Question 1

A monopolist has market power because it

Accepted Answer

A monopolist has market power because it faces a downward-sloping demand curve for its own output, meaning that as it raises the price of its product, it will sell fewer units. This gives the monopolist the ability to raise prices and earn higher profits compared to a perfectly competitive market. Option B is incorrect because a monopolist cannot raise its price as much as it wishes without losing any customers. Option C is incorrect because a monopolist is not a price taker, unlike firms in a perfectly competitive market. Option D may be true in some cases, but it is not a necessary condition for a monopolist to have market power.

Question 2

Suppose a monopoly concrete contractor builds 20 driveways per month for $10,000 each.In order to increase sales to 21 driveways, the contractor must lower the price of driveways to $9,500.The marginal revenue of the 21st driveway is

Accepted Answer

Marginal Revenue is the additional revenue that a firm earns by selling one more unit of its product.

In this case, the contractor sells 20 driveways at $10,000 each, which earns a total revenue of:

$10,000 x 20 = $200,000

If the contractor wants to sell one more driveway, he must lower the price to $9,500. This means that the total revenue earned from selling 21 driveways is:

$10,000 x 20 + $9,500 x 1 = $200,000 + $9,500 = $209,500

The marginal revenue of the 21st driveway is the difference between the total revenue earned from selling 21 driveways and the total revenue earned from selling 20 driveways:

Marginal Revenue = $209,500 - $200,000 = $9,500 - $500 = -$500

Therefore, the answer is C) -$500.

Question 3

The marginal revenue of a monopolist falls below price because the firm

Accepted Answer

A monopolist faces a downward-sloping demand curve, which means that in order to sell more units, the firm must lower the price of each unit sold. Therefore, when the monopolist lowers the price on all units to sell an additional unit, it will earn less revenue on all units sold, thus leading to a marginal revenue that falls below the price.

Question 4

Both a competitive industry and a monopoly

Accepted Answer

Both a competitive industry and a monopoly face downward-sloping market demand curves. However, the other choices do not necessarily apply to both types of markets. Marginal cost pricing is typically associated with a perfectly competitive market and producing products with many identical substitutes is a characteristic of a competitive market, while maximizing profit per unit where P = MC is associated with a monopoly.

Question 5

Monopolists are price

Accepted Answer

Monopolists are price makers because they have the power to set their own price due to the lack of competition. On the other hand, competitive firms are price takers because they have no market power and must accept the market price in order to sell their goods or services.

Question 6

The marginal revenue curve is below the demand curve

Accepted Answer

The marginal revenue curve is below the demand curve for a firm that must lower its price to sell additional output. This is because for each additional unit sold, the firm must lower its price, which reduces the marginal revenue earned from that unit. In a perfectly competitive market, the demand curve and marginal revenue curve are identical, but in other market structures, such as a monopolistic or oligopolistic market, the marginal revenue curve is below the demand curve. A market characterized by economies of scale may also have a downward-sloping marginal revenue curve, but this is not always the case. Therefore, the best answer is A.

Question 7

Monopolists set prices

Accepted Answer

Monopolists determine their output level where marginal revenue equals marginal cost, and then they set their prices based on the demand curve at that level of output. This strategy maximizes their profits.

Question 8

A monopolist will find that its marginal revenue curve

Accepted Answer

A monopolist faces a downward-sloping demand curve, meaning that in order to sell more units of their product, they must lower the price for all units sold. As a result, the marginal revenue they earn from selling an additional unit is lower than the price they charge for that unit. Therefore, their marginal revenue curve lies below their demand curve and is steeper, since the additional revenue they earn from selling an extra unit is less than the price reduction needed to sell that unit.

Question 9

Market power is

Accepted Answer

Market power refers to the ability of a firm to influence the market price of a product. This is not a characteristic of all market structures and is often associated with monopolies or oligopolies rather than competitive firms. Market power typically decreases as output levels increase for a firm.

Question 10

Which of the following is likely to be a monopolist?

Accepted Answer

A drug firm with a patent granting it the exclusive right to produce a drug is likely to be a monopolist, as it has complete control over the production and sale of that particular drug. GM, Boeing, and the Indonesian restaurant are not necessarily monopolists, as there are likely to be other firms in their respective markets.

