Deck 7: Monopoly and Its Regulation

Question 1

Firms that become monopolies because their operating systems and design standards gain widespread adoption are monopolies because of

A) control over basic inputs.
B) government action.
C) network effects.
D) economies of scale.
E) product differentiation.

Answer 1

C

Question 2

Which of the following would help to establish a monopoly?

A) possession of patent or copyright privileges
B) sharply increasing average cost at low rates of output
C) minimal industry barriers to entry for new products
D) a perfectly elastic demand curve for the product
E) the need to buy basic inputs in the world market

Answer 2

A

Question 3

A firm that realizes minimum average costs at an output rate sufficient to satisfy the entire market is an example of

A) monopolistic competition.
B) natural monopoly.
C) nonprice competition.
D) the crowding-out effect.
E) supply-side economics.

Answer 3

B

Question 4

Which of the following conditions would be LEAST likely to lead to a monopolistic market structure?

A) possession of patent rights for basic production processes
B) control over the entire supply of a basic input
C) the need to be a price taker in order to sell in the market
D) significant economies of scale leading to declining average cost until the entire market demand is satisfied
E) exclusive rights to sell in a particular geographic market

Question 5

How many sellers constitute a monopoly market?

A) 1
B) 2 or 3
C) between 5 and 10
D) between 10 and 50
E) many

Question 6

A firm given exclusive rights by the government to do business in a particular area is a(n)________ monopoly.

A) patent
B) output
C) natural
D) franchise
E) input

Question 7

A basic characteristic of natural monopoly is

A) that the firm has control over the entire supply of a basic input.
B) that a firm is protected by a government franchise.
C) patent protection of certain basic processes.
D) continuously decreasing average costs as the firm expands output.
E) collusion with other competitors in an attempt to divide up the market.

Question 8

If the demand curve is horizontal,marginal revenue must be the same as

A) total revenue.
B) quantity.
C) average costs.
D) price.
E) sales.

Question 9

Marginal revenue steadily declines as a monopolist tries to increase the number of units sold because

A) total revenue declines as additional units are sold.
B) the demand curve shifts to the left.
C) production costs fall as output rises.
D) the greater the sales, the smaller the profit.
E) to sell additional units, the firm must reduce the price of all the units it sells.

Question 10

Natural monopoly is common in the ________ industry.

A) trucking
B) agricultural
C) electric power
D) automobile
E) health care

Question 11

When total revenue for a monopolist reaches its maximum value,marginal revenue is

A) zero.
B) equal to total revenue.
C) negative.
D) rising.
E) equal to the price.

Question 12

If a firm's demand curve slopes downward,the firm's

A) marginal revenue will rise as price is cut.
B) marginal revenue will always be less than price.
C) total revenue will fall steadily as price is cut.
D) demand will be less than marginal revenue.
E) price will exceed total revenue.

Question 13

The monopolist faces a demand curve that is

A) horizontal.
B) less elastic than the market demand curve for the product.
C)upward sloping to the right.
D)equal to its marginal revenue curve.
E)identical to the industry demand curve.

Question 14

As a monopolist facing a downward-sloping demand curve increases sales from zero,total revenue

A) remains unchanged.
B) rises steadily to equal price.
C) falls until it equals marginal revenue.
D) equals demand.
E) rises at first but eventually falls.

Question 15

The following questions are based on the following demand schedule for a monopolist:

The marginal revenue associated with the sale of the third unit is

A) $390.
B) $130.
C) $110.
D) $10.
E) $3.

Question 16

The patent system is based on the theory that

A) innovation is risky and those who take risks deserve rewards.
B) a monopoly's lifespan should be controlled and limited.
C) technological advances should be shared throughout an industry.
D) monopoly is the most socially desirable market structure and should be supported.
E) patents create incentives to keep prices at competitive levels.

Question 17

The calculation of marginal revenue is best described by which of the following equations if R(q)equals total revenue for a given level of output (q)?

