Deck 15: Monopoly

Question 1

If the government deems a newly invented drug to be truly original,the pharmaceutical company is given the exclusive right to manufacture and sell the drug for 50 years.

Answer 1

False

Question 2

The De Beers Diamond company is not worried about differentiating its product from all other gemstones.

Answer 2

False

Question 3

A monopolist produces where P > MC = MR.

Answer 3

True

Question 4

Even with market power,monopolists cannot achieve any level of profit they desire because they will sell lower quantities at higher prices.

Question 5

Monopolists can achieve any level of profit they desire because they have unlimited market power.

Question 6

One characteristic of a monopoly market is that the product is virtually identical to products produced by competing firms.

Question 7

The De Beers Diamond company advertises heavily to promote the sale of all diamonds,not just its own.This is evidence that it has a monopoly position to some degree.

Question 8

Average revenue for a monopoly is the total revenue divided by the quantity produced.

Question 9

A monopolist maximizes profit by producing an output level where marginal cost equals price.

Question 10

A natural monopoly has economies of scale for most if not all of its range of output.

Question 11

Like competitive firms,monopolies choose to produce a quantity in which marginal revenue equals marginal cost.

Question 12

Copyrights and patents are examples of barriers to entry that afford firms monopoly pricing powers.

Question 13

The amount of power that a monopoly has depends on whether there are close substitutes for its product.

Question 14

If the ABC company owns the exclusive rights to mine land in Afghanistan for Lapis Lazuli,a rare stone used in jewelry which is found only in Afghanistan,the company benefits from a barrier to entry.

Question 15

A monopolist produces where P = MC = MR.

Question 16

Like competitive firms,monopolies charge a price equal to marginal cost.

Question 17

A monopolist produces an output level where marginal revenue equals marginal cost and charges a price where marginal cost equals average total cost.

Question 18

The fundamental cause of monopolies is barriers to entry.

Question 19

Declining average total cost with increased production is one of the defining characteristics of a natural monopoly.

Question 20

For a monopoly,marginal revenue is often greater than the price they charge for their good.

Question 21

During the life of a drug patent,the monopoly pharmaceutical firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost.

Question 22

A monopolist that can practice perfect price discrimination will not impose a deadweight loss on society.

Question 23

A monopolist earns higher profits by charging one price than by practicing price discrimination.

Question 24

Movie theatres charge different prices to different groups of people based on the differing marginal costs that exist from group to group.

Question 25

In order for a firm to maximize profits through price discrimination,the firm must have some market power and be able to prevent arbitrage.

Question 26

University financial aid can be viewed as a type of price discrimination.

Question 27

Suppose a profit-maximizing monopolist faces a constant marginal cost of $10,produces an output level of 100 units,and charges a price of $50.The socially efficient level of output is 200 units.Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines.The monopoly deadweight loss equals $2,000.

Question 28

The socially efficient quantity is found where the demand curve intersects the marginal cost curve.

Question 29

Airlines often separate their customers into business travelers and personal travelers by giving a discount to those travelers who stay over a Saturday night.

Question 30

Suppose a profit-maximizing monopolist faces a constant marginal cost of $20,produces an output level of 100 units,and charges a price of $50.The socially efficient level of output is 200 units.Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines.The monopoly deadweight loss equals $1,500.

Question 31

Suppose a profit-maximizing monopolist faces a constant marginal cost of $10,produces an output level of 100 units,and charges a price of $50.The socially efficient level of output is 200 units.Assume that the demand curve and marginal revenue curve are the typical downward-sloping straight lines.The monopoly deadweight loss equals $4,000.

Question 32

The deadweight loss for a monopolist equals one-half of its profits for any given level of output.

Question 33

By selling hardcover books to die-hard fans and paperback books to less enthusiastic readers,the publisher is able to price discriminate and raise its profits.

Question 34

A monopoly creates a deadweight loss to society because it produces less output than the socially efficient level.

Question 35

By offering lower prices to customers who buy a large quantity,a monopoly is price discriminating.

Question 36

A monopoly creates a deadweight loss to society because it earns both short-run and long-run positive economic profits.

Question 37

Price discrimination is prohibited by antitrust laws.

Question 38

A monopolist's supply curve is horizontal.

Question 39

A monopolist's supply curve is vertical.

Question 40

A monopolist does not have a supply curve because the firm's decision about how much to supply is impossible to separate from the demand curve it faces.

Question 41

Assume that a monopolist decides to maximize revenue rather than profit.How does this operating objective change the size of the deadweight loss? If you are a "benevolent" manager of a monopoly firm and are interested in reducing the deadweight loss of monopoly,should you maximize profits or maximize revenue? Explain your answer.

Question 42

What is the defining characteristic of a natural monopoly? Give an example of a natural monopoly.

Question 43

The government may choose to do nothing to reduce monopoly inefficiency because the "fix" may be worse than the problem.

Question 44

In the market for "home heating" consumers typically have several options (e.g. ,electricity,heating fuel,natural gas,propane,etc. ),yet we often think of firms in this industry as behaving like monopolists.Discuss the context in which your electricity provider is a monopolist.Is this characterization universally applicable? Explain your answer.

Question 45

If the government regulates the price a natural monopolist can charge to be equal to the firm's average total cost,the firm has no incentive to reduce costs.

Question 46

Some companies merge in order to lower costs through efficient joint production.

Question 47

Antitrust laws give the Justice Department the authority to challenge potential mergers between companies in an effort to safeguard society from monopoly power.

Question 48

The proper level of government intervention is unclear when dealing with a monopoly.

