a profit equal to zero.
C) at an efficient level of output.
D) at the minimum point on its average total cost curve.

Question 63

Exhibit 3  Demand and cost curves for GeneTech, a monopolist  with a patented vaccine

Consider Exhibit 9-3. Suppose GeneTech's patent expires and the market for the vaccine becomes perfectly competitive. Which of the following price and quantity combinations would be most likely?

A) $45 per dose and 100 doses per hour
B) $40 per dose and 200 doses per hour
C) $35 per dose and 300 doses per hour
D) $28 per dose and 450 doses per hour

Question 64

Exhibit 9-7 Monopolist
​

If the profit-maximizing monopoly in Exhibit 9-7 becomes a profit-maximizing perfectly competitive market, the price will go from

A) $8 to $6.
B) $10 to $8.
C) $10 to $6.
D) $6 to $8.

Question 65

Suppose both a monopolist and a perfectly competitive firm charge a price corresponding to the quantity at the intersection of the marginal cost and marginal revenue curves. If this price is between each firm's average variable cost and average total cost curves,

A) the perfectly competitive firm will continue to operate in the short run but the monopolist will shut down.
B) both firms will continue to operate in the short run.
C) both firms will shut down in the short run.
D) the perfectly competitive firm will continue to operate in spite of the loss but the monopolist will earn a profit.

Question 66

Under both perfect competition and monopoly, a firm:

A) is a price taker.
B) is a price maker.
C) will shut down in the short-run if price falls short of average total cost.
D) sets marginal cost equal to marginal revenue.

Question 67

Under both perfect competition and monopoly, a firm:

A) faces a perfectly elastic demand curve.
B) maximizes profit by setting marginal cost equal to marginal revenue.
C) sells at a price equal to the minimum average total cost.
D) sells at a price equal to marginal cost.

Question 68

At any point where a monopolist's marginal revenue is positive, the downward-sloping straight-line demand curve is:

A) perfectly elastic, as is the perfectly competitive firm's.
B) elastic but not perfectly elastic, and a perfectly competitive firm's demand curve is perfectly elastic.
C) elastic but not perfectly elastic, as is the perfectly competitive firm's.
D) inelastic, while a perfectly competitive firm's demand curve is perfectly elastic.

Question 69

If pizza used to be produced in a perfectly competitive market, and now the pizza market has become a monopoly, we can expect:

A) less pizza to be sold at a higher price.
B) more pizza to be sold at a higher price.
C) less pizza to be sold at a lower price.
D) more pizza to be sold at a lower price.

Question 70

Which of the following statements accurately describes a difference between a firm that is a monopolist and one that is a competitive price taker?

A) Marginal revenue and market price are equal for the competitive price taker but not for the monopolist.
B) The monopolist does not always produce the output that equates marginal cost and marginal revenue; the competitive price taker does.
C) The monopolist charges the highest price possible; the competitive price taker charges a price equal to its per-unit cost.
D) A monopolist can earn economic profit in the short run; a competitive price taker cannot.

Question 71

Suppose a perfectly competitive market results in a long-run equilibrium price of $8 and quantity of 500.  If this same market were a monopoly, which of the following price and quantity combinations would be the most likely?

A) Price: $10, Quantity: 350
B) Price: $8, Quantity: 500
C) Price: $6, Quantity: 650
D) Price will equal marginal revenue and quantity will be found where marginal revenue equals marginal cost.

Question 72

A monopolist will maximize profits by:

A) setting his price as high as possible, while a perfectly competitive firm will take price from the market.
B) setting his price at the level that will maximize per-unit profit, while a perfectly competitive firm will minimize per-unit loss.
C) producing the output where marginal revenue equals marginal cost, just as a perfectly competitive firm will.
D) producing the output where price equals marginal cost, while a perfectly competitive firm will produce where marginal revenue equals marginal cost.

Question 73

Which of the following is true for a monopolist but not for a firm in perfect competition?

A) The marginal revenue curve is downward-sloping.
B) Marginal revenue equals price.
C) Economic profits are zero in the long-run.
D) The marginal revenue curve lies above the demand curve.

Question 74

Both a perfectly competitive firm and a monopolist:

A) always earn an economic profit.
B) maximize profit by setting marginal cost equal to marginal revenue.
C) maximize profit by setting marginal cost equal to average total cost.
D) are price takers.

Question 75

Comparing a perfectly competitive market to a monopoly, which of the following is true ?

A) Price will be higher and quantity will be lower in the perfectly competitive market than in the monopoly.
B) Price will be higher than marginal cost in the perfectly competitive market but will be equal to marginal cost in the monopoly.
C) Price will be equal to marginal revenue in the perfectly competitive market but will be higher than marginal revenue in the monopoly.
D) at that point on the market demand curve which intersects the marginal cost curve.

Question 76

A monopolist can earn an economic profit only when:

A) marginal cost equals marginal revenue, and the same is true for a perfectly competitive firm.
B) marginal cost equals price, while a perfectly competitive firm earns a profit if average total cost is less than price.
C) average total cost is less than price and the same is true for a perfectly competitive firm.
D) average variable cost exceed marginal cost, while a perfectly competitive firm earns a profit if average total cost exceeds marginal cost.

Question 77

Because monopolists are protected by high barriers to entry, they:

A) may be able to earn long-run economic profits.
B) will not minimize the per-unit cost of producing their output.
C) will price their product at the highest possible price.
D) seek economic profit; however, they are not able to earn it in the long run.

Question 78

Which of the following best explains an economic criticism of unregulated monopolists?

A) Monopolists do not try to minimize their fixed costs of production.
B) Monopolists produce where marginal revenue is greater than marginal costs.
C) Monopolists attempt to produce too many products, and as a result, their prices are high, and consumer's waste time trying to choose between too many options.
D) Monopolists restrict output, and as a result, they fail to produce units that are valued more than the marginal cost of producing them.

Question 79

Suppose both a monopolist and a perfectly competitive firm are producing in their respective markets at a point where marginal cost is $8 and marginal revenue is $10. What should the profit-maximizing firms do?

A) Both the monopolist and the perfectly competitive firm should increase output until MC = MR.
B) Both the monopolist and the perfectly competitive firm should decrease output until MC = MR.
C) The monopolist should increase output but the perfectly competitive firm should shut down.
D) The monopolist should keep producing at this level but the perfectly competitive firm should decrease output until MC = MR.

Question 80

Which of the following is true about a monopoly?

A) A monopoly charges a higher price and produces a lower output level than if the market were competitive.
B) A monopoly is guaranteed an economic profit.
C) A monopoly charges the highest possible price.
D) A monopoly will shut down whenever losses are incurred.