Deck 9: Monopoly Markets

Question 1

A firm that is the only seller of a good or service that does not have a close substitute is called

A) a monopoly.
B) an oligopolist.
C) a market maker.
D) a price maker.

Answer 1

A

Question 2

Consider the following characteristics: a. a market structure with barriers to entry
B. demand curves that are easily identified
C. firm cannot make zero profits in the long run
D. firm can reap long run profits.
Which of the characteristics in the list above is shared by an oligopolist and a monopolist?

A) a, b, c, and d
B) a, b, and d
C) a, c, and d
D) a and d

Answer 2

D

Question 3

A monopoly is characterised by all of the following except

A) there are only a few sellers each selling a unique product.
B) entry barriers are high.
C) there are no close substitutes to the firm's product.
D) the firm has market power.

Answer 3

A

Question 4

A monopoly firm is the only seller of a good or service that

A) has a perfectly elastic demand.
B) has no close complements.
C) does not need to be advertised.
D) does not have a close substitute.

Question 5

Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?

A) Each must lower its price to sell more output.
B) Each sets a price for its product that will maximise its revenue.
C) Each maximises profits by producing a quantity for which marginal revenue equals marginal cost.
D) Each maximises profits by producing a quantity for which price equals marginal cost.

Question 6

Unlike a perfect competitor, a monopolist faces the market demand curve.

Question 7

A monopoly is a firm that is the only seller of a good or service that does not have

A) a patent.
B) a close complement.
C) a barrier to entry.
D) a close substitute.

Question 8

A monopoly differs from monopolistic competition in that

A) a monopoly has market power while a firm in monopolistic competition does not have any market power.
B) a monopoly can never incur a loss, but a firm in monopolistic competition can.
C) in a monopoly there are significant entry barriers, but there are low barriers to entry in a monopolistically competitive market structure.
D) a monopoly faces a perfectly inelastic demand curve while a monopolistic competitor faces an elastic demand curve.

Question 9

If we use a narrow definition of monopoly, then a monopoly is defined as a firm

A) that has been granted special production rights by the government.
B) that can ignore the actions of all other firms because it produces a superior product compared to its rivals' products.
C) that can ignore the actions of all other firms because it produces a product for which there are no close substitutes.
D) that has the largest market share in an industry.

Question 10

A monopoly is defined as a firm that has the largest market share in an industry.

Question 11

Compared to a monopolistic competitor, a monopolist faces

A) a more elastic demand curve.
B) a more inelastic demand curve.
C) a more elastic demand curve at higher prices and a more inelastic demand curve at lower prices.
D) a demand curve that has a price elasticity coefficient of zero.

Question 12

A firm that has the ability to control to some degree the price of the product it sells

A) is also able to dictate the quantity purchased.
B) faces a demand curve that is inelastic throughout the range of market demand.
C) is a price maker.
D) faces a perfectly inelastic demand curve.

Question 13

A narrow definition of monopoly is that a firm is a monopoly if it can ignore

A) government antitrust laws.
B) the pricing decisions of its suppliers.
C) the pricing decisions of firms that produce complementary products.
D) the actions of all other firms.

Question 14

A monopoly is a seller of a product

A) with many substitutes.
B) without a close substitute.
C) with a perfectly inelastic demand.
D) without a well-defined demand curve.

Question 15

A monopoly is a firm that is the only seller of a good or service that does not have a close substitute.

Question 16

A monopolist faces

A) a perfectly elastic demand curve.
B) a perfectly inelastic demand curve.
C) a horizontal demand curve.
D) a downward-sloping demand curve.

Question 17

Using a broad definition, a firm would have a monopoly if

A) it produced a product that has substitutes.
B) it does not have to collude with any other producer to earn an economic profit.
C) there is no other firm selling a substitute for its product close enough that its economic profits are competed away in the long run.
D) it can make decisions regarding price and output without violating antitrust laws.

Question 18

A snack shop inside a hotel in a busy city has a monopoly on food sales if it is the only food vendor in the hotel that is open 24 hours a day.

Question 19

The market demand curve facing a monopolist is more elastic than the market demand curve facing a monopolistic competitor.

Question 20

Peet's Coffee and Teas produces some flavourful varieties of Peet's brand coffee. Is Peet's a monopoly?

A) Yes, there are no substitutes to Peet's coffee.
B) No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes.
C) Yes, Peet's is the only supplier of Peet's coffee in a market where there are high barriers to entry.
D) No, Peet's is not a monopoly because there are many branches of Peet's.

Question 21

To have a monopoly in an industry there must be

A) barriers to entry so high that no other firms can enter the industry.
B) a patent or copyright giving the firm exclusive rights to sell a product for 20 years.
C) an inelastic demand for the industry's product.
D) a public franchise, making the monopoly the exclusive legal provider of a good or service.

