Deck 10: Monopoly

Question 1

One difficulty in identifying a monopoly is:

A)estimating demand elasticities.
B)defining the relevant market.
C)estimating firm's marginal cost functions.
D)estimating firm's marginal revenue.

Answer 1

defining the relevant market.

Question 2

If MR is greater than MC, a profit maximizing monopolist should:

A)calibrate all machinery.
B)hold output constant.
C)decrease output.
D)increase output.

Answer 2

increase output.

Question 3

A monopolist faces a demand function given by Q = 50 -P and has a cost function C =3Q²+ 10Q +
50. If the government imposes a lump sum tax of $50, the monopoly price is now greater than the pre- tax monopoly price.

A)$0.
B)$10.
C)$3.
D)$5.

Answer 3

$0.

Question 4

Consider a monopoly with inverse demand function p = 20 - y and cost function c(y)= 4 + y². The profit maximizing output is:

A)5.
B)2.
C)10.
D)4.

Question 5

A downward- sloping AR curve implies that:

A)AR is below MR at all positive levels of output.
B)price is falling as output rises.
C)TR is falling as output increases.
D)profits are decreasing as price falls.

Question 6

The relationship between MR and p means that when demand is elastic, marginal revenue is:

A)zero.
B)negative.
C)positive.
D)undefined.

Question 7

If a tax imposed on a monopolist causes marginal costs to increase then the consumer price:

A)will rise by less than the tax if demand is inelastic
B)will always rise by less than the tax
C)will always rise by more than the tax
D)will rise by more than the tax if demand is inelastic

Question 8

Average cost pricing is an inefficient regulatory mechanism because:

A)if AC does not equal MC, price is too high or too low.
B)if AC equals MC, price is too high or too low.
C)if AC does not equal MC, output is too large or too small.
D)if AC equals MC, output is too large or too small.

Question 9

A book vendor can produce a book at a constant MC equal to zero, and its potential buyers have the following reservation prices: $55, $50, $45, $40, $35, $30, $25, $20, $15, $10, $5. Suppose the book vendor can identify each buyer's reservation price and is able to set an individual price for each buyer. In order to maximize profits, the monopolist will sell:

A)12 books.
B)10 books.
C)11 books.
D)8 books.

Question 10

If p = 10 - y and TC(y)= 4y, then AC:

A)increases as output increases.
B)is independent of output.
C)falls as output increases.
D)is rising at low output and falling at high output.

Question 11

Suppose the price elasticity of demand at the profit maximizing output for a monopolist is - 3. If the monopolist's marginal cost is $6 per unit, what is the profit maximizing price?

A)12
B)9
C)3
D)6

Question 12

A monopolist is a natural monopolist if a potential entrant faces:

A)an inelastic residual demand schedule.
B)AC above the residual demand curve.
C)a higher AC curve than the monopolist.
D)decreasing returns to scale over a significant range of output.

Question 13

All but which one of the following statements are true, given a downward- sloping linear demand function?

A)MR is less than AR for all positive quantities.
B)When TR is at a maximum, MR is zero.
C)When the TR is increasing, AR is falling.
D)When TR is falling, price exceeds MR.

Question 14

Which of the following is an efficient regulatory mechanism for a monopolistic industry?

A)a regulatory mechanism which makes MR coincide with market demand
B)rate of return regulation
C)distributing supranormal profits to consumers
D)average- cost pricing

Question 15

A profit maximizing monopolist will change its price in response to all but which one of the following?

A)increase in its FC
B)an increase in a sales tax imposed on its product
C)a rightward shift in its demand curve
D)an upward shift in its variable cost curve

Question 16

Suppose a proportional tax is imposed on a monopolist's profits. Relative to the pretax situation, the monopolist will:

A)produce the same output and charge the same price as before the tax.
B)encourage new firms to enter and share the tax burden.
C)produce less, decreasing TC.
D)produce the same output, increase the price, and pass the tax to consumers.

Question 17

Suppose a monopoly has strictly positive marginal costs. Compared to the profit maximizing output, the output that maximizes sales revenue is:

A)higher.
B)cannot be compared.
C)lower.
D)equal.

Question 18

A market structure characterized by monopoly is one in which:

A)a monopolist manages its affairs in such a way that entry is deterred.
B)a monopolist operates in a complacent fashion.
C)a monopolist manages to operate at the efficient scale of production.
D)a monopolist maximizes profits by producing where MR = MC.

