Deck 13: Monopoly

Question 1

Use the following to answer questions:
Figure: Maximum Willingness to Pay
(Figure: Maximum Willingness to Pay) Refer to the figure. What is the maximum price that the consumer is willing to pay for 100 units?

A) $100
B) $80
C) $75
D) $90

Answer 1

$100

Question 2

In Chicago's Southside (and other places), auto mechanics (who work outside the formal sector, without a business license, advertising, or even a garage) will do work for gang members without charging them. In exchange, gang members chase away other mechanics who wish to operate in the area. These auto mechanics have monopoly power; what type of source does it come from?

A) barriers to entry
B) hard to duplicate inputs
C) innovation
D) economies of scale

Answer 2

barriers to entry

Question 3

A profit-maximizing monopolist's total profit can be found by calculating:

A) MR - MC.
B) TR - TC.
C) AR - AC.
D) MC - MR.

Answer 3

TR - TC.

Question 4

Which of the following is always TRUE for monopolies?

A) MR > D
B) P > MR
C) P > AC
D) TR < TC

Question 5

Which of the following is TRUE for monopolists?

A) They charge a price below average cost, which guarantees above-normal profits.
B) Their marginal revenue increases with output.
C) They maximize profits by producing at the minimum of average costs.
D) They produce all units of output for which marginal revenue is greater than or equal to marginal cost.

Question 6

If the demand curve for a firm is a straight line with negative slope, which of the following is the shortcut to finding the MR?

A) The demand curve starts below the marginal revenue curve and cuts the marginal revenue curve halfway down its length.
B) The marginal revenue curve starts at the same point as the demand curve and has twice the slope of the demand curve.
C) The marginal revenue curve is parallel to the demand curve with the same slope.
D) The marginal revenue curve starts at the same point as the demand curve and has a slope of 0.

Question 7

A monopoly is a firm:

A) that is exempt from patent protection.
B) that sets price above marginal cost without concern that other firms will enter the industry.
C) without market power.
D) that sets price higher than or equal to marginal cost.

Question 8

Which of the following statements is TRUE?

A) Market power is the ability to raise price and sell more units of a good.
B) Market power may result from government regulations or patent protection.
C) A monopoly is a firm without market power.
D) All of the answers are correct.

Question 9

When comparing a monopoly with a competitive industry, monopoly quantity:

A) and monopoly price will be lower than that of a competitive firm.
B) will be higher, and monopoly price will be lower, than that of a competitive firm.
C) will be lower, and monopoly price will be higher, than that of a competitive firm.
D) and monopoly price will be higher than that of a competitive firm.

Question 10

Which of the following is NOT a reason that monopolies arise?

A) patents
B) economies of scale
C) excess competition
D) control of natural resources

Question 11

For a monopolist, MR is always less than P because:

A) when a monopolist lowers the price to sell more units, it must lower the prices of all units sold.
B) MR is always less than P regardless of what type of firm we are discussing.
C) marginal revenue is always lower for the next unit sold.
D) when a monopolist needs to sell more units, it must lower marginal revenue in order to do so.

Question 12

The power to raise price above marginal cost without fear that other firms will enter the market is:

A) market power.
B) firm power.
C) marginal power.
D) cost power.

Question 13

GlaxoSmithKline prices Combivir, its AIDS drug:

A) at marginal cost.
B) at the same price as other firms do.
C) 25 times higher than the price of equivalent drugs in countries in which its patent is not recognized.
D) where supply intersects demand.

Question 14

What is the profit maximization condition for a monopolist?

A) MR > MC
B) MR = MC
C) AR = MC
D) AR = D

Question 15

Use the following to answer questions:
Figure: Maximum Willingness to Pay
(Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit that the monopolist is earning?

A) $10,000
B) $5,500
C) $4,500
D) There is not enough information to answer the question.

Question 16

Use the following to answer questions:
Figure: Maximum Willingness to Pay
(Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit-maximizing quantity for this monopolist?

