Deck 10: Monopoly

Question 1

All of the following are true of a monopoly except

A)high barriers to entry exist.
B)it has market power.
C)it is a price maker.
D)it is a single seller.
E)there are many close substitutes for its product.

Answer 1

E

Question 2

The monopolist is the sole seller of a product for which there are no close substitutes.

Answer 2

True

Question 3

A monopoly is a price-taker.

Answer 3

False

Question 4

A firm's market power is its ability to

A)produce as much as it can.
B)make a profit.
C)change its price without losing its market share.
D)affect other firms' output decisions.
E)enter and exit a market.

Question 5

The demand curve facing a monopoly firm

A)may well bend backward.
B)suggests that the monopoly can sell additional units without lowering the price.
C)is the market demand curve.
D)is equal to its total revenue curve.
E)is perfectly inelastic.

Question 6

Barriers to entry do not exist for a monopoly.

Question 7

Several monopolists can exist in a single market.

Question 8

A monopoly's demand curve most likely

A)is less elastic than a competitive firm's demand curve.
B)does not exist.
C)has the same elasticity as a competitive firm's demand curve.
D)is more elastic than a competitive firm's demand curve.
E)could be more or less elastic than a competitive firm's demand curve, depending on the level of output.

Question 9

The main difference between a monopoly and a competitive firm is that

A)they have differently-shaped cost curves.
B)a monopoly can change its output, whereas a competitive firm cannot.
C)with a monopoly there is a market demand, whereas with a competitive firm there is only firm demand.
D)a monopoly is not concerned with market price.
E)a monopoly can affect market price, whereas a competitive firm cannot.

Question 10

A firm can be the sole seller of a product but still not be a monopoly if

A)the firm is not making profits.
B)the firm is not large.
C)the product has many close substitutes.
D)the market price is high.
E)the cost of production is high relative to price.

Question 11

The market demand curve that a monopoly faces implies that

A)the law of demand is still at work.
B)cost does not matter.
C)the monopoly can increase price indiscriminately and consumers have no choice but to pay it.
D)the monopoly does not have to be concerned about making profits.
E)an increase in output will not affect price.

Question 12

A single seller can set a high price for its product because

A)the product has a high elasticity of demand.
B)the factors that motivate a monopoly are not the same as the factors that motivate a competitive firm.
C)the product is price-inelastic.
D)there are no other sellers of the product to undercut the price.
E)the product has many close substitutes.

Question 13

If the market price changes substantially when a firm cuts its level of production, then the firm is most likely to be

A)a competitor.
B)a monopoly.
C)both a competitor and a monopoly.
D)neither a competitor nor a monopoly.
E)a firm with no market power.

Question 14

Which of the following is true about market power?

A)An industry with 100 firms has more market power than the same industry with a single firm.
B)An industry with 100 firms has less market power than the same industry with a single firm.
C)An industry with 100 firms has the same market power as the same industry with any number of firms.
D)An industry with 100 firms has more market power than the same industry with 10 firms but less market power than the same industry with one firm.
E)An industry with 100 firms has less market power than the same industry with 10 firms but more market power than the same industry with one firm.

Question 15

Suppose a firm decides to cut its production in half. One could claim that this firm has market power if there is a significant change in the

A)firm's total cost.
B)market price of the product.
C)firm's total revenue.
D)firm's marginal revenue.
E)firm's average revenue.

Question 16

Which of the following firms faces the market demand curve?

A)All firms face the market demand curve.
B)A competitive firm
C)A monopolistically-competitive firm
D)A monopoly
E)No firm faces the market demand curve.

Question 17

Apple Computers is a monopoly in the computer industry because it is the only firm producing Macintosh computers.

Question 18

Monopoly means that

A)government regulates the industry.
B)the firm has control over market price but not output.
C)the firm has a patent.
D)one seller exists in a market in which there are no close substitutes.
E)a small number of firms are producing standardized products.

Question 19

Which of the following is a characteristic of a monopoly?

A)Free entry
B)Single buyer
C)Price-maker
D)Price-taker
E)Product differentiation

Question 20

Which of the following is true of a monopoly?

