Deck 15: Monopoly and Antitrust Policy

Question 1

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

Answer 1

Because consumers in your town could buy books on the Internet or by driving to another town that has a bookstore store,you would not have a monopoly under the narrow definition of the term.However,because competition from on-line sellers and stores in other towns may not be sufficient to eliminate your economic profits in the long run,you may have a monopoly in the broader sense of the term.

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

barriers to entry so high that no other firms can enter the industry.

Question 4

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 5

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 6

Andrea Wong owns the only Chinese restaurant in a small town that is also home to a Burger King,an Applebee's and a Popeye's.Using a broad definition of a monopoly,Andrea has a monopoly.

Question 7

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

A)it produced a product that has no close 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 8

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 9

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 10

By 1970,few households in the United States had cable television but two developments would lead to a substantial increase in the growth of the cable television industry.One of these developments was satellite relay technology that made it feasible for local systems to receive signals from distant broadcast stations.What was the second development?

A)the introduction of Home Box Office (HBO)and other premium cable channels
B)The U.S.Congress relaxed restrictions on rebroadcasting distant stations and premium channels.
C)Ted Turner purchased WTBS,which became the first cable "superstation."
D)The U.S.Congress granted an antitrust exemption that enabled cable stations to merge.As a result,several "superstations" were able to take advantage of economies of scale to lower their average costs and prices.

Question 11

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

Question 12

The Google search engine has a market share of ________ in the United States and ________ in Europe.

A)90 percent; 25 percent
B)50 percent; 50 percent
C)70 percent; 90 percent
D)45 percent; 15 percent

Question 13

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.

Question 14

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 15

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 16

Few firms in the United States are monopolies because

A)few firms experience economies of scale.
B)of antitrust laws.
C)when a firm earns profits,other firms will enter its market.
D)most products that firms produce have substitutes.

Question 17

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 favors 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 18

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 19

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 20

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 21

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 22

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 23

If the OpenTable Website 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 24

In the United States,barriers to entry in professional team sports (for example,football and baseball)result from

A)the draft of college players,which grants teams exclusive signing rights to individual players.
B)long-term leases teams sign for stadiums and ballparks in major cities.
C)television contracts,which give networks the exclusive rights to broadcast games.
D)the reserve clause,which is a provision in contracts of professional athletes that require them to play for specific teams over the length of their contracts.

Question 25

The International Nickel Company of Canada is often cited as an example of monopoly,but International Nickel eventually lost its monopoly.What event was responsible for this?

A)New technology allowed other firms to achieve network externalities after World War II.
B)The Canadian government,which had owned International Nickel,sold the company after World War II.The government no longer blocked entry into the market for nickel.
C)Competition in the market for nickel increased after nickel fields were developed in Russia after World War II.
D)Competition in the market for nickel increased after Canada signed the North American Free Trade Agreement with the United States and Mexico in 1994.

Question 26

For years the Paul Ecke Ranch had a monopoly on poinsettias.What event was responsible for the end of this monopoly?

A)A university researcher discovered the special technique the Ecke Ranch used for growing poinsettias.After the researcher published the technique other firms were able to compete with the Ecke Ranch.
B)Other poinsettia sellers were finally able to take advantage of the network externalities that had given the Ecke Ranch its monopoly.
C)After 20 years,the patent the Ecke Ranch had been granted for its poinsettias expired.
D)The government took away the public franchise it had earlier given to the Ecke Ranch to be the sole legal provider of poinsettias.

Question 27

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 28

The De Beers diamond mining and marketing company of South Africa became one of the most profitable and longest-lived monopolies in history.Which of the following has always threatened De Beers' control of the diamond market?

A)Since few diamonds are ever destroyed,De Beers has constantly faced possible competition from other firms reselling diamonds.
B)Competition from imitation diamonds.Technology has made it possible to make fake diamonds look exactly like real diamonds.
C)Competition from other gemstones,including rubies and emeralds,that have become more popular over time.
D)At different times in the past some countries have banned the importation of diamonds from South Africa for political reasons.

Question 29

The International Nickel Company of Canada is often cited as an example of monopoly.What was the source of the barrier to entry that gave this firm monopoly power?