A) 125
B) 110
C) 100
D) 75

Question 17

GlaxoSmithKline owns a government grant of temporary monopoly rights on the AIDS drug Combivir due to:

A) patents.
B) laws preventing entry of competitors.
C) economies of scale.
D) innovation.

Question 18

When a pharmaceutical company discovers a new drug, patent law gives it market power by guaranteeing:

A) partial ownership of the right to sell the drug for an unlimited number of years.
B) partial ownership of the right to sell the drug for a limited number of years.
C) sole ownership of the right to sell the drug for a limited number of years.
D) sole ownership of the right to sell the drug for an unlimited number of years.

Question 19

Which of the following statements about monopoly power is correct?

A) Monopoly power is the power attained solely by dual firm monopolists.
B) Monopoly power is the power to raise prices above average cost without facing new entry of firms.
C) Monopoly power is only generated by governments.
D) Firms attaining monopoly power always set the price at the marginal cost.

Question 20

Figure: Monopolist Profits Refer to the figure. Which of the following answers correctly indicates the profit earned by this monopolist at the profit-maximizing quantity?

A) the area A + B
B) the area A - B
C) the area (A + B) - MC
D) area A

Question 21

GlaxoSmithKline (GSK) maximizes profit by producing a quantity of 800 pills where marginal cost is $2 and average cost is $4. Consumers are willing to pay as much as $10 per pill when the quantity supplied is 800 pills. What is the maximum amount of profit that GSK can earn under these conditions?

A) $3,200
B) $4,800
C) $6,400
D) $8,000

Question 22

A firm with monopoly power is able to set a markup price that is:

A) lower than prices on similar goods sold by competitive firms.
B) the same as the prices on similar goods sold by competitive firms.
C) higher than prices on similar goods sold by competitive firms.
D) the maximum price all market participants will pay for similar goods.

Question 23

Assuming the same cost structure, a competitive market produces ________ output at ________ prices than a monopoly market.

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

Question 24

Use the following to answer questions:
Figure: Monopoly Profits
(Figure: Monopoly Profits) Refer to the figure. The monopolist earns a profit of:

A) $630.
B) $420.
C) $540.
D) $480.

Question 25

To maximize profit, the monopolist increases output:

A) until it is using full manufacturing capacity.
B) until marginal cost is equal to marginal revenue.
C) to the same amount it would produce if the firm was competitive, but maximizes price.
D) as long as the marginal revenue curve is higher than the demand curve.

Question 26

In a graph showing a straight-line market demand curve, the marginal revenue curve is:

A) a straight line that begins at the same point as the demand curve on the y-axis but with twice the slope.
B) a straight line that begins at the origin but with twice the slope of the demand curve.
C) the same straight line as the demand curve.
D) There is not enough information to complete the statement.

Question 27

To maximize , a monopolist will produce the level of output where:

A) marginal revenue is equal to average cost.
B) average revenue is equal to marginal cost.
C) marginal revenue is equal to marginal cost.
D) average revenue is equal to average cost.

Question 28

Table: Monopolist

Refer to the table. What is the monopolist's profit-maximizing level of output?

A) 3
B) 4
C) 5
D) 6

Question 29

If a monopolist faces a straight-line negatively sloped demand curve, the price of the units it sells is always:

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

Question 30

The marginal revenue curve is a straight line beginning at the same point on the:

A) horizontal axis as the demand curve but with half of the slope.
B) vertical axis as the demand curve but with half of the slope.
C) horizontal axis as the demand curve but with twice the slope.
D) vertical axis as the demand curve but with twice the slope.

Question 31

Use the following to answer questions:
Figure: Monopoly Profits
(Figure: Monopoly Profits) Refer to the figure. What is the monopolist's optimal price and output level?

