Deck 9: Monopoly

Question 1

One difference between a monopoly and a competitive firm is that

A)a monopoly is a price taker.
B)a monopoly maximizes profit by setting marginal revenue equal to marginal cost.
C)a monopoly faces a downward-sloping demand curve.
D)None of the above.

Answer 1

a monopoly faces a downward-sloping demand curve.

Question 2

If the inverse demand curve a monopoly faces is p = 100 - 2Q, then profit maximization

A)is achieved when 25 units are produced.
B)is achieved by setting price equal to 25.
C)is achieved only by shutting down in the short run.
D)cannot be determined solely from the information provided.

Answer 2

cannot be determined solely from the information provided.

Question 3

When the marginal revenue curve intersects the horizontal axis

A)demand is relatively elastic.
B)demand is relatively inelastic.
C)demand is perfectly elastic.
D)demand is unitary elastic.

Answer 3

demand is unitary elastic.

Question 4

A monopoly that is maximizing profits operates in the ________ portion of the demand curve.

A)unitary elastic
B)elastic
C)inelastic
D)horizontal

Question 5

Which of the following statements is TRUE?

A)A monopoly cannot set price and quantity such that the point lies above the demand curve.
B)A monopoly can charge whatever it wants.
C)Profit maximization occurs by setting price first.
D)Both A and B.

Question 6

A monopolist that chooses price

A)necessarily produces less than a monopolist that chooses quantity, hence the laws against price fixing.
B)produces the same amount as a monopolist that chooses quantity.
C)produces more than a monopolist that chooses quantity, thus the irony of laws against price fixing.
D)can set price higher than the demand curve and earn additional profits, whereas a firm that chooses quantity cannot.

Question 7

If the inverse demand function for a monopoly's product is p = 100 - 2Q, then the firm's marginal revenue function is

A)-2.
B)100 - 4Q.
C)200 - 4Q.
D)200 - 2Q.

Question 8

A monopoly shuts down when

A)the short run price is below its average variable costs.
B)the long run price is below its average variable costs.
C)the average cost is less than price.
D)never, because it can raise its prices as high as necessary to keep operating and maximize profits.

Question 9

A monopoly that is maximizing profits never operates in the ________ portion of the demand curve.

A)unitary elastic
B)elastic
C)inelastic
D)horizontal

Question 10

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization is achieved when the monopoly sets price equal to

A)16.
B)21.
C)25.
D)58.

Question 11

For a monopoly, marginal revenue is less than price because

A)the demand for the firm's output is downward sloping.
B)the firm has no supply curve.
C)the firm can sell all of its output at any price.
D)the demand for the firm's output is perfectly elastic.

Question 12

Marginal Revenue is

A)the increase in total revenue from selling one more unit of output.
B)equal to P(1 + 1/e)
C)equal to P when the price elasticity of demand is infinite.
D)All of the above.

Question 13

A profit-maximizing monopolist will never operate in the portion of the demand curve with price elasticity equal to

A)-3.
B)-1.
C)-1/3.
D)None of the above-the price elasticity does not matter.

Question 14

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then maximum profit

A)equals $336.
B)equals $882.
C)equals $1,218.
D)cannot be determined solely from the information provided.

Question 15

When a monopoly lowers its price to increase quantity

A)it is not maximizing its profit.
B)it will increase its profit.
C)it will make less money on the units it would have originally sold.
D)the quantity produced drives down marginal revenue.

Question 16

If the inverse demand function for a monopoly's product is p = a - bQ, then the firm's marginal revenue function is

A)a.
B)a - (1/2)bQ.
C)a - bQ.
D)a - 2bQ.

Question 17

The monopolist's marginal revenue curve

A)doesn't exist.
B)lies below the demand curve.
C)is identical to the demand curve.
D)lies above the demand curve.

Question 18

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization

A)is achieved when 21 units are produced.
B)is achieved by setting price equal to 21.
C)is achieved only by shutting down in the short run.
D)cannot be determined solely from the information provided.