A)It was a public enterprise; therefore,the Canadian government blocked entry into the market for nickel.
B)There were important network externalities in the production of nickel.
C)Economies of scale resulted in the company becoming a natural monopoly.
D)control of a key resource

Question 30

If the OpenTable Website was a natural monopoly,dividing the business equally between two firms that each supplied the same number of online reservations would

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

Question 31

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 32

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 33

BHP Billiton is a Canadian company that owns mines in Canada that

A)produce nickel.After World War II,BHP Billiton began to compete with another Canadian firm,the International Nickel Company.This competition eventually ended International Nickel's monopoly in this market.
B)produces bauxite,the mineral needed to produce aluminum.BHP Billiton began to mine bauxite after World War II.This competition eventually ended the Aluminum Company of America (ALCOA)'s monopoly in this market.
C)produces coal.Until World War II,BHP Billiton had a monopoly on coal in Canada.
D)produce diamonds.

Question 34

After having a monopoly in the diamond market for many years,by 2000 the De Beers company faced competition from other companies.To maintain its market share,De Beers

A)began buying so-called "blood diamonds" in order to keep these diamonds out of the control of other diamond companies.
B)adopted a strategy of differentiating its diamonds.Each of its diamonds is now marked with a microscopic brand.
C)bought diamond mines in Canada and Russia that had been its competitors.
D)lowered the prices of its diamonds to make the market appear less profitable to potential competitors.

Question 35

What type of protection does U.S.law grant the creator of a book,film or piece of music?

A)A public franchise,which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 70 years after the author's death.
B)A copyright,which grants exclusive rights to the creation's author for 20 years after the work is created.
C)A patent,which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 70 years after the author's death.
D)A copyright,which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 70 years after the author's death.

Question 36

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

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

Question 37

For years the Paul Ecke Ranch had a monopoly on poinsettias.What was the reason for the monopoly the Ranch had on poinsettia sales?

A)The Paul Ecke Ranch was granted a public franchise which made it the sole legal provider of poinsettias.
B)Paul Ecke discovered a technique for growing poinsettias that had more leaves and were more colorful than other poinsettias.
C)The Paul Ecke Ranch was granted a patent that gave it the exclusive right to produce and sell poinsettias.
D)The Paul Ecke Ranch was able to take advantage of network externalities in supplying poinsettias.

Question 38

Figure 15-1
Refer to Figure 15-1.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 maximizes its profits.

Question 39

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 40

Some economists argue that Microsoft become 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 41

Figure 15-2
Refer to Figure 15-2.If the monopolist charges price P* for output Q*,in order to maximize profit or minimize loss in the short run,it should

A)continue to produce because price is greater than average variable cost.
B)shut down because price is greater than marginal cost.
C)shut down because price is less than average total cost.
D)continue to produce because a monopolist always earns a profit.

Question 42

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

Question 43

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

Question 44

Figure 15-3 Figure 15-3 shows the cost and demand curves for a monopolist.
Refer to Figure 15-3.The monopolist's total revenue is

A)$1,116.
B)$1,488.
C)$1,726.40
D)$1,826.

Question 45

Table 15-1
The government of a small developing country has granted exclusive rights to Linden Enterprises for the production of plastic syringes.Table 15-1 shows the cost and demand data for this government protected monopolist.
Refer to Table 15-1.What is the profit-maximizing quantity and price for the monopolist?

A)Quantity = 8 cases,Price = $9
B)Quantity = 7 cases,Price = $10
C)Quantity = 9 cases,Price = $8
D)Quantity = 10 cases,Price = $7

Question 46

Table 15-1
The government of a small developing country has granted exclusive rights to Linden Enterprises for the production of plastic syringes.Table 15-1 shows the cost and demand data for this government protected monopolist.
Refer to Table 15-1.What is the amount of profit that the firm earns?

A)$34.50
B)$42
C)$47
D)$49

Question 47

Figure 15-3 Figure 15-3 shows the cost and demand curves for a monopolist.
Refer to Figure 15-3.The monopolist's total cost is

A)$1,116.
B)$1,240.
C)$1,660.
D)$1,726.40.

