Deck 7: Monopoly and Price Discrimination

Question 1

Which of the following firms have no market power?

A) clothing companies
B) fast food chains such as McDonald's
C) theme parks
D) gold panners during the gold rush

Answer 1

gold panners during the gold rush

Question 2

Which of the following is NOT an artificial barrier to entry?

A) a patent
B) government franchise
C) large economies of scale
D) government licensing

Answer 2

large economies of scale

Question 3

________ is a monopoly that exists in an industry where large economies of scale act as a barrier to entry.

A) A natural monopoly
B) A monopolistic competitor
C) A regulated monopoly
D) A price discriminator

Answer 3

A natural monopoly

Question 4

A monopoly may arise due to

A) a patent.
B) net work externalities.
C) large economies of scale.
D) all of the above.

Question 5

Table 7.1
Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. Gladys' marginal revenue becomes negative starting with the production of which unit?

A) 2
B) 4
C) 6
D) None of the above; marginal revenue is always positive or zero.

Question 6

Which of the following is NOT a barrier to entry for monopoly?

A) a patent
B) government licensing
C) large economies of scale
D) a large number of existing firms in a market

Question 7

The demand curve that a monopolist faces is

A) the market demand curve.
B) the same as the demand curve that faces a perfectly competitive firm.
C) not affected by changes in the prices of other goods.
D) generally flatter than the demand curve that faces a perfectly competitive firm.

Question 8

Table 7.1
Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The total revenue that Gladys receives from selling four units of output is

A) $4.
B) $6.
C) $10.
D) $24.

Question 9

A network externality occurs when

A) a firm has a patent.
B) the value of a product to a consumer increase with the number of other consumers who use it.
C) a firm has large economies of scale.
D) the value of a product to a consumer requires another product.

Question 10

When economists say a market has "barriers to entry", they refer to

A) monopolists being prohibited from selling their products to certain customers.
B) a policy that some countries establish to reduce imports from other countries.
C) factors that prevent other firms from challenging a firm with market power.
D) economic profits that are positive, but too high to encourage entry.

Question 11

A firm that has market power has the ability

A) to affect the price of its own product.
B) to conduct illegal activities without fear of prosecution.
C) to command consumer to buy any quantity from them.
D) to drive its competition out of the market.

Question 12

Table 7.1
Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The marginal revenue that Gladys receives from selling the fifth unit of output is

A) $5, because that is the price per unit of output that Gladys receives.
B) $5, because that is the quantity that Gladys sells.
C) $25, because Gladys sells five unit of output at a price of $5.
D) $1, because Gladys earns $1 more in revenue by increasing her output to five units from four units.

Question 13

Which of the following is an example of a barrier to entry?

A) A firm is open for business only at certain hours of the day, and has its doors locked at other times.
B) The government grants licenses to taxicab drivers, without which it is illegal to operate a taxicab.
C) A newspaper sells advertising space to businesses.
D) A firm is lacking a Web site.

Question 14

Which of the following is NOT a characteristic of a monopoly?

A) There is only one seller.
B) A monopolist is a price-taker.
C) There exist barriers to entry.
D) A monopolist's sales revenue is constrained by the market demand.

Question 15

When a firm is awarded a patent, it is given monopoly rights to the production of that product for ________ years.

A) 10
B) 20
C) 30
D) 50

Question 16

Which of the following firms rely on patents the most as the barrier to keep other firms from entering the industry?

A) pharmaceutical firms
B) textbook publishers
C) law firms
D) wine makers

Question 17

Table 7.1
Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a product and the quantity of that product that Gladys sells. The marginal revenue that Gladys receives from selling the fourth unit of output is

A) $3.
B) $6.
C) $10.
D) $24.

Question 18

A market served by only one firm is called a(n)

A) perfectly competitive market.
B) monopoly.
C) oligopoly.
D) Any of the above could be correct.

Question 19

Facebook is a social networking Web site that is used by a growing number of individuals. Because of its popularity, it is now more difficult for new networking websites to enter and compete with Facebook. Facebook enjoys ________ as a barrier for others to enter the market.

