Deck 9: Monopoly

Question 1

If the inverse demand curve a monopoly faces is p = 100 - 2Q, then profit maximization

A)is achieved when 25 units are produced.
B)is achieved by setting price equal to 25.
C)is achieved only by shutting down in the short run.
D)cannot be determined solely from the information provided.

Answer 1

cannot be determined solely from the information provided.

Question 2

A monopoly that is maximizing profits operates in the ________ portion of the demand curve.

A)unitary elastic
B)elastic
C)inelastic
D)horizontal

Answer 2

elastic

Question 3

A profit maximizing monopolist

A)is guaranteed to lose money because of a lack of competition.
B)is not guaranteed to make a positive profit.
C)is guaranteed to make a positive profit, hence the desire to be a monopolist.
D)is guaranteed to make a non-negative profit, otherwise government would step in to assist.

Answer 3

is not guaranteed to make a positive profit.

Question 4

The monopoly maximizes profit by setting

A)price equal to marginal cost.
B)price equal to marginal revenue.
C)marginal revenue equal to marginal cost.
D)marginal revenue equal to zero.

Question 5

If the inverse demand function for a monopoly's product is p = a - bQ, then the firm's marginal revenue function is

A)a.
B)a - (1/2)bQ.
C)a - bQ.
D)a - 2bQ.

Question 6

If the inverse demand function for a monopoly's product is p = 100 - 2Q, then the firm's marginal revenue function is

A)-2.
B)100 - 4Q.
C)200 - 4Q.
D)200 - 2Q.

Question 7

When the marginal revenue curve intersects the horizontal axis

A)demand is relatively elastic.
B)demand is relatively inelastic.
C)demand is perfectly elastic.
D)demand is unitary elastic.

Question 8

A profit-maximizing monopolist will never operate in the portion of the demand curve with price elasticity equal to

A)-3.
B)-1.
C)-1/3.
D)None of the above-the price elasticity does not matter.

Question 9

Which of the following statements is TRUE?

A)A monopoly cannot set price and quantity such that the point lies above the demand curve.
B)A monopoly can charge whatever it wants.
C)Profit maximization occurs by setting price first.
D)Both A and B.

Question 10

One difference between a monopoly and a competitive firm is that

A)a monopoly is a price taker.
B)a monopoly maximizes profit by setting marginal revenue equal to marginal cost.
C)a monopoly faces a downward sloping demand curve.
D)None of the above.

Question 11

A monopoly that is maximizing profits never operates in the ________ portion of the demand curve.

A)unitary elastic
B)elastic
C)inelastic
D)horizontal

Question 12

When a monopoly lowers its price to increase quantity

A)it is not maximizing its profit.
B)it will increase its profit.
C)it will make less money on the units it would have originally sold.
D)the quantity produced drives down marginal revenue.

Question 13

The monopolist's marginal revenue curve

A)doesn't exist.
B)lies below the demand curve.
C)is identical to the demand curve.
D)lies above the demand curve.

Question 14

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then maximum profit

A)equals $336.
B)equals $882.
C)equals $1,218.
D)cannot be determined solely from the information provided.

Question 15

A monopolist that chooses price

A)necessarily produces less than a monopolist that chooses quantity, hence the laws against price fixing.
B)produces the same amount as a monopolist that chooses quantity.
C)produces more than a monopolist that chooses quantity, thus the irony of laws against price fixing.
D)can set price higher than the demand curve and earn additional profits, whereas a firm that chooses quantity cannot.

Question 16

Marginal Revenue is

A)the increase in total revenue from selling one more unit of output.
B)equal to P(1+1/e)
C)equal to P when the price elasticity of demand is infinite.
D)All of the above.

Question 17

For a monopoly, marginal revenue is less than price because

A)the demand for the firm's output is downward sloping.
B)the firm has no supply curve.
C)the firm can sell all of its output at any price.
D)the demand for the firm's output is perfectly elastic.

