Deck 10: Monopoly and Its Regulation

Question 1

If economies of scale allow one cable TV firm to supply the entire market at the lowest possible cost, then this company is

A) a natural monopoly.
B) a monopoly, but not a natural monopoly.
C) a legal monopoly.
D) not a monopoly.

Answer 1

a natural monopoly.

Question 2

If the monopoly illustrated in the figure above could engage in perfect price discrimination, then when it maximises its profit the total revenue collected by the firm would be

A) $210.
B) $110.
C) $120.
D) $310.

Answer 2

$210.

Question 3

The capture theory holds that regulations are supplied to maximise _______ .

A) marginal product
B) total sales
C) consumer surplus
D) economic profit

Answer 3

economic profit

Question 4

If a natural monopoly is allowed to set its price above its average total cost, then

A) the company incurs an economic loss.
B) competitors will enter the market.
C) the company makes an economic profit.
D) the company will produce more than the efficient amount of output.

Question 5

Which of the following is a barrier to entry for a monopoly?

A) Severe diseconomies of scale
B) Close substitutes for the good or service exist
C) A patent
D) All of the above answers are correct.

Question 6

In the figure above, the efficient amount of output is

A) 60 units per day.
B) 80 units per day.
C) 20 units per day.
D) 40 units per day.

Question 7

According to social interest theory, _______.

A) unregulated firms try to avoid creating deadweight loss
B) price regulations are unconstitutional
C) monopoly practices last forever
D) regulation helps markets achieve efficiency

Question 8

Compared to a similar perfectly competitive industry, a single- price monopoly

A) is more efficient because there is no wasteful competition.
B) creates a deadweight loss and decreases consumer surplus.
C) produces more output.
D) creates a deadweight loss and decreases economic profit.

Question 9

Sue's Surfboards is the sole renter of surfboards on Big Wave Island. Sue's demand and marginal revenue curves are illustrated in the figure above. Sue's Surfboards currently rents 15 surfboards an hour. Sue's total revenue from the 15 surfboards is

A) $150.
B) $10.
C) $225.
D) $300.

Question 10

If a monopolist is maximising profits, then it is producing an amount of output so that

A) MR = ATC.
B) MR = MC.
C) MR = TC.
D) MC = AVC.

Question 11

Joe, a hairdresser, offers students a discount price on haircuts. This form of pricing is an example of

A) an average cost pricing rule.
B) price discrimination.
C) perfect price discrimination.
D) a marginal cost pricing rule.

Question 12

In the figure above, the single- price, unregulated monopoly produces

A) 20 units per day.
B) less than 19 units per day.
C) between 21 and 39 units per day.
D) 40 or more units per day.

Question 13

The above figure shows the demand and cost curves for a monopolist. What is the maximum economic profit this firm can make?

A) zero
B) $200
C) $100
D) $400

Question 14

A natural monopoly is defined as

A) an industry in which economies of scale allow one firm to supply the entire market at the lowest possible cost.
B) a market in which competition and entry are restricted by the granting of a government licence.
C) a market in which competition and entry are restricted by the granting of a patent.
D) any market where one firm constitutes the entire industry.

Question 15

Demand Schedule Facing a Perfectly Price- Discriminating Firm

Using the demand schedule in the above table, the marginal revenue for a perfectly price- discriminating monopolist from the sale of the third unit of output is

A) $6.
B) $5.
C) $3.
D) $4.

Question 16

Which of the following is true of a natural monopoly?

A) Economies of scale exist to only a very low level of output.
B) The firm is not protected by any barrier to entry.
C) Economies of scale allow one firm to supply the entire market at the lowest possible cost.
D) Its long- run average cost curve slopes upward as it intersects the demand curve.

Question 17

The table above shows the demand and costs for a single- price monopolist. The firm will

A) maximise profit by producing 3 units.
B) operate on the inelastic portion of its demand curve.
C) operate on the unit elastic portion of its demand curve.
D) maximise profit by producing 2 units.

Question 18

Price discrimination

A) turns consumer surplus into economic profit.
B) eliminates the producer surplus.
C) lowers a monopoly's economic profit.
D) decreases output below the profit- maximising level.

Question 19

The table above gives the demand for a monopolist's output. What is the marginal revenue of increasing production from 4 to 5 units?

A) $70
B) $14
C) $16
D) $6

Question 20

A patent creates a monopoly by restricting _______.

A) entry into the market
B) the number of complements for the product
C) demand for the product
D) the amount of advertising that can be undertaken

Question 21

The maximum amount a rent seeker would pay for a monopoly is the _______.

A) deadweight loss
B) monopoly's economic profit
C) market price
D) monopoly's normal profit

Question 22

_______ is defined as any attempt to capture consumer surplus, producer surplus or economic profit.

A) Search
B) Maximising monopoly profits
C) Rent seeking
D) Price discrimination

Question 23

Dee's TV Repair is the only TV repair shop in a small town. Dee is a single- price monopolist. Based on the demand and cost information in the table above, what quantity of TV repairs should Dee undertake?

