Deck 13: Monopoly

Question 1

In contrast with perfect competition, a monopolist:

A) produces more at a lower price.
B) produces where MR > MC, and a perfectly competitively firm produces where P = MC.
C) may have economic profits in the long run.
D) earns zero economic profits in the long run.

Answer 1

C

Question 2

An industry with a firm that is the only producer of a good or service for which there are no close substitutes and for which entry by potential rivals is prohibitively difficult is:

A) a duopoly.
B) a monopoly.
C) an oligopoly.
D) perfect competition.

Answer 2

B

Question 3

An industry with a single producer that sells a single product with no substitutes is a:

A) perfectly competitive industry.
B) monopoly.
C) oligopoly.
D) monopolistically competitive industry.

Answer 3

B

Question 4

_____ firms have the most market power.

A) Monopoly
B) Duopoly
C) Oligopoly
D) Monopolistic competition

Question 5

Most electric, gas, and water companies are examples of:

A) unregulated monopolies.
B) natural monopolies.
C) restricted-input monopolies.
D) sunk-cost monopolies.

Question 6

De Beers became a monopoly by:

A) establishing control over diamond mines.
B) use of economies of scale.
C) use of technological superiority.
D) ownership of a patent.

Question 7

If you had a license for the exclusive right to sell breakfast bagels in your community, your monopoly would result from:

A) control of a scarce resource or input.
B) technological superiority.
C) increasing returns to scale.
D) government-set barriers.

Question 8

If your farm had the only known source of a rare cocoa bean needed to make chocolate-covered peanuts, your monopoly would result from:

A) control of a scarce resource or input.
B) technological superiority.
C) increasing returns to scale.
D) government-set barriers.

Question 9

The ability of a monopolist to raise the price of a product above the competitive level by reducing the output is known as:

A) product differentiation.
B) barrier to entry.
C) market power.
D) patents and copyrights.

Question 10

Which of the following statements about the differences between monopoly and perfect competition is INCORRECT?

A) A monopolist has market power, while a perfect competitor does not.
B) Unlike a perfectly competitive firm, a monopoly can make positive economic profits in the long run.
C) A monopoly will charge a higher price and produce a smaller quantity than a competitive market with the same demand and cost structure.
D) Monopoly profits can continue in the long run because the monopoly produces more and charges a higher price than a comparable perfectly competitive industry.

Question 11

Suppose that you build a high-speed, magnetically powered transportation system from New York to Los Angeles, and you are the only firm providing this service. High fixed costs resulting from the enormous quantity of capital used in this system enable decreasing average cost for any conceivable level of demand. Your monopoly would result from:

A) control of a scarce resource or input.
B) technological superiority.
C) increasing returns to scale.
D) government-set barriers.

Question 12

You own a lemonade stand in a competitive market, and as such, you are a price-taking firm. Which of the following events would most likely increase your market power?

A) The government abolishes the system of patents and copyrights.
B) A booming economy increases the demand for lemonade and attracts entry into the market.
C) The average total cost curve for firms in the industry is horizontal.
D) You own exclusive rights to harvest lemons from all domestic citrus orchards.

Question 13

Which of the following statements concerning monopoly is TRUE?

A) Monopoly firms are always larger than perfectly competitive firms.
B) A monopoly has no rivals.
C) Barriers to entry do not prevent other firms from entering a monopolized industry.
D) Monopolists produce more output than a competitive market with the same demand and cost structure.

Question 14

A monopolist is likely to produce _____ and charge _____ than a comparable perfectly competitive firm.

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

Question 15

The De Beers company is described as a monopolist in the production of:

A) diamonds.
B) software.
C) oil.
D) beer.

Question 16

Because of monopoly, consumers experience _____ than with perfect competition.

A) more choices
B) larger quantities
C) higher quality
D) higher prices

Question 17

A monopoly is a market characterized by:

A) a single seller.
B) a product with many close substitutes.
C) a large number of small firms.
D) a small number of large firms.

Question 18

Diamond rings are relatively scarce because:

A) according to geologists, diamonds are less common than any other gem-quality stone.
B) the demand for diamonds is so high.
C) diamond producers limit the quantity supplied to the market.
D) of monopolistic competition.

Question 19

Market structures are categorized by:

A) the number and size of the firms.
B) whether products are differentiated and the extent of advertising.
C) the number of firms and whether products are differentiated.
D) the size of the firms and the extent of advertising.

Question 20

A monopoly:

A) produces a product with no close substitutes.
B) is composed of a single buyer and several sellers.
C) is composed of a large number of small firms.
D) is composed of a small number of large firms.