Question 18

A monopoly shuts down when

A)the short run price is below its average variable costs.
B)the long run price is below its average variable costs.
C)the average cost is less than price.
D)never, because it can raise its prices as high as necessary to keep operating and maximize profits.

Question 19

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization

A)is achieved when 21 units are produced.
B)is achieved by setting price equal to 21.
C)is achieved only by shutting down in the short run.
D)cannot be determined solely from the information provided.

Question 20

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization is achieved when the monopoly sets price equal to

A)16.
B)21.
C)25.
D)58.

Question 21

If the demand for a monopoly's output shifts rightward, the change in quantity produced is

A)positive.
B)negative.
C)zero.
D)not predictable.

Question 22

If the demand for a monopoly's output shifts leftward, the change in quantity produced is NOT predictable because

A)the monopoly is a profit maximizer.
B)the monopoly is a price taker.
C)the monopoly has no supply curve.
D)the monopoly's marginal cost curve might not be upward sloping.

Question 23

If a monopoly's demand curve shifts to the right, the monopoly

A)will charge a higher price.
B)will charge a lower price.
C)will sell more.
D)decision cannot be determined.

Question 24

If the demand for a firm's output is perfectly elastic, then the firm's Lerner Index equals

A)zero.
B)one.
C)infinity.
D)one-half.

Question 25

Suppose a monopolist has TC = 100 + 10Q + 2Q2, and the demand curve it faces is p = 90 - 2Q. What will be the price, quantity, and profit for this firm?

Question 26

The Lerner Index is

A)the ratio of the difference between price and marginal cost to price.
B)equal to (Price - MC)/Price
C)a measure of market power.
D)All of the above.

Question 27

Since there are no close substitutes for the monopoly's product, the monopoly can charge any price it wishes.

Question 28

In a recent court case, an expert witness defined a monopoly as a firm that can "raise price without reducing its total revenue." What does this imply about the elasticity of demand? Would this definition hold for a profit-maximizing monopoly? Explain.

Question 29

The more elastic the demand curve, a monopoly

A)will have a larger Lerner Index.
B)will face a lower marginal cost.
C)will earn more profit.
D)will lose more sales as it raises its price.

Question 30

A monopoly incurs a marginal cost of $1 for each unit produced. If the price elasticity of demand equals -2.0, the monopoly maximizes profit by charging a price of

A)$1.00.
B)$1.50.
C)$2.00.
D)$3.00.

Question 31

A firm that has market power

A)can charge whatever it wants for its product.
B)can charge a price above marginal cost.
C)has positive economic profits.
D)does not lose sales when increasing price.

Question 32

The monopolist's supply curve

A)doesn't exist.
B)is the region of its marginal cost curve above average cost.
C)is identical to the demand curve.
D)is the region of its marginal cost curve that lies above the marginal revenue curve.

Question 33

The more inelastic the demand curve, a monopoly

A)will have a smaller Lerner Index.
B)will face a lower marginal cost.
C)will earn less profit.
D)will lose fewer sales as it raises its price.

Question 34

The fact that a monopoly has to take the shapes of marginal cost AND marginal revenue into account when making decisions is reflected in the fact that

A)monopolies don't have a supply curve.
B)monopolies have shifting demand curves.
C)monopolies have the same supply curve as perfectly competitive firms.
D)monopolies are subject to market failure.

Question 35

Since a monopoly can set any price it wants, it always makes a profit?

Question 36

Market power guarantees profit.

A)True, which is why firm's locate as far away from each other as possible.
B)False, market power guarantees price greater than marginal cost.
C)True, market power guarantees price greater than average cost.
D)False, market power guarantees price equal to average cost.

Question 37

The ability of a monopoly to charge a price that exceeds marginal cost depends on the

A)price elasticity of supply.
B)price elasticity of demand.
C)slope of the demand curve.
D)shape of the marginal cost curve.

Question 38

A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10. Assuming profit maximization, the implicit demand elasticity is

A)-0.2.
B)-0.8.
C)-1.25.
D)-5.0.

