Deck 11: B: Price-Searcher Markets With High Entry Barriers

Question 1

Which of the following is true under natural monopoly?

A)the monopolist will ignore consumers' desires.
B)the marginal cost curve will lie below the average total cost curve.
C)the monopolist will set price equal to marginal cost and will earn economic profits.
D)output is produced under conditions of constant cost.

Answer 1

B

Question 2

Monopoly is a word derived from Greek origins that means, roughly, single seller. Why is the definition of monopoly as single seller inadequate in economic terms?

Answer 2

Single seller does not go far enough to describe the situation implied by the economic concept of monopoly. There are many single sellers. McDonald's is the single seller of Big Macs, General Motors is the single seller of Pontiacs, and Pentel is the single seller of the QE405 mechanical pencil. But none of these single sellers poses any unique problems for economic analysis because each has good substitutes. The notion of monopoly becomes significant only when it means the single seller of a product for which there are no good substitutes.

Question 3

Which of the following is a characteristic of an oligopolistic industry?

A)interdependence of a firm's price and output decisions
B)low barriers to entry
C)small output of individual firms relative to the total market
D)a large number of competing firms

Answer 3

A

Question 4

From the viewpoint of allocative efficiency, which of the following is a defect of pure monopoly?

A)The monopolist undersupplies the market and charges too high a price.
B)The monopolist is a revenue maximizer not a profit maximizer.
C)A monopolist has little incentive to produce efficiently (at a low cost).
D)All of the above are true.

Question 5

Suppose all automobile manufacturers have collusively agreed to sell their cars at a uniform price. If a firm wanted to break this agreement and not be detected, what would be one way to do this?

Question 6

In which of the following industries would we expect collusion to be most effective?

A)retail gasoline, where most gas is sold by a large number of small dealers
B)crude oil production, where most oil is sold by a small number of large sellers
C)housing construction, an industry dominated by local firms that produce unique products
D)soybean production, where there are large numbers of farmers in many countries

Question 7

For which of the following reasons do regulatory agencies sometimes fail to bring the price and output of a natural monopoly to the ideal level?

A)The regulatory agency does not have all the information concerning a firm's true costs.
B)Monopolists may conceal profits by inflating the costs of production by spending money to achieve personal objectives (a very nice office building, for example).
C)Regulatory agencies often come to reflect the views of the industries they are supposed to regulate.
D)All of the above are reasons.

Question 8

An oligopolistic firm that is deciding the price to charge, the output to produce, or the quality of product to offer, must consider

A)the regulatory price limits that are always present with oligopoly.
B)the potential reactions of rivals in the market.
C)the fact that per-unit costs will usually increase as the scale of production increases.
D)that entry barriers into oligopolistic markets are low.

Question 9

Mr. Stewart owns the only hardware store in a small Midwestern town. His nearest competition is more than 50 miles away, yet he does not earn any economic profit. Does someone need to explain the economic concept of monopoly to him?

Question 10

Patent laws that allow the inventor to maintain monopoly rights to an invention increase the price of the product and

A)increase the profitability of inventive activities, thereby speeding up technological developments.
B)increase the profitability of inventive activities, thereby slowing down technological developments.
C)decrease the profitability of inventive activities, thereby speeding up technological developments.
D)decrease the profitability of inventive activities, thereby slowing down technological developments.

Question 11

Even though a cartel is often profitable for its members, cartel arrangements contain the seeds of their own disintegration because

A)a price maintained above each cartel member's marginal cost provides each member with an incentive to offer secret price reductions to attract additional customers.
B)the profits earned by cartel members will induce others to enter the industry.
C)cartel members will attempt to garner more of the total profit for themselves by cheating on their agreement with other members.
D)all of the above are correct.

Question 12

Under what conditions can a monopolist have potentially lower costs and possibly charge a lower price than would exist if the market were competitive?

A)when the monopolist operates on the inelastic portion of the demand curve
B)when the monopolist is a profit maximizer rather than a revenue maximizer
C)when substantial diseconomies of scale are present
D)when substantial economies of scale are present

Question 13

Which of the following is true for a firm that is a monopolist?