A)Producers sell a product for which there are many substitutes.
B)Producers enjoy complete freedom of entry into and out of the industry.
C)The demand curve facing the producer is the market demand curve.
D)Producers always charge the highest possible price.
E)Producers are price-takers.

Question 21

A clothing store can sell two shirts for $20 each or three shirts for $15 each. At a quantity of three shirts sold, marginal revenue

A)is $45.
B)is $15.
C)is $5.
D)cannot be determined from the information given.
E)is $2.

Question 22

A monopoly's marginal revenue curve

A)slopes upward.
B)lies above the marginal cost curve at all points.
C)is horizontal.
D)is vertical.
E)lies below the average revenue curve.

Question 23

A monopoly's demand curve is less elastic than a perfect competitor's demand curve.

Question 24

The marginal revenue curve of a monopoly will

A)decrease at a faster rate than price because any reduction in price applies to all units sold.
B)lie above the demand curve.
C)increase at a faster rate than price because marginal revenue is always greater than price.
D)decrease at a faster rate than price because any reduction in price applies only to extra units sold.
E)equal the demand curve.

Question 25

Average revenue is ____ price.

A)equal to
B)less than
C)greater than
D)1 divided by
E)marginal revenue times

Question 26

When the monopoly's marginal revenue is positive, its

A)total revenue decreases with increases in quantity.
B)total revenue is at its maximum.
C)total revenue increases with increases in quantity.
D)elasticity of supply is less than 1.
E)elasticity of demand is less than 1.

Question 27

If, at a sales level of 100 units, a monopoly's marginal revenue is $5, then

A)at a sales level of more than 100 units, marginal revenue will be more than $5.
B)at a sales level of more than 100 units, marginal revenue will be $5.
C)at a sales level of less than 100 units, marginal revenue will be $5.
D)at a sales level of more than 100 units, marginal revenue will be less than $5.
E)total revenue is $500.

Question 28

A monopoly's marginal revenue is less than its price because

A)its demand curve slopes upward
B)its demand curve is horizontal.
C)each additional unit can be sold for a different price.
D)each additional unit can be sold only if the price is increased for all other units sold.
E)each additional unit can be sold only if the price is reduced for all units sold.

Question 29

For a monopoly, the demand curve shows

A)average revenue at each level of output.
B)average cost at each level of output.
C)marginal revenue at each level of output.
D)marginal cost at each level of output.
E)profits at each level of output.

Question 30

At any positive level of output, the monopoly's marginal revenue

A)curve is greater than its demand curve.
B)is greater than its average revenue.
C)equals marginal cost.
D)is less than price.
E)equals price.

Question 31

Marginal revenue lies below the demand curve because

A)average revenue declines as output decreases.
B)average revenue declines as output increases.
C)average revenue stays the same as output changes.
D)marginal revenue always equals average revenue.
E)price increases as output increases.

Question 32

A firm with market power can always sell more by raising the price of its product.

Question 33

The industry demand curve for a monopoly is the same as the individual monopoly's demand curve.

Question 34

For a monopoly with a straight-line demand curve, when demand is

A)unit-elastic, marginal revenue reaches its maximum.
B)inelastic, marginal revenue is negative.
C)elastic, marginal revenue is positive and increasing.
D)elastic, marginal revenue is greater than demand.
E)perfectly inelastic, marginal revenue equals demand.

Question 35

Monopoly power occurs when a shift in market demand does not affect a monopoly's profits.

Question 36

A firm's market power can be realized by considering how much price changes in response to an output change.

Question 37

Marginal revenue of a monopoly

A)lies above the demand curve.
B)equals average revenue.
C)declines as output is increased.
D)increases as output is increased.
E)is the short-run aggregate supply curve.

Question 38

For a monopoly, when demand is elastic, marginal revenue is

A)zero and total revenue is at its maximum.
B)positive and total revenue is falling.
C)positive and total revenue is rising.
D)negative and total revenue is rising.
E)negative and total revenue is falling.