Question 39

If the demand for a monopoly's output shifts rightward, the change in quantity produced is NOT predictable because

A)the monopoly is a profit maximizer.
B)the monopoly is a price taker.
C)the monopoly has no supply curve.
D)the monopoly's marginal cost curve might not be upward sloping.

Question 40

Market power is illegal.

A)True, no one is allowed to charge a price greater than marginal cost.
B)False.
C)True, no one is allowed to charge a price greater than average cost.
D)False, because market power guarantees price equal to average cost.

Question 41

The above figure shows the demand and cost curves facing a monopoly. If a $100 per unit tax is charged, what is the incidence of the tax on consumers?

A)100%
B)50%
C)25%
D)0%

Question 42

The above figure shows the demand and cost curves facing a monopoly. A $100 per unit tax would raise price by

A)$100.
B)$50.
C)$25.
D)$0.

Question 43

The above figure shows the demand and marginal cost curves for a monopoly. Under monopoly, consumer surplus equals

A)a + b.
B)a + b + c.
C)a + b + c + d + e + f.
D)None of the above.

Question 44

The above figure shows the demand and cost curves facing a monopoly. The deadweight loss of this monopoly is

A)$100.
B)$250.
C)$1,250.
D)$2,500.

Question 45

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then the deadweight loss from monopoly equals

A)$21.
B)$441.
C)$882.
D)$1,764.

Question 46

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then the firm's Lerner Index equals

A)58/16.
B)16/42.
C)58/42.
D)42/58.

Question 47

The above figure shows the demand and marginal cost curves for a monopoly. The deadweight loss of this monopoly equals

A)h.
B)c.
C)c + f.
D)c + d + e + f.

Question 48

If a monopoly can produce a good at zero marginal cost, then its Lerner Index is

A)zero.
B)one.
C)infinity.
D)undetermined.

Question 49

Which of the following could create a cost advantage for a monopoly?

A)better technology
B)lower friction due to better organization
C)standardization
D)All of the above.

Question 50

A flour mill holding exclusive contracts to 95% of the wheat in a large geographic area may operate as a flour producing monopoly locally because

A)the mill has a very inelastic supply curve.
B)the mill is a natural monopoly.
C)the mill controls a key input.
D)the government will declare it a monopoly.

Question 51

As other firms enter a monopoly's market, the monopoly's market power

A)is unaffected.
B)declines.
C)increases.
D)increases according to the Lerner Index but decreases according to the price/marginal cost ratio.

Question 52

The less elastic is the demand for a firm's product, the greater is that firm's market power.

Question 53

The loss associated with the fact that at the profit-maximizing quantity consumers value the goods more than it cost to produce them is called

A)deadweight loss.
B)comparative loss.
C)Lerner Loss.
D)Consumer Value Loss.

Question 54

If a monopoly's Lerner Index exceeds 1, then

A)it is earning maximum profit.
B)it has ultimate market power.
C)it must be pricing below marginal cost.
D)marginal revenue is negative.

Question 55

When would a profit-maximizing monopolist that operates with no government intervention choose to produce the competitive level of output?

Question 56

Which of the following would force a monopoly to charge a lower price?

A)A new firm selling the same enters the market.
B)A new firm selling the same product locates close to the monopoly.
C)A new firm introduces a better substitute for the firm's product.
D)All of the above.

Question 57

The above figure shows the demand and cost curves facing a monopoly. If a $100 per unit tax is charged, the loss in welfare resulting from the tax is

A)$250.
B)$312.50.
C)$1,250.
D)$1,562.50.

Question 58

The situation in which one firm can produce the total output of the market at lower cost than several firms is called

A)natural monopoly.
B)pure monopoly.
C)ruling monopoly.
D)cost monopoly.

Question 59

As other firms enter a monopoly's market, the demand curve a monopoly faces

A)is unaffected.
B)becomes more inelastic.
C)becomes more elastic.
D)may become more or less elastic, depending on its Lerner Index.