Question 22

A patent or copyright is a barrier to entry based on

A) ownership of a key necessary raw material.
B) large economies of scale as output increases.
C) government action to protect a producer.
D) widespread network externalities.

Question 23

In a natural monopoly, throughout the range of market demand

A) marginal cost is above average total cost and pulls average total cost upward.
B) average total cost is above marginal cost and pulls marginal cost upward.
C) marginal cost is below average total cost and pulls average total cost downward.
D) there are diseconomies of scale.

Question 24

If you own the only bookstore in a small town, do you have a monopoly?

Question 25

When the government wants to give an exclusive right to one firm to produce a product, it

A) imposes a tariff on imports of the product.
B) imposes a quota on imports of the product.
C) grants a patent or copyright to an individual or firm.
D) uses antitrust laws to keep other firms from entering the market.

Question 26

A public franchise

A) is a corporation that is owned by stockholders.
B) results from ownership of a key raw material.
C) is a government designation that a private firm is the only legal producer of a good or service.
D) is an unregulated monopoly necessary for the public good.

Question 27

One reason patent protection is vitally important to pharmaceutical firms is

A) successful new drugs are not profitable. If firms are not granted patents, many would go out of business and health care would be severely diminished.
B) the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly. Patents enable firms to recover costs incurred during this process.
C) that taxes on profits from drugs are very high; profits from patent protection enable firms to pay these taxes.
D) the high salaries pharmaceutical firms pay to scientists and doctors make their labour costs higher than for any other business. Profits from patents are needed to pay these labour costs.

Question 28

Which one of the following is not a possible barrier to entry high enough to keep competing firms out of a monopoly industry?

A) The monopoly firm has control of a key resource necessary to produce a good.
B) There are important network externalities in supplying a good or service.
C) large economies of scale that result in a natural monopoly
D) a high concentration ratio

Question 29

What is a monopoly? Can a firm be a monopoly if close substitutes for its product exists?

Question 30

A local electricity-generating company has a monopoly that is protected by an entry barrier that takes the form of

A) control of a key raw material.
B) network externalities.
C) economies of scale.
D) perfectly inelastic demand curve.

Question 31

For a natural monopoly to exist

A) a firm must continually buy up its rivals.
B) a firm's long-run average cost curve must exhibit diseconomies of scale beyond the economically efficient output level.
C) a firm's long-run average cost curve must exhibit economies of scale throughout the relevant range of market demand.
D) a firm must have a government-imposed barrier.

Question 32

There are several types of barriers to entry that can create a monopoly. Which of the following barriers is the result of government action?

A) network externalities
B) public franchise
C) economies of scale
D) control of a key resource

Question 33

To maintain a monopoly, a firm must have

A) a perfectly inelastic demand.
B) an insurmountable barrier to entry.
C) marginal revenue equal to demand.
D) few competitors.

Question 34

Governments grant patents to

A) compensate firms for research and development costs.
B) encourage competition.
C) encourage low prices.
D) encourage firms to reveal secret production techniques.

Question 35

For which of the following firms is patent protection of vital importance?

A) furniture producers
B) software firms
C) pharmaceutical firms
D) auto makers

Question 36

When the government makes a firm the exclusive legal provider of a good or service, it grants the firm

A) a copyright.
B) a network externality.
C) a quota.
D) a public franchise.

Question 37

What is a network externality?

A) It refers to having a network of suppliers and buyers for a good or service.
B) It refers to lobbying to form a public enterprise.
C) It refers to a situation in which a product's usefulness increases with the number of people using it.
D) It refers to a product that requires connection to a network for it to be useful.

Question 38

Which one of the following about a monopoly is false?

A) A monopoly could make profits in the long run.
B) A monopoly could break even in the long run.
C) A monopoly must have some kind of government privilege or government-imposed barrier to maintain its monopoly.
D) A monopoly status could be temporary.

Question 39

Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale. The main reason for the elimination of profits is

A) after 20 years most people who have taken the drug have passed away or are cured of the illness the drug was intended to treat.
B) firms sell their patent rights to other firms so that they can concentrate on finding drugs to treat new illnesses.
C) the quantity demanded of the drug has increased enough that the demand becomes inelastic and revenue falls.
D) after 20 years patent protection is ended and other firms can produce less expensive generic versions of the drug.

Question 40

Governments grant patents to encourage

A) research and development on new products.
B) competition.
C) low prices.
D) firms to form public enterprises.

Question 41

Ordinarily, governments attempt to promote competition in markets. Why do governments use patents to block entry into some markets when this prohibits competition?