A) 10 per week
B) 30 per week
C) 20 per week
D) 0 per week

Question 24

The unregulated, single- price monopoly shown in the figure above will sell

A) 50 tickets.
B) 100 tickets.
C) less than 30 tickets.
D) 30 tickets.

Question 25

A single- price monopolist determines

A) its output but not its price.
B) its price but not its output.
C) both its output and its price.
D) neither its output nor its price.

Question 26

Demand Schedule Facing a Perfectly Price- Discriminating Firm

Using the demand schedule in the above table, if the firm's marginal cost is constant at $3.00, output for a perfectly price- discriminating monopolist is

A) 4 units.
B) 2 units.
C) 5 units.
D) 3 units.

Question 27

Rent seeking

A) frees scarce resources that could otherwise have been employed in the production of goods and services.
B) cannot take the form of lobbying for government- imposed import restrictions.
C) increases the social cost of monopoly.
D) None of the above answers is correct.

Question 28

Price cap regulation

A) is a price floor.
B) is a price ceiling.
C) sets the minimum price the firm can charge.
D) is a form of marginal cost regulation.

Question 29

Buying a monopoly from the existing owner does not ensure an economic profit because

A) competition among buyers drives up the cost of buying the firm.
B) profits equal zero in the long run anyway.
C) of the deadweight loss triangle.
D) the market for monopolies is a monopoly.

Question 30

Price cap regulation is a type of regulation that

A) sets the minimum price the firm can charge.
B) sets the maximum price the firm can charge.
C) offers price subsidies to firms that comply with regulation guidelines.
D) is equivalent to marginal cost pricing.

Question 31

When natural or legal forces work to protect a firm from potential competitors, the market is said to have

A) non- competitive supply.
B) non- competitive entry.
C) restricted competition.
D) barriers to entry.

Question 32

Which of the following markets will have the largest deadweight loss?

A) A market that consists of a perfect price- discriminating monopoly.
B) A market that consists of competitive firms.
C) A market that consists of a single- price monopoly.
D) None of the above. There is no deadweight loss as long as firms produce at the level of output where marginal revenue equals marginal cost.

Question 33

A monopoly has two key features, which are

A) barriers to entry and no close substitutes.
B) close substitutes and no barriers to entry.
C) franchises and barriers to entry.
D) barriers to entry and close substitutes.

Question 34

Compared to a single- price monopolist, a price- discriminating monopolist

A) produces more output.
B) produces less output but charges a lower price.
C) generates a larger deadweight loss.
D) produces the same amount of output but charges a higher price.

Question 35

For a monopoly, at the level of output where marginal revenue equals zero, then the

A) firm is a price taker.
B) price elasticity of demand at this amount of output is zero.
C) firm has maximised total revenue.
D) firm earns no revenue.

Question 36

Prime Pharmaceuticals has developed a new asthma medicine, for which it has a patent. An inhaler can be produced at a constant marginal cost of $2/inhaler. The demand curve, marginal revenue curve, and marginal cost curve for this new asthma inhaler are in the figure above. With its patent giving it a monopoly for its new inhaler, if it is a single- price monopoly, Prime Pharmaceuticals will produce _______ inhalers and set a price of _______ for each inhaler.

A) 8 million; $2
B) 16 million; $2
C) 8 million; $6
D) 10 million; $5

Question 37

Sue's Surfboards is the sole renter of surfboards on Big Wave Island. Sue does not price discriminate. For Sue's Surfboards, the change in total revenue from each additional surfboard rented is her

A) marginal cost and is constant regardless of how many surfboards are rented.
B) marginal cost and is greater than the rental price of a surfboard.
C) marginal revenue and is equal to the rental price of a surfboard.
D) marginal revenue and is less than the rental price of a surfboard.

Question 38

Compared to the profit- maximising equilibrium of a natural monopoly, a price cap regulation _______ Price and _______ output.

A) lowers; decreases
B) raises; decreases
C) raises; increases
D) lowers; increases

Question 39

For a single- price monopolist to sell one more unit of a good, it must

A) raise the price on all units sold.
B) lower the price on just the last unit sold.
C) raise the price on just the last unit sold.
D) lower the price on all units sold.

Question 40

Of the following, consumer surplus is largest for

A) any price- discriminating monopoly.
B) a single- price monopoly.
C) a perfectly price- discriminating monopoly.
D) a competitive industry.

Question 41

A patent grants

A) a guarantee of quality to consumers.
B) the right to practice a profession.
C) control over a unique source or supply of raw materials.
D) an exclusive right to an inventor of a product.

