Deck 5: Market Power: Does It Help or Hurt the Economy

Question 1

A monopolist's marginal revenue measures the marginal social benefit of selling an additional unit.

Answer 1

False

Question 2

At the monopolist's profit maximizing level of output, price will exceed marginal revenue.

Answer 2

True

Question 3

According to the marginal principle, profits are maximized when marginal revenue exceeds marginal cost.

Answer 3

False

Question 4

Because the monopolist must lower price in order to sell more output, marginal revenue will be less than the demand price.

Question 5

A monopolist's profits will fall if output is increased when marginal revenue exceeds marginal cost.

Question 6

Economists object to monopoly because of the profits earned.

Question 7

Marginal revenue is the change in total revenue associated with a one-unit change in output.

Question 8

A monopolist will produce a greater level of output than a competitive industry.

Question 9

For a monopolist, price is greater than marginal revenue.

Question 10

Technical conditions may create a natural monopoly.

Question 11

According to the marginal principle, a monopolist should increase output if marginal cost exceeds marginal revenue.

Question 12

Increased competition from foreign producers in the manufacturing sector has increased market power in the U. S.

Question 13

A monopolist is a price taker in the market place.

Question 14

A natural monopoly will exist if demand conditions are such that only one firm can survive in an industry.

Question 15

The larger the number of firms, the easier it will be for an industry to form a cartel.

Question 16

Market power in the U. S. economy has decreased over the last 50 years.

Question 17

A monopoly is an industry with only one seller of a good that has many close substitutes.

Question 18

Market power in the U. S. has decreased as a result of increased foreign competition, deregulation, and the information revolution.

Question 19

Most U.S. industries with market power are oligopolies.

Question 20

A monopolist's demand curve represents market demand for the good.

Question 21

The desire to increase profits may cause firms to cheat on an agreement reached by a cartel.

Question 22

In a monopoly industry:

A) the firm is a price searcher.
B) the firm is a price taker.
C) markets are impersonal.
D) there are a large number of buyers and sellers.

Question 23

The monopolist's demand curve:

A) slopes down and to the right.
B) is a horizontal line.
C) shows that the firm must increase price to sell more output.
D) slopes up and to the right.

Question 24

A monopoly is an industry composed of:

A) a few interdependent firms.
B) a large number of firms that produce a similar product.
C) a small number of firms that produce dissimilar products.
D) a single seller of a product that has no close substitutes.

Question 25

The benefit the monopolist receives when it produces and sells an additional unit of output is measured by:

A) the monopolist's demand price.
B) the monopolist's total revenue.
C) the monopolist's marginal revenue.
D) the monopolist's profit.

Question 26

Suppose marginal cost currently exceeds marginal revenue. In order to maximize profits, the firm should:

A) decrease output.
B) increase output.
C) advertise more.
D) cease production.

Question 27

Relative to a competitive industry, a monopolist:

A) produces more output and charges a lower price.
B) produces less output and charges a higher price.
C) produces the same output and charges a higher price.
D) produces less output and charges a lower price.

Question 28

Suppose marginal revenue currently exceeds marginal cost. In order to maximize profits, the firm should:

A) decrease output.
B) increase output.
C) advertise less.
D) cease production.

Question 29

According to the marginal principle, a monopoly firm maximizes profits as the point where:

A) marginal revenue equals marginal cost.
B) marginal revenue equals average cost.
C) marginal cost equals price.
D) demand price equals supply price.

Question 30

An oligopoly is an industry composed of:

A) a large number of firms that produce close substitutes.
B) a large number of firms that produce a no close substitutes.
C) a few producers or sellers of a good that recognize their interdependence.
D) a single seller of a product that has no close substitutes.

Question 31

Because the monopolist must lower price in order to sell additional units of output:

A) marginal cost exceeds marginal revenue.
B) demand price exceeds marginal revenue.
C) marginal cost exceeds demand price.
D) marginal revenue exceeds demand price.

Question 32

Cartels are defined as:

A) a single seller of a product.
B) oil producers and exporters.
C) an organized group of firms that acts like a monopoly.
D) a large group of firms that exerts little influence in the market.

Question 33

To succeed, a cartel must restrict output and prevent entry of new firms. A successful cartel requires an ACE in the hole: agreement, cooperation, and enforcement.

Question 34

The less similar firms are, the easier it is to form a cartel.

Question 35

Many economists argue for the passage of additional antitrust laws because they believe that market power is a major problem in the economy.

Question 36

The Organization of Petroleum Exporting Countries (OPEC) cartel had its biggest impact on oil prices in the 1970s and 1980s.

Question 37

Economists argue that government should not pass policies that would impede economic rent seeking.

Question 38

Marginal revenue is defined as:

A) the change in total revenue associated with a one-unit change in output.
B) total revenue minus total cost.
C) the profit associated with producing an additional unit of output.
D) the average revenue a firm receives per unit of output produced.

Question 39

When firms have high up-front costs, they can recover development costs only if they can price their successful products at monopoly levels.

Question 40

A firm is said to have market power if:

A) it takes market price as given.
B) its actions affect market price.
C) its actions cause other firms to enter the industry.
D) it does not earn a loss.

