Question 1

Firms with substantial monopoly power are quite common, because many goods are truly unique.

Accepted Answer

While some firms may have monopoly power due to unique goods or services, it's not common for most markets because competition and substitutes typically exist, limiting widespread monopoly power.

Question 2

Suppose the market for coffee cups is a monopoly.If a consumer's willingness to pay is below the market price, then it is not possible for a mutually beneficial trade to occur.

Accepted Answer

False

Question 3

If a firm's average total cost is everywhere decreasing, then this is likely to lead to a natural monopoly.

Accepted Answer

As the average total cost decreases, the firm is experiencing economies of scale, which means it can produce goods at a lower cost. This gives the firm a competitive advantage over other firms, and it can potentially drive them out of the market. As a result, the firm may become the dominant player in the market, leading to a natural monopoly.

Question 4

If the current price charged by a monopolist is $5 and marginal cost is $3, then increasing output will always lead to an increase in profit as P>MC.

Accepted Answer

Increasing output in a monopolistic market can lead to a decrease in profit if the additional revenue generated by selling more units (marginal revenue) is less than the marginal cost of producing those extra units. Since monopolists face a downward-sloping demand curve, increasing output also tends to decrease the price, which can make additional sales less profitable.

Question 5

The monopolist's demand curve slopes downwards whenever marginal costs are increasing.

Accepted Answer

The monopolist's demand curve slopes downwards due to the law of demand, which states that as the price of a good increases, the quantity demanded decreases, and vice versa, regardless of the behavior of marginal costs.

Question 6

Governments should always avoid creating monopolies, as it leads to prices above marginal costs.

Accepted Answer

The answer of Governments should always avoid creating monopolies, as...

Question 7

When a firm operates under conditions of a monopoly, its price is unconstrained.

Accepted Answer

In a monopoly, while the firm has significant control over its price due to lack of competition, its pricing is still constrained by demand. If the price is set too high, demand will decrease.

Question 8

Apple is likely to charge a price above marginal cost for the iPhone.

Accepted Answer

Apple is a profit-maximizing firm and as per economic theory, firms charge a price above their marginal cost to earn profits. Apple incurs various costs such as research and development, marketing, and manufacturing costs apart from the raw material cost of producing the iPhone. Therefore, to earn profits, Apple will charge a price above the marginal cost of producing each unit of the iPhone.

Question 9

If a resource can be traded internationally, then it is less likely that a single domestic supplier will be able to price at the monopoly price.

Accepted Answer

When a resource can be traded internationally, there is increased competition in the domestic market, making it less likely for a single domestic supplier to have monopoly power and price at the monopoly price.

Question 10

In a monopoly, the firm demand-curve and market demand-curve are identical.

Accepted Answer

In a monopoly, the firm is the sole seller of the product and has complete control over the price. Therefore, the firm's demand curve and the market demand curve are identical, since the firm's output determines the total output of the market.

Question 11

The De Beers Diamond company is not worried about differentiating their product from all the other gemstones.

Accepted Answer

De Beers has historically been very concerned with differentiating their diamonds from other gemstones, investing heavily in marketing campaigns (like "A Diamond is Forever") to promote the uniqueness and desirability of diamonds over other gemstones.

Question 12

For a competitive firm, average revenue always equals the price of the good.This is also true for monopolies.

Accepted Answer

Average revenue is calculated by dividing total revenue by the quantity of output. For a competitive firm, the market price is determined by the supply and demand of the industry, so the average revenue will always equal the price. For a monopoly, the firm has control over the price, but the average revenue will still equal the price because it is the only seller in the market.

Question 13

Adult and concession prices for movie tickets are examples of perfect price discrimination.

Accepted Answer

Perfect price discrimination refers to the ability of a seller to charge each customer their willingness to pay, resulting in different prices for each customer. While movie theaters often offer different prices for adult and concession tickets, this is not an example of perfect price discrimination as the theater is still charging a fixed price for each category of customer (adult vs. concession). Perfect price discrimination is rare in practice as it requires the seller to have perfect information about each customer's willingness to pay, which is often difficult to obtain.

Question 14

Competitive firms maximise profit by setting MR = MC.This is not always true for monopoly firms.

Accepted Answer

The answer of Competitive firms maximise profit by setting MR...

Question 15

Airlines often separate their customers into business travellers and personal travellers by giving a discount to those travellers who stay over a Saturday night.

Accepted Answer

This is true. Many airlines offer lower fares to customers who extend their stay to include a Saturday night, as it indicates they are likely leisure or personal travellers rather than business travellers.

Question 16

A price-maker can charge a price above marginal cost.

Accepted Answer

A price-maker has the ability to set a price above marginal cost, which is a key characteristic that distinguishes it from a price-taker that is subject to the market price.

Question 17

A monopoly firm is able to charge a price that is higher than their marginal revenue.

Accepted Answer

A monopoly firm has market power, which means they can set their price higher than their marginal revenue, allowing them to earn profits.

Question 18

A natural monopoly can arise when a single firm has equal or greater average total costs than two or more firms.

Accepted Answer

A natural monopoly arises when a single firm can supply a product or service at a lower average total cost than two or more firms, due to economies of scale.

Question 19

The De Beers Diamond company advertises heavily to promote the sale of all diamonds, not just its own.This is evidence that they have a monopoly position to some degree.

Accepted Answer

If De Beers did not have a significant market share or control over the diamond industry, there would be no need for them to advertise the sale of all diamonds rather than just their own. Therefore, their heavy advertising suggests they hold a monopoly position to some extent.

Question 20

Another form of price discrimination is when a monopoly offers lower prices to customers who buy small quantities.

Accepted Answer

This is not an example of price discrimination, as the monopoly is not discriminating based on any characteristic such as willingness to pay or demographic information. Rather, they are simply offering different prices based on quantity, which is a common pricing strategy used by many businesses.

Quiz 15: Monopoly