Question 19

An important difference between competitive and monopoly markets is that in a competitive market:

A)no gains from trade are realized while all are in a monopoly.
B)all gains from trade are realized while they are not in a monopoly.
C)some gains from trade are realized while all are in a monopoly.
D)some gains from trade are realized while they are not in a monopoly.

Question 20

A firm is a monopoly if:

A)MR decreases with output.
B)no other firm produces the same good or a close substitute.
C)MR increases with output.
D)its AC is falling as output rises.

Question 21

The marginal revenue of a good that costs $5 and has an own- price elasticity (in absolute value)equal to 0.2 is:

A)- 20.
B)- 10.
C)10.
D)20.

Question 22

A book vendor can produce a book at a constant MC equal to zero, and its potential buyers have the following reservation prices: $55, $50, $45, $40, $35, $30, $25, $20, $15, $10, $5. If the book vendor must announce a take it or leave it price (i.e., he cannot price discriminate), what price maximizes profits?

A)$30
B)$35
C)$25
D)$40

Question 23

A proportional tax on a monopolist's profits will:

A)leave both profits and output unchanged.
B)have no effect on output.
C)lead to an increase in output accompanied by a fall in profits.
D)lead to a decrease in output and a rise in profits.

Question 24

Average- cost pricing is inefficient for monopolists because it:

A)may induce production where price is not equal to MC.
B)provides an incentive to minimize costs of production.
C)requires that all consumers pay the same price.
D)does not allow a fair rate of return.

Question 25

If the market demand curve has an elasticity of - 4, then the marginal revenue for a monopolist:

A)is half the price.
B)is not related to the price.
C)is three- quarters of the price.
D)is equal to the price.

Question 26

Which of the following is true at the output level where P=MC?

A)The monopolist is maximizing profit.
B)The monopolist is not maximizing profit and and should decrease output.
C)The monopolist is not maximizing profit and and should increase output.
D)The monopolist is earning a positive profit.

Question 27

An unregulated monopolist is inefficient because:

A)the monopolist has no incentive to minimize costs of production.
B)the MC of the last unit produced exceeds market price.
C)price exceeds MC at the profit maximizing output.
D)not all market demand is satisfied at the profit- maximizing price.

Question 28

If a monopolist's price is twice the marginal cost, the price elasticity of demand is:

A)- 1.
B)- 1/2.
C)- 1/3.
D)- 2.

Question 29

Which of the following statements about elasticity are true for a monopolist?

A)when marginal revenue is negative, demand is price elastic
B)marginal revenue revenue is maximized when elasticity is equal to one
C)a monopolist's demand curve always income elastic
D)when marginal revenue is positive, demand is price elastic

Question 30

The total cost function for a monopolist is TC = 100 + 4Q². If the demand for the monopolist's output can be expressed as P = 120 - 2Q, the deadweight loss to society of this monopoly is equal to:

A)100.
B)60.
C)40.
D)20.

Question 31

A monopolist has no incentive to minimize its costs of production when:

A)a regulatory agency imposes an efficient regulatory mechanism.
B)it is unregulated.
C)the regulatory agency imposes rate- of- return regulation.
D)the regulatory agency imposes MC pricing.

Question 32

Suppose a profit maximizing monopolist has total costs C(Y)= 10Y. The monopolist is charging a profit maximizing price or p = 15. If market demand has a constant price elasticity, then the price elasticity of demand must be equal to:

A)1.
B)3.
C)3/2.
D)2/3.

Question 33

A monopoly faces the following demand curve P = 100 - y and MC = 20. The profit- maximizing price and quantity are, respectively:

A)$40; 60.
B)$45; 55.
C)$80; 20.
D)$60; 40.

Question 34

A monopolist faces a demand function given by Q = 50 -P and has a cost function
C =3Q²+ 10Q + 50. If the government imposes a lump sum tax of $50, the monopoly price is:

A)$100.
B)$3.
C)$10.
D)$5.

Question 35

In deciding whether to enter a market, a potential entrant takes the output of existing firms as given. This is known as

A)the Coase theorem
B)the Hicksian effect
C)the Slutsky effect
D)the Sylos postulate

Question 36

When no other firm will enter the market when a monopolist produces the standard profit maximizing output, the monopoly is:

A)an anti- competitive monopoly.
B)a natural monopoly.
C)a duopoly.
D)an only monopoly.

Question 37

Natural monopolies are:

A)characterized by a downward- sloping TC function.
B)characterized by declining AC over significant output ranges.
C)protected by legal barriers to entry.
D)facing a perfectly inelastic demand curve.

Question 38

Which of the following statements about the profit maximizing quantity of output is false?