A) Patents encourage firms to spend money on research necessary to create new products.
B) Politicians sometimes succumb to pressure from lobbyists to grant favours to businesses for political reasons.
C) Patents are an important source of government revenue.
D) Patents are justified because they are an important means for creating network externalities.

Question 42

In discussions of barriers to entry, what is meant by the term 'virtuous cycle'?

A) A virtuous cycle refers to successful research and development that leads to information that is used to develop other new products.
B) A virtuous cycle refers to a firm using the profits from a monopoly in one market to establish a monopoly in another market.
C) A virtuous cycle refers to the situation where the pursuit of self-interest in establishing an entry barrier leads to an increase in social welfare (the 'invisible hand').
D) A virtuous cycle refers to a situation where if a firm can attract enough customers initially, it can attract additional customers because its product's value has been increased by other customers using it, which attracts even more customers.

Question 43

A natural monopoly is most likely to occur in which of the following industries?

A) the pharmaceutical industry because the development and approval of new drugs through the Food and Drug Administration can take more than 10 years
B) the diamond mining and marketing industry because one firm can control a key resource
C) the software industry because of the importance of network externalities
D) an industry where fixed costs are very large relative to variable costs

Question 44

Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.

Question 45

The 10-year protection period from generic competition for drug manufacturers is a form of

A) copyright.
B) trademark.
C) hallmark.
D) patent.

Question 46

Refer to Figure 9-1. Which of the following statements about the firm depicted in the diagram is true?

A) The fact that this firm is a natural monopoly is shown by the continually declining long-run average total cost as output rises.
B) The fact that this firm is a natural monopoly is shown by the continually declining market demand curve as output rises.
C) The fact that this firm is a natural monopoly is shown by the continually declining marginal revenue curve as output rises.
D) The fact that this firm is a natural monopoly is shown by the fact that marginal cost lies below the long-run average total cost where the firm maximises its profits.

Question 47

If a restaurant was a natural monopoly, its

A) marginal cost curve would still be declining when it crossed the demand curve.
B) average total cost curve would still be declining when it crossed the demand curve.
C) marginal revenue curve wold be the same as its demand curve.
D) marginal revenue curve would be horizontal.

Question 48

Network externalities

A) can only exist when there are economies of scale.
B) prevent the dominance of a market by one firm.
C) exist when the usefulness of a product increases with the number of consumers who use it.
D) are created when celebrity endorsements of products lead to a surge in the demand for those products.

Question 49

To be a natural monopoly a firm must

A) control a key resource input.
B) have economies of scale that are so large that it can supply the entire market at a lower cost than two or more firms.
C) have significant network externalities.
D) be very large relative to the total market.

Question 50

Experience with patents in the pharmaceutical industry shows that when patents on drugs expire,

A) most patients will continue to buy the drugs from the same firms because their doctors recommend they buy brand-name drugs.
B) prices remain high without patent protection because of a lack of competition. Firms that are not granted patents cannot compete with firms that are granted patents.
C) other firms are free to produce chemically identical drugs. Competition reduces the profits that had been earned by the firms that received patents.
D) firms will find ways to obtain additional patent protection-often by making cosmetic changes in drugs that were patented-so that they can continue charging high prices.

Question 51

A public franchise gives the exclusive right to produce a product for 20 years from the date the product is invented.

Question 52

A natural monopoly is characterised by large fixed costs relative to variable costs.

Question 53

For a natural monopoly, the marginal cost of producing an additional unit of its product is relatively small.

Question 54

A virtuous cycle refers to the development of new products that follows when a monopoly earns economic profits.

Question 55

A patent

A) grants the creator of a book, film, or piece of music the exclusive right to use the creation for 20 years.
B) grants the creator of a book, film, or piece of music the exclusive right to use the creation during the creator's lifetime.
C) gives a firm the exclusive right to a new product for 20 years from the date the product is invented.
D) gives the firm the exclusive right to a new product during the product inventor's lifetime.

Question 56

If a restaurant was a natural monopoly, dividing the restaurant equally into two separate restaurants would

A) decrease marginal cost.
B) raise average total cost.
C) increase total revenue.
D) make marginal revenue less elastic.

Question 57

Some economists argue that Microsoft became a monopoly in the market for computer software by developing MS-DOS, an operating system used for the first IBM personal computers. The more people who used MS-DOS-based programs, the greater the usefulness of a using a computer with an MS-DOS operating system. The explanation for Microsoft's monopoly is

A) the development of new technology that other firms could not copy.
B) control of a key resource which, in this case, is the MS-DOS operating system.
C) network externalities.
D) patents Microsoft obtained when it developed the MS-DOS operating system.

