Deck 10: Market Power: Monopoly and Monopsony

Question 1

A multiplant firm has equated marginal costs at each plant.By doing this

A)profits are maximized.
B)costs are minimized given the level of output.
C)revenues are maximized given the level of output.
D)none of the above

Answer 1

B

Question 2

Which of the following is NOT true regarding monopoly?

A)Monopoly is the sole producer in the market.
B)Monopoly price is determined from the demand curve.
C)Monopolist can charge as high a price as it likes.
D)Monopoly demand curve is downward sloping.

Answer 2

C

Question 3

Suppose that a firm can produce its output at either of two plants.If profits are maximized,which of the following statements is true?

A)The marginal cost at the first plant must equal marginal revenue.
B)The marginal cost at the second plant must equal marginal revenue.
C)The marginal cost at the two plants must be equal.
D)all of the above
E)none of the above

Answer 3

D

Question 4

Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost.We can conclude that the

A)firm is maximizing profit.
B)firm's output is smaller than the profit maximizing quantity.
C)firm's output is larger than the profit maximizing quantity.
D)firm's output does not maximize profit,but we cannot conclude whether the output is too large or too small.

Question 5

Which of the following is NOT true for monopoly?

A)The profit maximizing output is the one at which marginal revenue and marginal cost are equal.
B)Average revenue equals price.
C)The profit maximizing output is the one at which the difference between total revenue and total cost is largest.
D)The monopolist's demand curve is the same as the market demand curve.
E)At the profit maximizing output,price equals marginal cost.

Question 6

Use the following two statements to answer this question: I.For a monopolist,at every output level,average revenue is equal to price.
II)For a monopolist,at every output level,marginal revenue is equal to price.

A)Both I and II are true.
B)I is true,and II is false.
C)I is false,and II is true.
D)Both I and II are false.
E)Statements I and II could either be true or false depending upon demand.

Question 7

Which of the following is true at the output level where P=MC?

A)The monopolist is maximizing profit.
B)The monopolist is not maximizing profit and should increase output.
C)The monopolist is not maximizing profit and should decrease output.
D)The monopolist is earning a positive profit.

Question 8

For the monopolist shown below,the profit maximizing level of output is:

A)Q1.
B)Q2.
C)Q3.
D)Q4.
E)Q5.

Question 9

The monopoly supply curve is the

A)same as the competitive market supply curve.
B)portion of marginal costs curve where marginal costs exceed the minimum value of average variable costs.
C)result of market power and production costs.
D)none of the above

Question 10

To find the profit maximizing level of output,a firm finds the output level where

A)price equals marginal cost.
B)marginal revenue and average total cost.
C)price equals marginal revenue.
D)all of the above
E)none of the above

Question 11

As the manager of a firm you calculate the marginal revenue is $152 and marginal cost is $200.You should

A)expand output.
B)do nothing without information about your fixed costs.
C)reduce output until marginal revenue equals marginal cost.
D)expand output until marginal revenue equals zero.
E)reduce output beyond the level where marginal revenue equals zero.

Question 12

How much profit will the monopolist whose cost and demand curves are shown below earn at output Q1?

A)0CDQ1
B)0BEQ1
C)0AFQ1
D)ACDF
E)BCDE

Question 13

Compared to the equilibrium price and quantity sold in a competitive market,a monopolist will charge a __________ price and sell a __________ quantity.

A)higher; larger
B)lower; larger
C)higher; smaller
D)lower; smaller
E)none of these

Question 14

When the demand curve is downward sloping,marginal revenue is

A)equal to price.
B)equal to average revenue.
C)less than price.
D)more than price.

Question 15

The __________ elastic a firm's demand curve,the greater its __________.

A)less; monopoly power
B)less; output
C)more; monopoly power
D)more; costs

Question 16

A monopolist has equated marginal revenue to zero.The firm has:

A)maximized profit.
B)maximized revenue.
C)minimized cost.
D)minimized profit.

Question 17

If a monopolist sets her output such that marginal revenue,marginal cost and average total cost are equal,economic profit must be:

A)negative.
B)positive.
C)zero.
D)indeterminate from the given information.