A)the Profit curve is flat
B)Total Revenue = Total Cost
C)the TR and TC curves are parallel
D)Marginal Revenue = Marginal Cost

Question 39

If MC is greater than MR, a profit maximizing monopolist should:

A)calibrate all machinery.
B)hold output constant.
C)decrease output.
D)increase output.

Question 40

The fundamental difference between a perfectly competitive and monopolistic profit maximization problem is that, in a competitive market MR:

A)diminishes as quantity increases while in a monopoly it is fixed.
B)is fixed while in a monopoly it diminishes as quantity increases.
C)increases as quantity increases while in a monopoly it is fixed.
D)diminishes as quantity increases while in a monopoly it increases.

Question 41

A monopolist faces a demand function given by Q = 50 -P and has a cost function C =3Q²+ 10Q +
100. If the government imposes a lump sum tax of $100, the monopoly will:

A)decrease its output.
B)cease production.
C)increase its price.
D)not modify its output.

Question 42

For a firm to be a natural monopoly, a potential entrant's revenues are:

A)higher than its total costs.
B)lower than its total costs.
C)lower than its fixed costs.
D)higher than its fixed costs.

Question 43

A regulatory agency can prevent a natural monopoly from earning supranormal profits by forcing it to operate:

A)at the minimum of the AC function.
B)where p = MC.
C)where p = AC.
D)within the inelastic portion of the market demand curve.

Question 44

Which of the following is not a possible cause of monopoly?

A)warranties
B)patents
C)falling average costs
D)government franchise grants

Question 45

A problem with average cost regulation of monopoly is that:

A)regulators are overwhelmed by pressure.
B)firms stops maximizing profits.
C)firms cease to minimize costs.
D)firms become less capital intensive.

Question 46

Which of the following acts as a barrier for natural monopolist?

A)ownership of a key resource
B)a government license
C)increasing returns to scale
D)possession of a patent

Question 47

A necessary condition for a monopolist to maximize profit is that:

A)the slope of the TC and TR functions are the same.
B)the last unit produced reduced revenue and cost by the same amount.
C)the TC curve is upward sloping.
D)it is producing at the minimum of its AC function.

Question 48

From last year to this year, the markup of a monopoly has decreased. We can conclude that, in absolute value, the price elasticity of demand has:

A)remained the same.
B)decreased.
C)increased.
D)we cannot conclude.

Question 49

In the case of a monopoly, the supply curve:

A)is given by the marginal cost curve above average variable cost.
B)is given by the marginal revenue curve.
C)is given by the demand curve.
D)does not exist.

Question 50

Last year, the price elasticity of demand for a monopolist - 3. This year, the price elasticity decreased to - 4. From last year to this year, the monopoly markup has:

A)decreased.
B)increased.
C)remained the same.
D)we cannot conclude.

Question 51

One peanut seller in the park

A)is a perfectly competitive firm in a small market.
B)is a local monopoly.
C)is an oligopoly.
D)is a monopoly.

Question 52

Consider a monopoly with inverse demand function p = 20 - y and cost function c(y)= 4 + y². The maximum profit is equal to:

A)12.
B)55.
C)36.
D)46.

Question 53

Which of the following is not a way to regulate a natural monopoly?

A)2- tier pricing
B)ATC pricing
C)scale pricing
D)rate of return pricing

Question 54

Marginal revenue and elasticity:

A)are positively related.
B)are related only when the demand curve is linear.
C)are unrelated.
D)are inversely related.

Question 55

If a monopolist faces a demand curve given by p = a - by, then TR is maximized when:

A)MR(y)= a - 2by = MC(y).
B)y = a/b.
C)p = a/b.
D)y = a/(2b).

Question 56

The marginal revenue curve:

A)is the change in total revenue for a change in output.
B)is the change in total revenue when one more unit is produced.
C)is always less than price.
D)is never equal to the average revenue.

Question 57

If p = 20 - y and TC(y)= 8y, then a profit- maximizing monopolist will set a price equal to:

A)8.
B)7.
C)12.
D)14.

Question 58

Monopolies are considered inefficient when compared to perfect competition because

A)marginal revenue exceeds marginal cost
B)elasticity of demand is less than one
C)monopolies make profits in the short run
D)marginal benefit exceeds marginal cost

Question 59

If p = 20 - y and TC(y)= 4y, then when y = 4:

A)profits are positive.
B)profits are maximizing.
C)profits are negative.
D)profits are zero.

Question 60

Monopolies are inefficient for all but which of the following reasons?