A) a network externality
B) price discrimination
C) a negative externality
D) economies of scale

Question 20

Which of the following firms have market power?

A) private universities
B) fast food chains such as McDonald's
C) theme parks
D) All of the above have market power.

Question 21

Figure 7.2
Figure 7.2 shows a monopolist's demand curve. The marginal revenue from selling the fourth unit is

A) $8.
B) $6.
C) $4.
D) $2.

Question 22

When a monopolist sells two units of output its total revenues are $100. When the monopolist sells three units of output its total revenues are $120. When the monopolist sells three units of output, the price per unit is

A) $6.67.
B) $20.
C) $33.33.
D) $40.

Question 23

Figure 7.2
Figure 7.2 shows a monopolist's demand curve. The marginal revenue from selling the third unit is

A) $6.
B) $8.
C) $10.
D) $44.

Question 24

Figure 7.2
Figure 7.2 shows a monopolist's demand curve. Suppose that the marginal cost is $6 for all units and the current output level is 4 units. Then which of the following is TRUE?

A) The marginal revenue is less than the marginal cost.
B) The price is greater than the average total cost.
C) The firm is producing the profit maximizing level of output.
D) all of the above

Question 25

At a price of $20, the marginal revenue of a monopolist is $12. If the marginal cost of production is $10, what should the monopolist do in order to maximize profits?

A) Increase its price.
B) Decrease its price.
C) Keep its price at the same level.
D) There is not enough information to solve.

Question 26

Figure 7.1
Figure 7.1 shows a monopolist's demand curve. If the monopolist increases output from two to three units, what is its marginal revenue?

A) $3
B) $5
C) $12
D) $15

Question 27

Figure 7.1
Figure 7.1 shows a monopolist's demand curve. If the monopolist were to maximize its total revenue, it would produce ________ units of output and charge a price of ________.

A) 3; $5
B) 4; $4
C) 5; $3
D) 6; $2

Question 28

At a price of $10, the marginal revenue of a monopolist is $6. If the marginal cost of production is $8, what should the monopolist do in order to maximize profits?

A) Increase its price.
B) Decrease its price.
C) Keep its price at the same level.
D) There is not enough information to solve.

Question 29

When a monopolist sells two units of output its total revenues are $100. When the monopolist sells three units of output, its price per unit is $35. The monopolist's marginal revenue from selling the third unit of output is

A) $5.
B) $33.33.
C) $35.
D) $105.

Question 30

How do monopoly prices and quantities produced differ from perfectly competitive outcomes, all other things equal?

A) Monopoly prices and quantities are both lower than competitive outcomes.
B) Monopoly prices and quantities are both higher than competitive outcomes.
C) Monopoly prices are lower than competitive prices but monopoly quantities are higher than competitive quantities.
D) Monopoly prices are higher than competitive prices but monopoly quantities are lower than competitive quantities.

Question 31

Which of the following is NOT a characteristic of a monopoly?

A) A monopolist faces a downward-sloping demand curve.
B) There are no close substitutes for a monopolist's product.
C) After the first unit, the monopolist's marginal revenue is always less than its price.
D) A monopolist is a price taker.

Question 32

A monopolist will never produce at a quantity where the

A) MR < 0.
B) MR > 0.
C) P > MR.
D) MR = MC.

Question 33

Figure 7.2
Figure 7.2 shows a monopolist's demand curve. Suppose that the marginal cost is $6 for all units and the current output level is 4 units. Then what would you recommend to the firm?

A) Lower the price to sell more units.
B) Raise the price and sell fewer units.
C) Maintain the current price and output level.
D) There is not sufficient information.

Question 34

If a monopolist charges the same price for all of the units of the good that it sells, then beyond the first unit sold

A) P = MR because the firm maximizes profit.
B) P = MR because the monopolist holds price constant.
C) P < MR because the monopolist must decrease price on all units in order to sell another unit.
D) P > MR because the monopolist must decrease price on all units in order to sell another unit.

Question 35

Figure 7.3
The firm in Figure 7.3 will produce

A) Q₁.
B) Q₂.
C) Q₃.
D) Q₄.

