Question 1

Many natural monopolies are regulated.Explain the rationale for such regulation.

Accepted Answer

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Question 2

Which of the following is the best example of product differentiation?
A)A cookie manufacturer introduces a new variant of cookies for Halloween.
B)A firm that sells printers starts a new manufacturing unit to manufacture printer cartridges.
C)A firm that produces laptops introduces a new line of tablet personal computers.
D)A leading women's fashion house introduces a line of men's clothing.
E)A supermarket introduces a range of pre-packaged salads.

Accepted Answer

Product differentiation refers to a strategy where a company introduces a product with unique features or attributes to stand out from competitors. The introduction of a new variant of cookies for Halloween by a cookie manufacturer is a classic example of product differentiation, as it offers consumers a unique product different from the standard offerings.

Question 3

Explain why monopolies are economically inefficient.

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Question 4

A monopolist faces the demand curve P = 100 - 2Q,where P = price and Q is quantity demanded.If the monopolist has a total cost of C = 50 + 20Q,determine its profit-maximizing price and output.

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Question 5

Which of the following,if true,would be an example of a monopolistically competitive industry?
A)In the utilities industry,average cost declines over all levels of output.
B)In the automobile industry,fixed costs as well as variable costs are high.
C)In the retail trade industry,a large number of firms provide similar products.
D)In the steel industry,a dominant part of the market is served by one firm.
E)In the pharmaceuticals industry,the entire market is served by a small number of large firms.

Accepted Answer

In a monopolistically competitive industry, there are many firms that provide similar products, but they are not identical. This leads to firms having some market power to set prices, but they also face competition from other firms so they cannot fully control the market. Option A is an example of a natural monopoly, where a single firm has the lowest average costs and dominates the market. Option B could refer to any industry, it does not distinguish between monopolistic competition and other market structures. Option D is an example of a monopoly, where one firm dominates the market and faces no direct competition. Option E is an example of an oligopoly, where only a few large firms dominate the market.

Question 6

How useful is the Lerner index as a measure of monopoly power?

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Question 7

Unlike perfectly competitive markets,monopolistically competitive markets _____.
A)have significant barriers to entry
B)face declining average costs at all levels of output
C)have fewer firms
D)operate under economies of scale
E)produce differentiated products

Accepted Answer

Monopolistically competitive markets produce differentiated products, which means that each firm has some degree of market power and can charge a slightly higher price for their product. This leads to a downward sloping demand curve for each firm, but there are still many firms in the market and entry and exit is relatively easy, so significant barriers to entry do not exist. Additionally, firms in monopolistically competitive markets do not face declining average costs at all levels of output and may not operate under economies of scale as they do not produce identical products.

Question 8

The demand curve faced by individual firms under monopolistic competition is _____.
A)perfectly elastic
B)perfectly inelastic
C)a downward-sloping curve
D)an upward-sloping curve
E)the same as the market demand curve

Accepted Answer

The demand curve faced by individual firms under monopolistic competition is a downward-sloping curve. This is because they have some control over the price they charge due to product differentiation, but the more they increase their price, the more customers will switch to similar products offered by competitors.

Question 9

Which of the following is a characteristic of a monopolistically competitive firm as opposed to a monopoly firm?
A)Monopolistically competitive firms make positive economic profit in the long-run unlike monopoly firms.
B)Monopolistically competitive firms face downward sloping demand curves unlike monopoly firms.
C)Monopolistically competitive firms do not face entry barriers unlike monopoly firms.
D)Monopolistically competitive firms produce goods that have no substitutes unlike monopoly firms.
E)Monopolistically competitive firms produce at the level where marginal revenue equals marginal cost unlike monopoly firms.

Accepted Answer

Monopolistically competitive firms do not face entry barriers, allowing new firms to enter the market, unlike monopoly firms which have high entry barriers.

Question 10

Which of the following holds good in the long run under monopolistic competition?
A)Price = marginal cost
B)Price = average cost
C)Price > average cost > marginal cost
D)Price > average cost = marginal cost
E)Marginal revenue = price

Accepted Answer

In the long run, firms in monopolistic competition earn zero economic profit, so price equals average cost.

Question 11

The demand curve for a monopolistically competitive firm slopes downward because:
A)the demand for the product drops to zero after a slight price increase.
B)the product has close substitutes produced by competing firms.
C)there is a very little brand loyalty towards a single firm's product.
D)customers are not influenced by advertising.
E)buyers are not sensitive to changes in the price of the product.

Accepted Answer

The demand curve for a monopolistically competitive firm slopes downward because the product has close substitutes produced by competing firms. This means that if the firm raises its price too much, consumers will switch to a similar product from a competing firm, leading to a decrease in demand for the monopolistically competitive firm's product.

