Deck 14: Monopoly

Question 1

Microsoft faces very little competition from other firms for its Windows software. Why isn't the price of the software $1,000 per copy?

A) because the government would not allow such a high price
B) because stockholders would not allow such a high price
C) because the company would sell so few copies that they would earn higher profits by selling at a lower price
D) All of the above are correct.

Answer 1

C

Question 2

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.

Answer 2

C

Question 3

Which of the following is not a characteristic of a monopoly?

A) barriers to entry
B) one seller
C) one buyer
D) a product without close substitutes

Answer 3

C

Question 4

Which of the following is not a characteristic of a monopoly?

A) the seller has market power
B) one seller
C) free entry and exit
D) a product without close substitutes

Question 5

Because a monopolist does not face competition from other firms, the outcome in a market with a monopoly

A) does not illustrate profit maximization.
B) is often not in the best interest of society.
C) is characterized by unlimited profits.
D) would be improved if the government produced the product rather than a private firm.

Question 6

A perfectly competitive market

A) may not be in the best interests of society, whereas a monopoly market promotes general economic well-being
B) promotes general economic well-being, whereas a monopoly market may not be in the best interests of society.
C) and a monopoly market are equally likely to promote general economic well-being.
D) is less likely to promote general economic well-being than a monopoly market.

Question 7

A benefit of a monopoly is

A) lower prices.
B) a wide variety of similar products.
C) decreasing long-run average total costs.
D) greater creativity by authors who can copyright their novels.

Question 8

The DeBeers Company faces very little competition from other firms in the wholesale diamond market. Why isn't the price of the wholesale diamonds $10,000 per carat?

A) because the government would not allow such a high price
B) because stockholders would not allow such a high price
C) because the company would sell so few copies that they would earn higher profits by selling at a lower price
D) All of the above are correct.

Question 9

Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly is often

A) not in the best interest of society.
B) one that fails to maximize total economic well-being.
C) inefficient.
D) All of the above are correct.

Question 10

A monopoly market is characterized by

A) many buyers and sellers.
B) "natural" products.
C) barriers to entry.
D) a Nash equilibrium.

Question 11

The fundamental source of monopoly power is

A) barriers to entry.
B) profit.
C) decreasing average total cost.
D) a product without close substitutes.

Question 12

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 13

A competitive firm

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

Question 14

Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly

A) is often not in the best interest of society.
B) maximizes total economic well-being.
C) is efficient.
D) benefits consumers more so than the producer.

Question 15

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 16

Which of the following are necessary characteristics of a monopoly? i) The firm is the sole seller of its product.
Ii) The firm's product does not have close substitutes.
Iii) The firm generates a large economic profit.
Iv) The firm is located in a small geographic market.

A) i) and ii) only
B) i) and iii) only
C) i), ii), and iii) only
D) i), ii), iii), and iv)

Question 17

The fundamental source of monopoly power is

A) many buyers and sellers.
B) low fixed costs.
C) rising average total costs.
D) barriers to entry.

Question 18

Which of the following is a characteristic of a monopoly?

A) rising average total costs
B) one buyer
C) rising fixed costs
D) a product without close substitutes

Question 19

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 20

A monopoly can earn positive profits because it

A) can sell unlimited quantities at any price it chooses.
B) takes the market price as given and can sell unlimited quantities.
C) can set the price it charges for its output but faces a horizontal demand curve.
D) can maintain a price such that total revenues will exceed total costs.

Question 21

Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds. Then DeBeers, a large diamond company, has

A) less incentive to advertise than it would otherwise have.
B) less market power than it would otherwise have.
C) more control over the price of diamonds than it would otherwise have.
D) higher profits than it would otherwise have.

Question 22

Most markets are not monopolies in the real world because

A) firms usually face downward-sloping demand curves.
B) supply curves slope upward.
C) firms usually equate price with marginal cost.
D) there are reasonable substitutes for most goods.

Question 23

Suppose ABC Aluminum Inc. owns 80% of the world's bauxite, a mineral used in the production of aluminum. Which of the following reasons describes the fundamental barrier to entry for the aluminum industry?