Question 48

Which of the following is true for a monopolist?

A)Being the only seller in the market,the monopolist faces a perfectly inelastic demand curve.
B)Being the only seller in the market,the monopolist faces a perfectly elastic demand curve.
C)Being the only seller in the market,the monopolist faces the market demand curve.
D)Being the only seller in the market,the monopolist faces a downward sloping demand curve that lies below the marginal revenue curve.

Question 49

Table 15-2
Assume Table 15-2 gives the monthly demand and costs for subscriptions to basic cable for Comcast,a cable television monopoly in Philadelphia.
Refer to Table 15-2.If Comcast wants to maximize its profits,what price (P)should it charge and how many cable subscriptions per month (Q)should it sell?

A)P = $12; Q = 8
B)P = $14; Q = 6
C)P = $16; Q = 4
D)P = $15: Q = 5

Question 50

A price maker is

A)a person who actively seeks out the best price for a product that he or she wishes to buy.
B)a firm that has some control over the price of the product it sells.
C)a firm that is able to sell any quantity at the highest possible price.
D)a consumer who participates in an auction where she announces her willingness to pay for a product.

Question 51

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

Question 52

A monopoly firm's demand curve

A)is the same as the market demand curve.
B)is perfectly inelastic.
C)is more inelastic than the demand curve for the product.
D)is inelastic at high prices and elastic at lower prices.

Question 53

U.S.antitrust laws are designed to prohibit monopolization and encourage competition.Why,then,does the government erect barriers to entry and create monopoly power by granting firms patents?

Question 54

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

Question 55

Natural monopolies are most likely to occur in markets where fixed costs are very large relative to variable costs.

Question 56

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

Question 57

Figure 15-3 Figure 15-3 shows the cost and demand curves for a monopolist.
Refer to Figure 15-3.The monopolist earns a profit of

A)$0.
B)$170.
C)$248.
D)$372.

Question 58

Figure 15-3 Figure 15-3 shows the cost and demand curves for a monopolist.
Refer to Figure 15-3.The profit-maximizing output and price for the monopolist are

A)output = 62; price = $24.
B)output = 62; price = $18.
C)output = 83; price = $22.
D)output = 104; price = $20.80.

Question 59

Wendell can sell five motor homes per week at a price of $22,000.If he lowers the price of motor homes to $20,000 per week he will sell six motor homes.What is the marginal revenue of the sixth motor home?

A)$10,000
B)$12,000
C)$20,000
D)$22,000

Question 60

Firms that face downward-sloping demand curves for their output in the product market are called

A)price takers.
B)price dictators.
C)monopolists.
D)price makers.

Question 61

If a monopolist's marginal revenue is $35 per unit and its marginal cost is $25,then

A)to maximize profit the firm should increase output.
B)to maximize profit the firm should decrease output.
C)to maximize 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 maximize profit.

Question 62

If a monopolist's price is $50 at 63 units of output and marginal revenue equals marginal cost and average total cost equals $43,then the firm's total profit is

A)$3,150.
B)$2,709.
C)$441.
D)$7.

Question 63

The most profitable price for a monopolist is

A)the highest price a consumer is willing to pay for the monopolist's product.
B)the price at which demand is unit-elastic.
C)a price that maximizes the quantity sold.
D)the price for which marginal revenue equals marginal cost.

Question 64

"Being the only seller in the market,the monopolist can choose any price and quantity it desires." Evaluate this statement: is it true or false? Explain your answer.

Question 65

Which of the following statements is true?

A)Monopolists are price makers.All other firms are price takers.
B)Unlike other industries,monopoly industries have high barriers to entry.
C)Only monopoly firms are granted patents and copyrights.
D)Unlike other firms,a monopolist's demand curve is the same as the market demand curve.

Question 66

A monopolist will maximize profit where marginal revenue equals marginal cost.

Question 67

A monopolist currently sells 18 units of a good.If marginal revenue on the last unit sold is $117,then the price of the good must be less than $117.

