Question 1

Because barriers to entry limit the amount of competition in various markets,government policy should be designed to reduce or eliminate such barriers wherever possible.

Accepted Answer

While reducing or eliminating barriers to entry can promote competition, it's not always desirable or beneficial to do so in every market. Some barriers are necessary for protecting public safety, ensuring quality, and encouraging investment in research and development. Government policy needs to balance the benefits of competition with the need for regulation, consumer protection, and incentives for innovation.

Question 2

Barriers to entry serve to limit the number of firms that operate in a particular market and,as such,reduce the amount of total profit earned in the market.

Accepted Answer

Barriers to entry serve to limit competition by preventing new firms from entering the market, which can actually allow existing firms to maintain higher profits due to reduced competition.

Question 3

Because a price setter has control over both the level of output it produces and the price it charges,it can select from a number of different combinations of output and price levels that will maximize its profits.

Accepted Answer

The answer of Because a price setter has control over...

Question 4

So long as a monopolist finds itself in the situation where price is greater than average fixed cost at the profit-maximizing (loss-minimizing)level of output,the firm should continue to operate to minimize its losses.

Accepted Answer

A monopolist should continue to operate if the price is greater than average variable cost, not average fixed cost, to cover variable costs and contribute to fixed costs.

Question 5

Barriers to entry reduce the likelihood that price-setter firms will see their positive economic profits competed away over time.

Accepted Answer

Barriers to entry make it more difficult for new firms to enter a market, which reduces competition and allows price-setter firms to maintain their market power and positive economic profits over time.

Question 6

Price will be higher and output will be lower under monopoly than under perfect competition with the same demand and cost conditions.

Accepted Answer

Monopoly firms have profit maximization as their main objective, which results in a higher price and lower output compared to perfect competition. In perfect competition, firms have to price at the market equilibrium, resulting in a lower price and higher output. Additionally, monopoly firms have market power, which allows them to charge a higher price, while perfect competition firms have no market power and have to price at the market equilibrium.

Question 7

Even if production of a good is characterized by economies of scale,consumers of the good would be best served by having a large number of small firms produce the good because of the effects of increased competition.

Accepted Answer

Economies of scale mean that as a firm increases its production, the average cost of producing each unit decreases. Therefore, consumers are often better served by fewer, larger firms that can produce goods more efficiently and potentially at a lower cost, rather than a large number of small firms that may have higher average costs.

Question 8

Suppose the firms in a monopolistically competitive market are incurring economic losses.What will happen to move the market to its long-run equilibrium?
A)More close substitutes will appear in the market until economic profits are zero.
B)The firms that dropped out of the market will reenter once the level of economic losses is zero.
C)Firms will continue to exit the market until economic losses are equal to zero.
D)The demand functions of all the firms remaining in the market will become relatively more elastic.

Accepted Answer

In the long run, economic losses cannot persist in a monopolistically competitive market. Firms will continue to exit the market until economic losses are equal to zero. This is because in the long run, there are no barriers to entry or exit, and firms cannot sustain losses indefinitely. As firms exit, the demand for the remaining firms' products will increase, allowing them to raise their prices and earn normal profits in the long run. Therefore, choice C is the best option.

Question 9

Patents and copyrights create incentives for individuals to create information that might not be produced otherwise.

Accepted Answer

Patents and copyrights give creators the exclusive right to their creations for a limited period, which provides an incentive to create and invest in further research and development. Without these legal protections, creators may not have the financial incentives to produce the information.

Question 10

Licensing requirements for doctors,which are intended primarily to maintain the quality of persons who work in the profession,have no the effect on the profits of those individuals because the number of competitors is so large.

Accepted Answer

Licensing requirements for doctors can limit the number of individuals who are able to enter the profession, thereby reducing competition. This can lead to higher profits for those who are licensed, as there is less competition and they can command higher fees for their services.

Question 11

Although monopoly and perfect competition result in different market outcomes,the fact that firms in both market structures work to maximize their profits ensures that resources are allocated efficiently in both situations.