Question 18

The monopolist has no supply curve because

A)the quantity supplied at any particular price depends on the monopolist's demand curve.
B)the monopolist's marginal cost curve changes considerably over time.
C)the relationship between price and quantity depends on both marginal cost and average cost.
D)there is a single seller in the market.
E)although there is only a single seller at the current price,it is impossible to know how many sellers would be in the market at higher prices.

Question 19

For a monopolist,changes in demand will lead to changes in

A)price with no change in output.
B)output with no change in price.
C)both price and quantity.
D)any of the above can be true.

Question 20

When a per unit tax is imposed on the sale of a product of a monopolist,the resulting price increase will

A)always be less than the tax.
B)always be more than the tax.
C)always be less than if a similar tax were imposed on firms in a competitive market.
D)not always be less than the tax.

Question 21

DVDs can be produced at a constant marginal cost of $10 per disk,and Roaring Lion Studios is releasing the DVDs for its last two major films.The DVD for Rambeau 17 is priced at $20 per disk,and the DVD for Schreck 10 is priced at $30 per disk.What are the Lerner indices for these two movies?

A)Both equal one.
B)2 and 3,respectively
C)0)5 and 0.67,respectively
D)1 and 2,respectively

Question 22

Which factors determine the firm's elasticity of demand?

A)Elasticity of market demand and number of firms
B)Number of firms and the nature of interaction among firms
C)Elasticity of market demand,number of firms,and the nature of interaction among firms
D)none of the above

Question 23

What is the value of the Lerner index under perfect competition?

A)1
B)0
C)infinity
D)two times the price

Question 24

Suppose Orange Inc.sells MP3 players and initially has monopoly power because there are only a few close substitutes available to consumers.As more types of MP3 players are introduced into the market,the demand facing Orange becomes __________ elastic and the Lerner index achieved by the firm in this market __________.

A)less,declines
B)less,increases
C)more,declines
D)more,increases

Question 25

The Lerner index measures

A)a firm's potential monopoly power.
B)the amount of monopoly power a firm chooses to exercises when maximizing profits.
C)a firm's potential profitability.
D)an industry's potential market power.

Question 26

A manufacturer of digital music players uses a proprietary file format that is not used by the other firms in the market.This action by the firm may be an example of using a __________ to reduce the number of firms in the market and to maintain a relatively inelastic demand for its products.

A)natural monopoly
B)positive externality
C)subsidy
D)barrier to entry

Question 27

Suppose that the competitive market for rice in Japan was suddenly monopolized.The effect of such a change would be:

A)to decrease the price of rice to the Japanese people.
B)to decrease the consumer surplus of Japanese rice consumers.
C)to decrease the producer surplus of Japanese rice producers.
D)a welfare gain for the Japanese people.
E)increase the consumption of rice by the Japanese people.

Question 28

Suppose there are seven firms in a market where the three largest firms supply 20% of the market-clearing quantity and the other four firms supply 10% of the market-clearing quantity.What is the five-firm concentration ratio (i.e.,the share of total sales controlled by the five largest firms in the market)?

A)60%
B)70%
C)80%
D)90%

Question 29

Under which of the following scenarios is it most likely that monopoly power will be exhibited by firms?

A)When there are few firms in the market and the demand curve faced by each firm is relatively inelastic.
B)When there are many firms in the market and the demand curve faced by each firm is relatively inelastic.
C)When there are few firms in the market and the demand curve faced by each firm is relatively elastic.
D)When there are many firms in the market and the demand curve faced by each firm is relatively elastic.

Question 30

DVDs can be produced at a constant marginal cost,and Roaring Lion Studios is releasing the DVDs for its last two major films.The DVD for Rambeau 17 is priced at $20 per disk,and the DVD for Schreck 10 is priced at $30 per disk.If the Lerner indices for Rambeau 17 divided by the Lerner index for Schreck 10 equals 0.5,what is the constant marginal cost of producing both DVDs?