Question 49

Government intervention always reduces monopoly deadweight loss.

Question 50

Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods.

Question 51

Firms with substantial monopoly power are quite common because many goods are truly unique.

Question 52

If the government regulates the price a natural monopolist can charge to be equal to the firm's marginal cost,the government will likely need to subsidize the firm.

Question 53

Graphically depict the deadweight loss caused by a monopoly.How is this similar to the deadweight loss from taxation?

Question 54

There has been much discussion of deregulating electricity and natural gas delivery companies in the United States.Discuss the likely effect of deregulation on prices in these two industries.

Question 55

What are the four ways that government policymakers can respond to the problem of monopoly?

Question 56

One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel and later releases a cheaper paperback edition.Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy.

Question 57

What is the deadweight loss due to profit-maximizing monopoly pricing under the following conditions: The price charged for goods produced is $10.The intersection of the marginal revenue and marginal cost curves occurs where output is 100 units and marginal revenue is $5.The socially efficient level of production is 110 units.The demand curve is linear and downward sloping,and the marginal cost curve is constant.

Question 58

A common solution to monopoly in European countries is public ownership.

Question 59

Describe how government is involved in creating a monopoly.Why might the government create one? Give an example.

Question 60

Goods that do not have close substitutes have downward-sloping demand curves.

Question 61

Why might economists prefer private ownership of monopolies over public ownership of monopolies?

Question 62

One solution to the problems of marginal-cost pricing of a regulated natural monopolist is average cost pricing.In this model,the monopolist is allowed to price its production at average total cost.How does average-cost pricing differ from marginal-cost pricing? Does this solution maximize social well-being?

Question 63

A monopoly market is characterized by

A) many buyers and sellers.
B) "natural" products.
C) barriers to entry.
D) a Nash equilibrium.

Question 64

A firm that is the sole seller of a product without close substitutes is

A) perfectly competitive.
B) monopolistically competitive.
C) an oligopolist.
D) a monopolist.

Question 65

A monopoly

A) can set the price it charges for its output and earn unlimited profits.
B) takes the market price as given and earns small but positive profits.
C) can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits.
D) can set the price it charges for its output but faces a horizontal demand curve so it can earn unlimited profits.

Question 66

Most markets are not monopolies in the real world because

A) firms usually face downward-sloping demand curves.
B) supply curves slope upward.
C) price is usually set equal to marginal cost by firms.
D) there are reasonable substitutes for most goods.

Question 67

Which of the following are necessary characteristics of a monopoly?

A) (i)and (ii)only
B) (i)and (iii)only
C) (i),(ii),and (iii)only
D) (i),(ii),(iii),and (iv)

Question 68

The fundamental source of monopoly power is

A) barriers to entry.
B) profit.
C) decreasing average total cost.
D) a product without close substitutes.

Question 69

Give some examples of the benefits and costs of antitrust laws.

Question 70

Which of the following statements is correct?

A) Both a competitive firm and a monopolist are price takers.
B) Both a competitive firm and a monopolist are price makers.
C) A competitive firm is a price taker,whereas a monopolist is a price maker.
D) A competitive firm is a price maker,whereas a monopolist is a price taker.

Question 71

A perfectly competitive market

A) may not be in the best interests of society,whereas a monopoly market promotes general economic well-being
B) promotes general economic well-being,whereas a monopoly market may not be in the best interests of society.
C) and a monopoly market are equally likely to promote general economic well-being.
D) is less likely to promote general economic well-being than a monopoly market.

Question 72

Which of the following is not a reason for the existence of a monopoly?

A) sole ownership of a key resource
B) patents
C) copyrights
D) diseconomies of scale

Question 73

Suppose most people regard emeralds,rubies,and sapphires as close substitutes for diamonds.Then DeBeers,a large diamond company,has

A) less incentive to advertise than it would otherwise have.
B) less market power than it would otherwise have.
C) more control over the price of diamonds than it would otherwise have.
D) higher profits than it would otherwise have.

Question 74

One difference between a perfectly competitive firm and a monopoly is that a perfectly competitive firm produces where

A) marginal cost equals price,while a monopolist produces where price exceeds marginal cost.
B) marginal cost equals price,while a monopolist produces where marginal cost exceeds price.
C) price exceeds marginal cost,while a monopolist produces where marginal cost equals price.
D) marginal cost exceeds price,while a monopolist produces where marginal cost equals price.

Question 75

Which of the following is not a characteristic of a monopoly?

A) barriers to entry
B) one seller
C) one buyer
D) a product without close substitutes

Question 76

Because monopoly firms do not have to compete with other firms,the outcome in a market with a monopoly is often

A) not in the best interest of society.
B) one that fails to maximize total economic well-being.
C) inefficient.
D) All of the above are correct.

Question 77

Which of the following would be most likely to have monopoly power?

A) a long-distance telephone service provider
B) a local cable TV provider
C) a large department store
D) a gas station

Question 78

The simplest way for a monopoly to arise is for a single firm to

A) decrease its price below its competitors' prices.
B) decrease production to increase demand for its product.
C) make pricing decisions jointly with other firms.
D) own a key resource.

Question 79

A benefit of a monopoly is

A) lower prices.
B) a wide variety of similar products.
C) decreasing long-run average total costs.
D) greater creativity by authors who can copyright their novels.

Question 80

In many countries,the government chooses to "internalize" the monopoly by owning monopoly providers of goods and services.(In some cases these firms are "nationalized," and the government actually buys or confiscates firms that operate in monopoly markets).What would be the advantages and disadvantages of such an approach to ensure that the "best interest of society" is promoted in these markets? Explain your answer.