Question 39

When a monopoly increases output by one unit,

A)the change in revenue equals market price.
B)market price does not change.
C)only that unit must be sold for less than other units.
D)revenue for the firm decreases.
E)less must be charged for all units of output.

Question 40

Suppose you observe that as output in the market increases, total revenue for the market declines. This would imply that

A)a monopoly would be unable to exercise market power in this market.
B)the demand for this product is not completely inelastic.
C)the market is not a monopoly.
D)any type of firm in this market would be a price-taker.
E)firms in this market have strong market power.

Question 41

Marginal revenue and demand are unrelated.

Question 42

If, at an output of 10 units, a monopoly is earning a positive profit (marginal revenue is $6 and marginal cost is $4), then the monopoly

A)should raise the price at the current output level.
B)should reduce output.
C)is in equilibrium.
D)should increase output.
E)should reduce output before increasing it.

Question 43

Exhibit 10-1
Refer to Exhibit 10-1. The maximum amount of profits is

A)$35.
B)$50.
C)$100.
D)$1,000.
E)$2,500.

Question 44

When the price elasticity of demand is less than 1, then marginal revenue is

A)equal to 0.
B)positive.
C)negative.
D)greater than 1.
E)infinity.

Question 45

For a monopoly, average revenue is always less than price.

Question 46

Suppose a monopoly is producing at an output such that the price elasticity of demand is 0.8. Then

A)there is not enough information to reach any conclusion listed.
B)price equals marginal cost.
C)output should be increased.
D)the monopoly is probably maximizing profits.
E)marginal revenue is less than marginal cost.

Question 47

Marginal revenue is positive when the price elasticity of demand is greater than 1.

Question 48

For a monopoly to maximize profits, price must exceed marginal cost.

Question 49

Exhibit 10-1
A monopoly will expand output until

A)total revenue is maximized.
B)marginal revenue equals marginal cost.
C)price elasticity is equal to 1.
D)average revenue is maximized.
E)marginal revenue equals zero.

Question 50

For a monopoly, the demand curve equals marginal revenue at each level of output.

Question 51

Exhibit 10-1
Refer to Exhibit 10-1. Profits are maximized when the level of output is

A)10 units.
B)50 units.
C)90 units.
D)more than 90 units.
E)0 units.

Question 52

A monopoly will maximize profits by producing an output at which

A)MR > D.
B)ATC = MR.
C)MC = P.
D)MC = MR.
E)TC = TR.

Question 53

If a firm is producing at a point at which marginal revenues are greater than marginal costs, it should decrease its level of production.

Question 54

A profit-maximizing monopoly with a straight-line demand will never produce when demand is inelastic because

A)price would be negative.
B)consumers would buy nothing.
C)revenue would be rising as cost falls.
D)marginal revenue would be negative and could not equal marginal cost.
E)there would be too few potential customers.

Question 55

When a profit-maximizing monopoly produces an output for which marginal revenue is less than marginal cost, the firm is

A)making a profit.
B)producing too little.
C)producing too much.
D)breaking even.
E)incurring a loss.

Question 56

The marginal revenue curve of a monopoly will decrease at a faster rate than price because any reduction in price applies to all units sold.

Question 57

A monopoly maximizes profit by

A)producing at the level of output associated with unitary price elasticity of demand.
B)producing at the level of output associated with maximum total revenue.
C)producing at the level at which MR = MC.
D)producing as much as people will buy at level at which P = AC.
E)charging the highest price that anyone will pay for the good.

Question 58

Suppose that for a monopoly average total cost is $3.50, marginal cost is $3.00, and marginal revenue is $3.00 with a selling price of $4.00. To maximize profits, the monopoly should

A)change neither price nor output.
B)increase both output and price.
C)decrease both output and price.
D)increase output but decrease price.
E)decrease output but increase price.

Question 59

When marginal cost is equal to marginal revenue,

A)an increase in output will increase revenue more than cost.
B)production is being maximized.
C)an increase in price will cause revenue to rise.
D)a decrease in output will decrease revenue more than cost.
E)economic profit is equal to zero.

Question 60

For a monopoly, the marginal revenue curve lies below the demand curve.