A) P = $3.00; Q = 40
B) P = $16.50; Q = 40
C) P = $6.00; Q = 40
D) P = $6.00; Q = 80

Question 32

Use the following to answer questions:
Figure: Maximize Monopoly Profits
(Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by producing at output equal to:

A) Q₁.
B) Q₂.
C) Q₃.
D) Q₄.

Question 33

Suppose that a monopolist can sell five units of output at a price of $5 or six units of output at a price of $4. What is the marginal revenue of the sixth unit?

A) $24
B) $49
C) -$1
D) $4

Question 34

Monopoly power is best described as the ability to:

A) charge the profit-maximizing price.
B) produce the profit-maximizing output level.
C) earn economic profits without causing new firms to enter the market.
D) produce where marginal revenue intersects halfway between the origin and the demand curve.

Question 35

Which statement is TRUE?

A) If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling more units at a lower price per unit.
B) If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling fewer units at a higher price per unit.
C) When a monopolist produces where MR < MC it always earns a positive economic profit.
D) A monopolist is guaranteed monopoly profits by the government.

Question 36

If the quantity demanded for a hand-carved pineapple is two at a price of $16, and the quantity demanded will increase to three if the seller lowers the price to $14, what is the seller's marginal revenue from selling 3 units of pineapple?

A) $8
B) $24
C) $10
D) $14

Question 37

A monopolist can sell 300 units of output for $29.00 per unit. Alternatively, it can sell 301 units of output for $28.25 per unit. The marginal revenue of the 301st unit of output is:

A) -$196.75.
B) -$0.75.
C) $196.75.
D) $28.25.

Question 38

Typical evidence for the existence of market power would be market prices:

A) below production costs.
B) equal to production costs.
C) above production costs.
D) varying with market supply and demand conditions.

Question 39

Use the following to answer questions:
Figure: Maximize Monopoly Profits
(Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by charging a price equal to:

A) P₁.
B) P₂.
C) P₃.
D) P₄.

Question 40

When a monopolist decreases the price of its good, consumers:

A) buy the same amount of the good as before.
B) buy more.
C) buy less.
D) may buy more or less, depending on the price elasticity of demand.

Question 41

A firm with no competitors:

A) faces a perfectly inelastic demand curve.
B) faces a perfectly elastic demand curve.
C) still faces a downward-sloping demand curve.
D) has a perfectly elastic supply curve.

Question 42

Figure: Monopolist If this figure represents the demand and cost curves for a firm with market power, what price should the firm charge to maximize profits?

A) $40
B) $50
C) $60
D) $65

Question 43

Figure: Monopolist 4 What is the profit-maximizing price and output level for the monopolist in this figure?

A) P = $8; Q = 6
B) P = $14; Q = 6
C) P = $8; Q = 12
D) P = $10; Q = 10

Question 44

A firm would prefer that its product demand curve is:

A) perfectly elastic.
B) elastic.
C) inelastic.
D) horizontal.

Question 45

The more inelastic the demand curve for a product is, the:

A) higher is the monopolist's price markup.
B) smaller is the monopolist's price markup.
C) more responsive buyers are to a change in the price.
D) less chance monopolists will have to earn above-normal profits.

Question 46

The "You can't take it with you" effect potentially increases market power for pharmaceuticals if consumers who are dying of disease are also:

A) more inclined to spend their money on medicine than to save it.
B) more inclined to bequeath their money than spend it on medicine.
C) relatively sensitive to the price of life-saving pharmaceuticals.
D) relatively sensitive to how they spend money.

Question 47

Which of the following statements is correct?

A) A monopolist's marginal cost is greater than its price.
B) The more inelastic the demand curve is, the greater is the monopolist's price markup.
C) The monopolist's profit is equal to P(Q - MR).
D) The position of the marginal revenue curve on the y-axis reflects consumer demand elasticity.

Question 48

Figure: Demand Curve In this figure, the marginal revenue of the third unit is given by area:

A) D.
B) C + D.
C) D - - B.
D) D + C + E.