Question 42

The more perfectly a monopoly can price discriminate, the

A) larger its output and the lower its profits.
B) smaller its output and the lower its profits.
C) smaller its output and the greater its profits.
D) larger its output and the greater its profits.

Question 43

If a natural monopoly does not inflate its costs, the output it produces is the smallest when the monopoly is

A) regulated according to an average cost pricing rule.
B) regulated according to a marginal cost pricing rule.
C) regulated to maximise total surplus.
D) left unregulated.

Question 44

Which of the following statements regarding an average cost pricing rule for a natural monopoly is WRONG?

A) The firm makes zero economic profit.
B) More output is produced than if the firm maximised profit.
C) It sets price equal to average total cost.
D) It is efficient.

Question 45

The table above shows the demand and costs for a single- price monopolist. The firm can maximise its profit by selling

A) 60 units.
B) 40 units.
C) 20 units.
D) 0 units.

Question 46

If a monopolist can perfectly price discriminate, then

A) it will not give a discount to those who buy in bulk.
B) the deadweight loss is larger than if it cannot price discriminate.
C) there will be no consumer surplus.
D) it will charge just two different prices in two different markets.

Question 47

The creation of a monopoly results in gains to

A) producers at the expense of consumers.
B) consumers at the expense of producers.
C) producers at no expense to consumers.
D) consumers at no expense to producers.

Question 48

Under a marginal cost pricing rule, a regulated natural monopoly

A) incurs an economic loss and there is no deadweight loss.
B) incurs an economic loss and there is a deadweight loss.
C) makes a positive economic profit and there is a deadweight loss.
D) makes zero economic profit and there is no deadweight loss.

Question 49

Perfect price discrimination

A) turns all the producer surplus into consumer surplus.
B) turns all the consumer surplus into economic profit.
C) cannot result in profit maximisation.
D) creates a deadweight loss.

Question 50

Which of the following statements about a monopoly is FALSE?

A) The good produced by a monopoly has no close substitutes.
B) Monopolies have no barriers to entry or exit.
C) A monopoly is the only producer of the good.
D) None of the above; that is, all of the above answers are true statements about a monopoly.

Question 51

Compared to a single- price monopoly, the output of a competitive market with the same costs

A) is the same as the monopoly's output.
B) could be more than, less than, or equal to the monopoly's output.
C) is less than the monopoly's output.
D) is more than the monopoly's output.

Question 52

A monopoly can price discriminate between two groups of consumers if each group has _______.

A) the ability to resell the good to the other group
B) a large consumer surplus
C) a different willingness to pay
D) the same willingness to pay

Question 53

Single- price monopolies maximise profit by producing the amount of output where

A) price is equal to marginal cost.
B) total revenue is maximised.
C) price is equal to marginal revenue.
D) marginal revenue is equal to marginal cost.

Question 54

Because of a decrease in labour costs, a monopoly finds that its marginal cost and average total cost have decreased. The monopoly _______ its price and _______ its quantity.

A) lowers; decreases
B) raises; increases
C) lowers; increases
D) raises; decreases

Question 55

There is a deadweight loss if a natural monopoly is regulated to use

A) marginal cost pricing and if it is allowed to be unregulated and maximise its profit.
B) marginal cost pricing and if it is regulated to use average cost pricing.
C) average cost pricing and if it is allowed to be unregulated and maximise its profit.
D) None of the above answers is correct.

Question 56

An industry in which economies of scale allow one firm to supply the entire market at the lowest possible cost is called a

A) single- price monopoly.
B) natural monopoly.
C) one- firm monopoly.
D) legal monopoly.

Question 57

Which of the following occurs with both perfectly price- discriminating and single- price monopolies?

A) The amount of output is inefficient.
B) Deadweight loss is created.
C) All consumer surplus goes to the monopoly.
D) There is a redistribution of consumer surplus to the monopoly.

Question 58

Customers are most likely buying from a natural monopoly when they purchase

A) a laptop computer from Sony.
B) a glass of water from the local water company.
C) aspirin from a generic drug company.
D) All of the above

Question 59

Compared to a single- price monopoly, a competitive market with the same costs produces _______ Output and has a _______ price.

A) more; lower
B) more; higher
C) less; higher
D) less; lower

Question 60

A single- price monopolist will find when it produces its profit- maximising amount of output that

A) price exceeds marginal cost.
B) marginal revenue equals marginal cost.
C) price exceeds marginal revenue.
D) All of the above occur at the profit- maximising output level.

Question 61

When Dominant Pizza is willing to sell a pizza to a student who lives on- campus at a lower price than it sells the identical pizza to a student who lives a block away from the campus, the pizza firm is _______.