A) marginal revenue = R(q) × R(q - 1)
B) marginal revenue = R(q) + R(q - 1)
C) marginal revenue = R(q)/R(q - 1)
D) marginal revenue = R(q) - R(q - 1)
E) marginal revenue = [R(q) + R(q - 1)]/R(q)

Question 18

A firm produces heavy machinery and can sell 10 units per month at a price of $50,000.To increase sales to 11 units per month,the firm must cut its price to $46,000.The marginal revenue for selling one extra unit per month is

A) $363.
B) $4,000.
C) $4,182.
D) $6,000.
E) $46,000.

Question 19

If the monopolist wished to sell 4 units,the marginal revenue of the fourth unit would be

A) greater than the marginal revenue of the third unit.
B) less than the price necessary to sell 4 units.
C) greater than the total revenue earned by selling 4 units.
D) equal to the demand curve for selling 4 units.
E) impossible to calculate.

Question 20

Marginal revenue

A) generally rises as output increases.
B) exceeds price under conditions of monopoly.
C) is the addition to total revenue from the sale of one more unit.
D) coincides with marginal cost at each level of output.
E) is another name for profit.

Question 21

When marginal revenue exceeds marginal cost,a monopolist should reduce

A) output.
B) price.
C) demand.
D) revenue.
E) employment.

Question 22

In the long run,a monopolist incurring short-run losses is likely to

A) charge the highest price possible.
B) increase the demand.
C) do nothing unless demand conditions change.
D) change the scale of operations.
E) do nothing unless cost conditions change.

Question 23

Compared to a perfectly competitive industry in long-run equilibrium,an industry under monopoly

A) may realize economic profits in the long run.
B) may sustain losses indefinitely and still remain in business.
C) actively encourages competitors and thereby increases profits.
D) continues to expand until profits are reduced to zero.
E) can sell at a price below average variable cost and earn economic profits.

Question 24

A monopolist seeking to maximize total profits will

A) maximize profit per unit.
B) minimize cost per unit.
C) charge the highest possible price.
D) set price equal to average total cost.
E) set marginal cost equal to marginal revenue.

Question 25

The following questions are based on the following data for a monopolist:

A monopolist faces the following demand and marginal cost data over the relevant range of output.

If the firm wants to maximize profits,it should charge a price of

A) $2,750.
B) $3,200.
C) $3,875.
D) $5,000.
E) $7,250.

Question 26

For a monopolist the Golden Rule of Output Determination is to set the output rate at the point where marginal revenue equals

A) price.
B) marginal cost.
C) profits.
D) output.
E) zero.

Question 27

To earn economic profit,a monopolist must charge a price that

A) maximizes total output.
B) equals marginal revenue.
C) is above average cost.
D) is below marginal cost.
E) is greater than demand.

Question 28

The following questions are based on the following graph:

For this firm profits are maximized at an output rate of

A) 0Q.
B) 0P.
C) 0W.
D) 0U.
E) 0V.

Question 29

The following questions are based on the following data for a monopolist:

At the profit-maximizing output rate,marginal costs are

A) $12.50.
B) $7.50.
C) $5.00.
D) $0.50.
E) impossible to calculate from the information given.

Question 30

The following questions are based on the following data for a monopolist:

The profit-maximizing price is

A) above $5.
B) $5.
C) between $4.50 and $5.
D) below $4.50.
E) impossible to determine; more information is needed.

Question 31

The following questions are based on the following graph:

The total profit at the profit-maximizing output is

A) 0V.
B) PR.
C) QT.
D) UV.
E) RS.

Question 32

When marginal revenue exceeds marginal cost,a monopolist should

A) expand output.
B) discontinue production.
C) raise price.
D) reduce demand.
E) encourage new firms to compete with it.

Question 33

The following questions are based on the following graph:

The total revenue curve is best represented by line

A) RS.
B) PR.
C) URT.
D) 0ST.
E) 0WPQ.

Question 34

The following questions are based on the following data for a monopolist:

The profit-maximizing output rate is

A) 7.
B) 8.
C) 9.
D) 10.
E) 11.

Question 35

When marginal cost exceeds marginal revenue,a monopolist should reduce

A) output.
B) price.
C) demand.
D) revenue.
E) profit.