Question 21

The large barriers to entry are a reason a monopoly:

A) earns an economic profit in the long run.
B) produces at the minimum average total cost in the long run.
C) produces with no fixed costs in the long run.
D) maximizes its profits by producing where P = MC.

Question 22

Which of the following is (are) barrier(s) to entry?

A) control of scarce resources
B) economies of scale
C) patents and copyrights
D) control of scarce resources, economies of scale, and patents and copyrights

Question 23

A natural monopoly exists whenever a single firm:

A) is owned and operated by the government.
B) is investor owned but has been granted the exclusive right by the government to operate in a market.
C) has economies of scale over the entire range of production that is relevant to its market.
D) has gained control over a strategic input of an important production process.

Question 24

A monopoly is an industry structure characterized by:

A) a single buyer and several sellers.
B) a product with many close substitutes.
C) a large number of small firms.
D) barriers to entry and exit.

Question 25

Lenoia runs a natural monopoly producing electricity for a small mountain village. The barrier preventing other firms from competing with her is:

A) her control of scarce natural resources.
B) economies of scale.
C) her technological superiority.
D) a government-set barrier.

Question 26

Microsoft and its operating system are often cited as an example of a company that grew into a monopolist through:

A) ownership of a resource.
B) patents.
C) network externalities.
D) large economies of scale.

Question 27

A firm that has economies of scale:

A) at low output and but diseconomies of scale at high output is a natural monopoly.
B) over the entire range of output demanded is a natural monopoly.
C) at any particular level of output is a natural monopoly.
D) has a continually rising long-run average cost curve.

Question 28

Network externalities exist when a good's value to the consumer rises as:

A) the number of people who use the good increases.
B) the number of people who use the good decreases.
C) the number of people who use the good remains constant.
D) technology improves.

Question 29

If the state government gave you the exclusive right to sell cement to municipalities, your monopoly would result from:

A) sunk costs.
B) government restrictions to entry.
C) economies of scale.
D) location.

Question 30

Critics of the National Collegiate Athletic Association (NCAA) argue that the NCAA monopolizes college athletics and prevents student-athletes from earning money while in college. If this is true, what type of entry barrier does the NCAA have?

A) a patent
B) a copyright
C) control of a scarce resource or input
D) economies of scale

Question 31

Natural monopolies are likely to include all of the following EXCEPT:

A) a diamond mining company.
B) a gas company.
C) an electricity company.
D) railways.

Question 32

The demand curve for a monopoly is:

A) the sum of the supply curves of all of the firms in the monopoly's industry.
B) the industry demand curve.
C) horizontal because no one can enter.
D) perfectly elastic.

Question 33

Conditions that keep new firms out of a monopoly market are:

A) barriers to entry.
B) terms of sale.
C) labor market stipulations.
D) production controls.

Question 34

Which of the following is TRUE?

A) A monopoly firm is a price taker.
B) MR > P if the demand curve is downward-sloping.
C) MR = MC is a profit-maximizing rule for any firm.
D) In monopoly P = MC when profits are maximized.

Question 35

A monopoly is most likely to be temporary if the monopoly power is derived from:

A) high barriers to entry.
B) a lack of substitutes for the monopolist's product.
C) economies of scale.
D) technological change.

Question 36

If a product's usefulness increases with the number of users, it:

A) has network externalities.
B) is a monopoly.
C) is a conglomerate.
D) has an exclusive franchise.

Question 37

The land you own has the only known source of aloe needed to make anti-itch lotion. In this case, your monopoly results from:

A) government restrictions.
B) location.
C) sunk costs.
D) ownership of scarce inputs.

Question 38

Suppose that you build a new jumbo jet that can carry five times more passengers than any other competitor. You have high fixed costs due to the quantity of capital used to build the jets, and average cost is decreasing for all levels of demand. In this case, your monopoly would result from:

A) sunk costs.
B) location.
C) economies of scale.
D) government restrictions.

Question 39

The demand curve facing a monopolist is:

A) horizontal, the same as that facing a perfectly competitive firm.
B) downward-sloping, the same as that facing a perfectly competitive firm.
C) upward-sloping, the same as that facing a perfectly competitive firm.
D) downward-sloping, unlike the horizontal demand curve facing a perfectly competitive firm.

Question 40

Which of the following is NOT a barrier to entry?

A) control of an input essential for production
B) government-set barriers such as patents
C) a ban on certain kinds of advertising
D) the existence of significant economies of scale

Question 41

Which of the following is TRUE?

A) Instead of applying the marginal decision rule, monopoly firms just set the price as high as possible.
B) If demand is downward-sloping, P = MR.
C) If demand is downward-sloping, P = ATC.
D) If demand is downward-sloping, P > MR.