A)MC = $10
B)MC = $15
C)MC = $20
D)MC = $5

Question 31

Which of the following is NOT associated with a high degree of monopoly power?

A)A relatively inelastic demand curve for the firm
B)A small number of firms in the market
C)Significant price competition among firms in the market
D)Significant barriers to entry

Question 32

The more elastic the demand facing a firm,

A)the higher the value of the Lerner index.
B)the lower the value of the Lerner index.
C)the less monopoly power it has.
D)the higher its profit.

Question 33

Monopoly power results from the ability to

A)set price equal to marginal cost.
B)equate marginal cost to marginal revenue.
C)set price above average variable cost.
D)set price above marginal cost.

Question 34

The firms in a market have decided not to compete with one another and have agreed to limit output and raise price.

A)This practice is known as concentrating and is legal in the United States and Canada.
B)This practice is known as collusion and is illegal in the United States.
C)In this way firms take advantage of economies of scale.
D)This is an effective barrier to entry,but is illegal in the United States.

Question 35

Assume that a firm's marginal cost is $10 and the elasticity of demand is -2.We can conclude that the firm's profit maximizing price is approximately

A)$20.
B)$5.
C)$10.
D)The answer cannot be determined without additional information.

Question 36

Use the following two statements to answer this question: I.A firm can exert monopoly power if and only if it is the sole producer of a good.
II)The degree of monopoly power a firm possesses can be measured using the
Lerner Index: L = (P - AC)/AC.

A)Both I and II are true.
B)I is true,and II is false.
C)I is false,and II is true.
D)Both I and II are false.

Question 37

When a drug company develops a new drug it is granted a __________ making it illegal for other firms to enter the market until the __________ expires.

A)franchise; franchise
B)copyright; copyright
C)government license; government license
D)patent; patent

Question 38

Roaring Lion Studios can produce DVDs at a constant marginal cost of $5 per disk,and the studio has just releasing the DVD for its latest hit film,Ernest Goes to the Hamptons.The retail price of the DVD is $25,and the elasticity of demand for this film is -2.Has the studio selected the profit-maximizing retail price for this DVD?

A)Yes
B)No,the retail price is too low
C)No,the retail price is too high
D)We do not have enough information to answer this question.

Question 39

The cartel of oil-producing nations (OPEC)once controlled about 80% of the world petroleum market,but OPEC's market share has declined to about half of its former level.This outcome is a good example of how firms may have:

A)relatively high short-run monopoly power that strengthens in the long run.
B)relatively high short-run monopoly power that declines in the long run.
C)relatively low short-run monopoly power that strengthens in the long run.
D)relatively low short-run monopoly power that declines in the long run.

Question 40

DVDs can be produced at a constant marginal cost of $5 per disk,and Roaring Lion Studios is releasing the DVDs for its last two major films.The DVD for Rambeau 17 is priced at $20 per disk,and the DVD for Schreck 10 is priced at $30 per disk.What are the price elasticities of demand for these two movies?

A)Both equal -1.2.
B)-0.75 and -5/6,respectively
C)-1.33 and -1.2,respectively
D)-1.33 and -2,respectively

Question 41

Figure 10.2
Refer to Figure 10.2.At output Qm,and assuming that the monopoly has set her price to maximize profit,the consumer surplus is:

A)CDE.
B)BDEF.
C)ADEG.
D)0DEQm.
E)none of the above

Question 42

In the personal computer market,some large manufacturers are able to buy computer components (e.g.,disk drives,flat-screen monitors,and memory chips)and software at lower prices than smaller firms in the market.This outcome indicates that the large firms enjoy some degree of __________ in this market.

A)monopoly power
B)oligopoly power
C)oligopsony power
D)monopsony power

Question 43

Figure 10.2
Refer to Figure 10.2.In moving from the competitive level of output and price to the monopoly level of output and price,the monopolist is able to add to producer surplus:

A)the area BCEF.
B)the area BCEF less the area GFH.
C)the area BCEH.
D)the area BCEH less the area GFH.
E)none of the above

Question 44

Figure 10.1
The revenue and cost curves in the diagram above are those of a natural monopoly.
Refer to Figure 10.1.The minimum feasible price is __________.

