Deck 14: Market Structures I: Monopoly

Question 1

The simplest way for a monopoly to arise is for a single firm to

A) decrease its price below its competitors' prices.
B) decrease production to increase demand for its product.
C) make pricing decisions jointly with other firms.
D) own a key resource.

Answer 1

own a key resource.

Question 2

Most economists argue that the most efficient solution to the problem of monopoly is that the monopoly should be publicly owned.

Answer 2

False

Question 3

Most markets are not monopolies in the real world because

A) firms usually face downward sloping demand curves.
B) supply curves slope upward.
C) price is usually set equal to marginal cost by firms.
D) there are reasonable substitutes for most goods.

Answer 3

there are reasonable substitutes for most goods.

Question 4

Which of the following statements is correct?

A) Both a competitive firm and a monopolist are price takers.
B) Both a competitive firm and a monopolist are price makers.
C) A competitive firm is a price taker, whereas a monopolist is a price maker.
D) A competitive firm is a price maker, whereas a monopolist is a price taker.

Question 5

If government officials break a natural monopoly up into several smaller firms, then

A) competition will force firms to attain economic profits rather than accounting profits.
B) competition will force firms to produce surplus output, which drives up price.
C) the average costs of production will increase.
D) the average costs of production will decrease.

Question 6

A monopolist produces an efficient quantity of output, but it is still inefficient because it charges a price that exceeds marginal cost, and the resulting profit is a social cost.

Question 7

A monopoly

A) can set the price it charges for its output and earn unlimited profits.
B) takes the market price as given and earns small but positive profits.
C) can set the price it charges for its output, but faces a downward sloping demand curve so it cannot earn unlimited profits.
D) can set the price it charges for its output, but faces a horizontal demand curve so it can earn unlimited profits.

Question 8

For the monopolist, marginal revenue is always less than the price of the good.

Question 9

Monopolies use their market power to

A) charge prices that equal minimum average total cost.
B) attain normal profits in the long run.
C) restrict output and increase price.
D) dump excess supplies of their product on the market.

Question 10

Price discrimination is only possible if there is no arbitrage.

Question 11

A monopoly is the sole seller of a product with no close substitutes.

Question 12

Sizable economic profits can persist over time under monopoly if the monopolist

A) produces that output where average total cost is at a maximum.
B) is protected by barriers to entry.
C) operates as a price taker rather than a price maker.
D) realises revenues that exceed variable costs.

Question 13

Price discrimination can raise economic welfare because output increases beyond that which would result under monopoly pricing.

Question 14

A benefit of a monopoly is

A) efficient production.
B) decreasing long-run marginal costs.
C) profit that can be invested in research and development.
D) All of the above are correct.

Question 15

Universities are engaging in price discrimination when they charge different levels of tuition to poor and wealthy students.

Question 16

Perfect price discrimination is efficient, but all of the surplus is received by the consumer.

Question 17

Which of the following is a characteristic of a monopoly?

A) Low fixed costs as a portion of total costs.
B) Free entry and exit.
C) Barriers to entry.
D) Declining marginal cost.

Question 18

One difference between a perfectly competitive firm and a monopoly is that a perfectly competitive firm produces where

A) marginal cost equals price, while a monopolist produces where price exceeds marginal cost.
B) marginal cost equals price, while a monopolist produces where marginal cost exceeds price.
C) price exceeds marginal cost, while a monopolist produces where marginal cost equals price.
D) marginal cost exceeds price, while a monopolist produces where marginal cost equals price.

Question 19

Monopolists are price takers.

Question 20

The demand curve facing a monopolist is the market demand curve for its product.

Question 21

Consider the following demand and cost information
$\begin{array} { | c | c | c | } \hline \text { Quantity } & \text { Price } & \text { Total Cost } \\\hline 0 & \text { R40 } & \text { R10 } \\\hline 1 & \text { R30 } & \text { R15 } \\\hline 2 & \text { R20 } & \text { R25 } \\\hline 3 & \text { R10 } & \text { R40 } \\\hline 4 & \text { R0 } & \text { R60 } \\\hline\end{array}$


-Refer to the table above. The marginal revenue of the second unit is

A) R10
B) R20
C) R30
D) R40

Question 22

If a monopolist can sell 7 units when the price is R3 and 8 units when the price is R2, then marginal revenue of selling the eighth unit is equal to

A) R2.
B) R3.
C) R16.
D) -R5.