Question 36

Figure 7.1
Figure 7.1 shows a monopolist's demand curve. If the monopolist increases output from four to five units, what is its marginal revenue?

A) $16
B) $15
C) $3
D) -$1

Question 37

For a monopolist, marginal revenue ________ for all units of output except the first unit.

A) is greater than the price of output
B) is less than the price of output
C) is equal to the price of output
D) may be either greater than or less than the price of output

Question 38

Which of the following best characterizes the tradeoff faced by a monopolist when deciding what quantity to produce?

A) The firm can increase its output, but needs to lower its price for only the marginal unit of output.
B) The firm can increase its output, but to do so it must charge a higher price to all customers.
C) The firm gets more revenue from new customers by increasing output, but gets less revenue from existing customers given that it lowered its price.
D) The firm gets less revenue from new customers by increasing output, but gets more revenue from existing customers given that it lowered its price.

Question 39

A monopolist maximizes profits by setting the quantity where

A) marginal revenue is equal to marginal cost.
B) marginal revenue is greater than marginal cost.
C) marginal revenue is less than marginal cost.
D) total revenue is as high as possible.

Question 40

If a monopolist is maximizing its profits, we know that it has

A) maximized total revenue.
B) maximized marginal revenue.
C) minimized total cost.
D) equated marginal cost and marginal revenue.

Question 41

A monopolist maximizes profit by producing the output at which marginal revenue equals marginal cost.

Question 42

Why do barriers to entry create market power?

Question 43

A network externality acts as a barrier to entry.

Question 44

Figure 7.3
At the optimal production point, the firm in Figure 7.3 will

A) make a zero economic profit.
B) suffer a loss.
C) make a positive economic profit.
D) break even.

Question 45

Why do some markets have more firms than others?

Question 46

How does a monopolist's marginal revenue change as output increases? Why?

Question 47

Why is a monopolist's marginal revenue less than the price?

Question 48

Should a monopolist charge the highest price for its good that anyone in the market will pay?

Question 49

At a price of $15, a firm sells 80 CDs per day. If the slope of the demand curve is 0.10, marginal revenue is $5.

Question 50

Monopolist marginal revenue rises with output.

Question 51

At a price of $18, the marginal revenue of a movie seller is $12. If the marginal cost of a movie is $9, the firm should increase its price.

Question 52

Recall the Application about setting the price of tickets for Major League Baseball games to answer the following question(s).
According to the Application, due to the marginal revenue from ticket sales for a typical Major League Baseball team, the team could increase total revenue from ticket sales by ________ the price of tickets and ________ the quantity of tickets sold.

A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing

Question 53

What is a network externality?

Question 54

Figure 7.3
The firm in Figure 7.3 will charge

A) P₁.
B) P₂.
C) P₃.
D) P₄.

Question 55

Will a profit maximizing monopolist who is not subject to government regulation produce a quantity where the MR < 0?

Question 56

A monopolist's marginal cost is less than the price it charges.

Question 57

After the first unit, a monopolist's marginal revenue is less than the price it charges because to sell an additional unit it needs to lower its price.

Question 58

A monopolist will never produce a level of output where MR < 0.

Question 59

Recall the Application about setting the price of tickets for Major League Baseball games to answer the following question(s).
According to the Application, the marginal revenue from ticket sales for a typical Major League Baseball team is

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

Question 60

A monopolist picks the quantity of output at which price equals marginal cost.

Question 61

Recall the Application about allegations that the makers of branded drugs made deals with generic drug makers once the patents expired on branded drugs to answer the following question(s).
Recall the Application. When a patent ends and generic drugs are introduced, there is

A) downward pressure on the price of the patent version of the drug.
B) upward pressure on the price of the patent version of the drug.
C) no pressure on the price of the patent version of the drug.
D) no demand for the patent version of the drug.

Question 62

Which of the following situations would be examples of price discrimination?