A)P1
B)P2
C)P3
D)P4
E)none of the above

Question 45

Bridge Coal Company is the only employer in a remote and mountainous region of the country,so the firm is the monopsony buyer of labor in the market.If the price of coal increases,then the firm's:

A)ME curve shifts leftward.
B)AE curve shifts rightward.
C)ME and AE curves shift rightward.
D)MV curve shifts rightward.

Question 46

Use the following information to answer the next question: The marginal cost of a monopolist is constant and is $10.The demand
Curve and marginal revenue curves are given as follows:
Demand: Q = 100 - P
Marginal revenue: MR = 100 - 2Q
The deadweight loss from monopoly power is __________.

A)$1000.00
B)$1012.50
C)$1025.00
D)$1037.50
E)none of the above

Question 47

Bridge Coal Company is the only employer in a remote and mountainous region of the country,so the firm is the monopsony buyer of labor in the market.If the price of coal increases,then the firm's quantity of labor demanded __________ and the equilibrium wage __________.

A)decreases,decreases
B)decreases,increases
C)increases,decreases
D)increases,increases

Question 48

The regulatory lag:

A)always benefits the regulated firm.
B)is likely to occur with rate-of-return regulation.
C)promotes economic efficiency.
D)all of the above

Question 49

Figure 10.1
The revenue and cost curves in the diagram above are those of a natural monopoly.
Refer to Figure 10.1.Suppose that the government decides to limit monopoly power with price regulation.If the government sets the price at the competitive level,it will set the price at __________.

A)P1
B)P2
C)P3
D)P4
E)none of the above

Question 50

Which of the following statements about natural monopolies is true?

A)Natural monopolies are only found in the markets for natural resources (like crude oil and coal).
B)For natural monopolies,marginal cost is always below average cost.
C)For natural monopolies,average cost is always increasing.
D)Natural monopolies cannot be regulated.

Question 51

In an oligopsony market:

A)there are many buyers and sellers.
B)there are many buyers and a single seller.
C)there is a single buyer and many sellers.
D)there are a few buyers and many sellers.
E)there are a few buyers and a few sellers.

Question 52

Figure 10.2
Refer to Figure 10.2.In moving from the competitive level of output and price to the monopoly level of output and price,the deadweight loss is the area:

A)QmEHQc.
B)GEH.
C)GFH.
D)FEH.
E)none of the above

Question 53

With respect to monopolies,deadweight loss refers to the

A)socially unproductive amounts of money spent to obtain or acquire a monopoly.
B)net loss in consumer and producer surplus due to a monopolist's pricing strategy/policy.
C)lost consumer surplus from monopolistic pricing.
D)none of the above

Question 54

The monopolist that maximizes profit

A)imposes a cost on society because the selling price is above marginal cost.
B)imposes a cost on society because the selling price is equal to marginal cost.
C)does not impose a cost on society because the selling price is above marginal cost.
D)does not impose a cost on society because price is equal to marginal cost.

Question 55

Deadweight loss from monopoly power is expressed on a graph as the area between the

A)competitive price and the average revenue curve bounded by the quantities produced by the competitive and monopoly markets.
B)competitive price line and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets.
C)competitive price line and the monopoly price line bounded by zero output and the output chosen by the monopolist.
D)average revenue curve and the marginal cost curve bounded by the quantities produced by competitive and monopoly markets.

Question 56

Figure 10.1
The revenue and cost curves in the diagram above are those of a natural monopoly.
Refer to Figure 10.1.If the monopolist is not regulated,the price will be set at __________.

A)P1
B)P2
C)P3
D)P4
E)none of the above

Question 57

Which of the following is true when the government imposes a price ceiling on a monopolist?

A)Marginal revenue becomes horizontal.
B)Marginal revenue is linear.
C)Marginal revenue is kinkedhorizontal and then downward sloping.
D)Marginal revenue is kinkeddownward sloping and then horizontal.

