Deck 10: Monopoly

Question 1

A competitive industry is a viable alternative to a natural monopoly.

Answer 1

False

Question 2

In practice,many monopolists are required to earn zero economic profit.

Answer 2

True

Question 3

A monopoly's supply curve is the portion of its marginal cost curve that lies above its average variable cost curve.

Answer 3

False

Question 4

Patents have ambiguous welfare consequences because they both create monopoly power and promote inventive activity.

Question 5

An unregulated,profit maximizing monopoly will never set a price where demand is inelastic.

Question 6

If a monopoly desires to raise its profits,it can simply raise the price it charges.

Question 7

A simple profit-maximizing monopoly will choose its price and quantity from the elastic portion of its demand curve.

Question 8

Expedia.com's sale of discount airline tickets to those willing to travel any hour of a day on any airline is an example of third degree price discrimination.

Question 9

In both the short-run and the long-run,a monopoly is guaranteed to earn positive profits.

Question 10

We know that the producer's surplus accruing to a simple monopoly firm must be greater than operating in a competitive market,else firms would not act as monopolists.

Question 11

In third-degree price discrimination,the monopoly receives the highest marginal revenue from the group that is charged the highest price.

Question 12

Unlike perfectly competitive firms,monopolies do not produce where marginal revenue equals marginal cost,thus leading to deadweight loss.

Question 13

The competition among firms to acquire the rights to legal barriers to entry helps to reduce the welfare costs of monopoly.

Question 14

The large increase in the price of oil and in the total revenues and profits of the US oil industry in the 1990's are evidence that it was exercising monopoly power.

Question 15

Both first-degree price discrimination and the two-part tariff,when perfectly implemented,reduce consumers' surplus to zero.

Question 16

When a simple profit-maximizing monopoly begins to practice second-degree price discrimination,both consumers and the monopoly will benefit.

Question 17

A firm has monopoly power when it is the single seller of a good or service.

Question 18

Social gain is lowered when a monopoly begins to practice price discrimination.

Question 19

An excise tax will increase the deadweight loss due to monopoly,but an excise subsidy can reduce the deadweight loss.

Question 20

If a natural monopoly charged the competitive price,it would earn a negative profit.

Question 21

Market Diagram

The following questions refer to the accompanying market diagram. PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly.


-Refer to Market Diagram.Suppose this firm initially acted competitively.If the firm switched to the monopoly equilibrium,how much deadweight loss would be created?

A) Area E + H.
B) Area G + H.
C) Area B + D + E + G + H.
D) Area D + E + G + H.

Question 22

Market Diagram

The following questions refer to the accompanying market diagram. PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly.


-Refer to the market diagram.Of the surplus that consumers lose because there is a monopoly (and not perfect competition),how much is lost to the monopoly itself?

A) Area C + D
B) Area E + H
C) Area A + B
D) Area C + D + E

Question 23

A monopolist will always end up choosing to operate

A) even if its profits are negative.
B) on the elastic portion of its demand curve.
C) until such time as a new competitor enters its market.
D) only if it can capture the entire consumer surplus.

Question 24

Market Diagram

The following questions refer to the accompanying market diagram. PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly.


-Refer to the market diagram.Of the surplus that the consumers lose because there is a monopoly (and not perfect competition),how much has become deadweight loss?

A) Area E
B) Area H
C) Area E + H
D) Area C + D + H

Question 25

A firm is a monopoly if

A) it faces a demand curve for its product that equals market demand.
B) it is a very large firm.
C) it takes its rivals' actions into account when choosing its price and output levels.
D) its production decisions do not affect the price of its product.

Question 26

For a given quantity,a monopoly's marginal revenue is always greater than the price associated with that quantity.

Question 27

Market Diagram

The following questions refer to the accompanying market diagram. PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly.


-Refer to the market diagram.Relative to the surplus they would receive in a competitive market,consumers lose how much surplus because there is a monopoly?

A) Area F + G + H
B) Area C + D + E
C) Area E + H
D) Area A + B

Question 28

Market Diagram

The following questions refer to the accompanying market diagram. PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly.


-Refer to Market Diagram.The difference between producer's surplus as a monopolist and producer's surplus when setting price at what would exist in a competitive market is

A) Area C + D + E - G - H.
B) Area C + D - H.
C) Area C + D + E - A - B.
D) Area E + H.