Question 60

A market failure occurs when

A)price equals marginal cost.
B)there is a non-optimal allocation that leads to an inefficient market.
C)deadweight loss is maximized.
D)a firm shuts down.

Question 61

For network externalities to occur

A)the government has to create new laws.
B)deadweight loss must be minimized.
C)there must be a critical mass of users.
D)there must be a positive benefit to society.

Question 62

Which of the following average cost functions suggests the presence of a natural monopoly?

A)AC = 2
B)AC = 100/Q + 2
C)TC = 100/Q + 2Q
D)All of the above.

Question 63

Which of the following products benefits from network externalities?

A)cable TV service
B)fashion clothing
C)all-electric cars
D)high-speed trains

Question 64

For there to be positive network externalities

A)there must be a direct size effect.
B)there must be an indirect size effect.
C)introductory prices are required.
D)None of the above.

Question 65

The situation where one person's demand for a good depends on the consumption of the good by others is called a

A)network externality.
B)network internality.
C)consumption externality.
D)production externality.

Question 66

A firm will increase its spending on advertising until

A)it has monopolized the market.
B)it has deterred all future entry.
C)the marginal benefit of advertising is zero.
D)the marginal benefit of advertising equals the marginal cost of advertising.

Question 67

If a monopoly can advertise and as a result the demand curve will become more inelastic, the monopoly

A)should always engage in the advertising.
B)should engage in the advertising until the demand curve becomes more elastic.
C)will earn higher gross profit if it advertises.
D)None of the above.

Question 68

Which of the following total cost functions suggests the presence of a natural monopoly?

A)TC = 2Q
B)TC = 100 + 2Q
C)TC = 100 + 2Q2
D)All of the above.

Question 69

Limited government licenses that create a monopoly do so because

A)the license generates a marginal cost advantage.
B)the monopoly will become a natural monopoly.
C)a barrier to enter the market exists.
D)All of the above.

Question 70

A monopoly advertises

A)to raise its profit.
B)to decrease costs.
C)dissuade entry by other firms.
D)reduce deadweight loss.

Question 71

All of the following government actions create barriers to entry EXCEPT

A)limiting the number of airlines that may operate at an airport.
B)granting a patent to a drug company.
C)requiring a pizza parlor to get a business license.
D)giving a power company exclusive use of the city's transmission lines.

Question 72

The monopoly can shift the demand for its product rightward by

A)accommodating entry.
B)advertising new uses for its product.
C)moving along the learning curve.
D)All of the above.

Question 73

A patent

A)always gives rise to a monopoly.
B)may not provide a barrier to entry.
C)allows the patent owner to capture all of the consumer surplus.
D)increases total welfare.

Question 74

The use of "introductory prices" suggests

A)firms engaged in multi-period decision making.
B)firms engaged in price gouging.
C)firms engaged in anti-competitive behavior.
D)firms engaged in single-period decision making.

Question 75

The situation in which a person places greater value on a good as more and more people possess it is called the

A)Bandwagon Effect.
B)Greater Value Effect.
C)Snob Effect.
D)Behavioral Effect.

Question 76

An exclusive right to sell a new and useful product, process, substance, or design for a fixed period of time is called a

A)patent.
B)barrier to entry.
C)monopoly.
D)research disincentive.

Question 77

If a firm uses introductory pricing, it is likely ________ short run profit and ________ long run profit.

A)minimizing; maximizing
B)maximizing; maximizing
C)maximizing; reducing
D)reducing; maximizing

Question 78

Which of the following products benefits from network externalities?

A)microwave ovens
B)diamond rings
C)Twitter
D)concert tickets

Question 79

Government actions that create monopolies

A)spur product innovation by the monopoly.
B)create deadweight loss.
C)result in lower average costs of production.
D)ensure that firms price at marginal cost.

Question 80

Privatization of a state-owned monopoly can

A)allow governments to capture future producer surplus.
B)allow governments to be more efficient.
C)reduce bribery of government officials.
D)increases chances of reelection for politicians.