Question 36

In general,as a monopolist increases its output rate,its profit

A) rises steadily.
B) falls steadily.
C) first rises but then falls.
D) first falls but then rises.
E) remains constant.

Question 37

For a perfectly competitive firm,at any output rate

A) total cost equals total revenue.
B) price and total revenue are the same.
C) marginal cost and price are the same.
D) total cost equals supply.
E) price and marginal revenue are the same.

Question 38

Which of the following conditions would most likely permit a monopolist to continue earning economic profits even in the long run?

A) a price below average variable cost for all levels of output
B) loss of patent protection
C) a total revenue that is lower than fixed cost for all levels of output
D) significant barriers to entry
E) loss of control over a basic input

Question 39

The Golden Rule of Output Determination is,in fact,the same for both a monopolist and a perfectly competitive firm because

A) price is equal to marginal cost for both market types.
B) price and marginal revenue are identical for a perfectly competitive firm.
C) price exceeds marginal revenue for both market types.
D) profits are maximized for both firm types as long as marginal revenue exceeds marginal cost.
E) marginal revenue and marginal cost curves are identical for both market types.

Question 40

The profit of a monopolist facing a downward-sloping demand curve typically

A) rises steadily as the monopolist increases the price.
B) rises steadily as the monopolist reduces the price.
C) first rises as the monopolist reduces the price, then falls.
D) first falls as the monopolist reduces the price, then rises.
E) rises regardless of the direction of the price change.

Question 41

In addition to misallocating resources,monopolists are also accused of

A) being slow to innovate and adopt new technologies.
B) equating average costs with demand.
C) producing more of a good than society can absorb.
D) charging the highest prices they can possibly get.
E) maximizing per unit profits rather than total profits.

Question 42

The following questions are based on the following diagram of a monopolist:

For this monopolist,the profit-maximizing price is

A) 0.
B) 0D.
C) 0E.
D) 0F.
E) above 0F.

Question 43

The following questions are based on the following diagram of a monopolist:

If a perfectly competitive,constant-cost industry is monopolized,the market supply curve becomes the monopolist's ________ curve.

A) demand
B) marginal cost
C) average cost
D) marginal revenue
E) total revenue

Question 44

In general,the social value of an extra unit of a good can be measured by its

A) availability.
B) labor content.
C) durability.
D) total cost.
E) price.

Question 45

The approach to natural monopolies in the United States is to

A) nationalize them.
B) break them up into small competitive businesses.
C) give them franchises and subject them to regulation.
D) require them to merge with existing perfectly competitive business firms.
E) leave them alone.

Question 46

The following questions are based on the following diagram of a monopolist:

If the product demand curve and cost functions of a perfectly competitive industry and a monopolist are the same,then compared to a monopoly,the perfectly competitive industry's output and price tend to be,respectively

A) larger and higher.
B) smaller and higher.
C) larger and lower.
D) smaller and lower.
E) the same and lower.

Question 47

Government regulation of business is

A) subject to criticism because of the alleged inefficiency of regulated industries.
B) a universally acceptable and noncontroversial subject in our economy.
C) widespread in our economy, involving industries that produce over 25 percent of our national income.
D) completely unnecessary in our highly competitive economic system.
E) the same thing as government ownership of business.

Question 48

The following questions are based on the following diagram of a monopolist:

If the monopolist is currently producing 0A and wants to maximize profits,it should

A) do nothing because it is maximizing profits.
B) decrease output to zero.
C) raise output to 0B.
D) raise output to 0C.
E) raise output above 0C.

Question 49

When price exceeds marginal cost

A) the market structure is perfectly competitive.
B) resources are optimally allocated from society's point of view.
C) too much output is being produced, resulting in losses to businesses.
D) a 1-unit increase in output increases the social value of output by more than the social costs of production.
E) the costs of production are greater than the demand.

Question 50

The following questions are based on the following graph showing the demand and cost curves of a regulated monopolist. Assume the cost curves include provisions for "fair" rates of return.

The regulatory agency typically establishes a price of

A) 0A.
B) 0B.
C) 0C.
D) 0D.
E) 0E.