Question 29

When there are significant differences among customers,a monopolist will look for opportunities to price discriminate.

Question 30

A monopoly will set price

A) at the highest price along its demand curve.
B) equal to the value at which marginal cost intersects the demand curve.
C) so that it can sell the quantity at which marginal revenue is equal to marginal cost.
D) so that it can sell the quantity at which marginal revenue is equal to zero.

Question 31

When regulating a natural monopoly one should set the regulatory price such that the monopoly will produce the efficient level of output.

Question 32

What can,in general,be said about a monopoly's supply curve?

A) A monopoly's supply curve,like that for a competitive firm,coincides with its marginal cost curve.
B) A profit-maximizing monopoly will operate only on the elastic portion of its supply curve.
C) The monopoly's supply curve is more inelastic than if the firm were competitive.
D) The concept of a supply curve is meaningless in the context of the monopoly problem.

Question 33

Using $\eta$ to represent price elasticity of demand,a simple monopolist will find that its marginal revenue at any point along its demand curve is equal to price at that point multiplied by

A) (1 - 1/ $|\eta|$ )
B) 1/ $|\eta|$
C) $|\eta|$
D) $|\eta|$ *MC

Question 34

When a two-part tariff is perfectly implemented,the monopoly charges a price that is greater than its marginal cost.

Question 35

When a simple monopolist chooses to sell an additional unit of a good or service

A) marginal revenue will be equal to the going market price.
B) marginal revenue will always be negative.
C) it will only have to lower its price on the additional unit.
D) it will have to lower its price on the additional unit and on all other units.

Question 36

Market Diagram

The following questions refer to the accompanying market diagram. PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly.



-Refer to Market Diagram.What area represents the producer's surplus earned in the monopoly equilibrium?

A) Area A + C + F.
B) Area C + F.
C) Area C + D + F + G.
D) Area C + D + E.

Question 37

Versioning occurs when a company offers an inferior version of a product because it is cheaper to produce.

Question 38

Deadweight loss because of a monopoly can be attributed to the fact that monopolies produce at a quantity where the price of the good exceeds the marginal cost of producing the last unit.

Question 39

A simple monopoly will maximize its profit by producing the quantity where

A) price and marginal cost are equal.
B) the demand curve crosses the average cost curve.
C) marginal cost reaches its minimum.
D) marginal revenue equals marginal cost.

Question 40

Price discrimination does not require monopoly power.

Question 41

In third-degree price discrimination,the monopolist will choose quantities so that each market has the same

A) price.
B) total revenue.
C) marginal revenue.
D) elasticity.

Question 42

An economic problem with using subsidies or price ceilings to move a monopoly toward the competitive equilibrium is that

A) it may increase monopoly profits.
B) it may decrease monopoly profits.
C) policy makers may not be able to determine what the competitive equilibrium is.
D) policy makers always need to be lobbied before taking any actions.

Question 43

How does a per-unit subsidy affect the simple monopoly equilibrium?

A) The subsidy does not affect marginal cost and thus does not affect the monopoly equilibrium.
B) The subsidy lowers the price charged by the monopoly,but it also lowers social gain.
C) The subsidy increases the monopoly's profit but does not improve social gain.
D) The subsidy causes both monopoly output and social gain to increase.

Question 44

If regulators require a monopoly to earn zero economic profit,the monopoly will produce the quantity where

A) the marginal cost curve crosses the average cost curve.
B) the marginal cost curve crosses the demand curve.
C) the average cost curve crosses the demand curve.
D) the marginal cost curve crosses the marginal revenue curve.

Question 45

Consider a price ceiling imposed on a monopoly.For what quantities will the monopoly's new marginal revenue curve be horizontal at the ceiling price?

A) For quantities where the demand curve lies above the ceiling price.
B) For quantities where demand is elastic.
C) For quantities where marginal cost is rising.
D) Marginal revenue will be constant and equal to the ceiling price for all quantities.

Question 46

If a natural monopolist were to sell at the price where marginal cost equals demand,then it would be earning

A) zero economic profits,like a competitive firm in the long-run.
B) negative profits and would not be able to survive.
C) positive profits but not would not need to worry about government intervention to regulate it.
D) positive profits but would still need to worry about possible government intervention to regulate it.