Question 19

The monopoly maximizes profit by setting

A)price equal to marginal cost.
B)price equal to marginal revenue.
C)marginal revenue equal to marginal cost.
D)revenue equal to zero.

Question 20

A profit maximizing monopolist

A)is guaranteed to lose money because of a lack of competition.
B)is not guaranteed to make a positive profit.
C)is guaranteed to make a positive profit, hence the desire to be a monopolist.
D)is guaranteed to make a non-negative profit, otherwise government would step in to assist.

Question 21

If a monopoly's demand curve shifts to the right, the monopoly

A)will charge a higher price.
B)will charge a lower price.
C)will sell more.
D)decision cannot be determined.

Question 22

Market power guarantees profit.

A)True, which is why firm's locate as far away from each other as possible.
B)False, market power guarantees price greater than marginal cost.
C)True, market power guarantees price greater than average cost.
D)False, market power guarantees price equal to average cost.

Question 23

The ability of a monopoly to charge a price that exceeds marginal cost depends on the

A)price elasticity of supply.
B)price elasticity of demand.
C)slope of the demand curve.
D)shape of the marginal cost curve.

Question 24

The more inelastic the demand curve, a monopoly will

A)have a smaller Lerner Index.
B)face a lower marginal cost.
C)earn less profit.
D)lose fewer sales as it raises its price.

Question 25

Since there are no close substitutes for the monopoly's product, the monopoly can charge any price it wishes.

Question 26

The Lerner Index is

A)the ratio of the difference between price and marginal cost to price.
B)equal to (Price - MC)/Price
C)a measure of market power.
D)All of the above.

Question 27

If the demand for a monopoly's output shifts leftward, the change in quantity produced is NOT predictable because the monopoly

A)is a profit maximizer.
B)is a price taker.
C)has no supply curve.
D)has a marginal cost curve that might not be upward sloping.

Question 28

If the demand for a monopoly's output shifts rightward, the change in quantity produced is

A)positive.
B)negative.
C)zero.
D)not predictable.

Question 29

A firm that has market power

A)can charge whatever it wants for its product.
B)can charge a price above marginal cost.
C)has positive economic profits.
D)does not lose sales when increasing price.

Question 30

Suppose a monopolist has TC = 100 + 10Q + 2Q², and the demand curve it faces is p = 90 - 2Q. What will be the price, quantity, and profit for this firm?

Question 31

In a recent court case, an expert witness defined a monopoly as a firm that can "raise price without reducing its total revenue." What does this imply about the elasticity of demand? Would this definition hold for a profit-maximizing monopoly? Explain.

Question 32

A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10. Assuming profit maximization, the implicit demand elasticity is

A)-0.2.
B)-0.8.
C)-1.25.
D)-5.0.

Question 33

The fact that a monopoly has to take the shapes of marginal cost AND marginal revenue into account when making decisions is reflected in the fact that monopolies

A)don't have a supply curve.
B)have shifting demand curves.
C)have the same supply curve as perfectly competitive firms.
D)are subject to market failure.

Question 34

Since a monopoly can set any price it wants, it always makes a profit?

Question 35

The more elastic the demand curve, a monopoly will

A)have a larger Lerner Index.
B)face a lower marginal cost.
C)earn more profit.
D)lose more sales as it raises its price.

Question 36

If the demand for a monopoly's output shifts rightward, the change in quantity produced is NOT predictable because

A)the monopoly is a profit maximizer.
B)the monopoly is a price taker.
C)the monopoly has no supply curve.
D)the monopoly's marginal cost curve might not be upward sloping.

Question 37

If the demand for a firm's output is perfectly elastic, then the firm's Lerner Index equals

A)zero.
B)one.
C)infinity.
D)one-half.

Question 38

The monopolist's supply curve

A)doesn't exist.
B)is the region of its marginal cost curve above average cost.
C)is identical to the demand curve.
D)is the region of its marginal cost curve that lies above the marginal revenue curve.