A) practicing price discrimination
B) eliminating all competition
C) unfair
D) incurring a loss on on- campus sales

Question 62

La Bella Pizza is the only pizza place on Pepper Island. The figure above shows La Bella Pizza's demand curve, marginal revenue curve and marginal cost curve. At La Bella Pizza's
Profit- maximising output, its annual total revenue is

A) $624,000.
B) $312,000.
C) $336,000.
D) $168,000.

Question 63

The fundamental reason a single- price monopoly creates a deadweight loss is that compared to the efficient outcome, the single- price monopoly

A) restricts output.
B) reduces the elasticity of demand.
C) raises fixed cost.
D) raises variable cost.

Question 64

The social interest theory of regulation suggests that the political process and regulations will _______ and the capture theory of regulation suggests that the political process and regulations will _______.

A) seek to minimise deadweight loss; serve the interests of the producers
B) ignore producers' interests and concentrate on consumers' interests; seek to minimise firms' economic profits
C) be unaffected by deadweight loss; increase the firms' economic profits
D) try to maximise the producers' economic profits; seek to minimise deadweight loss

Question 65

A rule that specifies the highest price that a regulated firm is permitted to set is called

A) maximum price regulation.
B) average cost pricing.
C) price cap regulation.
D) marginal cost pricing.

Question 66

If the monopoly illustrated in the figure above could engage in perfect price discrimination, then each buyer would pay

A) $2.00.
B) a different price.
C) $3.00.
D) $3.50.

Question 67

If the government grants a firm a monopoly franchise to supply coal, a monopoly is created by

A) a natural barrier to entry.
B) price discrimination.
C) a legal barrier to entry.
D) All of the above answers are correct.

Question 68

When an average cost pricing rule is imposed on a natural monopoly, _______ .

A) total surplus is maximised and the monopoly makes an economic profit
B) the monopoly makes zero economic profit
C) total surplus is maximised and the monopoly incurs an economic loss
D) the monopoly makes an economic profit

Question 69

Roxie's Movie Theatre has a monopoly and discovers that at $12 a movie, no one is buying movie tickets during weekdays. Roxie's conducts a survey and the table above reveals the results of the survey. Roxie decides to price discriminate between weekend and weekday moviegoers. The marginal cost of showing a movie is $6. Roxie's charges _______ on weekdays and _______ on weekends.

A) $3; $12
B) $6; $15
C) $9; $12
D) $6; $18

Question 70

Total revenue equals

A) price multiplied by quantity sold.
B) total cost minus profit.
C) the area between the demand curve and the marginal revenue curve.
D) marginal revenue multiplied by quantity sold.

Question 71

An average cost pricing rule for a natural monopoly sets the price _______ the marginal cost, thereby _______ a deadweight loss.

A) below; creating
B) above; creating
C) below; avoiding
D) above; avoiding

Question 72

Activity aimed at creating artificial barriers to entry into a particular market

A) has no social cost.
B) improves the economy's efficiency.
C) improves competition.
D) is rent seeking.

Question 73

Roxie's Movie Theatre is the only one in town. The table above gives the demand schedule for movies. If Roxie's is a single- price monopoly and the marginal cost of a movie is $6, Roxie's will charge _______ a movie and will sell _______ movie tickets a week.

A) $15; 100
B) $6; 400
C) $9; 300
D) $12; 200

Question 74

Efforts by a firm to obtain a monopoly

A) are called price discrimination.
B) are called rent seeking.
C) increase consumer surplus.
D) are called price taking.

Question 75

A profit- maximising single- price monopolist charges a price equal to

A) the price necessary for the firm to earn a normal return on its investment.
B) the highest price consumers are willing to pay for the profit- maximising quantity.
C) marginal revenue.
D) average total cost.

Question 76

Patents are _______ barriers to entry and monopoly franchises are _______ barriers to entry.

A) natural; legal
B) legal; natural
C) legal; legal
D) natural; natural

Question 77

Suppose a new vaccine for Lyme disease is developed by Merck, a large drug company. Which of the following is most likely to occur?

A) Merck will apply for a patent on the vaccine that grants it the monopoly rights to the vaccine for many years.
B) Merck will not tell anyone about its discovery though it will sell the vaccine.
C) Other firms will quickly copy the formula making the market for the vaccine competitive.
D) Merck will have a monopoly on this vaccine because of economies of scale.

Question 78

A natural monopoly

A) is not protected by any barrier to entry.
B) exists because of legal barriers to entry.
C) is an industry where two or more smaller firms can supply the market at a lower cost than one big firm could.
D) is an industry in which economies of scale exist at the level of output where the market demand curve intersects the long- run average cost curve.

Question 79

Which of the following is NOT an effective entry barrier?

A) A firm being granted a patent for its product
B) When huge economies of scale exist
C) A firm owning all of a vital resource needed to produce a good
D) A firm earning very high economic profits

Question 80

Natural monopolies occur when there are

A) external economies.
B) large economies of scale.
C) natural resources involved.
D) large diseconomies of scale.