Question 47

A natural monopoly exists when a firm

A) owns all of the world's known reserves of a natural resource.
B) has an average cost curve that is decreasing at the point where it crosses demand.
C) has obtained a patent on a new genetically modified organism.
D) is able to practice price discrimination in the sale of a natural resource.

Question 48

Second-degree price discrimination generally takes the form of

A) special prices for students and seniors.
B) membership clubs.
C) quantity discounts.
D) "extras" like free delivery and free customer service.

Question 49

In order to practice third degree price discrimination all of the following conditions must hold except that the firm

A) has monopoly power.
B) is able to exercise control over resales.
C) is willing to sell more to each customer at lower prices.
D) charges a lower price to groups with more elastic demand.

Question 50

Which of the following is the best example of second-degree price discrimination?

A) A car salesperson's attempts to discover and charge the highest price that the customer is willing to pay.
B) A sub shop that gives you a half-price sandwich on every sixth visit.
C) Manufacturers' use of discount coupons printed in Sunday newspapers.
D) Polaroid cameras and film.

Question 51

Market Diagram

The following questions refer to the accompanying market diagram. PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly.


-Refer to the market diagram.Relative to the surplus achieved under perfect competition,how much surplus is lost (deadweight loss)when there is a monopoly?

A) E
B) H
C) E + H
D) D + G + E + H

Question 52

Suppose regulators impose a price ceiling on a monopoly.If the price ceiling is set too high

A) deadweight loss will be eliminated.
B) deadweight loss will be reduced.
C) deadweight loss will be increased.
D) deadweight loss will not be affected.

Question 53

Third-degree price discrimination occurs when a monopoly

A) separates its customers into distinct markets,charging a different price to each group.
B) charges different prices for the same good sold to the same customer.
C) requires the consumer to pay a separate fee simply for the right to purchase the good.
D) charges each customer the maximum that he is willing to pay for each item purchased.

Question 54

Universities tend to set tuition high and then,through financial aid,effectively charge each student a different price for education.Financial aid statements allow the university to determine the student's financial status and set an appropriate price to charge the student.This situation is an example of

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) a two-part tariff.

Question 55

In rate-of-return regulation,a monopoly is required to have zero

A) profit.
B) rent.
C) producer's surplus.
D) deadweight loss.

Question 56

When first-degree price discrimination is perfectly implemented

A) social gain is maximized,with all gains going to the monopoly.
B) consumers' surplus and producer's surplus are both larger than in the case of simple monopoly.
C) the resulting deadweight loss is larger than if the monopoly did not price discriminate.
D) the consumers' and producer's gains from trade are identical to those in a competitive market.

Question 57

In order to practice any form of price discrimination,a monopoly must be able to

A) identify the maximum price that each customer is willing to pay.
B) separate its customers into distinct groups.
C) prevent resale of its product.
D) establish a legal barrier to entry.

Question 58

When a firm with market power practices third-degree price discrimination,it charges the highest price to the group that

A) has the most elastic demand.
B) has the most inelastic demand.
C) purchases the highest quantity.
D) purchases the lowest quantity.

Question 59

Legal restrictions on entry into an industry

A) are strongly opposed by those already in an industry.
B) are promoted through lobbying efforts by those already in the industry,thereby further increasing the social costs of monopoly.
C) are promoted by those who wish to enter the industry,thereby potentially increasing the social welfare generated by the industry.
D) are always instituted to protect the public's health and welfare.

Question 60

Rate of return regulation will

A) always result in the firm producing the quantity that would be produced if the market were competitive.
B) always result in the firm producing less than the quantity that would be produced if the market were competitive.
C) always result in the firm producing more than the quantity that would be produced in a competitive industry.
D) result in a new equilibrium with either more or loss produced in comparison to a competitive market.

Question 61

What relationship exists between marginal revenue and the elasticity of demand? Use this relationship to explain how a monopoly can increase its profit if demand is inelastic.

Question 62

At a fast food restaurant,a large drink is twice as big as a small drink,but the restaurant charges 79¢ for the small drink and only 99¢ for the large drink.This situation is probably not a case of price discrimination because

A) the restaurant cannot easily prevent resale.
B) people who buy large drinks order more food than people who buy small drinks.
C) the cost of serving a large drink is not twice the cost of serving a small drink.
D) the fast food restaurant has no monopoly power.

