Question 1

U.S.antitrust laws are designed to prohibit monopolization and encourage competition.Why, then, does the government erect barriers to entry and create monopoly power by granting firms patents?

Accepted Answer

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Question 2

Provide two examples of a government barrier to entry.

Accepted Answer

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Question 3

Figure 15-2
  
Figure 15-2 above shows the demand and cost curves facing a monopolist.
-Refer to Figure 15-2.If the firm's average total cost curve is ATC₂, the firm will
A)suffer a loss.
B)break even.
C)make a profit.
D)face competition.

Accepted Answer

The answer of Figure 15-2
  
Figure 15-2 above shows...

Question 4

Figure 15-2
  
Figure 15-2 above shows the demand and cost curves facing a monopolist.
-Refer to Figure 15-2.To maximize profit, the firm will produce at output level
A)Q₁.
B)Q₂.
C)Q₃.
D)Q₄.

Accepted Answer

The monopolist will produce where marginal revenue (MR) is equal to marginal cost (MC) to maximize profits. In Figure 15-2, this occurs at output level Q₂, where the MR and MC curves intersect. At this output level, the firm can charge a price of P₂ and still sell all of its output. Producing at any other output level would result in lower profits. Therefore, the best choice is B, producing at output level Q₂.

Question 5

Identify four reasons for high entry barriers.Briefly explain each reason.

Accepted Answer

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Question 6

If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the
A)marginal revenue of the sixth performance is $288,000.
B)marginal revenue of the sixth performance is $38,000.
C)cost of staging the sixth performance is probably higher than the cost of staging the previous five.
D)company will be making a loss on the sixth performance because its ticket sales will be less than the average revenue received from the previous five.

Accepted Answer

The marginal revenue of the sixth performance is the difference in revenue between the five performances and the six performances, which is $288,000 - $250,000 = $38,000.

Question 7

Figure 15-2
  
Figure 15-2 above shows the demand and cost curves facing a monopolist.
-Refer to Figure 15-2.If the firm's average total cost curve is ATC₁, the firm will
A)suffer a loss.
B)break even.
C)make a profit.
D)face competition.

Accepted Answer

If the firm's average total cost curve is ATC₁ and it is below the market price, the firm will make a profit as its costs are lower than the revenue it earns per unit.

Question 8

If a monopolist's price is $50 per unit and its marginal cost is $25, then
A)to maximize profit the firm should increase output.
B)to maximize profit the firm should decrease output.
C)to maximize profit the firm should continue to produce the output it is producing.
D)Not enough information is given to say what the firm should do to maximize profit.

Accepted Answer

The answer of If a monopolist's price is $50 per...

Question 9

Because a monopoly's demand curve is the same as the market demand curve for its product,
A)the monopoly's marginal revenue equals its price.
B)the monopoly is a price taker.
C)the monopoly must lower its price to sell more of its product.
D)the monopoly's average total cost always falls as it increases its output.

Accepted Answer

A monopoly must lower its price to sell more of its product because its demand curve is downward sloping, meaning it faces the entire market demand.

Question 10

A monopolist's profit-maximizing price and output correspond to the point on a graph
A)where average total cost is minimized.
B)where total costs are the smallest relative to price.
C)where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.
D)where price is as high as possible.

Accepted Answer

A monopolist's profit-maximizing point is where marginal revenue (MR) equals marginal cost (MC). This is because at this point, the monopolist is producing an output level where the additional revenue earned from selling one more unit (MR) is equal to the additional cost of producing one more unit (MC). Additionally, they charge the price on the market demand curve for that output, which corresponds to the highest price consumers are willing to pay for that quantity. Therefore, C is the correct answer.

Question 11

A virtuous cycle refers to the development of new products that follows when a monopoly earns economic profits.

Accepted Answer

A virtuous cycle refers to a self-reinforcing cycle of positive feedback between different aspects of product development, such as innovation, investment, and market adoption. It is not directly tied to the economic profits of a monopoly. In fact, monopolies can potentially hinder innovation and competition, leading to a less dynamic and efficient market.

Question 12

The demand curve for a monopoly's product is
A)the market demand for the product.
B)more elastic than the market demand for the product.
C)more inelastic than the market demand for the product.
D)undefined.

Accepted Answer

In a monopoly, the firm is the sole producer of the product, so the demand curve for the monopoly's product is the same as the market demand curve.

Question 13

A public franchise gives the exclusive right to produce a product for 20 years from the date the product is invented.