Question 41

Government may allow monopolies to exist in knowledge-based industries because:

A) of relatively low up-front costs.
B) of relatively high up-front costs.
C) of the fear of inferior products.
D) too much competition will result in allocative inefficiency.

Question 42

The existence of market power:

A) makes markets impersonal because the firms are so large.
B) gives consumers greater choice.
C) makes firms more responsive to consumer demand.
D) give consumers less choice.

Question 43

Market power can be beneficial to the economy if:

A) it decreases entrepreneurial activity.
B) it encourages political rent seeking.
C) it encourages economic rent seeking.
D) it discourages ruinous competition.

Question 44

One of the reasons OPEC has lost market power since the 1960s is

A) there were high barriers to entry.
B) there were not high barriers to entry.
C) the search for knowledge is costly.
D) refinery production in the United States has declined.

Question 45

The increased competitiveness of the U.S. economy can be explained by:

A) competition from imports.
B) government deregulation.
C) the information revolution.
D) All of the above.

Question 46

A monopoly may be able to earn profits greater than a competitive firm because:

A) entry by new firms may be prevented.
B) government policies often ensure that certain industries such as utilities earn a guaranteed rate of return on their investment.
C) consumers are unaware of the existence of such profits and unwittingly pay the higher price.
D) The above statement is False. In the long run a monopoly earns the same profit as a competitive firm.

Question 47

A cartel would most likely form if:

A) there are a small number of firms that have similar production costs.
B) there are a large number of firms that have similar production costs.
C) there are a small number of firms that have different costs of production.
D) there are a large number of firms that have different costs of production.

Question 48

The efficient level of output occurs when:

A) a monopolist is maximizing profits.
B) marginal social benefit exceeds marginal social cost.
C) marginal social cost exceeds marginal social benefit.
D) marginal social benefit equals marginal social cost.

Question 49

Which of the following is not a source of market power in the United States?

A) low barriers to entry.
B) the cost advantages existing firms may have over potential new firms.
C) technical conditions of production.
D) a single firm having exclusive access to an essential input.

Question 50

Which of the following is a source of market power in the United States?

A) low barriers to entry.
B) competition from foreign firms.
C) technical conditions.
D) the existence of a large number of substitute goods.

Question 51

The problems encountered by the OPEC cartel can be explained by:

A) relatively high barriers to entry existing in the petroleum industry.
B) the fact that most OPEC producers had similar levels of reserves.
C) the small number of producers who made up the cartel having the same objectives.
D) the fact that OPEC did not have significant barriers to entry for new producers.

Question 52

When a monopolist is maximizing profits:

A) marginal social benefit and marginal social cost are equal.
B) marginal social cost exceeds marginal social benefit.
C) output level is less than the efficient level of output.
D) no potential gains from trade exist.

Question 53

The existence of market power in an industry implies that:

A) government should enact regulations to make the industry more competitive.
B) consumers should form consumer protection groups to offset the market power in the industry.
C) government should provide subsidies to encourage firms to enter the industry. As the number of firms increases market power will decline.
D) price is greater than marginal cost.

Question 54

Government encourages market power when it:

A) promotes international trade.
B) restricts imports.
C) enacts antitrust legislation.
D) eliminates licensing systems.

Question 55

Cartel members have an incentive to cheat by:

A) lowering price and selling less output.
B) lowering price and selling more output.
C) raising price and selling less output.
D) raising price and selling more output.

Question 56

A likely source of market power in the United States is:

A) the explicit cooperation of firms on price and output decisions.
B) government licensing and regulations.
C) multiple firms having control over a vital input.
D) voluntary export restrictions.

Question 57

When demand and cost conditions are such that only one firm can exist in an industry:

A) government must enact regulations to protect consumers and ensure competition.
B) production costs could be decreased if government were to divide the single firm into several smaller firms.
C) efficiency will be increased by dividing the single firm into several smaller firms.
D) a natural monopoly is said to exist.

Question 58

Government might grant patents in order to:

A) increase private-sector research.
B) enhance competition.
C) decrease market power.
D) ensure that politicians are re-elected to office.

Question 59

Which of the following would contribute to the break-up of a cartel?

A) There are a small number of firms.
B) The firms produce a similar product.
C) The firms' desire to increase their profits.
D) The firms have similar production costs.

Question 60

Although cartels can increase the profits of their members, they are often difficult to maintain for extended periods of time because:

A) consumer pressure often forces cartels to disband.
B) managers realize that while the cartel increases profits in the short run, profits in the long run will be lower because of cartel activity.
C) there is an incentive for each member to further increase its profits by cheating on the cartel agreement.
D) producers may not understand the benefits of maintaining the cartel.

Question 61

Use the following diagram to answer the following questions.

Refer to Diagram 5-1. If a competitive firm were currently producing output at Q₃, we know that:

A) profits are being maximized.
B) increasing output would increase profits.
C) decreasing output would increase profits.
D) there should be no change in output.

Question 62

Suppose a monopolist is currently producing at a point where marginal revenue is $20 and marginal cost is $25. This monopolist should:

A) decrease output in order to increase profits.
B) increase output in order to increase profits.
C) make no change in output. It is maximizing profits at its current level of production.
D) advertise less. This would cut its costs and bring it to a profit maximizing position.