Question 23

The inefficiency associated with monopoly is due to

A) the monopoly's profits.
B) underproduction of the good.
C) the monopoly's losses.
D) overproduction of the good.

Question 24

The purpose of competition laws is to

A) Ensure prices are the same for all consumers.
B) regulate the prices charged by a monopoly.
C) increase merger activity to help generate synergies that reduce costs and raise efficiency.
D) create public ownership of natural monopolies.
E) increase competition in an industry by preventing mergers, and breaking up large firms.

Question 25

Sizable economic profits can persist over time under monopoly if the monopolist

A) produces that output where average total cost is at a maximum.
B) is protected by barriers to entry.
C) operates as a price taker rather than a price maker.
D) earns revenues that exceed variable costs.

Question 26

Patents grant

A) permanent monopoly status to creators of inventions.
B) permanent right to creators of inventions to produce the product they have invented.
C) temporary monopoly status to creators of inventions.
D) temporary right to creators of inventions to produce the product they have invented.

Question 27

Refer to the above graph. The profit-maximising monopolist will choose the price and quantity represented by point

A) Point A.
B) Point B.
C) Point C.
D) Point D.
E) none of these four points

Question 28

Cengage is a monopolist in the production of your textbook because Cengage

A) is a very large company.
B) owns a key resource in the production of textbooks.
C) is a natural monopoly.
D) has a legally protected exclusive right to produce this textbook.

Question 29

When a monopolist produces an additional unit, the marginal revenue generated by that unit must be

A) above the price because the output effect outweighs the price effect.
B) below the price because the price effect outweighs the output effect.
C) above the price because the price effect outweighs the output effect.
D) below the price because the output effect outweighs the price effect.

Question 30

Using government regulations to force a natural monopoly to charge a price equal to its marginal cost will

A) improve efficiency.
B) cause the monopolist to exit the market.
C) raise the price of good.
D) attract additional firms to enter the market.

Question 31

Which of the following is not a barrier to entry in a monopolised market?

A) A single firm is very large.
B) The government gives a single firm the exclusive right to produce some good.
C) The costs of production make a single producer more efficient than a large number of producers.
D) A key resource is owned by a single firm.

Question 32

Patent and copyright laws encourage

A) creative activity.
B) lower prices due to decreasing average total costs.
C) competition among firms.
D) All of the above are correct.

Question 33

The monopolist's supply curve

A) is the upward sloping portion of the average variable cost.
B) is the marginal cost curve above average variable cost.
C) is the marginal cost curve above average total cost.
D) is the upward sloping portion of the average total cost curve.
E) does not exist.

Question 34

Consider the following demand and cost information
$\begin{array} { | c | c | c | } \hline \text { Quantity } & \text { Price } & \text { Total Cost } \\\hline 0 & \text { R40 } & \text { R10 } \\\hline 1 & \text { R30 } & \text { R15 } \\\hline 2 & \text { R20 } & \text { R25 } \\\hline 3 & \text { R10 } & \text { R40 } \\\hline 4 & \text { R0 } & \text { R60 } \\\hline\end{array}$


-Refer to the table above. To maximise profit, the monopolist sets the price at

A) R40
B) R20
C) R0
D) R10

Question 35

Consider the following demand and cost information
$\begin{array} { | c | c | c | } \hline \text { Quantity } & \text { Price } & \text { Total Cost } \\\hline 0 & \text { R40 } & \text { R10 } \\\hline 1 & \text { R30 } & \text { R15 } \\\hline 2 & \text { R20 } & \text { R25 } \\\hline 3 & \text { R10 } & \text { R40 } \\\hline 4 & \text { R0 } & \text { R60 } \\\hline\end{array}$


-Refer to the table above. The marginal cost of the fourth unit is

A) R60
B) R40
C) R20
D) R10

Question 36

Which of the following statements about price and marginal cost in competitive and monopolised markets is true?

A) In competitive markets, price equals marginal cost; in monopolised markets, price exceeds marginal cost.
B) In competitive markets, price equals marginal cost; in monopolised markets, price equals marginal cost.
C) In competitive markets, price exceeds marginal cost; in monopolised markets, price exceeds marginal cost.
D) In competitive markets, price exceeds marginal cost; in monopolised markets, price equals marginal cost.

Question 37

A monopolist maximises profit by producing the quantity at which

A) marginal cost equals price.
B) marginal revenue equals price.
C) marginal revenue equals marginal cost.
D) marginal cost equals demand.
E) marginal cost is minimised.