Accepted Answer

A public franchise is a contract between a government agency and a private entity granting the entity the exclusive right to perform a particular service or produce a particular product. However, the duration of a public franchise can vary and is not limited to 20 years.

Question 14

What is a public franchise? Are all public franchises natural monopolies?

Accepted Answer

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Question 15

Network externalities refer to the situation where the usefulness of a product increases with the number of consumers who use it.

Accepted Answer

Network externalities occur when a product or service becomes more valuable as more people use it. This is often seen in social networks or communication platforms, where the value of the service increases as more people join and use it, providing more opportunities for interaction and connections.

Question 16

Microsoft hires marketing and sales specialists to decide what prices it should set for its products, whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity market, does not.Why is this so?
A)because Microsoft is large enough to hire the best people in the field
B)because Microsoft could potentially lose sales if it sets prices indiscriminately
C)because the wealthy corn farmer is a price maker who sets his price independently of the market price, but Microsoft's optimal output depends on the price it selects
D)because unlike Microsoft, the wealthy corn farmer is probably a monopolist

Accepted Answer

Microsoft operates in a competitive market where setting prices too high could result in lost sales to competitors or even push customers towards substitutes. Thus, it requires specialized professionals to determine the optimal prices that can maximize profits without jeopardizing sales. On the other hand, the corn farmer operates in a commodity market where the prevailing market price is beyond their control. They have to accept the market price for their product as they cannot individually influence it. Hence, the need for pricing specialists is much more crucial for Microsoft than for the corn farmer.

Question 17

How does a network externality serve as a barrier to entry? Is this barrier surmountable? Explain.

Accepted Answer

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Question 18

If a monopolist's marginal revenue is $25 a unit and its marginal cost is $25, then
A)to maximize profit the firm should increase output.
B)to maximize profit the firm should decrease output.
C)to maximize profit the firm should continue to produce the output it is producing.
D)Not enough information is given to say what the firm should do to maximize profit.

Accepted Answer

Since the marginal revenue and marginal cost are equal in this scenario, the monopolist is already producing the output level that maximizes its profit. Therefore, there is no need to increase or decrease output.

Question 19

What gives rise to a natural monopoly? How do consumers benefit from a natural monopoly?

Accepted Answer

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Question 20

Figure 15-2
  
Figure 15-2 above shows the demand and cost curves facing a monopolist.
-Refer to Figure 15-2.The firm's profit-maximizing price is
A)P₁.
B)P₂.
C)P₃.
D)P₄.

Accepted Answer

The answer of Figure 15-2
  
Figure 15-2 above shows...

Quiz 15: Monopoly and Antitrust Policy

U.S.antitrust laws are designed to prohibit monopolization and encourage competition.Why, then, does the government erect barriers to entry and create monopoly power by granting firms patents?

Provide two examples of a government barrier to entry.

Figure 15-2 Figure 15-2 above shows the demand and cost curves facing a monopolist. -Refer to Figure 15-2.If the firm's average total cost curve is ATC₂, the firm will

Figure 15-2 Figure 15-2 above shows the demand and cost curves facing a monopolist. -Refer to Figure 15-2.To maximize profit, the firm will produce at output level

Identify four reasons for high entry barriers.Briefly explain each reason.

If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the

Figure 15-2 Figure 15-2 above shows the demand and cost curves facing a monopolist. -Refer to Figure 15-2.If the firm's average total cost curve is ATC₁, the firm will

If a monopolist's price is $50 per unit and its marginal cost is $25, then

Because a monopoly's demand curve is the same as the market demand curve for its product,

A monopolist's profit-maximizing price and output correspond to the point on a graph

A virtuous cycle refers to the development of new products that follows when a monopoly earns economic profits.

The demand curve for a monopoly's product is

A public franchise gives the exclusive right to produce a product for 20 years from the date the product is invented.

What is a public franchise? Are all public franchises natural monopolies?

Network externalities refer to the situation where the usefulness of a product increases with the number of consumers who use it.

Microsoft hires marketing and sales specialists to decide what prices it should set for its products, whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity market, does not.Why is this so?

How does a network externality serve as a barrier to entry? Is this barrier surmountable? Explain.

If a monopolist's marginal revenue is $25 a unit and its marginal cost is $25, then

What gives rise to a natural monopoly? How do consumers benefit from a natural monopoly?

Figure 15-2 Figure 15-2 above shows the demand and cost curves facing a monopolist. -Refer to Figure 15-2.The firm's profit-maximizing price is