Question 68

Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly.As a result of this change

A)Price will be higher,output will be lower and the deadweight loss will be eliminated.
B)Consumer surplus will be smaller,producer surplus will be greater and there will be a reduction in economic efficiency.
C)Price will be higher,consumer surplus will be greater and output will be greater.
D)Consumer surplus will be smaller and producer surplus will be greater.There will be a net increase in economic surplus.

Question 69

Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly.Which of the following statements comparing the conditions in the industry under both market structures is true?

A)A monopoly will produce more and charge a higher price than would a perfectly competitive industry producing the same good.
B)A monopoly will produce more and advertise more than would a perfectly competitive industry producing the same good.
C)A monopoly will produce less and charge a higher price than would a perfectly competitive industry producing the same good.
D)A monopoly will produce less and charge a lower price than would a perfectly competitive industry producing the same good.

Question 70

Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly.Which of the following statements regarding economic surplus in each market structure is true?

A)Under perfectly competitive conditions,economic surplus in this industry equals consumer surplus plus producer surplus.Under monopoly conditions,some consumer surplus is transferred to producer surplus,but economic surplus is the same as it was under perfectly competitive conditions.
B)Under perfectly competitive conditions,economic surplus in this industry is maximized.Under monopoly conditions economic surplus is minimized.
C)Under perfectly competitive conditions,economic surplus is equal to consumer surplus; there is no producer surplus because firms are price-takers.Under monopoly conditions,economic surplus is equal to producer surplus.
D)Under perfectly competitive conditions,economic surplus is maximized.Under monopoly conditions economic surplus is less than under perfect competition and there is a deadweight loss.

Question 71

A monopolist's demand curve is the same as the marginal revenue curve for the product.

Question 72

To maximize profit a monopolist will produce where

A)marginal revenue is equal to marginal cost.
B)demand for its product is unit-elastic.
C)revenue per unit is maximized.
D)average total cost is equal to average revenue.

Question 73

The demand curve for a monopoly firm

A)is perfectly inelastic.
B)lies below its marginal revenue curve.
C)is the same as the market demand curve.
D)is horizontal.

Question 74

Table 15-2
Assume Table 15-2 gives the monthly demand and costs for subscriptions to basic cable for Comcast,a cable television monopoly in Philadelphia.
Refer to Table 15-2.If Comcast maximizes its profits how much profit will it earn?

A)$84
B)$40
C)$4
D)Comcast will break even.

Question 75

Which of the following statements is true?

A)If a tax is imposed on a product sold by a monopolist,the monopolist will maximize its profits by producing where marginal revenue equals marginal cost.
B)A monopolist will always charge the highest possible price.
C)If a tax is imposed on a product sold by a monopolist,the monopolist can increase its price to pass along the entire tax to consumers.
D)Because a monopolist faces no competition,the demand for its product is perfectly inelastic.

Question 76

Figure 15-5 Figure 15-5 shows the cost and demand curves for a monopolist.
Refer to Figure 15-5.Assume the firm maximizes its profits.What is the amount of consumer surplus?

A)$21
B)$124
C)$186
D)$332

Question 77

Explain whether a monopoly that maximizes profit will also be maximizing revenue and production.

Question 78

Figure 15-4 Figure 15-4 reflects the cost and revenue structure for a monopoly that has been in business for a very long time.
Refer to Figure 15-4.Use the figure above to answer the following questions.
a.Identify the curves labeled A and B.Identify the curve which contains both point Y and point Z.Identify the curve which contains both point V and point W.
b.What is the profit-maximizing quantity and what price will the monopolist charge?
c.What area represents total revenue at the profit-maximizing output level?
d.What area represents total cost at the profit-maximizing output level?
e.What area represents profit?
f.What is the profit per unit (average profit)at the profit-maximizing output level?
g.If this industry was organized as a perfectly competitive industry,what would be the profit-maximizing price and quantity?
h.What area represents the deadweight loss as a result of a monopoly?

Question 79

What is the difference between a monopoly's marginal revenue curve and a perfect competitor's marginal revenue curve?

Question 80

If a monopolist's price is $50 at the output where marginal revenue equals marginal cost and average total cost is $43,then the incremental profit from the last unit sold is $7.