Question 38

Refer to the above graph. The efficient price and quantity are represented by point

A) Point A.
B) Point D.
C) Point B.
D) Point C.
E) none of these answers.

Question 39

Compared to a perfectly competitive market, a monopoly market will usually generate

A) lower prices and lower output.
B) higher prices and higher output.
C) higher prices and lower output.
D) lower prices and higher output.

Question 40

A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a

A) regulated monopoly.
B) perfect competitor.
C) government monopoly.
D) natural monopoly.

Question 41

If marginal revenue exceeds marginal cost, a monopolist should

A) raise the price.
B) decrease output.
C) keep output the same because profits are maximised when marginal revenue exceeds marginal cost.
D) increase output.

Question 42

Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from taxation?

Question 43

Why might economists prefer private ownership of monopolies over public ownership of monopolies?

Question 44

Which of the following is an example of price discrimination?

A) Nestlé provides money off coupons for its products.
B) Gautrain offers a lower price for weekend travel compared to weekday rates on the same routes.
C) Hotel rates for members of the AA are lower than for non-members.
D) All of the above are correct.

Question 45

What are the four ways that government policymakers can respond to the problem of monopoly?

Question 46

A monopoly is able to continue to generate economic profits in the long run because

A) it can control both price and output in the market.
B) potential competitors sometimes don't notice the profits.
C) the monopolist is financially powerful.
D) competition laws eliminate competitors for a specified number of years.
E) there is some barrier to entry to that market.

Question 47

Assume that a monopolist decides to maximise revenue rather than profit. How does this operating objective change the size of the deadweight loss? If you are a "benevolent" manager of a monopoly firm and are interested in reducing the deadweight loss of monopoly, should you maximise profits or maximise revenue? Explain your answer.

Question 48

In many countries, the government chooses to "internalise" the monopoly by owning monopoly providers of goods and services. In some cases, these firms are "nationalised," and the government actually buys or confiscates firms that operate in monopoly markets. What would be the advantages and disadvantages of such an approach to ensure that the "best interest of society" is promoted in these markets? Explain your answer.

Question 49

The task of economic regulation is to

A) protect monopoly profits.
B) approximate the results of the competitive market.
C) replace competition with government ownership.
D) increase competition within the market.

Question 50

One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy. The answer should address the three basic lessons of price discrimination.

Question 51

Public ownership of natural monopolies

A) creates synergies between the newly acquired firm and other government owned companies.
B) usually lowers the cost of production dramatically.
C) tends to be inefficient.
D) does none of the things described in these answers.

Question 52

If regulators break up a natural monopoly into many smaller firms, the cost of production

A) will remain the same.
B) will fall.
C) will rise.
D) could either rise or fall depending on the elasticity of the monopolist's supply curve.

Question 53

A monopolist's profits with price discrimination will be

A) lower than if the firm charged a single, profit-maximising price.
B) the same as if the firm charged a single, profit-maximising price.
C) higher than if the firm charged just one price, because the firm will capture more consumer surplus.
D) higher than if the firm charged a single price, because the costs of selling the good will be lower.

Question 54

Describe how government is involved in creating a monopoly. Why might the government create one? Give an example.

Question 55

Explain how a profit-maximising monopolist chooses its level of output and the price of its goods.

Question 56

Give some examples of the benefits and costs of competition laws.

Question 57

A monopolist that practises perfect price discrimination

A) creates no deadweight loss.
B) charges one group of buyers a higher price than another group, such as offering a student discount.
C) produces the same monopoly level of output as when a single price is charged.
D) charges some customers a price below marginal cost because costs are covered by the high-priced buyers.

Question 58

Which of the following strategies is not an effective strategy to reduce monopoly inefficiency?

A) Competition laws.
B) Price discrimination.
C) Doing nothing.
D) Breaking up a natural monopoly into more than one firm.

Question 59

What is the deadweight loss due to profit-maximising monopoly pricing under the following conditions: The price charged for goods produced is R10. The intersection of the marginal revenue and marginal cost curves occurs where output is 100 units and marginal revenue is R5. The socially efficient level of production is 110 units. The demand curve is linear and downward sloping, and the marginal cost curve is constant.

Question 60

Which of the follow statements about price discrimination is not true?

A) Price discrimination increases a monopolist's profits.
B) Price discrimination can raise economic welfare.
C) Price discrimination requires that the seller be able to separate buyers according to their willingness to pay.
D) Perfect price discrimination generates a deadweight loss.
E) For a monopolist to engage in price discrimination, buyers must be unable to engage in arbitrage.