Question 42

After the first unit sold, the marginal revenue a monopolist receives from selling one more unit of a good is less than the price of that unit because of:

A) diminishing marginal returns.
B) increasing marginal cost.
C) a downward-sloping demand curve.
D) declining average fixed cost.

Question 43

A monopolist's marginal cost curve shifts up, but the firm's demand curve remains the same and the firm does not shut down. Compared to the condition before the increase in marginal costs, the monopolist will _____ its price and _____ its level of production.

A) raise; decrease
B) not change; decrease
C) raise; increase
D) lower; increase

Question 44

If a firm faces a downward-sloping demand curve, it will ensure that:

A) P = ATC.
B) P > MR.
C) P < MC.
D) P = MC.

Question 45

The demand curve facing a monopolist is always:

A) the same as the industry's demand curve.
B) perfectly elastic.
C) unit-elastic.
D) perfectly inelastic.

Question 46

Suppose that a monopoly computer chip maker increases production from 10 microchips to 11 microchips. If the market price declines from $30 per unit to $29 per unit, marginal revenue for the eleventh unit is:

A) $1.
B) $9.
C) $19.
D) $29.

Question 47

Marginal revenue for a monopolist is:

A) equal to price.
B) greater than price.
C) less than price.
D) the change in total revenue plus the change in output.

Question 48

Wendy has a monopoly in the retailing of motor homes. She can sell five per week at $21,000 each. If she wants to sell six, she can charge only $20,000 each. The quantity effect of selling the sixth motor home is:

A) $20,000.
B) $10,000.
C) $15,000.
D) $21,000.

Question 49

The demand curve for a monopoly is:

A) the MR curve above the AVC curve.
B) the MR curve above the horizontal axis.
C) the entire MR curve.
D) above the MR curve.

Question 50

The demand curve for a monopoly is:

A) above the marginal revenue curve.
B) below the marginal revenue curve.
C) horizontal because of economics of scale.
D) infinitely elastic.

Question 51

The demand curve for a monopoly is:

A) the MC curve above the AVC curve.
B) the MR curve above the horizontal axis.
C) identical to the MR curve.
D) also the industry demand curve.

Question 52

One of the major differences between a monopolist and a purely competitive firm is that the monopolist has a _____ demand curve, while the purely competitive firm has a _____ demand curve.

A) downward-sloping; perfectly elastic
B) perfectly inelastic; perfectly elastic
C) downward-sloping; perfectly inelastic
D) perfectly elastic; downward-sloping

Question 53

Mr. Porter sells 10 bottles of champagne per week at $50 per bottle. He can sell 11 bottles per week if he lowers the price to $45 per bottle. The quantity and the price effects on total revenue would be, respectively, an increase of _____ and a decrease of _____.

A) $450; $500
B) $495; $550
C) $45; $5
D) $45; $50

Question 54

The demand curve facing a monopolist is:

A) vertical, the same as that facing a perfectly competitive firm.
B) perfectly inelastic, the same as that facing a perfectly competitive firm.
C) upward-sloping, the same as that facing a perfectly competitive firm.
D) downward-sloping, like the industry demand curve in perfect competition.

Question 55

Marginal revenue for a monopolist is:

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

Question 56

A firm that faces a downward-sloping demand curve is a:

A) price setter.
B) quantity minimizer.
C) quantity taker.
D) price taker.

Question 57

The demand curve facing a monopolist is:

A) downward-sloping.
B) vertical.
C) horizontal.
D) upward-sloping.

Question 58

Wendy has a monopoly in the retailing of motor homes. She can sell five per week at $21,000 each. If she wants to sell six, she can only charge $20,000 each. The price effect of selling the sixth motor home is:

A) $20,000.
B) -$15,000.
C) -$5,000.
D) $25,000.

Question 59

Because monopoly firms are price setters:

A) they can sell more only by lowering price.
B) they sell more at higher prices than at lower prices.
C) they take the market-determined price as given and sell all they can at that price.
D) they charge the highest possible price.

Question 60

A downward-sloping demand curve will ensure that:

A) P = MR.
B) P > MR.
C) P < MR.
D) P = MC.

Question 61

A monopoly is producing output so that average total cost is $30, marginal revenue is $40, and the price is $50. If ATC is at its minimum level and the ATC curve is U-shaped, to maximize profits this firm should:

A) increase output.
B) reduce output.
C) do nothing; it is already maximizing profits.
D) shut down.

Question 62

If a monopolist is producing a quantity that generates MC = P, then profit:

A) is maximized.
B) is maximized only if MR = P.
C) can be increased by increasing production.
D) can be increased by decreasing production.