Question 12

The profit margins for fast food firms like Wendy's have fallen because of an increase in competition from similar fast food chains and microwaveable food available in supermarkets.Based on this information,which of the following is true?
A)The absolute value of price elasticity of demand for Wendy's fast food is low.
B)Wendy's operates as a monopoly firm in the fast food market.
C)The fast food market is monopolistically competitive.
D)Wendy's fast food is an inferior good for most consumers.
E)There are strategic entry barriers in the fast-food market.

Accepted Answer

The increase in competition from similar fast food chains and microwaveable food available in supermarkets suggests that the fast food market is monopolistically competitive, as firms are competing with differentiated products. The decrease in profit margins also indicates that there is price elasticity of demand, meaning that consumers have other options for similar products. The other choices are not supported by the information given.

Question 13

How can the quality of a product serve as an entry barrier in a market?

Accepted Answer

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Question 14

In the long run,monopolistically competitive firms _____.
A)earn zero economic profit
B)face perfectly elastic demand curves
C)tend to standardize their products
D)produce output at minimum marginal cost
E)merge and form a few dominant firms to maximize profit

Accepted Answer

In the long run, monopolistically competitive firms will have competitors entering the market, driving down demand for their slightly differentiated products, resulting in only normal profits being earned.

Question 15

Why are substantial economies of scale considered a barrier to entry?

Accepted Answer

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Question 16

Carefully define and describe a natural monopoly.

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Question 17

In the long run,the economic profit earned by a firm under monopolistic competition:
A)is positive because firms produce with excess capacity.
B)is zero because of price wars among a small number of firms.
C)is zero because of free entry and exit possibilities in the market.
D)is positive because of advertising and product differentiation by the firms.
E)is positive because of collusive behavior between firms.

Accepted Answer

In the long run, economic profit earned by a firm under monopolistic competition is zero because there are free entry and exit possibilities in the market. As firms earn a profit, new firms will be attracted to the market, increasing competition and reducing profits. This process continues until all firms earn zero economic profit in the long run.

Question 18

In comparing monopolistic competition to perfect competition,the major difference lies in:
A)the number of firms in each industry.
B)the typical firm size in each industry.
C)the degree of entry barriers in each industry.
D)the demand curves faced by individual firms in each industry.
E)the long-run profits of firms in each industry.

Accepted Answer

The major difference between monopolistic competition and perfect competition lies in the demand curves faced by individual firms in each industry. In perfect competition, firms face a perfectly elastic demand curve, meaning they are price takers and cannot influence the market price. In monopolistic competition, firms face a downward sloping demand curve, meaning they have some control over the price they charge.

Question 19

Which of the following is a criticism of average-cost pricing as a regulatory response to a natural monopoly?
A)With average-cost pricing,the output produced is lower than the efficient level of output.
B)Firms that practice average-cost pricing suffer persistent losses.
C)Imperfect information about the firm's costs reduces the effectiveness of average-cost pricing.
D)Average-cost pricing reduces the firm's economic profit but also reduces consumer welfare.
E)With average-cost pricing,the price in the market is lower than the efficient price.

Accepted Answer

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Question 20

When competing firms or nations collude to form a cartel,the intention is to set one common price.This tendency to avoid competition should bring about stability.Paradoxically,however,cartels are usually unstable.Why?

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Quiz 8: Monopoly

Many natural monopolies are regulated.Explain the rationale for such regulation.

Which of the following is the best example of product differentiation?

Explain why monopolies are economically inefficient.

A monopolist faces the demand curve P = 100 - 2Q,where P = price and Q is quantity demanded.If the monopolist has a total cost of C = 50 + 20Q,determine its profit-maximizing price and output.

Which of the following,if true,would be an example of a monopolistically competitive industry?

How useful is the Lerner index as a measure of monopoly power?

Unlike perfectly competitive markets,monopolistically competitive markets _____.

The demand curve faced by individual firms under monopolistic competition is _____.

Which of the following is a characteristic of a monopolistically competitive firm as opposed to a monopoly firm?

Which of the following holds good in the long run under monopolistic competition?

The demand curve for a monopolistically competitive firm slopes downward because:

The profit margins for fast food firms like Wendy's have fallen because of an increase in competition from similar fast food chains and microwaveable food available in supermarkets.Based on this information,which of the following is true?

How can the quality of a product serve as an entry barrier in a market?

In the long run,monopolistically competitive firms _____.

Why are substantial economies of scale considered a barrier to entry?

Carefully define and describe a natural monopoly.

In the long run,the economic profit earned by a firm under monopolistic competition:

In comparing monopolistic competition to perfect competition,the major difference lies in:

Which of the following is a criticism of average-cost pricing as a regulatory response to a natural monopoly?

When competing firms or nations collude to form a cartel,the intention is to set one common price.This tendency to avoid competition should bring about stability.Paradoxically,however,cartels are usually unstable.Why?