Question 63

For a monopolist, marginal revenue is less than demand price because:

A) the firm must take the market price as given.
B) the firm must raise price in order to sell additional units of output.
C) the firm must lower price in order to sell additional units of output.
D) the firm cannot raise price too much or additional firms will be attracted to the industry.

Question 64

Use the following diagram to answer the following questions.

Refer to Diagram 5-1. If the firm were currently producing output level Q₁, we know that:

A) marginal revenue would exceed marginal cost.
B) marginal cost would exceed marginal revenue.
C) marginal revenue and marginal cost would be equal.
D) demand price and marginal revenue would be equal.

Question 65

Use the following diagram to answer the following questions.

Refer to Diagram 5-2. The price and output that maximize the monopolist's profits are:

A) P₁ and Q₁, respectively.
B) P₁ and Q₂, respectively.
C) P₂ and Q₁, respectively.
D) P₂ and Q₂, respectively.

Question 66

Suppose a monopolist is currently producing at a point where marginal revenue is $25 and marginal cost is $18. This monopolist should:

A) decrease output in order to increase profits.
B) increase output in order to increase profits.
C) advertise more to encourage consumers to buy more of the product.
D) cease production to cut its losses.

Question 67

In the 1980s Japanese automakers were successful in U.S. markets because:

A) U.S. management and production methods had become obsolete.
B) U.S. consumers were unwilling to buy foreign autos.
C) The U.S. government placed high tariffs on all foreign imports.
D) U.S cars were higher quality.

Question 68

Use the following diagram to answer the following questions.

Refer to Diagram 5-2. The monopolist's profits are given by area:

A) P₁P₂AC.
B) OP₁CQ₁.
C) P₁P₃AC.
D) P₁P₃B.

Question 69

Use the following diagram to answer the following questions.

Refer to Diagram 5-2. The price and output that would emerge under a competitive industry are:

A) P₁ and Q₁, respectively.
B) P₁ and Q₂, respectively.
C) P₂ and Q₁, respectively.
D) P₂ and Q₂, respectively.

Question 70

Suppose Kris Kraf, a monopolist is producing the profit-maximizing level of output. At this level of output we know that:

A) marginal revenue and marginal social benefit are equal.
B) marginal revenue exceeds marginal social benefit.
C) marginal social benefit exceeds marginal revenue.
D) marginal revenue exceeds price.

Question 71

Use the following diagram to answer the following questions.

Refer to Diagram 5-1. A competitive industry would charge what price and produce what level of output?

A) P₁ and Q₁, respectively.
B) P₂ and Q₂, respectively.
C) P₁ and Q₂, respectively.
D) P₁ and Q₃, respectively.

Question 72

Which of the following methods does the U.S. government use to reduce market power?

A) The provision of patents
B) Anti-trust law
C) The requirement of licensing in various occupational areas
D) The provision of monopoly grants

Question 73

We should not tax windfall profits of U.S. oil refineries because

A) taxes would discourage future investment in capacity.
B) monopoly profits are necessary to motivate continued adaptation in production to an ever changing industry.
C) political decisions on taxation are driven by political benefits rather than market outcomes.
D) All of the above are possible explanations.

Question 74

Use the following information to answer the following questions.

Refer to Pharmaceuticals. The total revenue associated with selling 3 units of pharmaceuticals is:

A) $120.
B) $90.
C) $50.
D) $45.

Question 75

Use the following information to answer the following questions.

Refer to Pharmaceuticals. The marginal revenue associated with the second unit of pharmaceuticals is:

A) $120.
B) $90.
C) $50.
D) $45.

Question 76

Suppose the Ding-Dong Doorbell Co., a monopoly, finds that at current production levels marginal revenue is $15 while marginal cost is $10. This company should:

A) make no change in present production level.
B) without further information on average production cost there is no way to determine what actions the company should take.
C) decrease production, as this will allow price and marginal revenue to increase, thereby increasing profits.
D) increase output as this will result in higher profits.

Question 77

Suppose We Are Unique Corporation, a monopoly, finds that at its current production levels marginal revenue is $18 while marginal cost if $20. This company should:

A) make no change in present production level.
B) without further information on average production cost there is no way to determine what actions the company should take.
C) decrease production, as this will allow price and marginal revenue to increase, thereby increasing profits.
D) increase output as this will result in higher profits.

Question 78

Stuff-It Corporation is the sole producer of Trindles, a new toy. Stuff-It would be an example of:

A) a cartel.
B) a monopoly.
C) an oligopoly.
D) a competitive firm.

Question 79

Use the following diagram to answer the following questions.

Refer to Diagram 5-1. What level of output should the monopolist produce?

A) Q₁.
B) Q₂.
C) Q₃.
D) Output should be between Q₂ and Q₃, depending upon the level of market power the firm has.

Question 80

Use the following diagram to answer the following questions.

Refer to Diagram 5-1. What price should the monopolist charge?

A) P₁.
B) P₂.
C) P₃.
D) a price between P₁ and P₂.