A) monopoly resources
B) government regulation
C) the production process
D) Both a and b are correct.

Question 24

Which of the following is not an example of a barrier to entry?

A) A soybean farmer is the first in her county to use a new brand of fertilizer.
B) Microsoft obtains a copyright for its Windows operating system.
C) A pharmaceutical company obtains a patent for a new medication to treat migraine headaches.
D) A taxi cab driver in New York City obtains a license to legally provide transportation in New York City.

Question 25

Which of the following is not a reason for the existence of a monopoly?

A) sole ownership of a key resource
B) patents
C) copyrights
D) diseconomies of scale

Question 26

Which of the following would be most likely to have monopoly power?

A) a national florist
B) an online bookstore
C) a local restaurant
D) a local electrical cooperative

Question 27

Which of the following is an example of a barrier to entry?

A) Tom charges a higher price than his competitors for his golf lessons.
B) Dick charges a lower price than his competitors for his lawn-mowing services.
C) Harry offers free concerts on Sunday afternoons as a form of advertising.
D) Larry obtains a copyright for the new computer game that he invented.

Question 28

Which of the following is not an example of a barrier to entry?

A) Mighty Mitch's Mining Company owns a unique plot of land in Tanzania, under which lies the only large deposit of Tanzanite in the world.
B) A chemist receives a patent for a new skin cream.
C) An entrepreneur opens a cupcake bakery.
D) A taxi cab driver in New York City obtains a license to legally provide transportation in New York City.

Question 29

Which of the following would be most likely to have monopoly power?

A) a long-distance telephone service provider
B) a local cable TV provider
C) a large department store
D) a gas station

Question 30

Which of the following is an example of a barrier to entry?

A) Crystal charges a higher price than her competitors for her hair-styling services.
B) Dan charges a lower price than his competitors for his dry-walling services.
C) Jackie offers free samples of her loose-meat sandwiches to attract new customers.
D) Roseanne obtains a copyright for a short story that she wrote and published.

Question 31

Which of the following statements is not correct?

A) Consumers will likely benefit in the form of lower prices from buying a product made by a natural monopoly than if the market were served by several firms.
B) Monopolists typically charge higher prices than competitive firms.
C) Monopolists typically produce larger quantities of output than competitive firms.
D) Consumers may benefit from monopolies if the firms invest their higher profits into something that benefits society such as medical research.

Question 32

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.

Question 33

Which of the following is not a reason for the existence of a monopoly?

A) patents
B) marginal-cost pricing
C) economies of scale
D) trademarks

Question 34

Exclusive ownership of a key resource

A) is the most common cause of a monopoly.
B) is a potential but rare cause of a monopoly.
C) explains the monopoly ownership of the US Postal Service.
D) explains why a single firm distributes water to a community.

Question 35

A firm that is the sole seller of a product without close substitutes is

A) perfectly competitive.
B) monopolistically competitive.
C) an oligopolist.
D) a monopolist.

Question 36

Which of the following is not an example of a barrier to entry?

A) Mighty Mitch's Mining Company owns a unique plot of land in Tanzania, under which lies the only large deposit of Tanzanite in the world.
B) A college student starts a part-time tutoring business.
C) A novelist obtains a copyright for her new book.
D) A taxi cab driver in New York City obtains a license to legally provide transportation in New York City.

Question 37

Which of the following is not an example of a barrier to entry?

A) Mighty Mitch's Mining Company owns a unique plot of land in Tanzania, under which lies the only large deposit of Tanzanite in the world.
B) A pharmaceutical company obtains a patent for a specific high blood pressure medication.
C) A musician obtains a copyright for her original song.
D) An entrepreneur opens a popular new restaurant.

Question 38

Which of the following is not an example of a barrier to entry?

A) John owns the only parcel of lakeside property with a beach that is safe for swimming. He charges admission to neighbors who want to use the beach.
B) Jackie owns the copyright to a popular song. She receives royalties every time a radio station plays her song.
C) John Jr. owns the best seafood restaurant in a popular resort area. He charges high prices because the quality of the food is so good.
D) Caroline owns the patent for a new running shoe. She receives payments from the company who manufactures the shoes.

