Deck 8: Monopoly

Question 1

A market is considered a pure monopoly when:

A)all firms in the market sell homogeneous goods.
B)there is a single buyer for the goods produced in the market.
C)the firm produces a good that has imperfect substitutes.
D)a single firm produces a good that has no substitutes.
E)there are low entry barriers in the market.

Answer 1

D

Question 2

Cartels are inherently unstable because individual members:

A)face horizontal demand curves.
B)tend to produce above their quotas.
C)are culturally and politically heterogeneous.
D)produce highly differentiated products.
E)have a low elasticity of supply.

Answer 2

B

Question 3

Which of the following is likely to take place if regulators split a natural monopoly into two smaller firms?

A)The number of firms in the market will increase but the market price will be unchanged.
B)The output in the industry will increase.
C)The cost of production in the industry will increase.
D)The market demand curve will become flatter.
E)The total industry profits will increase.

Answer 3

C

Question 4

A monopolist produces the equilibrium output of 350 units at a price of $50.Given that the monopolist's marginal cost is equal to $15 and the monopolist earns a profit of $5,500,what is the monopolist's approximate average cost?

A)$66
B)$34
C)$70
D)$16
E)$23

Question 5

Which of the following is true of a pure monopoly?

A)A pure monopoly can raise the market price indefinitely.
B)A pure monopoly is typically more efficient than other firms in the market.
C)A pure monopoly faces a horizontal demand curve.
D)A pure monopoly restricts output below the competitive level.
E)A pure monopoly produces at the level where price equals marginal cost.

Question 6

The following figure shows the demand curve [ES],the average cost curve [AC],the marginal cost curve [MC],and the marginal revenue curve [MR] for a firm.
Figure 8-1

Refer to Figure 8-1.If the firm operates as a monopoly in an unregulated market,its profit-maximizing price and output would be _____,respectively.

A)0C and 0Q
B)0A and 0Q
C)0B and 0R
D)0D and 0P
E)0A and 0T

Question 7

Compared to a perfectly competitive industry,a monopolist will generally produce:

A)a greater level of output and will sell it at a lower price.
B)a greater level of output but will sell it at a higher price.
C)a smaller level of output and will sell it at a lower price.
D)a smaller level of output but will sell it at a higher price.
E)roughly the same level of output but will sell it at a higher price.

Question 8

If the regulator institutes average-cost pricing in a natural monopoly market,then:

A)the firm makes zero economic profit.
B)the firm has an incentive to produce at minimum cost.
C)the marginal benefit to the consumer is less than marginal cost to the firm.
D)firms in the market will produce at the efficient level.
E)consumer surplus in the market is maximized.

Question 9

A monopoly earns positive economic profits in the long run because _____.

A)there are barriers to entry in the market
B)demand in a monopoly market is perfectly elastic
C)it faces a kinked demand curve
D)it operates with diseconomies of scale
E)it operates with an optimal plant size

Question 10

The following figure shows the demand curve [ES],the average cost curve [AC],the marginal cost curve [MC],and the marginal revenue curve [MR] for a firm.
Figure 8-1

Refer to Figure 8-1.Under average-cost pricing,the equilibrium price and output in the market are _____,respectively.

A)0B and 0R
B)0A and 0T
C)0C and 0Q
D)0D and 0P
E)0A and 0Q

Question 11

The following figure shows the demand curve [ES],the average cost curve [AC],the marginal cost curve [MC],and the marginal revenue curve [MR] for a firm.
Figure 8-1

Refer to Figure 8-1.The efficient level of output in the market is _____.

A)0R - 0P
B)0R
C)0Q
D)0P
E)0T

Question 12

Which of the following does not contribute to the existence of monopoly power?

A)A continuously decreasing long-run average cost curve
B)The possession of a patent
C)The control of essential inputs in the production process
D)A pure cost or quality advantage
E)A perfectly elastic market demand curve

Question 13

The basic objective of a cartel is to:

A)maximize profit for the largest,most influential members.
B)increase the total consumer surplus in the market.
C)produce the highest output level possible.
D)secure monopoly profits for its members.
E)successfully practice price discrimination in the market.

Question 14

Which of the following is true of a profit-maximizing competitive firm in the long run?

A)The firm produces at the point where price is equal to marginal cost.
B)The firm produces at the point where average cost equals marginal cost when average cost is at its minimum point.
C)The demand curve faced by all firms in the industry is downward sloping.
D)The firm makes positive economic profit in the long run.
E)In the long run,there is a deadweight loss in a competitive market.

Question 15

Which of the following is true of pure monopolies?