Question 11

If the entire output of a market is produced by a single seller, the firm

Accepted Answer

A single seller in the market indicates that there is no competition, which means the firm is a monopoly. The other options are not necessarily true for a monopoly.

Question 12

If a monopolist is producing a level of output where MR exceeds MC, then it should

Accepted Answer

If MR exceeds MC, then the last unit produced is earning more revenue than it is costing to produce. By increasing output, the monopolist can continue to earn additional revenue that exceeds the additional cost of production. This will increase their profits. Therefore, the monopolist should increase its output.

Question 13

The marginal revenue of a monopolist

Accepted Answer

Marginal revenue is the additional revenue that a firm receives from selling one more unit of a good or service. For a monopolist, marginal revenue is positive up to the point where total revenue is maximized. Beyond this point, producing additional units would decrease total revenue, indicating that marginal revenue becomes negative. This is because, in a monopolistic market, the firm faces a downward-sloping demand curve and must lower the price to sell additional units, which affects the revenue generated from selling previous units.

Question 14

For a monopolist, marginal revenue equals

Accepted Answer

Marginal revenue for a monopolist is defined as the change in total revenue divided by the change in quantity, which allows the firm to determine the additional revenue generated by selling one more unit of a good or service.

Question 15

If a firm can raise market price by reducing its output, then

Accepted Answer

If a firm can raise market price by reducing its output, it implies that the firm faces a downward-sloping demand curve. This is because a reduction in the firm's output leads to an increase in scarcity of the product, leading to a higher price. If the firm had no market power, it would not be able to influence the market price by reducing its output. Similarly, it would not be a price taker or engage in marginal cost pricing if it has the ability to affect market price.

Question 16

In monopoly and perfect competition, a firm should expand production when

Accepted Answer

In both monopoly and perfect competition, a firm should expand production as long as the marginal revenue earned from each additional unit produced is greater than the marginal cost of producing that unit. This is because producing more will result in increased profits as long as the marginal revenue is greater than the marginal cost. Therefore, the correct option is C where marginal revenue is above marginal cost.

Question 17

Suppose a monopoly firm produces bicycles and can sell 10 bicycles per month at a price of $700 per bicycle.In order to increase sales by one bicycle per month, the monopolist must lower the price of its bicycles by $50 to $650 per bicycle.The marginal revenue of the 11th bicycle is

Accepted Answer

The marginal revenue (MR) of the 11th bicycle is calculated by the total revenue (TR) difference between selling 11 bicycles and 10 bicycles. Selling 10 bicycles at $700 each gives $7000. Selling 11 bicycles at $650 each gives $7150. The difference, or MR, is $7150 - $7000 = $150.

Question 18

Which of the following is true for a monopolist?

Accepted Answer

Monopolists face a downward-sloping demand curve, meaning to sell additional units, they must lower the price. Unlike perfect competition where the demand curve is perfectly elastic, a monopolist's demand curve is not, and its marginal revenue curve lies below its demand curve due to the need to lower prices to sell more units, distinguishing it from option C. Options A and D describe characteristics of perfect competition, not monopoly.

Question 19

Which of the following rules is satisfied when a monopoly maximizes profits?

Accepted Answer

Monopolies maximize profits by producing the quantity where Marginal Revenue (MR) equals Marginal Cost (MC) and charging the highest price that consumers are willing to pay for that quantity. This means setting the price at the point on the demand curve where MR=MC, which ensures that the firm is not increasing costs or revenue by producing more or less than the optimal output level. Therefore, choice C - MR=MC - is the rule that is satisfied when a monopoly maximizes profit.

Question 20

If a firm can change market prices by altering its output, then it

Accepted Answer

If a firm can change market prices by altering its output, it has the ability to exercise market power. This means that the firm has some degree of control over the price of its product in the market, rather than being a price taker that has no influence on the market price. The firm can use this market power to set a price that maximizes its profits. A firm that faces a flat demand curve is a perfect competitor and is a price taker. Engaging in marginal cost pricing means setting the price equal to the marginal cost of producing an additional unit of output, which may or may not involve market power.

Quiz 10: Monopoly