Question 39

Market power is illegal.

A)True, no one is allowed to charge a price greater than marginal cost.
B)False.
C)True, no one is allowed to charge a price greater than average cost.
D)False, because market power guarantees price equal to average cost.

Question 40

A monopoly incurs a marginal cost of $1 for each unit produced. If the price elasticity of demand equals -2.0, the monopoly maximizes profit by charging a price of

A)$1.00.
B)$1.50.
C)$2.00.
D)$3.00.

Question 41

Which of the following would force a monopoly to charge a lower price?

A)A new firm selling the same product enters the market.
B)A new firm selling the same product locates close to the monopoly.
C)A new firm introduces a better substitute for the firm's product.
D)All of the above.

Question 42

A market failure occurs when

A)price equals marginal cost.
B)there is a non-optimal allocation that leads to an inefficient market.
C)deadweight loss is maximized.
D)a firm shuts down.

Question 43

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then the deadweight loss from monopoly equals

A)$21.
B)$441.
C)$882.
D)$1,764.

Question 44

As other firms enter a monopoly's market, the demand curve a monopoly faces

A)is unaffected.
B)becomes more inelastic.
C)becomes more elastic.
D)may become more or less elastic, depending on its Lerner Index.

Question 45

The above figure shows the demand and marginal cost curves for a monopoly. The deadweight loss of this monopoly equals

A)h.
B)c.
C)c + f.
D)c + d + e + f.

Question 46

The above figure shows the demand and cost curves facing a monopoly. If a $100 per unit tax is charged, what is the incidence of the tax on consumers?

A)100%
B)50%
C)25%
D)0%

Question 47

The above figure shows the demand and cost curves facing a monopoly. A $100 per unit tax would raise price by

A)$100.
B)$50.
C)$25.
D)$0.

Question 48

The above figure shows the demand and marginal cost curves for a monopoly. Under monopoly, consumer surplus equals

A)a + b.
B)a + b + c.
C)a + b + c + d + e + f.
D)None of the above.

Question 49

When would a profit-maximizing monopolist that operates with no government intervention choose to produce the competitive level of output?

Question 50

The loss associated with the fact that at the profit-maximizing quantity consumers value the goods more than it cost to produce them is called

A)deadweight loss.
B)comparative loss.
C)Lerner Loss.
D)Consumer Value Loss.

Question 51

If a monopoly can produce a good at zero marginal cost, then its Lerner Index is

A)zero.
B)one.
C)infinity.
D)undetermined.

Question 52

In a monopoly market, total surplus

A)cannot be determined because there is no supply curve.
B)is less than in a competitive market.
C)is equal to consumer surplus.
D)is completely captured by the monopolist.

Question 53

Which of the following could create a cost advantage for a monopoly?

A)Better technology
B)Lower friction due to better organization
C)Standardization
D)All of the above.

Question 54

The less elastic is the demand for a firm's product, the greater is that firm's market power.

Question 55

A flour mill holding exclusive contracts to 95% of the wheat in a large geographic area may operate as a flour producing monopoly locally because

A)the mill has a very inelastic supply curve.
B)the mill is a natural monopoly.
C)the mill controls a key input.
D)the government will declare it a monopoly.

Question 56

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then the firm's Lerner Index equals

A)58/16.
B)16/42.
C)58/42.
D)42/58.

Question 57

If a monopoly's Lerner Index exceeds 1, then

A)it is earning maximum profit.
B)it has ultimate market power.
C)it must be pricing below marginal cost.
D)marginal revenue is negative.

Question 58

The above figure shows the demand and cost curves facing a monopoly. The deadweight loss of this monopoly is

A)$100.
B)$250.
C)$1,250.
D)$2,500.

Question 59

The above figure shows the demand and cost curves facing a monopoly. If a $100 per unit tax is charged, the loss in welfare resulting from the tax is

A)$250.
B)$312.50.
C)$1,250.
D)$1,562.50.