A)Monopolies earn positive economic profits in the long run.
B)Monopolies produce output that is higher than the competitive level to maximize profits.
C)Monopolies produce products that have a negligible marginal cost but a high fixed cost.
D)Monopolies reduce welfare by engaging in excessive product differentiation.
E)Monopolies maximize consumer surplus at the cost of producer surplus.

Question 16

Industry demand is given by P = 200 - 0.4Q,where P = price and Q = quantity produced.The long-run industry costs are: average cost [AC] = marginal cost [MC] = $80.Based on this information,which of the following is true?

A)If the market is a pure monopoly,the price of the good will be $120.
B)If the market is perfectly competitive,300 units of the good will be produced.
C)If the market is perfectly competitive,the price of the good will be $100.
D)Under both monopoly and perfect competition,average revenue = $80.
E)If the market is a pure monopoly,200 units of the good will be produced.

Question 17

A monopolist produces the equilibrium output of 400 units at a price of $40.Given that the monopolist's marginal cost is equal to $15 and average cost is equal to $23,what is the monopolist's profit?

A)$6,800
B)$800
C)$1,600
D)$4,000
E)$1,000

Question 18

A monopolist maximizes profit by producing _____.

A)on the inelastic portion of the demand curve
B)at the level where average cost is minimized
C)at the point where the cost of producing the last unit of output is equal to the price of that unit
D)at the output level where marginal revenue equals marginal cost
E)at the level where the deadweight loss in the market is zero.

Question 19

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

A)The firm's average costs decline over all levels of output.
B)The firm's elasticity of supply is very low.
C)The firm does not incur any sunk costs.
D)The firm faces a horizontal demand curve.
E)The firm makes zero economic profit.

Question 20

The following figure shows the demand curve [ES],the average cost curve [AC],the marginal cost curve [MC],and the marginal revenue curve [MR] for a firm.
Figure 8-1

Refer to Figure 8-1.If the regulator institutes marginal-cost pricing in the market,then:

A)marginal cost = average cost.
B)average revenue = marginal cost.
C)marginal cost = marginal revenue.
D)price = marginal cost = marginal revenue.
E)price = marginal cost < average cost.

Question 21

Many natural monopolies are regulated.Explain the rationale for such regulation.

Question 22

Which of the following is the best example of product differentiation?

A)A cookie manufacturer introduces a new variant of cookies for Halloween.
B)A firm that sells printers starts a new manufacturing unit to manufacture printer cartridges.
C)A firm that produces laptops introduces a new line of tablet personal computers.
D)A leading women's fashion house introduces a line of men's clothing.
E)A supermarket introduces a range of pre-packaged salads.

Question 23

Explain why monopolies are economically inefficient.

Question 24

A monopolist faces the demand curve P = 100 - 2Q,where P = price and Q is quantity demanded.If the monopolist has a total cost of C = 50 + 20Q,determine its profit-maximizing price and output.

Question 25

Which of the following,if true,would be an example of a monopolistically competitive industry?

A)In the utilities industry,average cost declines over all levels of output.
B)In the automobile industry,fixed costs as well as variable costs are high.
C)In the retail trade industry,a large number of firms provide similar products.
D)In the steel industry,a dominant part of the market is served by one firm.
E)In the pharmaceuticals industry,the entire market is served by a small number of large firms.

Question 26

How useful is the Lerner index as a measure of monopoly power?

Question 27

Unlike perfectly competitive markets,monopolistically competitive markets _____.

A)have significant barriers to entry
B)face declining average costs at all levels of output
C)have fewer firms
D)operate under economies of scale
E)produce differentiated products

Question 28

The demand curve faced by individual firms under monopolistic competition is _____.

A)perfectly elastic
B)perfectly inelastic
C)a downward-sloping curve
D)an upward-sloping curve
E)the same as the market demand curve

Question 29

Which of the following is a characteristic of a monopolistically competitive firm as opposed to a monopoly firm?

A)Monopolistically competitive firms make positive economic profit in the long-run unlike monopoly firms.
B)Monopolistically competitive firms face downward sloping demand curves unlike monopoly firms.
C)Monopolistically competitive firms do not face entry barriers unlike monopoly firms.
D)Monopolistically competitive firms produce goods that have no substitutes unlike monopoly firms.
E)Monopolistically competitive firms produce at the level where marginal revenue equals marginal cost unlike monopoly firms.

Question 30

Which of the following holds good in the long run under monopolistic competition?