Question 39

Which of the following would be most likely to have monopoly power?

A) an online bookstore
B) a municipal water company
C) a local restaurant
D) a grocery store

Question 40

A market structure with barriers to entry is

A) a monopoly.
B) oligopolistically competitive.
C) monopolistically competitive.
D) perfectly competitive.

Question 41

Patent and copyright laws encourage

A) creative activity.
B) research and development.
C) competition among firms.
D) Both a and b are correct.

Question 42

Which of the following is an example of a barrier to entry? i) A key resource is owned by a single firm.
Ii) The costs of production make a single producer more efficient than a large number of producers.
Iii) The government has given the existing monopolist the exclusive right to produce the good.

A) i) and ii) only
B) ii) and iii) only
C) i) only
D) i), ii), and iii)

Question 43

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 44

Patents, copyrights, and trademarks

A) are examples of government-created monopolies.
B) allow their owners to reduce the costs of what they produce.
C) generate more revenue for the government than they cost consumers in the form of higher prices.
D) All of the above are correct.

Question 45

Which of the following is an example of a barrier to entry?

A) Matthew offers free samples of his latest flavored coffee drink to entice customers to buy a cup.
B) Mark charges a lower price to students than to faculty for his tattoo services.
C) Luke charges a higher hourly price to business students than to liberal arts students for his economics tutoring.
D) John obtained a copyright for the song he wrote and recorded.

Question 46

Patents, copyrights, and trademarks

A) are examples of government-created monopolies.
B) are examples of barriers to entry.
C) allow their owners to charge higher prices.
D) All of the above are correct.

Question 47

Allowing an inventor to have the exclusive rights to market her new invention will lead to i) a product that is priced higher than it would be without the exclusive rights.
Ii) desirable behavior in the sense that inventors are encouraged to invent.
Iii) higher profits for the inventor.

A) i) and ii) only
B) ii) and iii) only
C) i) and iii) only
D) i), ii), and iii)

Question 48

Patent and copyright laws

A) encourage creative activity.
B) promote competition among firms.
C) discourage creative activity.
D) Both a and b are correct.

Question 49

The fundamental cause of monopoly is

A) incompetent management in competitive firms.
B) the zero-profit feature of long-run equilibrium in competitive markets.
C) advertising.
D) barriers to entry.

Question 50

A fundamental source of monopoly market power arises from

A) perfectly elastic demand.
B) perfectly inelastic demand.
C) barriers to entry.
D) availability of "free" natural resources, such as water or air.

Question 51

Encouraging firms to invest in research and development and individuals to engage in creative endeavors such as writing novels is one justification for

A) resource monopolies.
B) natural monopolies.
C) government-created monopolies.
D) breaking up monopolies into smaller firms.

Question 52

Patent and copyright laws are major sources of

A) natural monopolies.
B) government-created monopolies.
C) resource monopolies.
D) antitrust regulation.

Question 53

A government-created monopoly arises when

A) government spending in a certain industry gives rise to monopoly power.
B) the government exercises its market control by encouraging competition among sellers.
C) the government gives a firm the exclusive right to sell some good or service.
D) Both a and c are correct.

Question 54

A benefit to society of the patent and copyright laws is that those laws

A) help to keep prices down.
B) help to prevent a single firm from acquiring ownership of a key resource.
C) encourage creative activity.
D) discourage the production of inefficient products.

Question 55

Drug companies are allowed to be monopolists in the drugs they discover in order to

A) allow drug companies to charge a price that is equal to their marginal cost.
B) discourage new firms from entering the drug market.
C) encourage research.
D) allow the government to earn patent revenue.

Question 56

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 57

The laws governing patents and copyrights

A) promote monopolies.
B) are intended to serve private interests, not the public's interest.
C) have costs but not benefits.
D) eliminate the need for firms to engage in research and development.

Question 58

Which of the following statements is true about patents and copyrights? i) They have benefits and costs.
Ii) They lead to higher prices.
Iii) They enhance the ability of monopolists to earn above-average profits.