Question 63

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P.

-Refer to Monopoly Problem.This monopoly will charge

A) $20
B) $25
C) $30
D) $35

Question 64

All natural monopolies are characterized by

A) decreasing marginal cost at the point where their marginal cost curve crosses their demand curve.
B) the fact that they earn economic losses.
C) decreasing average costs at the point where their average cost curve crosses their demand curve.
D) the fact that losses can only be avoided if they are regulated.

Question 65

A country club charges a membership fee.Members pay competitive prices for the club's recreation and restaurant services.This situation is an example of

A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) a two-part tariff.

Question 66

Consider a price ceiling imposed on a monopoly that is set below the competitive price.Design a diagram showing the monopoly equilibrium in this case.Use your diagram to show that a price ceiling set this low will create a shortage.

Question 67

Suppose a monopoly has constant marginal costs of $40 per unit.Demand for the monopolist's product is Q = 100 - 0.5P.

Question 68

When will setting a relatively high entry fee and a low competitive price be the best strategy for a two-part tariff monopolist?

A) When the customers are nearly identical.
B) When the customers have inelastic demand for the product.
C) When the customers place a relatively low value on their time.
D) When the customers can be separated into a number of diverse groups.

Question 69

Define the term price discrimination.What conditions must hold for a firm to be able to practice price discrimination? How are consumers affected by price discrimination?

Question 70

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P.

-Refer to Monopoly Problem.The equation for this monopolist's marginal revenue is

A) MR = 100 - 2P
B) MR = 100 - 4P
C) MR = 50 - 0.5Q
D) MR = 50 - Q

Question 71

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P.

-Refer to Monopoly Problem.How much consumer surplus will there be when this monopolist charges its profit maximizing price?

A) $225
B) $450
C) $900
D) $1800

Question 72

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P.

-Refer to Monopoly Problem.This monopoly will receive producer surplus of

A) $0
B) $225
C) $450
D) $900

Question 73

Suppose you are the monopoly owner of a movie theatre.You can allow people to enter the theatre at zero marginal cost,and you can provide popcorn at a constant marginal cost of $0.50 per bag.You have two customers,Larry and Terry,who are identical twins.Larry never buys popcorn under any circumstances.If you charge the monopoly price of $1.00 per bag for popcorn,Terry will buy 2 bags of popcorn and earn $0.50 in consumer's surplus,and you will earn $1.00 in profit from popcorn sales.If you charge the competitive price of $0.50 per bag for popcorn,Terry will buy 4 bags of popcorn and earn $2.00 in consumer's surplus,and you will earn no profit from popcorn sales.

Question 74

A monopoly's marginal revenue curve is always

A) is always above the demand curve.
B) identical to that of a perfectly competitive firm.
C) twice as steep as the demand curve.
D) none of the above.

Question 75

Monopoly Problem. Consider a monopoly with constant marginal costs of $20. Consumers in the market for this monopoly’s product have demand of Q = 100 - 2P.

-Refer to Monopoly Problem.This monopoly will produce

A) 20 units.
B) 30 units.
C) 40 units.
D) 60 units.

Question 76

What price does a monopoly charge when it perfectly implements a two-part tariff?

A) The simple monopoly price.
B) The competitive price.
C) A price higher than that charged by a simple monopoly.
D) A price between the monopoly and competitive prices.

Question 77

Suppose a monopolist sells in two distinct markets.The demand and marginal revenue for the first market are given by P₁ = 240 - 2Q₁ and MR₁ = 240 - 4Q₁,respectively,where Q₁ is the quantity demanded and P₁ is the price paid by the first group.The demand and marginal revenue for the second market are given by P₂ = 120 - Q₂ and MR₂ = 120 - 2Q₂,respectively,where Q₂ is the quantity demanded and P₂ is the price paid by the second group.The monopoly's marginal cost is given by MC = 4/9 Q,where Q is the total output produced by the monopoly.

Question 78

Standard graphical analysis shows that monopoly creates a deadweight loss.

Question 79

Senior citizen and student discounts on tickets at movies theaters are examples of

A) First-degree price discrimination.
B) Second-degree price discrimination.
C) Third-degree price discrimination.
D) A two-part tariff.