Accepted Answer

In a monopoly, a single firm controls the market, leading to higher prices and lower output compared to perfect competition, where many firms ensure prices are close to marginal costs, promoting efficient resource allocation. Monopolies can result in allocative and productive inefficiencies, unlike perfect competition, which is characterized by optimal resource allocation.

Question 12

Efforts by firms to secure patents increase the amount of competition in the affected markets.

Accepted Answer

Efforts by firms to secure patents limit competition by granting them exclusive rights to produce, use or sell the patented product or process. This allows them to charge higher prices and restrict entry of new competitors into the market, resulting in lower competition.

Question 13

Economies of scale can benefit consumers to the extent that the costs of production incurred by the firms in the industry are lower than they would otherwise be.At the same time,the price-setting power of those firms is increased,which could hurt consumers.

Accepted Answer

Economies of scale can result in lower costs for firms, which can potentially lead to lower prices for consumers. However, as firms become larger and more dominant in the industry, they may gain more market power and be able to set higher prices without fear of losing customers to smaller competitors. This can ultimately harm consumers by giving them fewer choices and higher prices. Therefore, both effects are possible and can coexist.

Question 14

A price-setting firm prefers to operate in the inelastic portion of its demand curve because total revenue increases when price is increased.

Accepted Answer

A price-setting firm prefers to operate in the elastic portion of its demand curve because in the inelastic portion, increasing price would lead to a proportionally larger decrease in quantity demanded, potentially reducing total revenue.

Question 15

Any firm that operates in an imperfectly competitive market faces a downward-sloping demand curve for its product.

Accepted Answer

This is because in an imperfectly competitive market, the firm does not have complete control over the price of its product, and therefore must adjust quantity sold in response to changes in price. This results in a downward-sloping demand curve, as the quantity demanded decreases as price increases.

Question 16

Consumers lose when a market is served by a monopolist to the extent that units of output for which the price consumers are willing to pay exceeds the marginal costs of production are not produced.

Accepted Answer

When a market is served by a monopolist, the monopolist sets a price above the marginal cost of production, causing a reduction in output and efficiency. This means that some units of output that consumers are willing to buy are not produced, resulting in consumer welfare loss. Therefore, consumers lose when a market is served by a monopolist.

Question 17

Price will always exceed marginal cost for the profit-maximizing monopolist,or any price-setter firm for that matter.

Accepted Answer

The profit-maximizing monopolist or any price-setter firm will always set the price at a level higher than the marginal cost in order to earn profits. This is because the marginal cost represents the cost of producing one additional unit of output, whereas the price is the revenue that the firm earns from selling that unit. If the price were set equal to the marginal cost, the firm would not earn any profit. Therefore, in order to maximize profits, the firm will set a price that is higher than the marginal cost.

Question 18

For a monopolist to earn a positive economic profit,price has to exceed average total cost at the level of output at which marginal revenue equals marginal cost.

Accepted Answer

In order for a monopolist to earn economic profit, they must charge a price that is higher than their average total cost at the output level where marginal revenue equals marginal cost. This is because the monopolist has market power and can effectively charge a higher price than what a competitive market would bear. However, if the price is below average total cost, the monopolist would incur losses. Therefore, the statement is true.

Question 19

The term "price setter" refers to a firm that faces a downward-sloping demand curve and must therefore set the combination of output and price that will maximize the firm's profits.

Accepted Answer

A price setter is a firm that has some degree of market power, allowing it to set the price for its product or service. This is typically achieved when the firm faces a downward-sloping demand curve, meaning that as the price of the product decreases, consumers will demand more of it. In order to maximize its profits, the price setter must find the optimal combination of price and output that will maximize its revenue while also taking into account its costs. This differs from a price taker, which is a firm that has no market power and must accept the prevailing market price for its product.

Question 20

The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.

Accepted Answer

Being a price-setter does not guarantee that the firm's revenue will exceed its costs, which is necessary for making a positive economic profit. Other factors such as competition, changes in market demand, and production costs can also affect the firm's profit level.

Quiz 8: Market Structure: Monopoly and Monopolistic Competition