Question 58

If the regulatory agency sets a price where AR = AC for a natural monopoly,output will be

A)equal to the competitive level.
B)equal to the monopoly profit maximizing level.
C)greater than the monopoly profit maximizing level and less than the competitive level.
D)greater than the competitive level.

Question 59

Bridge Coal Company is the only employer in a remote and mountainous region of the country,so the firm is the monopsony buyer of labor in the market.If the local population declines and there are fewer qualified coal miners available,which one of the curves used to determine the monopsony outcome in this market shifts?

A)MV curve
B)AE curve
C)ME curve
D)Both the ME and AE curves

Question 60

If a monopolist's profits were taxed away and redistributed to its consumers,

A)inefficiency would remain because output would be lower than under competitive conditions.
B)inefficiency would remain,but not because output would be lower than under competitive conditions.
C)efficiency would be obtained because output would be increased to the competitive level.
D)efficiency would be obtained because output would be increased and profits removed.

Question 61

In a bilateral monopoly with one buyer and one seller,the monopoly power of the seller and the monopsony power of the buyer tend to:

A)reinforce one another.
B)counter-act one another.
C)favor the buyer.
D)favor the seller.

Question 62

Use the following statements to answer this question: I.Cartel activities like price fixing and other forms of collusion are never allowed under U.S.antitrust laws.
II)The Sherman Act applies to all firms that operate in U.S.markets,but the law does not apply to foreign governments.

A)I and II are true.
B)I is true and II is false.
C)II is true and I is false.
D)I and II are false.

Question 63

A form of implicit collusion in which one firm consistently follows the actions of another firm is:

A)predatory pricing.
B)a Webb-Pomerene association.
C)parallel conduct.
D)only illegal in Europe.

Question 64

Which of the following is NOT an example of buyer interaction that may improve the effectiveness of monopsony power?

A)Professional sports leagues that coordinate salary structures for players across the teams.
B)A buying cooperative in which members pool their purchases into one large order.
C)Labor unions that negotiate wage contracts for many workers who are employed by one firm.
D)All of the above are examples of buyer interaction in monopsonistic markets.

Question 65

A firm's demand curve is given by P = 500 - 2Q.The firm's current price is $300 and the firm sells 100 units of output per week.
a.Calculate the firm's marginal revenue at the current price and quantity using the expression for marginal revenue that utilizes the price elasticity of demand.
b.Assuming that the firm's marginal cost is zero,is the firm maximizing profit?

Question 66

John Gardner is the city planner in a medium-sized southeastern city.The city is considering a proposal to award an exclusive contract to Clear Vision,Inc.,a cable television carrier.Mr.Gardner has discovered that an economic planner hired a year before has generated the demand,marginal revenue,total cost and marginal cost functions given below:
P = 28 - 0.0008Q
MR = 28 - 0.0016Q
TC = 120,000 + 0.00062
MC = 0.0012Q,
where Q = the number of cable subscribers and P = the price of basic monthly cable service.Conditions change very slowly in the community so that Mr.Gardner considers the cost and demand functions to be reasonably valid for present conditions.Mr.Gardner knows relatively little economics and has hired you to answer the questions listed below.
a.What price and quantity would be expected if the firm is allowed to operate completely unregulated?
b.Mr.Gardner has asked you to recommend a price and quantity that would be socially efficient.Recommend a price and quantity to Mr.Gardner using economic theory to justify your answer.
c.Compare the economic efficiency implications of (a)and (b)above.Your answer need not include numerical calculations,but should include relevant diagrams to demonstrate deadweight loss.

Question 67

In 1982 the CEO of American Airlines spoke on the telephone to the CEO of Braniff Airlines.The CEO of American Airlines proposed that the two airlines fix prices.The CEO of Braniff Airlines rejected the proposal.The CEO of American Airlines:

A)was within his 1st Amendment right to free speech.
B)was in violation of the antitrust laws which prohibit price fixing.
C)was in violation of the antitrust laws which prohibit predatory pricing.
D)Both B and C are correct.
E)None of the above is necessarily correct.

Question 68

Which of the following is not an important antitrust law?