A) i) and ii) only
B) ii) and iii) only
C) ii) only
D) i), ii), and iii)

Question 59

The laws governing patents and copyrights

A) eliminate the need for firms to engage in research and development.
B) are intended to serve private interests, not the public's interest.
C) reduce fixed costs for firms that obtain them.
D) None of the above is correct.

Question 60

Granting a pharmaceutical company a patent for a new medicine will lead to i) a product that is priced higher than it would be without the exclusive rights.
Ii) incentives for pharmaceutical companies to invest in research and development.
Iii) higher quantities of output than without the patent.

A) i) and ii) only
B) ii) and iii) only
C) i) and iii) only
D) i), ii), and iii)

Question 61

Figure 15-1
Refer to Figure 15-1. The shape of the average total cost curve reveals information about the nature of the barrier to entry that might exist in a monopoly market. Which of the following monopoly types best coincides with the figure?

A) ownership of a key resource by a single firm
B) natural monopoly
C) government-created monopoly
D) a patent or copyright monopoly

Question 62

Which of the following is a characteristic of a natural monopoly?

A) Average cost exceeds marginal cost over large regions of output.
B) Increasing the number of firms increases each firm's average total cost.
C) One firm can supply output at a lower cost than two firms.
D) All of the above are correct.

Question 63

Figure 15-1
Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the marginal cost curve for this firm must

A) lie entirely above the average total cost curve.
B) lie entirely below the average total cost curve.
C) be U-shaped.
D) be horizontal.

Question 64

Natural monopolies differ from other forms of monopoly because they are

A) not subject to barriers to entry.
B) not regulated by government.
C) unable to sustain long-run profits.
D) are generally not worried about competition eroding their monopoly position in the market.

Question 65

Authors are allowed to be monopolists in the sale of their books in order to

A) encourage authors to write more and better books.
B) correct for the negative externalities that the Internet and television impose.
C) satisfy literary advocacy groups that exercise their lobbying power.
D) promote a society in which people think for themselves and learn from whichever books they please.

Question 66

Drug companies are allowed to be monopolists in the drugs they discover in order to

A) increase the availability of expensive but useful medications.
B) increase the overall welfare of society through better health because drug companies continually produce better medications.
C) encourage research.
D) All of the above are correct.

Question 67

Scenario 15-2
Consider a local, privately-owned electrical cooperative named Poweshiek Power Company PPCo). PPCo has just completed a clean-coal-burning electrical power plant in Iowa. Currently, PPCo can meet the electricity needs of all residents in the county. In fact, its capacity far exceeds the needs of the county. After just a few years of operation, the shareholders of PPCo experienced incredibly high rates of return on their investment due to the profitability of the corporation.
Refer to Scenario 15-2. Which of the following statements is most likely to be true? i) New entrants to the market know they will have a smaller market share than PPCo currently has.
Ii) PPCo is most likely experiencing rising marginal cost.
Iii) PPCo is a natural monopoly.
Iv) PPCo is most likely experiencing declining average total cost.

A) i) and ii) only
B) i), ii), and iii) only
C) i), iii) and iv) only
D) i), ii), iii), and iv)

Question 68

Scenario 15-2
Consider a local, privately-owned electrical cooperative named Poweshiek Power Company PPCo). PPCo has just completed a clean-coal-burning electrical power plant in Iowa. Currently, PPCo can meet the electricity needs of all residents in the county. In fact, its capacity far exceeds the needs of the county. After just a few years of operation, the shareholders of PPCo experienced incredibly high rates of return on their investment due to the profitability of the corporation.
Refer to Scenario 15-2. PPCo will continue to be a monopolist in the electricity industry only if

A) population growth leads to an increased demand for electricity.
B) there are no new entrants to the market.
C) the price of natural gas decreases.
D) All of the above are correct.

Question 69

Figure 15-1
Refer to Figure 15-1. The shape of the average total cost curve in the figure suggests an opportunity for a profit- maximizing monopolist to take advantage of

A) economies of scale.
B) diseconomies of scale.
C) diminishing marginal product.
D) increasing marginal cost.