A)Price = marginal cost
B)Price = average cost
C)Price > average cost > marginal cost
D)Price > average cost = marginal cost
E)Marginal revenue = price

Question 31

The demand curve for a monopolistically competitive firm slopes downward because:

A)the demand for the product drops to zero after a slight price increase.
B)the product has close substitutes produced by competing firms.
C)there is a very little brand loyalty towards a single firm's product.
D)customers are not influenced by advertising.
E)buyers are not sensitive to changes in the price of the product.

Question 32

The profit margins for fast food firms like Wendy's have fallen because of an increase in competition from similar fast food chains and microwaveable food available in supermarkets.Based on this information,which of the following is true?

A)The absolute value of price elasticity of demand for Wendy's fast food is low.
B)Wendy's operates as a monopoly firm in the fast food market.
C)The fast food market is monopolistically competitive.
D)Wendy's fast food is an inferior good for most consumers.
E)There are strategic entry barriers in the fast-food market.

Question 33

How can the quality of a product serve as an entry barrier in a market?

Question 34

In the long run,monopolistically competitive firms _____.

A)earn zero economic profit
B)face perfectly elastic demand curves
C)tend to standardize their products
D)produce output at minimum marginal cost
E)merge and form a few dominant firms to maximize profit

Question 35

Why are substantial economies of scale considered a barrier to entry?

Question 36

Carefully define and describe a natural monopoly.

Question 37

In the long run,the economic profit earned by a firm under monopolistic competition:

A)is positive because firms produce with excess capacity.
B)is zero because of price wars among a small number of firms.
C)is zero because of free entry and exit possibilities in the market.
D)is positive because of advertising and product differentiation by the firms.
E)is positive because of collusive behavior between firms.

Question 38

In comparing monopolistic competition to perfect competition,the major difference lies in:

A)the number of firms in each industry.
B)the typical firm size in each industry.
C)the degree of entry barriers in each industry.
D)the demand curves faced by individual firms in each industry.
E)the long-run profits of firms in each industry.

Question 39

Which of the following is a criticism of average-cost pricing as a regulatory response to a natural monopoly?

A)With average-cost pricing,the output produced is lower than the efficient level of output.
B)Firms that practice average-cost pricing suffer persistent losses.
C)Imperfect information about the firm's costs reduces the effectiveness of average-cost pricing.
D)Average-cost pricing reduces the firm's economic profit but also reduces consumer welfare.
E)With average-cost pricing,the price in the market is lower than the efficient price.

Question 40

When competing firms or nations collude to form a cartel,the intention is to set one common price.This tendency to avoid competition should bring about stability.Paradoxically,however,cartels are usually unstable.Why?

Question 41

Describe the different types of entry barriers and their importance to the study of monopoly.

Question 42

Kiwi Inc.dominates the wholesale chicken market in New Zealand.Its production cost is: long-run average cost [LAC] = long-run marginal cost [LMC] = $2 per pound and demand is given by P = 6 - 2Q,where P denotes price per pound and Q denotes output (in millions of pounds).
(a)Determine Kiwi's output and price (presuming it faces no other competitors).

Question 43

Regulatory authorities tend to be concerned about barriers to entry.Why are barriers so important?

Question 44

Most people believe that monopolies always have high profits,yet some unregulated monopolies might have very low earnings.
(a)Why might a monopoly have little or no economic value? Explain.

Question 45

Based on your understanding of monopolistic competition,list five examples of real firms that operate in monopolistically competitive markets.

Question 46

A monopolist faces the price equation: P = 1,000 - 0.5Q,and total cost: C = 50,000 + 100Q + 0.4Q2.
(a)Determine the price and output that maximize total revenue,and the level of profit.

Question 47

Carefully explain how short-run equilibrium and long-run equilibrium in monopolistic competition differ.Use graphs to illustrate your answer.

Question 48

In a perfectly competitive market,industry demand is: P = 850 - 2Q,and industry supply is: P = 250 + 4Q (Supply is the sum of the marginal cost curves of the firms in the industry).
(a)Determine price and output under perfect competition.

Question 49

The demand for a good produced by a firm has been reliably measured by P = 100 - 5Q,where P is price in dollars and Q is output.If the total cost [C] function is given by C = 10Q,what is the optimal level of output produced by the monopolist?

Question 50

Under patent protection,a firm has a monopoly in the production of a high-tech component.Market demand is estimated to be P = 100 - 0.2Q.The firm's economic costs are given by average cost [AC] = marginal cost [MC] = $60 per component.
(a)Determine the firm's output and price.

Question 51

Compare and contrast a monopolistically competitive firm and a perfectly competitive firm.

Question 52

Why do monopolistically competitive firms have a tendency to advertise much more than perfectly competitive firms?