Question 51

The following questions are based on the following diagram of a monopolist:

To maximize profits,the firm will produce an output rate of

A) 0A.
B) 0B.
C) 0C.
D) 0D.
E) 0E.

Question 52

If people are willing to pay $130 for a particular bicycle and its marginal cost is $80

A) bicycle producers enjoy a profit of $50.
B) bicycle production will be unprofitable.
C) too many resources are being allocated to the production of bicycles.
D) the social value of one more bicycle is $130.
E) the bicycle industry is perfectly competitive.

Question 53

The following questions are based on the following diagram of a monopolist:

If a perfectly competitive,constant-cost industry is monopolized,the

A) number of firms in the industry will rise.
B) industry price and output will remain unchanged.
C) industry price and output will rise.
D) price will fall and industry output will rise.
E) price will rise and industry output will fall.

Question 54

The following questions are based on the following diagram of a monopolist:

The monopolist can set a price well above the competitive supply and demand level by

A) advertising to expand the market.
B) pushing the supply curve as far to the right as it will go.
C) restricting output.
D) using technology to speed production.
E) setting price equal to average cost.

Question 55

Resources are considered to be misallocated when

A) the market is perfectly competitive.
B) price exceeds marginal cost.
C) the social value of an extra unit equals its social cost.
D) price is equal to average total cost at its lowest value.
E) economic profits are zero.

Question 56

Among the arguments against monopoly is that

A) compared to a perfectly competitive industry, a monopolist produces too much of a good.
B) a monopolist charges a price that is less than the cost to society of producing the extra unit.
C) a monopolist redistributes income in its favor by charging a price above marginal cost.
D) as monopoly profits disappear, a monopolist must raise price to increase sales.
E) the socially optimal output rate is frequently too high for a single firm to produce at minimum unit costs.

Question 57

The following questions are based on the following graph showing the demand and cost curves of a regulated monopolist. Assume the cost curves include provisions for "fair" rates of return.

This regulated price ensures that the output rate is

A) higher than if the monopolist were unregulated.
B) lower than if the monopolist were unregulated.
C) the same as if the monopolist were unregulated, but the price would be lower.
D) the same as if the industry were perfectly competitive.
E) impossible to determine from the graph.

Question 58

The following questions are based on the following diagram of a monopolist:

To maximize profits,the firm will charge a price of

A) 0A.
B) 0B.
C) 0C.
D) 0D.
E) 0E.

Question 59

The following questions are based on the following diagram of a monopolist:

At the profit-maximizing output rate,marginal costs will be

A) 0A.
B) 0B.
C) 0C.
D) 0D.
E) 0E.

Question 60

Perhaps the single greatest criticism economists have of monopolies is that monopolies tend to

A) oppose technological development.
B) create misallocation of resources.
C) make monopolists rich.
D) produce goods and services that are of questionable social benefit.
E) require government regulation in order to be efficient.

Question 61

In the United States regulated industries produce about ________ percent of our national output.

A) 10
B) 25
C) 33
D) 50
E) 67

Question 62

One problem associated with public regulation of industries has been the tendency for

A) regulators to set prices below average variable costs.
B) most regulatory agencies to be incapable of carrying out their duties.
C) regulatory commissions to accommodate the requests of the businesses they are supposed to regulate at the expense of the public.
D) regulatory agencies and legislation to be ruled unconstitutional by the courts.
E) public regulation to be introduced in markets characterized as natural monopolies, where such regulation is least appropriate.

Question 63

If a natural monopoly is forced to break up into many smaller competitive firms,prices will most likely

A) fall dramatically.
B) fall somewhat.
C) stay about the same.
D) rise.
E) there is not enough information available to answer this question.

Question 64

Experience with public regulation of monopolies indicates that

A) on the average, regulated prices are clearly lower than unregulated prices of the same item.
B) regulation provides a stronger set of incentives than competitive markets for firms to increase efficiency.
C) a decision to base a fair rate of return on either historical cost or replacement cost yields the same pricing result.
D) most public utility regulation should be in the hands of federal rather than state commissions.
E) if a firm is guaranteed a fixed amount of profit, it will be less efficient than if its profits depend on how efficiently it operates.