A) United Airlines charges customers who book 14 days ahead a lower price than those who don't.
B) Chevron gas stations charges customers 20 cents more per gallon if they choose the premium grade over the regular unleaded.
C) The local carwash charges drivers of minivans and large SUVs a $2.00 "large vehicle" surcharge.
D) GEICO, an insurance company, charges higher rates to those who received more than one speeding ticket in the last 6 months.

Question 63

Suppose that it would cost a firm $9 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $4 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most CORRECT?

A) The government should grant a patent to the firm, because the firm would not produce the drug at all without a patent.
B) The government should grant a patent to the firm, because it does not have the resources to determine on a case-by-case basis exactly which inventions merit award of the patent.
C) The government should grant a patent to the firm, because even with a patent the firm will not earn a monopoly profits.
D) The government should not grant a patent to the firm, because the firm would earn sufficient profits to develop the drug without the patent.

Question 64

The merits of a patent system is

A) the patent system gives firms strong incentives to take the risk of substantial research and development costs.
B) the patent system may precipitate the development of new products.
C) granting monopoly power through a patent may be beneficial from society's perspective.
D) all of the above.

Question 65

Since patents lead to lower quantities and higher prices for new products, society is necessarily worse off when patents are awarded.

Question 66

What is a patent?

Question 67

When governments grant patents

A) producers earn profits that are substantially higher than would occur in a competitive market.
B) consumers pay a higher price than they would in a competitive market.
C) consumers are likely to pay lower prices than they would in a competitive market.
D) Both A and B are correct.

Question 68

Price discrimination is when a firm charges

A) the same price to all consumers.
B) different prices for different goods to different consumers.
C) different prices for the same goods to different consumers.
D) None of the above is correct.

Question 69

Patents encourage firms to engage in innovation.

Question 70

Why do pharmaceutical firms benefit most from patent protection?

A) because research and development of drugs require large expenditures that need to be recouped while the patent is still valid
B) because pharmaceutical drugs need to be controlled by the government
C) because pharmaceutical companies pay large taxes to the government
D) because only physicians can legally prescribe pharmaceutical drugs

Question 71

Society gains from a patent if the product would not otherwise be developed.

Question 72

Recall the Application about allegations that the makers of branded drugs made deals with generic drug makers once the patents expired on branded drugs to answer the following question(s).
Recall the Application. When a patent ends and generic drugs are introduced there is downward pressure on price. Therefore, the makers of the brand name drug will

A) raise their price.
B) abandon the product.
C) claim the generic is not as good as the patent version of the drug.
D) price discriminate.

Question 73

All patent protected products would not have been developed without patent protection.

Question 74

What would happen if the government chooses to increase the number of years that a firm can enjoy patent protection from 20 years to 25 years?

Question 75

In which of the following situations can a firm or individual apply for a patent?

A) A firm develops a new tool that makes cutting grass much easier.
B) An author publishes a new novel.
C) Nicki Minaj, a recording artist, releases a new CD in the market.
D) All of the above are activities that can be patented.

Question 76

Why does the government grant patents to companies that research new drugs?

Question 77

A patent is a government granted exclusive right to sell a product for a period of time.

Question 78

The government allows firms to engage in price discrimination unless the practice

A) allows the firm to earn positive economic profits.
B) reduces consumer surplus.
C) drives rival firms out of business.
D) increases prices to consumers.

Question 79

Suppose that it would cost a firm $10 million to develop a new drug. In the absence of a patent, other firms will be able to copy and bring to market a generic equivalent of the drug in three years. In each of these three years, the firm would earn monopoly profits of $3 million. A patent will generate monopoly status for the firm for twenty years. If the government knew this information ahead of time, which of the following is most CORRECT?

A) The government should not grant a patent to the firm, because the firm would earn monopoly profits for three years even without the patent.
B) The government should not grant a patent to the firm, because monopoly leads to efficiency losses relative to the competitive market.
C) The government should grant a patent to the firm, because even with a patent the firm will not earn a monopoly profits.
D) The government should grant a patent to the firm, because the firm would not produce the drug at all without a patent.

Question 80

Why does the government grant patents universally rather than just to those products that would not be developed without a patent?