Question 63

At a monopoly's profit-maximizing level of output:

A) marginal revenue equals marginal cost.
B) marginal revenue is greater than marginal cost.
C) marginal revenue is less than marginal cost.
D) price is less than marginal cost.

Question 64

An increase in the fixed costs of a monopoly firm would _____ price and _____ quantity in the short run.

A) increase; decrease
B) increase; increase
C) not change; not change
D) decrease; decrease

Question 65

Suppose that a profit-maximizing monopoly firm undergoes a substantial technological change that reduces its marginal and average total costs by $40. If in response to its reduction in cost the firm changes its price in a profit-maximizing way, then we can predict that its total output will:

A) rise.
B) fall.
C) remain unchanged.
D) It is not possible to make a determination from the information given.

Question 66

If a monopolist is producing a quantity that generates MC > MR, then profit:

A) is maximized.
B) is maximized only if MC = P.
C) can be increased by increasing production.
D) can be increased by decreasing production.

Question 67

A monopolist responds to a decrease in demand by _____ price and _____ output.

A) increasing; decreasing
B) increasing; increasing
C) decreasing, increasing
D) decreasing; decreasing

Question 68

Which of the following is TRUE?

A) Profit-maximizing behavior occurs only in perfectly competitive markets.
B) Additional units of a good should be produced as long as MR < MC.
C) The profit-maximizing solution occurs where MR = MC.
D) The profit-maximizing solution occurs where MR > MC.

Question 69

If a monopolist is producing a quantity that generates MC > MR, then profit:

A) is maximized.
B) is maximized only if MC = P.
C) can be increased by increasing price.
D) can be increased by decreasing price.

Question 70

If a monopolist is producing a quantity that generates MC < MR, then profit:

A) is maximized.
B) is maximized only if MC = P.
C) can be increased by increasing production.
D) can be increased by decreasing production.

Question 71

A monopolist responds to an increase in demand by _____ price and _____ output.

A) increasing; decreasing
B) increasing; increasing
C) decreasing; increasing
D) decreasing; decreasing

Question 72

A monopolist responds to an increase in marginal cost by _____ price and _____ output.

A) increasing; decreasing
B) increasing; increasing
C) decreasing; increasing
D) decreasing; decreasing

Question 73

Suppose that the Yankee Cap Company is a profit-maximizing firm with a monopoly in the production of baseball caps. The firm sells its baseball caps for $25 each. For this information, we can assume that the Yankee Cap Company is producing a level of output at which:

A) marginal revenue equals $25.
B) marginal cost equals marginal revenue.
C) average total cost equals $25.
D) average total cost is greater than $25.

Question 74

The GoSports Company is a profit-maximizing firm with a monopoly in the production of school team pennants. The firm sells its pennants for $10 each. We can conclude that GoSports is producing a level of output at which:

A) average total cost equals $10.
B) average total cost is greater than $10.
C) marginal revenue equals $10.
D) marginal cost equals marginal revenue.

Question 75

Suppose that a monopoly firm is required to pay a new annual license fee to do business in its city and that the fee is somewhat less than the economic profit the firm is now earning. In response to the increase in fees, the firm will:

A) raise its price by less than the amount of the license fee.
B) raise its price by the amount of the license fee.
C) raise its price by somewhat more than amount of the license fee.
D) not change its price.

Question 76

Use the following to answer questions:
Figure: Short-Run Monopoly
(Figure: Short-Run Monopoly) Look at the figure Short-Run Monopoly. The profit-maximizing rule is satisfied by the intersection at point:

A) G.
B) H.
C) J.
D) L.

Question 77

Suppose a monopoly is producing output so that marginal revenue equals marginal cost. If the monopolist reduces output, it:

A) can charge a higher price.
B) will increase profits.
C) will decrease marginal revenue.
D) can charge a higher price and it will increase profits.

Question 78

Suppose that a profit-maximizing monopoly firm undergoes a substantial technological change that reduces its marginal and average total costs by $40. If in response to its reduction in cost the firm changes its price in a profit-maximizing way, then we can predict that its total economic profit will:

A) fall.
B) remain unchanged.
C) rise.
D) It is not possible to make a determination from the information given.

Question 79

A monopoly responds to a decrease in marginal cost by _____ price and _____ output.

A) increasing; decreasing
B) increasing; increasing
C) decreasing; increasing
D) decreasing; decreasing

Question 80

If a monopolist is producing a quantity that generates MC = MR, then profit:

A) is maximized.
B) is maximized only if MC = P.
C) can be increased by increasing production.
D) can be increased by decreasing production.