Question 1

What is a network externality?

Accepted Answer

A network externality refers to a situation in which a product becomes more useful as more people use it. This can create a positive feedback loop in which an increasing number of users increases the product's value, which in turn attracts more users. This effect is often seen in the technology industry, where products like social networks, messaging apps, and online marketplaces become more valuable as more people use them.

Question 2

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

Accepted Answer

The granting of a patent or copyright gives exclusive rights to an individual or firm to produce and sell a particular product or idea. This is a common method used by governments to incentivize innovation and protect the interests of inventors and creators. Tariffs and quotas are trade measures used to restrict the imports of a particular product, while antitrust laws are used to promote competition and prevent monopolies.

Question 3

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

Accepted Answer

A high concentration ratio may indicate a lack of competition in an industry, but it does not necessarily prevent new firms from entering the industry. The other options, such as control of a key resource and economies of scale, create significant barriers to entry that may deter potential competitors. Network externalities can also make it difficult for new entrants to gain a foothold in an industry.

Question 4

The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds?

Accepted Answer

De Beers' market power comes from its control over the supply of newly mined diamonds, which allows it to maintain high prices. If previously owned diamonds became more widely available, they would provide a substitute to newly mined diamonds, reducing De Beers' market power. This would be a threat to the company's monopoly position.

Question 5

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

Accepted Answer

The 10-year protection period from generic competition for drug manufacturers is a form of patent. A patent is a legal protection of a new invention or discovery granted to the inventor or assignee, giving them the exclusive right to make, use, and sell the invention for a certain period of time. In the case of pharmaceuticals, this period is typically 10 years, during which time the manufacturer can charge a premium price for their product without competition from generic versions.

Question 6

For a natural monopoly to exist

Accepted Answer

A natural monopoly exists when a single firm can produce a given quantity of output at a lower cost than any combination of smaller firms. This occurs when there are economies of scale throughout the relevant range of market demand, meaning that as the firm produces more, its average costs decrease. Thus, the firm can produce at lower costs than any potential competitors, making it a natural monopoly. Choices A, B, and D are not necessary conditions for a natural monopoly to exist.

Question 7

In 1935, the U.S. Patent and Trademark Office issued Parker Brothers a trademark on the use of the name Monopoly for a board game. Hasbro bought Parker Brothers in 1991. Which of the following statements is true regarding the trademark on the name Monopoly for a board game?

Accepted Answer

The answer of In 1935, the U.S. Patent and Trademark...

Question 8

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

Accepted Answer

When the government makes a firm the exclusive legal provider of a good or service, it is granting them a public franchise. This means that the firm has the legal right to provide the good or service, and no other firm can compete with them without breaking the law. The government typically grants public franchises for goods or services that are essential to the public welfare, such as utilities or transportation services.

Question 9

A patent

Accepted Answer

A patent gives a firm the exclusive right to a new product for a specific period of time, usually 20 years from the date the patent application is filed with the government. This means that no one else can manufacture, use, or sell the patented product without the permission of the patent holder during that time frame. Patents are typically granted for inventions such as new machines, processes, or chemical compounds.

Question 10

A virtuous cycle occurs

Accepted Answer

A virtuous cycle refers to a positive feedback loop where the success of one element leads to the success of another, creating further success. In the case of a firm, if it can attract enough buyers initially, it can increase the usefulness of the product, which in turn attracts even more buyers. This creates a virtuous cycle of increasing sales and profitability for the firm. Option A refers to a different phenomenon (lobbyists influencing Congress), while option B talks about using monopoly profits to create new products, but does not necessarily lead to a virtuous cycle. Option D talks about taking advantage of economies of scale, which can reduce the price of the product to boost sales, but does not necessarily lead to a virtuous cycle unless the reduced price itself attracts more buyers.

Question 11

What is the difference between a public franchise and a public enterprise?

Accepted Answer

A public franchise refers to a legal right to provide a good or service exclusively. For example, a public franchise may grant a specific cable company the exclusive right to provide cable services in a certain area. On the other hand, a public enterprise refers to a service that is owned and provided by the government directly to consumers, such as public transportation or utilities.

Question 12

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?

Accepted Answer

The extension of patent protection for biologic drugs to 12 years acts as a barrier to entry by blocking the introduction of generic competitors, effectively restricting competition and consolidating market power for biologic drug manufacturers. This is a form of entry being blocked by government action, as it is a policy decision rather than a result of natural market forces or control of a key resource. Network externalities and economies of scale creating a natural monopoly are not as applicable in this context.

Question 13

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

Accepted Answer

The primary purpose of patents is to provide incentives for firms to invest in research and development (R&D) to create new products by granting them temporary monopolies over their creations. This encourages firms to invest in R&D, which can help drive innovation and increase productivity. By granting patents, governments aim to strike a balance between the interests of inventors and the public interest, which often involves promoting competition. However, some argue that too much patent protection can hinder competition by preventing new entrants from entering markets or creating barriers to entry for competitors.

Question 14

The Aluminum Company of America (Alcoa) had a monopoly until the 1940s because

Accepted Answer

Alcoa had control of almost all the available supply of bauxite, which gave them a significant advantage over any potential competitors. This control of the raw materials allowed them to maintain a monopoly until the 1940s when other companies began developing new methods for producing aluminum.

Question 15

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

Accepted Answer

After 20 years, patent protection for the drug ends, allowing other firms to produce and sell less expensive generic versions of the drug. This increase in competition lowers the price of the drug and eliminates the economic profits for the original firm.

Question 16

In a natural monopoly, throughout the range of market demand,

Accepted Answer

In a natural monopoly, there are economies of scale, which means that as output increases, the average total cost decreases. Therefore, the marginal cost is below the average total cost and pulls the average total cost downward. This is because the fixed cost is spread over a larger quantity of output, leading to a lower average cost per unit of output.

Question 17

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

Accepted Answer

When patents on drugs expire, other firms are free to produce chemically identical drugs. This increases competition and reduces the profits that had been earned by the firms that received patents. This often leads to lower prices for consumers. While firms may try to obtain additional patent protection by making cosmetic changes, this strategy is limited and eventually the market will become more competitive. Therefore, option C is the best choice. Options A, B, and D are incorrect. While doctors may recommend brand-name drugs, patients have the option to choose a cheaper generic version of the same drug once the patent expires. Prices may be high initially without patent protection, but competition will eventually lead to lower prices. While firms may try to obtain additional patent protection, this is not always successful and does not change the fact that competitors can produce the same drug once the original patent expires.

Question 18

To have a monopoly in an industry there must be

Accepted Answer

In order to have a monopoly, there must be barriers to entry that prevent other firms from entering the industry and competing with the monopolist. This could be due to high startup costs, economies of scale, or legal restrictions. Without these barriers, other firms would enter and compete, preventing the monopolist from controlling the market. The other options (B, C, D) may contribute to a firm's ability to maintain a monopoly, but they are not necessary conditions for a monopoly to exist.

Question 19

The United States Post Office

Accepted Answer

The United States Post Office has a legal monopoly on the provision of first-class mail service, as granted by the Postal Accountability and Enhancement Act of 2006. This means that no individual or company can compete in the first-class mail market. However, USPS does face competition in other mail and package delivery services from companies like FedEx and UPS. Though, it does not mean USPS can ignore the prices for mail services charged by its rivals.

Question 20

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

Accepted Answer

A public franchise is a type of monopoly that is created by government action. The government grants exclusive rights to a particular company to provide a certain product or service, thereby preventing other firms from entering the market. This is a common barrier in industries such as utilities, transportation, and telecommunications.

Quiz 15: Monopoly and Antitrust Policy