Question 1

Both a competitive industry and a monopoly

Accepted Answer

Both a competitive industry and a monopoly face downward-sloping market demand curves. However, using marginal cost pricing or maximizing profit per unit where P=MC are specific strategies that may only apply to one or the other, not both. Similarly, producing products that have many identical substitutes is a characteristic of a competitive industry, not a monopoly.

Question 2

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. Initially, TR for 10 bicycles is 10 * $700 = $7000. After the price drop to $650, TR for 11 bicycles is 11 * $650 = $7150. The difference, or MR, is $7150 - $7000 = $150.

Question 3

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

Accepted Answer

In both monopoly and perfect competition, a firm should expand production when marginal revenue is above marginal cost. This is because producing an additional unit will bring in more revenue than the additional cost of producing it, leading to an increase in profit. When marginal revenue is below marginal cost or price is below marginal cost, producing an additional unit would actually result in a loss for the firm. When price is above marginal cost, it may be profitable for the firm to expand production, but this alone is not a sufficient condition as it depends on the relationship between marginal revenue and marginal cost.

Question 4

The marginal revenue of a monopolist

Accepted Answer

The marginal revenue of a monopolist is positive up to the rate of output that maximizes total revenue because at lower output levels, the increase in revenue from selling an additional unit (marginal revenue) is greater than the decrease in revenue from lowering the price to sell that additional unit. However, beyond the point where total revenue is maximized, marginal revenue becomes negative due to the decrease in price needed to sell additional units. Therefore, options A and B are incorrect because marginal revenue is not equal to price at all output levels and is not necessarily above the demand curve. Option D is incorrect because marginal revenue is not negative up to the point where total revenue is maximized.

Question 5

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

Accepted Answer

A firm with market power has the ability to influence the market price by changing its output. This indicates that the firm has some degree of control over the market and can affect the behavior of competitors and buyers.

Question 6

Monopolists are price

Accepted Answer

Monopolists are price makers because they have the ability to set their own price due to lack of competition. On the other hand, competitive firms are price takers because they have to accept the market price set by the forces of supply and demand.

Question 7

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. This measures the additional revenue generated by selling one more unit of a good or service.

Question 8

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 change in revenue from selling one additional unit. In this case, the contractor is decreasing the price of each driveway from $10,000 to $9,500 in order to sell one more driveway. 
The decrease in price means that the revenue from the 21st driveway is $9,500. However, if the contractor had continued to sell driveways at $10,000 each, they would have earned $200,000 in revenue (20 driveways x $10,000 per driveway). 
So, the marginal revenue for the 21st driveway is:
$9,500 - $10,000 = -$500 
This is a negative number, indicating that the contractor is losing money by selling the 21st driveway at a lower price. Therefore, the best choice is C.

Question 9

Monopolists set prices

Accepted Answer

Monopolists set prices at the output level where marginal revenue equals marginal cost in order to maximize profits. This is because at this point, the additional revenue earned from selling one more unit equals the additional cost of producing one more unit. Setting prices on the marginal revenue curve or at the minimum of the long-run average total cost curve is not optimal for maximizing profits, while monopolists do not have the freedom to set prices without constraints since they still have to consider demand and potential competition from substitute goods.

Question 10

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

Accepted Answer

A market with a single seller is a monopoly.

Question 11

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, which is characteristic of firms in imperfectly competitive markets (e.g., monopolistic competition, oligopoly, and monopoly). In such markets, to increase sales, a firm must reduce the price of its product, which means the additional revenue generated by selling one more unit (marginal revenue) is less than the price at which the unit is sold, causing the marginal revenue curve to lie below the demand curve.

Question 12

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. This means that it can influence the price of its product by adjusting the quantity it supplies to the market. If a monopolist increases the price, the quantity demanded will decrease, but the decrease in quantity demanded will be less than proportionate to the increase in price. As a result, the monopolist can increase its profits by raising the price of its product.

Question 13

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 suggests that there is a downward-sloping demand curve. This means that the level of output produced has an impact on the price that consumers are willing to pay for the product. Therefore, the firm in question has some degree of market power, and cannot be considered a price taker. This also means that the firm is not engaging in marginal cost pricing, as they are able to influence the market price through their level of output.

Question 14

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 in perfect competition, where firms face a perfectly elastic demand curve, a monopolist has market power and can set prices above marginal costs. This necessitates lowering prices to increase sales, affecting all units sold due to the single price nature of most monopolies.

Question 15

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

Accepted Answer

When a monopoly maximizes profits, it chooses the level of output where marginal revenue (MR) equals marginal cost (MC). This is because at this level, the firm is producing the quantity of goods where the marginal revenue gained from an additional unit sold is equal to the marginal cost of producing that unit. As a result, the monopoly can maximize its profits by setting the price at the level corresponding to this quantity of output. Therefore, the correct rule that is satisfied when a monopoly maximizes profits is MR = MC.

Question 16

Market power is

Accepted Answer

Market power refers to the ability of a firm or a group of firms to influence the market price of a product. This ability is not present in a perfectly competitive market as no single firm has the power to change the market price. Therefore, choice B is the correct answer. Choices A, C, and D are incorrect as they do not accurately describe market power.

Question 17

Which of the following is likely to be a monopolist?

Accepted Answer

A drug firm with a patent has exclusive rights to produce a particular drug, which means there are no other firms producing that drug, resulting in a monopoly. The other options listed may have a large market share, but they still face competition from other firms in their industry, so they are not monopolies.

Question 18

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

Accepted Answer

If MR exceeds MC, the monopolist can increase their profits by increasing their output until MR is equal to MC. This is because producing an additional unit of output generates more revenue than the cost of producing the unit, which increases the monopolist's profit.

Question 19

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

Accepted Answer

A monopolist faces a downward-sloping demand curve, meaning that in order to sell more units of output, they must lower the price on all units sold, resulting in a lower marginal revenue. This is due to the fact that the monopolist is the sole producer within the market, and therefore has the power to set prices higher than their marginal cost. However, doing so will result in a lower quantity demanded, leading to a lower total revenue. As the monopolist lowers their price to sell more units, the marginal revenue from each additional unit sold will also decrease.

Question 20

A monopolist will find that its marginal revenue curve

Accepted Answer

A monopolist's marginal revenue curve lies below its demand curve because to sell additional units, the monopolist must lower the price not only for the additional units but also for all previous units sold. This results in the marginal revenue being less than the price at every quantity except the first unit sold, making the marginal revenue curve steeper than the demand curve.

Quiz 10: Monopoly