A)the firm will make an economic profit in the short run.
B)the firm will produce a smaller quantity of output than what would be best from the viewpoint of ideal economic efficiency.
C)the additional revenue that can be generated from an increase in output will exceed the firm's price.
D)the firm can charge whatever it wants for its product since consumers have no alternatives.

Question 14

As Adam Smith indicated, the trouble with monopoly is that

A)firms have no incentive to produce efficiently.
B)regardless of what is produced, the firm will use too many resources.
C)a producer has no incentive to keep his costs down.
D)the monopolist "understocks" the market and charges too high a price.

Question 15

Which of the following statements is true for a monopolist?

A)a monopolist will charge the highest price for which he can sell units of his product.
B)unregulated monopolists can gain by producing their chosen output at a low cost.
C)if a firm has a monopoly, it will always be able to earn economic profit.
D)none of the above statements are true.

Question 16

Which of the following explains why firms in competitive price-searcher and competitive price-taker markets will both have zero economic profits in the long run but a monopoly will not?

A)There is always more than one firm in competitive price-searcher and competitive price-taker markets.
B)Both competitive price-searcher and competitive price-taker markets are characterized by firms producing identical goods, but a monopoly is not.
C)In both competitive price-searcher and competitive price-taker markets, the barriers to entry are low; this is not true under a monopoly.
D)A monopoly firm has a downward-sloping demand curve; firms in the other types of markets do not.

Question 17

If a local community has only one doctor, the monopoly power of the physician will

A)be small if entry barriers into the local market are high.
B)depend on how many other physicians there are in the national market.
C)be total since there are not any other providers of the same service in the local market.
D)be minimal if the entry barriers restricting competition from other physicians are low.

Question 18

Which of the following is the best explanation of why a lack of information is a problem when the government wants to impose price regulation on a monopolist?

A)the government does not have information about which firms are monopolies.
B)firms that are monopolies do not have information about their level of profit or about potential competition.
C)consumers do not have information about which firms are competitive and which firms are monopolies.
D)regulators do not have information about the demand and marginal costs of the firms that they regulate.

Question 19

Economic theory suggests that government-operated monopolies will

A)be highly efficient and follow policies that are in the consumers' interest.
B)be dominated by persons who, while seeking to serve the public interest, are not hard-nosed enough to run a business efficiently.
C)be inefficient because of poor incentives for operational efficiency.
D)favor the consumer at the expense of special interest groups in and out of government.

Question 20

Licensing is a process in which a firm wanting to enter a market must

A)require all potential customers to obtain government permission to purchase the product.
B)notify the government within a certain period after it has entered the market.
C)pay all overdue taxes before entering the market.
D)obtain permission from the government to enter the market.

Question 21

Why does the U.S. government maintain a monopoly in the delivery of first-class mail? Does the Postal Service nevertheless face other forms of competition?

Question 22

Since its beginning, the cable television industry has been viewed as a natural monopoly. Typically, cities would grant individual firms local monopolies and then regulate them. Is this a valid approach from an economic perspective? What do you expect the future of the television-viewing market to hold?

Question 23

The Big River Power Company is a regulated monopolist with pricing structured such that the stockholders receive a "fair" rate of return based on the firm's unit costs. Can economic thinking predict how the company executive offices are likely to be furnished? Given a choice between Hawaii and downtown Cleveland (20 miles away), where would we expect the Board of Directors to meet?

Question 24

One answer to the problem of natural monopoly is provision of the good by a government-owned and operated firm. Why is that option not used very often?

Question 25

The Redwood City Council has decided that there is an overallocation of resources in the lawn-care industry. Almost every homeowner owns a lawnmower, hose and sprinkler, seeder, spreader, etc., and these items are used, at most, once a week. The council will establish a legal monopoly and select a private firm that will be responsible for all lawn care in the city. What types of rent-seeking activities can be expected as a result of this action?