Question 49

Figure: Monopolist 2 In this figure, the monopolist's marginal revenue curve is:

A) also the demand curve.
B) MR₁.
C) MR₂.
D) MR₃.

Question 50

Use the following to answer questions:
Figure: Monopolist 3
(Figure: Monopolist 3) In this figure, the monopolist's maximum profit is:

A) $99.
B) $45.
C) $36.
D) $54.

Question 51

A firm can sell 1 unit at $9 or 2 units at $8 or 3 units at $7, and so on. What is the marginal revenue from the sale of the fifth unit?

A) $0
B) $1
C) $4
D) $5

Question 52

Figure: Paint Market What is the profit or loss for this monopoly?

A) -$200,000
B) $10,000
C) $100,000
D) $250,000

Question 53

Which of the following statements are TRUE?
I. Monopolists can raise prices as high as they want and still earn economic profits.
II. Even with no competitors, firms face a downward-sloping demand curve.
III. Just like competitive firms, monopolists maximize profits where marginal revenue equals marginal cost.

A) I and III only
B) II and III only
C) I and II only
D) I, II, and III

Question 54

Figure: Monopoly Markup Refer to the figure. The monopolist's price markup is:

A) a - b.
B) b - d.
C) d.
D) a - d.

Question 55

A consumer is ________ likely to be sensitive to price if the purchase ________ covered by insurance.

A) more; is
B) less; is
C) less; is not
D) None of the answers is correct.

Question 56

A monopoly is able to increase the markup of price over marginal cost:

A) when the demand is more price-elastic.
B) when the demand is less price-elastic.
C) when there is more marginal revenue per unit sold.
D) at will regardless of price-elasticity.

Question 57

For a linear demand curve, the marginal revenue curve has:

A) the same slope.
B) the reciprocal slope.
C) half the slope.
D) twice the slope.

Question 58

Use the following to answer questions:
Figure: Monopolist 3
(Figure: Monopolist 3) In this figure, the profit-maximizing monopolist sells:

A) 9 units of output at $11 per unit.
B) 16 units of output at $4 per unit.
C) 9 units of output at $20 per unit.
D) 18 units of output at $2 per unit.

Question 59

Graphically, a firm's marginal revenue curve is:

A) perfectly elastic and equal to their marginal cost curve.
B) downward-sloping and equal to the market demand curve.
C) downward-sloping, but with twice the slope of the market demand curve.
D) perfectly elastic but lies underneath the market demand curve.

Question 60

If the monopolist's demand is given by P = 100 - Q, marginal revenue is given by:

A) MR = 100 - 2Q.
B) MR = 100 - Q.
C) MR = 100Q.
D) MR = 100Q - Q².

Question 61

Which of the following effects would generally make demand curves more inelastic?

A) "You can't take it with you" effect
B) "Other people's money" effect
C) Both effects
D) Neither effect

Question 62

A monopolist can raise its price further above marginal cost, the more ______ is the ______ for its product.

A) elastic; demand
B) inelastic; demand
C) elastic; supply
D) inelastic; supply

Question 63

Figure: Monopolist 5
In these figures, the markup of price over marginal cost for the relatively inelastic demand is ______, and the markup of price over marginal cost for the relatively elastic demand is ______.

A) $10; $2
B) $15; $7.50
C) $7.50; $3
D) $5; $1

Question 64

With health insurance, medical treatments are often paid by someone other than the patient, which will make consumers with serious diseases relatively:

A) insensitive to the price of pharmaceuticals.
B) sensitive to the price of pharmaceuticals.
C) insensitive to the premium of health insurance.
D) sensitive to the premium of health insurance.

Question 65

If these were monopolistic markets, which one would clearly have a greater markup than a monopolized banana industry?