A)the Sherman Act of 1890
B)the Clayton Act of 1914
C)the Consumer Protection Act of 1932
D)the Federal Trade Commission Act of 1914
E)None of the above are antitrust laws.

Question 69

There are two satellite radio providers in the U.S.market,Sirius and XM Radio.The firms are proposed a merger,and it appears that the federal government will allow the merger to occur.Although the merger will create a single seller in this market,the existence of a monopoly may not have much impact on U.S.consumers.Which of the following statements are plausible reasons for the limited impact of the proposed merger?

A)There are very large fixed costs in providing satellite radio,and the industry may be a natural monopoly.One seller may be able to operate at lower cost than two sellers.
B)Although there will only be one seller of satellite radio,there are other forms of radio broadcasts available to U.S.consumers and demand for satellite radio may be relatively elastic.
C)The merged firm will operate at higher capacity and may be able to reduce costs through learning-by-doing,which will benefit U.S.consumers.
D)all of the above

Question 70

The degree of monopsony power that a firm enjoys is determined by

A)elasticity of market demand,elasticity of market supply,and number of buyers in the market.
B)elasticity of market supply,number of buyers in the market,and how buyers interact.
C)number of buyers in the market,how buyers interact,and number of sellers of the resource.
D)how buyers interact,number of sellers of the resource,and elasticity of market demand.

Question 71

Large manufacturing firms that buy many different parts or components (e.g.,auto manufacturers)can choose which parts to buy from other firms and which parts to make in their own factories.These manufacturers may be able to use monopsony power to reduce the price paid to outside suppliers for parts that are:

A)standard components for many manufacturers so that there are many buyers and sellers.
B)only used in their cars so that there is one buyer and a few sellers.
C)bought and sold in perfectly competitive markets.
D)none of the above

Question 72

Use the following statements to answer this question: I.If the market supply is perfectly elastic,then a few buyers with monopsony power can achieve the same percentage mark-down in the purchase price as a pure monopsonist.
II)The deadweight loss associated with a monopsony declines as the market supply curve becomes more elastic.

A)I and II are true.
B)I is true and II is false.
C)II is true and I is false.
D)I and II are false.

Question 73

Determine the "rule-of-thumb" price when the monopolist has a marginal cost of $25 and the price elasticity of demand of -3.0.

Question 74

The following diagram shows marginal value and expenditure curves for a monopsony.In moving from the competitive price and quantity to the monopsony price and quantity,the deadweight loss from monopsony power is the area:

A)ACDF
B)CDE
C)EDG
D)FDG
E)BCDG

Question 75

In some cases,firms that are accused of antitrust violations by federal authorities will plead guilty to the criminal charges in order to avoid facing the same charges in a private or civil trial.Why?

A)Attorneys in civil cases tend to be more effective at proving their claims.
B)The penalties for a conviction in a civil or private case are treble damages,or three times larger than the penalties in a criminal or public case.
C)Judges in criminal cases are known to be more lenient.
D)none of the above

Question 76

Predatory pricing is defined to be

A)collusive pricing.
B)behavior designed to drive out current competition.
C)cooperative behavior between two firms with monopoly power.
D)collusion.

Question 77

In a market with a bilateral monopoly:

A)there is a single buyer and a single seller.
B)there are many buyers and a single seller.
C)there is a single buyer and few sellers.
D)there are a few buyers and many sellers.
E)there are a few buyers and a few sellers.

Question 78

In a bilateral monopoly,equilibrium price will

A)favor the seller.
B)favor the buyer.
C)approximate the competitive equilibrium price.
D)not be determined by a simple rule.

Question 79

Which of the following is true of the antitrust laws in the United States? They are

A)designed to make the business environment more equitable.
B)designed to promote a competitive economy.
C)deliberately written in a way to make clear to all what is and what is not allowed.
D)deliberately written in a language to promote cooperation among businesses.

Question 80

The percentage "markdown" due to monopsony power is equal to __________.

A)(P - MC)/P
B)1/ED
C)(MV - P)/P
D)P[1 + (1/ED)]