Question 65

In 1914,the government gave AT&T the right to set up its long-distance network with the assurance that the government would not take that network away in exchange for AT&T's agreement to refrain from buying up any more independent telephone companies and for providing existing companies access to that network.This agreement was called the

A) rule of reason.
B) Kingsbury Commitment.
C) Sherman Act.
D) Spindletop Resolution.
E) Golden Rule of Output Determination.

Question 66

Available studies show that if the largest firms in a market of a given size were replaced by a larger number of smaller firms

A) the rate of technological change would decline substantially.
B) total research and development expenditures would decrease.
C) the commercial introduction of innovation that requires a large amount of capital might slow down.
D) there would be a noticeable decline in the riskiness of research and development activities.
E) federal funding for research and development would automatically increase.

Question 67

A natural monopoly is a likely result whenever

A)the market demand curve is downward sloping to the right.
B)the market demand curve is horizontal.
C)a firm is granted a patent on a new product or process.
D)long-run marginal costs increase as output rises.
E)there are significant economies of scale.

Question 68

Which of the following firms is the best example of one that has achieved its monopoly advantage because of network externalities?

A) General Motors
B) General Electric
C) Alcoa
D) Union Pacific Railroad
E) Microsoft

Question 69

A major factor that weakened Standard Oil's monopoly power prior to being broken up by the Supreme Court in 1911 was

A) the discovery and development of the Texas and Oklahoma oil fields.
B) an increase in the demand for oil brought about by the increase in automobile ownership.
C) the government regulation of Standard Oil as a natural monopoly.
D) the increased use of ethanol, which is made from corn, as a source of fuel.
E) the significant losses incurred while searching and drilling for oil.

Question 70

A basic problem with public regulation is that

A) regulatory agencies exist at the state but not the federal level of government and therefore lack power.
B) it is difficult to decide what constitutes a fair rate of return.
C) it inevitably expands so that ultimately all production is nationalized.
D) regulatory commissions set only minimum prices that regulated firms can charge, thus promoting excessive entry of new firms into regulated markets.
E) regulation requires that modestly staffed government agencies make the day-to-day operating decisions of regulated firms.

Question 71

Schumpeter argues that the rate of technological change is likely to be greater in imperfectly competitive industries because imperfectly competitive firms

A) earn profits that support expenditures on research and development.
B) lack the power necessary to keep rivals from imitating their innovations.
C) have a vested interest in maintaining demand for existing products.
D) use their power to keep out rivals who would be more inclined to use new techniques.
E) are composed of a large number of independent decision-making units that are less inclined to be conservative.

Question 72

Contrary to the allegations of some economists,there is evidence that the development,promotion,and diffusion of new techniques in an industry may benefit from

A) a diversity of firm sizes in the industry.
B) the concentration of production in the hands of a regulated monopolist.
C) perfect competition.
D) allowing the industry to form a cartel.
E) the nationalization of that industry.

Question 73

Schumpeter and Galbraith argue that,in a dynamic sense,innovation is less likely in

A) monopoly.
B) pure oligopoly.
C) monopolistic competition.
D) perfect competition.
E) differentiated oligopoly.

Question 74

For purposes of public regulation,when computing a fair rate of return,a firm's assets are generally valued at ________ cost.

A) marginal
B) variable
C) either implicit or opportunity
D) declining
E) either historic or reproduction

Question 75

The natural monopoly characteristics of the telecommunication industry disappeared in the last few decades,largely because of

A) the emergence of significant economies of scale in the industry.
B) increased government regulation.
C) increased foreign competition.
D) widespread losses leaving firms financially weak.
E) rapid changes in technology.

Question 76

According to the video on Monopolies,one of the major forces that weakens monopoly power over the long run is

A) government ownership of large firms.
B) regulation by federal, state, and local governments.
C) a rapid pace of technological change and innovation.
D) significant economies of scale.
E) high taxes on profits in excess of normal returns.

Question 77

A notable movement in the direction of deregulation of industry in the United States occurred during

A) the 1930s.
B) World War II.
C) the late 1940s and early 1950s.
D) the early 1960s.
E) the late 1970s and early 1980s.