Question 70

Scenario 15-2
Consider a local, privately-owned electrical cooperative named Poweshiek Power Company PPCo). PPCo has just completed a clean-coal-burning electrical power plant in Iowa. Currently, PPCo can meet the electricity needs of all residents in the county. In fact, its capacity far exceeds the needs of the county. After just a few years of operation, the shareholders of PPCo experienced incredibly high rates of return on their investment due to the profitability of the corporation.
Refer to Scenario 15-2. Which of the following statements is most likely to be true? i) New entrants to the market know they will have a smaller market share than PPCo currently has.
Ii) PPCo is a natural monopoly.
Iii) PPCo would experience higher profits if it were government-run.

A) i) and ii) only
B) ii) and iii) only
C) i) and iii) only
D) i), ii), and iii)

Question 71

Figure 15-1
Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the marginal cost curve for this firm

A) must lie entirely above the average total cost curve.
B) must lie entirely below the average total cost curve.
C) must be upward sloping.
D) does not exist.

Question 72

The defining characteristic of a natural monopoly is

A) constant marginal cost over the relevant range of output.
B) economies of scale over the relevant range of output.
C) constant returns to scale over the relevant range of output.
D) diseconomies of scale over the relevant range of output.

Question 73

Drug companies are allowed to be monopolists in the drugs they discover in order to

A) allow drug companies to charge a price that is equal to their marginal cost.
B) discourage new firms from entering the drug market.
C) allow the government to earn patent revenue.
D) None of the above is correct.

Question 74

Which of the following is a characteristic of a natural monopoly?

A) Fixed costs are typically a small portion of total costs.
B) Average total cost declines over large regions of output.
C) The product sold is a natural resource such as diamonds or water.
D) All of the above are correct.

Question 75

When a natural monopoly exists, it is

A) always cost effective for government-owned firms to produce the product.
B) never cost effective for one firm to produce the product.
C) always cost effective for two or more private firms to produce the product.
D) never cost effective for two or more private firms to produce the product.

Question 76

An industry is a natural monopoly when i) the government assists the firm in maintaining the monopoly.
Ii) a single firm owns a key resource.
Iii) a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

A) ii) only
B) iii) only
C) i) and ii) only
D) ii) and iii) only

Question 77

A natural monopoly occurs when

A) the product is sold in its natural state, such as water or diamonds.
B) there are economies of scale over the relevant range of output.
C) the firm is characterized by a rising marginal cost curve.
D) production requires the use of free natural resources, such as water or air.

Question 78

Scenario 15-1
Consider a transportation corporation named Reading's that has just completed the development of a new light rail system in Minneapolis. Currently, there are plenty of seats on the train, and it is never crowded. Its capacity far exceeds the needs of the city. After just a few years of operation, the shareholders of Reading's experienced incredibly high rates of return on their investment due to the profitability of the corporation.
Refer to Scenario 15-1. Which of the following statements is most likely to be true? i) New entrants to the market know they will have a smaller market share than Reading's
Currently has.
Ii) Reading's is a natural monopoly.
Iii) Reading's is most likely experiencing increasing average total cost.

A) i) and ii) only
B) ii) and iii) only
C) i) and iii) only
D) i), ii), and iii)

Question 79

Authors are allowed to be monopolists in the sale of their books in order to

A) promote a society in which people think for themselves and learn from whichever books they please.
B) correct for the negative externalities that the Internet and television impose.
C) satisfy literary advocacy groups that exercise their lobbying power.
D) None of the above is correct.

Question 80

Scenario 15-1
Consider a transportation corporation named Reading's that has just completed the development of a new light rail system in Minneapolis. Currently, there are plenty of seats on the train, and it is never crowded. Its capacity far exceeds the needs of the city. After just a few years of operation, the shareholders of Reading's experienced incredibly high rates of return on their investment due to the profitability of the corporation.
Refer to Scenario 15-1. Which of the following statements is most likely to be true? i) New entrants to the market know they will have a smaller market share than Reading's
Currently has.
Ii) Reading's is most likely experiencing decreasing average total cost.
Iii) Reading's is a natural monopoly.

A) i) and ii) only
B) ii) and iii) only
C) i) and iii) only
D) i), ii), and iii)