Question 58

Network externalities refer to the situation where the usefulness of a product increases with the number of consumers who use it.

Question 59

Although some economists believe network externalities are important barriers to entry, other economists disagree because

A) they believe that the dominant positions of firms that are supposedly due to network externalities are to a greater extent the result of the efficiency of firms in offering products that satisfy consumer preferences.
B) they believe that most examples of network externalities are really barriers to entry caused by the control of a key resource.
C) network externalities are really negative externalities.
D) they believe that the dominant positions of firms that are supposedly due to network externalities are to a greater extent the result of economies of scale.

Question 60

Many biologic drug manufacturers are pushing for patent protection to be extended to 12 years before generics are allowed to be introduced to the market. This reflects which of the following barriers to entry?

A) control of a key resource
B) network externalities
C) entry blocked by government action
D) economies of scale creating a natural monopoly

Question 61

What is a public franchise? Are all public franchises natural monopolies?

Question 62

How does a network externality serve as a barrier to entry? Is this barrier surmountable? Explain.

Question 63

If a firm's average total cost is less than price where MR = MC,

A) the firm should shut down.
B) the firm should raise its price.
C) the firm should continue to produce the output it is producing.
D) the firm should cut back on its output to lower its cost.

Question 64

Refer to Figure 9-2. If the firm's average total cost curve is ATC₃, the firm will

A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.

Question 65

Refer to Figure 9-2. If the firm's average total cost curve is ATC₂, the firm will

A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.

Question 66

If a monopolist's price is $50 per unit and its marginal cost is $25, then

A) to maximise profit the firm should increase output.
B) to maximise profit the firm should decrease output.
C) to maximise profit the firm should continue to produce the output it is producing.
D) Not enough information is given to say what the firm should do to maximise profit.

Question 67

If a monopolist's marginal revenue is $25 a unit and its marginal cost is $25, then

A) to maximise profit the firm should increase output.
B) to maximise profit the firm should decrease output.
C) to maximise profit the firm should continue to produce the output it is producing.
D) Not enough information is given to say what the firm should do to maximise profit.

Question 68

A monopolist's profit-maximising price and output correspond to the point on a graph

A) where average total cost is minimised.
B) where total costs are the smallest relative to price.
C) where marginal revenue equals marginal cost.
D) where price is as high as possible.

Question 69

What gives rise to a natural monopoly? How do consumers benefit from a natural monopoly?

Question 70

Refer to Table 9-1. What is the marginal revenue from the sale of the 12th unit?

A) $75
B) $50
C) $20
D) -$5

Question 71

Refer to Table 9-1. What is the firm's profit-maximising output and what is the price charged to sell this output?

A) P = $85; Q = 10
B) P = $80; Q = 11
C) P = $70; Q = 13
D) P = $65; Q = 14

Question 72

The demand curve for the monopoly's product is

A) the market demand for the product.
B) more elastic than the market demand for the product.
C) more inelastic than the market demand for the product.
D) undefined.

Question 73

Identify four reasons for high entry barriers. Briefly explain each reason.

Question 74

Refer to Figure 9-2. If the firm's average total cost curve is ATC₁, the firm will

A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.

Question 75

Refer to Table 9-1. What is the amount of the firm's profit?

A) $335
B) $350
C) $880
D) $910

Question 76

Because a monopoly's demand curve is the same as the market demand curve for its product

A) the monopoly's marginal revenue equals its price.
B) the monopoly is a price taker.
C) the monopoly must lower its price to sell more of its product.
D) the monopoly's average total cost always falls as it increases its output.

Question 77

Microsoft hires marketing and sales specialists to decide what prices it should set for its products, whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity market, does not. Why is this so?

A) because Microsoft is large enough to hire the best people in the field
B) because Microsoft could potentially lose sales if it sets prices indiscriminately
C) because the wealthy corn farmer is a price taker who chooses his optimal output independently of market price but Microsoft's optimal output depends on the price it selects
D) because unlike Microsoft, the wealthy corn farmer is probably a monopolist

Question 78

If a theatre company expects $250 000 in ticket revenue from five performances and $288 000 in ticket revenue if it adds a sixth performance, the

A) marginal revenue of the sixth performance is $48 000.
B) marginal revenue of the sixth performance is $38 000.
C) cost of staging the sixth performance is probably higher than the cost of staging the previous five.
D) company will be making a loss on the sixth performance because its ticket sales will be less than the average received from the previous five.

Question 79

Refer to Figure 9-2. To maximise profit, the firm will produce

A) Q₁.
B) Q₂.
C) Q₃.
D) Q₄.

Question 80

Refer to Figure 9-2. The firm's profit-maximising price is

A) P₁.
B) P₂.
C) P₃.
D) P₄.