A) organic bananas
B) pencils
C) electric car
D) laptop computers

Question 66

Under monopoly, the portion of the outgoing consumer surplus that is not transferred to the monopoly firm or still considered consumer surplus is:

A) known as deadweight loss.
B) proof that monopolies should not be allowed.
C) transferred to the government.
D) available to third parties who benefit from sales of the monopolist's output.

Question 67

When the demand curve for the profit-maximizing monopolist's product is relatively inelastic:

A) it cannot raise the price of the product above the marginal cost of the product.
B) raising the product's price will lower the total revenue for the product.
C) the product does not have good substitutes.
D) All of these choices are correct.

Question 68

When demand is inelastic, revenues increase and production costs decrease as the quantity produced declines, total profits will always increase with a higher price. Therefore, monopolists:

A) can't exist.
B) can't exist for industries in which demand is relatively inelastic.
C) can't maximize profits if they face a relatively inelastic demand.
D) will always raise their price until they get to an elastic portion of the demand curve.

Question 69

Other things being equal, the markup above marginal cost that a monopolist charges will be:

A) higher when there are more substitutes for the monopolist's product.
B) lower when there are more substitutes for the monopolist's product.
C) the same, no matter the number of substitutes for the monopolist's product.
D) zero if there are any substitutes for the monopolist's product.

Question 70

When a monopolist's demand curve is inelastic, raising the price:

A) increases total revenue and increases total cost.
B) decreases total revenue and increases total cost.
C) increases total revenue and decreases total cost.
D) decreases total revenue and decreases total cost.

Question 71

A monopolist increased output by 100 units but cut prices by $20 to sell this additional output at $1,000 per unit. What is TRUE about marginal revenue?

A) MR totals $2,000.
B) MR totals $100,000.
C) MR totals -$2,000.
D) MR cannot be calculated with the information given.

Question 72

When a good has relatively few substitutes:

A) demand for the good is elastic.
B) monopolists will tend to increase their markup for the good.
C) monopolists will tend to decrease their markup for the good.
D) producers will be able to "steal" all of the consumer surplus from consumers.

Question 73

The economic inefficiency of a monopolist can be measured by the:

A) excess profit generated by monopoly firms.
B) poor quality of service offered by monopoly firms.
C) number of consumers who are unable to purchase the product because of its high price.
D) deadweight loss involved relative to a competitive firm.

Question 74

Figure: Optimal Output Refer to the figure. The competitive industry level of output is:

A) 40.
B) 65.
C) 80.
D) 100.

Question 75

In which of the following product markets should we see a higher price markup?

A) one with lots of substitutes
B) one with few substitutes
C) one with a very elastic demand
D) one for a commodity good

Question 76

Use the following to answer questions:
Figure: Monopoly Markup
(Figure: Monopoly Markup) Refer to the figure. Consumer surplus under competition is represented by:

A) triangle abc.
B) triangle cef.
C) square bcde.
D) triangle adf.

Question 77

When demand is relatively elastic, monopolists will charge:

A) a higher markup.
B) a lower markup.
C) the same markup as when demand is relatively inelastic.
D) a price equal to marginal cost.

Question 78

Use the following to answer questions:
Figure: Monopoly Markup
(Figure: Monopoly Markup) Refer to the figure. Consumer surplus under monopoly is represented by:

A) triangle abc.
B) triangle cef.
C) square bcde.
D) triangle adf.

Question 79

A monopolist sells in two different markets and charges the same price of $10 in both markets. In Market A, the demand curve is described by Q_d = 50 - 2P. In Market B, the demand curve is described by Q_d = 60 - P. If the monopolist lowers prices by $1 in the market with the more elastic demand and raises prices by $1 in the market with the more inelastic demand curve, by how much does its total revenue change?

A) -$27
B) $459
C) $767
D) $308

Question 80

Use the following to answer questions:
Figure: Monopoly Markup
(Figure: Monopoly Markup) Refer to the figure. The deadweight loss attributable to monopoly is:

A) triangle abc.
B) triangle cef.
C) square bcde.
D) triangle adf.