Question 60

As other firms enter a monopoly's market, the monopoly's market power

A)is unaffected.
B)declines.
C)increases.
D)increases according to the Lerner Index but decreases according to the price/marginal cost ratio.

Question 61

An exclusive right to sell a new and useful product, process, substance, or design for a fixed period of time is called a

A)patent.
B)barrier to entry.
C)monopoly.
D)research disincentive.

Question 62

A patent

A)always gives rise to a monopoly.
B)may not provide a barrier to entry.
C)allows the patent owner to capture all of the consumer surplus.
D)increases total welfare.

Question 63

The situation in which a person places greater value on a good as more and more people possess it is called the

A)Bandwagon Effect.
B)Greater Value Effect.
C)Snob Effect.
D)Behavioral Effect.

Question 64

Privatization of a state-owned monopoly can

A)allow governments to capture future monopoly earnings.
B)allow governments to be more efficient.
C)reduce bribery of government officials.
D)increases chances of reelection for politicians.

Question 65

The situation where one person's demand for a good depends on the consumption of the good by others is called a

A)network externality.
B)network internality.
C)consumption externality.
D)production externality.

Question 66

A firm will increase its spending on advertising until

A)it has monopolized the market.
B)it has deterred all future entry.
C)the marginal benefit of advertising is zero.
D)the marginal benefit of advertising equals the marginal cost of advertising.

Question 67

Which of the following total cost functions suggests the presence of a natural monopoly?

A)TC = 2Q
B)TC = 100 + 2Q
C)TC = 100 + 2Q²
D)All of the above.

Question 68

A monopoly advertises

A)to raise its profit.
B)to decrease costs.
C)to dissuade entry by other firms.
D)to reduce deadweight loss.

Question 69

For there to be positive network externalities,

A)there must be a direct size effect.
B)there must be an indirect size effect.
C)introductory prices are required.
D)None of the above.

Question 70

Limited government licenses that create a monopoly do so because

A)the license generates a marginal cost advantage.
B)the monopoly will become a natural monopoly.
C)a barrier to enter the market exists.
D)All of the above.

Question 71

For network externalities to occur,

A)the government has to create new laws.
B)deadweight loss must be minimized.
C)there must be a critical mass of users.
D)there must be a positive benefit to society.

Question 72

Which of the following products benefits from network externalities?

A)Microwave ovens
B)Diamond rings
C)Twitter
D)Concert tickets

Question 73

Which of the following average cost functions suggests the presence of a natural monopoly?

A)AC = 2
B)AC = 100/Q + 2
C)TC = 100/Q + 2Q
D)All of the above.

Question 74

If a monopoly can advertise and as a result the demand curve will become more inelastic, the monopoly

A)should always engage in the advertising.
B)should engage in the advertising until the demand curve becomes more elastic.
C)will earn higher gross profit if it advertises.
D)None of the above.

Question 75

Government actions that create monopolies

A)spur product innovation by the monopoly.
B)create deadweight loss.
C)result in lower average costs of production.
D)ensure that firms price at marginal cost.

Question 76

The situation in which a person places greater value on a good as fewer and fewer people possess it is called the

A)Bandwagon Effect.
B)Greater Value Effect.
C)Snob Effect.
D)Behavioral Effect.

Question 77

The situation in which one firm can produce the total output of the market at lower cost than several firms is called

A)natural monopoly.
B)pure monopoly.
C)ruling monopoly.
D)cost monopoly.

Question 78

All of the following government actions create barriers to entry EXCEPT

A)limiting the number of airlines that may operate at an airport.
B)granting a patent to a drug company.
C)requiring a pizza parlor to get a business license.
D)giving a power company exclusive use of the city's transmission lines.

Question 79

Which of the following products benefits from network externalities?

A)Cable TV service
B)Fashion clothing
C)All-electric cars
D)High-speed trains

Question 80

The monopoly can shift the demand for its product rightward by

A)accommodating entry.
B)advertising new uses for its product.
C)moving along the learning curve.
D)All of the above.