A)Price is greater than Marginal Cost.
B)The total surplus represents worker exploitation.
C)The sale of additional units is Pareto- improving.
D)The potential surplus is unrealized.

Question 61

A franchise monopoly arises when a:

A)firm's production is more efficient than two or more firms.
B)government grants the exclusive right to do business in a market.
C)firm has exclusive ownership of an input.
D)government grants a patent for a new product.

Question 62

Suppose a monopolist faces the demand curve Y^d=1600- 400 P. Which of the following is correct?

A)Profit = 1600P - 400P²- MC
B)TR = 1600- 400P²
C)MR = 1600- 200 P
D)AR = 1600- 200P

Question 63

Profit maximizing monopolists set their prices:

A)by finding MR = MC.
B)as low as possible.
C)as high as possible.
D)at a convenient level.

Question 64

A monopolist:

A)earns a profit only in the long run.
B)must set price equal to average cost and earns zero profit.
C)always earns a profit.
D)earns above the competitive rate of return in the long run.

Question 65

When a per unit tax is imposed on the sale of a product of a monopolist, the resulting price increase will:

A)not always be less than the tax.
B)always be more than the tax.
C)always be less than if a similar tax were imposed on firms in a competitive model.
D)always be less than the tax.

Question 66

The least ambiguous definition of a monopoly involves markets with:

A)small cross- price elasticities between products.
B)interdependent pricing decisions.
C)large cross- price elasticities between products.
D)only one firm offering a product.

Question 67

Individuals that receive income from royalties often want:

A)to maximize the volume of sales.
B)to maximize the profits of the firm.
C)lower prices for the product.
D)higher prices for the product.

Question 68

The deadweight loss of monopoly is caused by:

A)too little output being produced.
B)the marginal cost exceeding the marginal revenue.
C)the marginal cost exceeding marginal value.
D)average costs exceeding average revenue.

Question 69

A book vendor can produce a book at a constant MC equal to zero, and its potential buyers have the following reservation prices: $55, $50, $45, $40, $35, $30, $25, $20, $15, $10, $5. What are the unrealized gains from trade if the monopolistic vendor chooses p = $25?

A)$65
B)$45
C)$155
D)$50

Question 70

Rate of return regulations encourage monopolists to use:

A)too much capital and too much labour.
B)too much capital and too little labour.
C)too little capital and too much labour.
D)too little capital and too little labour.

Question 71

If output is positive, a monopolist's MR is:

A)equal to price.
B)greater than price.
C)zero.
D)less than price.

Question 72

Consider a monopoly with inverse demand function p = 20 - y and cost function c(y)= 4 + y². The profit maximizing price is:

A)$10.
B)$15.
C)$25.
D)$5.

Question 73

Rate- of- return regulation is inefficient because it induces the monopolist to:

A)use input bundles that are too capital intensive.
B)use input bundles that are too labour intensive.
C)produce more output but also charge a higher price.
D)produce less output than it would in the absence of the regulation.

Question 74

The profit- maximizing monopolist that faces a horizontal TC curve will:

A)produce that level of output at which MR is equal to zero.
B)shut down and move to his best alternative employment.
C)charge a price equal to MC and satisfy all market demand.
D)produce at the level of output where demand equals supply.

Question 75

Suppose the market demand curve has an elasticity of - 4. If the monopolist's average cost is a horizontal straight line, then the profit is:

A)half the total revenue.
B)one quarter of total revenue.
C)not related to the total revenue.
D)equal to the total revenue.

Question 76

All of the following are sources of monopoly except:

A)good management
B)franchises and patents
C)economic profit
D)resource access or scale economies

Question 77

A monopolist faces a demand function given by Q = 50 -P and has a cost function C =3Q²+ 10Q +
50. If the government imposes a lump sum tax of $50, the monopoly profit is:

A)$100.
B)$150.
C)$0.
D)$50.

Question 78

A monopolist has set the level of output to maximize profit. The firm's marginal revenue is $20 and the price elasticity of demand is - 2.0. The firm's profit maximizing price is approximately:

A)$10.
B)$20.
C)$40.
D)$0.

Question 79

Suppose a specific excise tax is imposed on a monopolist's product. In order to maximize profits, the monopolist will produce:

A)less output and charge a higher price.
B)the same output and charge a higher price.
C)the same output and charge the same price as before the tax.
D)more output and charge a lower price.

Question 80

An unregulated monopolist produces an output level in the elastic portion of the demand curve because:

A)it is only in this region that price exceeds AC.
B)it is only in this region that MR is positive.
C)TR increases at the same rate as TC; that is, MR = MC.
D)prices, and profits, rise.