Question 61

When price equals marginal cost,

A)a monopoly should raise its price to increase profits.
B)a monopoly's profits are maximized.
C)a competitive firm should decrease output to increase profits.
D)it means that profits are maximized for both competitive firms and monopolies.
E)a competitive firm should raise its price to increase profits.

Question 62

Suppose there are 1,000 firms in a market, and market demand has a price elasticity of 0.5. Initially, all firms produce the same output and the market price is $5. One firm then decides to double its output. By how much will price change? Show your work.

Question 63

Explain why a monopoly can raise the price of its product and continue operating, whereas a competitive firm cannot.

Question 64

On a monopoly diagram showing demand, marginal revenue, marginal cost, and average total cost, which of the following cannot be illustrated?

A)Marginal cost
B)Market price
C)Total costs
D)Market output
E)Fixed costs

Question 65

Why is the marginal revenue curve for a monopoly steeper than its demand curve?

Question 66

A monopoly will expand output until total revenue is maximized.

Question 67

When we say that a monopoly has market power, does it mean that the monopoly can produce and charge any amount it wants? Explain.

Question 68

Explain why decreasing or increasing output beyond the point at which marginal cost equals marginal revenue will reduce profits for a monopoly.

Question 69

Exhibit 10-2

-Refer to Exhibit 10-2. Suppose fixed costs are $10. What are the profit-maximizing output, output price, and total profit?

Question 70

Exhibit 10-2
To ascertain the profit-maximizing price on a monopoly diagram, one must first determine output by finding where

A)marginal cost and marginal revenue cross, and then doubling the amount indicated on the vertical axis to determine price.
B)marginal cost and demand cross, and then looking at the vertical axis to determine price.
C)marginal cost and marginal revenue cross, and then extending upward to the demand curve to determine price on the vertical axis.
D)marginal cost and marginal revenue cross, and then looking at that point on the vertical axis to determine price.
E)marginal revenue crosses the horizontal axis, and then noting what price demand indicates at that output level.

Question 71

A profit-maximizing monopoly produces at the point at which marginal cost equals marginal revenue, while a profit-maximizing competitive firm produces at the point at which marginal cost equals price.

Question 72

To maximize profits, both monopolies and competitive firms must produce at the point at which price equals marginal cost.

Question 73

In order to maximize profit, a monopoly will set output so that marginal revenue equals marginal cost and will charge a price equal to marginal revenue.

Question 74

When a monopoly maximizes profits, it produces at an output level at which marginal revenue exceeds marginal cost.

Question 75

On a graph of monopoly, the profit-maximizing output level is determined by noting where the ____ and ____ curves cross.

A)marginal revenue; demand
B)marginal cost; demand
C)marginal cost; average total cost
D)marginal revenue; marginal cost
E)average total cost; demand

Question 76

If a monopoly charges a price equal to its marginal cost, then it must be the case that the firm has

A)maximized profits.
B)suffered a loss.
C)made a profit that is less than the maximum level.
D)suffered a loss that is less than the minimum level.
E)made a profit or suffered a loss, depending on the cost structure.

Question 77

Exhibit 10-2

-Refer to Exhibit 10-2. Calculate marginal revenue for the second, third, and fourth unit of output.

Question 78

To maximize profits, a monopoly produces at ____ and a competitive firm produces at ____.

A)price equal to marginal cost; price equal to marginal cost
B)price equal to average cost; price equal to marginal cost
C)marginal revenue greater than marginal cost; price greater than marginal cost
D)marginal revenue equal to marginal cost; price equal to marginal cost
E)marginal revenue equal to average revenue; price greater than marginal revenue

Question 79

A profit-maximizing monopoly might choose to produce anywhere along a straight-line market demand curve.

Question 80

Which of the following statements is false?

A)A competitive firm maximizes profit when marginal revenue equals marginal cost.
B)When a competitive firm increases output by one unit, revenue increases by an amount equal to market price.
C)A monopoly and a competitive firm use a similar rule for setting output to maximize profit.
D)When a monopoly increases output by one unit, revenue increases by an amount less than market price.
E)A monopoly maximizes profit when price equals marginal cost.