Question 1

Figure 15-11
  
In 2011, Verizon was granted permission to enter the market for cable TV in Upstate New York, ending the virtual monopoly that Time Warner Cable had in most local communities in the region. Figure 15-11 shows the cable television market in Upstate New York.
-Refer to Figure 15-11.What is the size of the deadweight loss prior to Verizon entering the market and what happens to this deadweight loss after Verizon does enter the market?
A)The deadweight loss of area D is converted to consumer surplus.
B)The deadweight loss of area C+D is converted to consumer surplus
C)The deadweight loss of area D is converted to producer surplus.
D)The total deadweight loss is the area D+F; D is converted to consumer surplus and F to producer surplus.

Accepted Answer

When Verizon enters the market, the deadweight loss of area D is converted to consumer surplus as competition increases, leading to lower prices and increased consumer benefits.

Question 2

Table 15-4
  
Shakti Inc. has been granted a patent for its Arnica toothache balm. Table 15-4 shows the demand and the total cost schedule for the firm.
-Refer to Table 15-4.What is the amount of Shakti's profit?
A)$68
B)$72
C)$124
D)$192

Accepted Answer

The correct answer is $68, which is the amount of Shakti's profit as per the information provided in Table 15-4.

Question 3

The size of a deadweight loss in a market is reduced by
A)government legislating a ceiling price.
B)government legislating a price floor.
C)market price being close to marginal cost.
D)creative destruction.

Accepted Answer

When the market price is close to the marginal cost, it means that the market is operating at an efficient level of production. The deadweight loss is minimized, and the market is operating at its optimal level. Government intervention through price ceilings or floors, or creative destruction, can disrupt the market and increase the deadweight loss. Therefore, the best choice is C.

Question 4

Firms do not have market power in which of the following market structures?
A)perfect competition only
B)perfect competition and monopolistic competition
C)oligopoly
D)monopoly

Accepted Answer

In a perfectly competitive market, firms are price takers, which means they have no market power to influence the market price. In monopolistic competition, firms have some degree of market power through product differentiation, but it is limited by the presence of close substitutes. In oligopoly and monopoly, firms have significant market power due to barriers to entry and limited competition.

Question 5

Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly.Which of the following statements regarding economic surplus in each market structure is true?
A)Under perfectly competitive conditions, economic surplus in this industry equals consumer surplus plus producer surplus. Under monopoly conditions, some consumer surplus is transferred to producer surplus, but economic surplus is the same as it was under perfectly competitive conditions.
B)Under perfectly competitive conditions, economic surplus in this industry is maximized. Under monopoly conditions, economic surplus is minimized.
C)Under perfectly competitive conditions, economic surplus is equal to consumer surplus; there is no producer surplus because firms are price takers. Under monopoly conditions, economic surplus is equal to producer surplus.
D)Under perfectly competitive conditions, economic surplus is maximized. Under monopoly conditions, economic surplus is less than under perfect competition and there is a deadweight loss.

Accepted Answer

Under perfect competition, economic surplus is maximized because the market is efficient and produces the socially optimal level of output. However, under monopoly conditions, the monopolist restricts output to increase prices, leading to a reduction in economic surplus compared to perfect competition, and there is a deadweight loss due to the inefficient allocation of resources. Therefore, option D is the correct statement. Option A is incorrect because economic surplus is reduced under monopoly conditions, even though producer surplus increases. Option B is incorrect because economic surplus is not necessarily minimized under monopoly conditions, but rather reduced from its maximum level. Option C is incorrect because producer surplus is not equal to economic surplus under monopoly conditions.

Question 6

A market economy benefits from market power
A)if the majority of the population are entrepreneurs.
B)if firms with market power do research and development with the profits earned.
C)if market power gets so bad the government creates public enterprises.
D)under no circumstances.

Accepted Answer

Market power allows firms to earn profits, which they can use to invest in research and development, leading to innovation and advancements in technology. This, in turn, can benefit the overall economy. However, if market power becomes too dominant and harmful to competition, it can lead to market inefficiencies and the need for government intervention.

Question 7

Market power refers to
A)the ability of consumers to dictate what products should be produced.
B)the ability of a firm to advertise its product and succeed in selling more output.
C)the ability of a firm to sell at a lower price than rival sellers.
D)the ability of a firm to charge a price higher than the marginal cost of production.

Accepted Answer

Market power refers to the ability of a firm to charge a price higher than the marginal cost of production, thereby generating excess profits. This ability to set prices above the competitive level is usually associated with firms that hold a dominant market share and face limited competition. The other options (A, B, and C) do not accurately capture the concept of market power.

Question 8

Figure 15-11
  
In 2011, Verizon was granted permission to enter the market for cable TV in Upstate New York, ending the virtual monopoly that Time Warner Cable had in most local communities in the region. Figure 15-11 shows the cable television market in Upstate New York.
-Refer to Figure 15-11.Following the entry of Verizon, the subscription price falls from PM to PC.What is the increase in consumer surplus as a result of this change?
A)the area A + B + C
B)the area B + C
C)the area D + F
D)the area B + C + D

Accepted Answer

The answer of Figure 15-11
  
In 2011, Verizon was...

Question 9

Figure 15-10
 
-Refer to Figure 15-10.What is the area that represents consumer surplus under a monopoly?
A)the triangle P₀P₁F
B)the triangle P₀P₂E
C)the area P₁P₂EF
D)the rectangle P₁P₃HF

Accepted Answer

Consumer surplus under a monopoly is represented by the triangle P₀P₁F, which is the area between the demand curve (P₀F) and the monopoly price (P₁). This is the maximum amount that consumers would be willing to pay for the product, minus the price they actually pay. The other areas listed do not represent consumer surplus.

Question 10

Table 15-4
  
Shakti Inc. has been granted a patent for its Arnica toothache balm. Table 15-4 shows the demand and the total cost schedule for the firm.
-Refer to Table 15-4.What is Shakti's profit-maximizing output?
A)4 units
B)5 units
C)6 units
D)7 units

Accepted Answer

The answer of Table 15-4
  
Shakti Inc. has been...

Question 11

Which of the following statements is consistent with the views of Joseph Schumpeter?
A)Research and development by competitive firms is responsible for most technological changes.
B)An economy benefits from firms having market power because these firms are more likely to be able to commit funds for research and development.
C)Enforcement of antitrust laws is necessary to promote competition among firms.
D)A lack of competition discourages firms from developing new technologies.

Accepted Answer

Joseph Schumpeter believed that firms with market power are better able to invest in research and development, which leads to technological innovation and economic growth. He also argued that monopolies may emerge as a result of successful innovation by entrepreneurial firms, but they are ultimately temporary and will be displaced by new innovators. Therefore, Schumpeter's views were more favorable towards market power than towards competition.

Question 12

Table 15-4
  
Shakti Inc. has been granted a patent for its Arnica toothache balm. Table 15-4 shows the demand and the total cost schedule for the firm.
-Refer to Table 15-4.What is the amount of the deadweight loss generated by Shakti when it produces the monopoly output?
A)$124
B)$42
C)$36
D)$12

Accepted Answer

The answer of Table 15-4
  
Shakti Inc. has been...

Question 13

Figure 15-10
 
-Refer to Figure 15-10.What is the area that represents producer surplus under a monopoly?
A)the triangle 0P₂E
B)the triangle 0P₃H
C)the area 0P₁FH
D)the rectangle P₁P₃HF

Accepted Answer

Producer surplus under a monopoly is represented by the area above the supply curve (or marginal cost curve) and below the price level set by the monopoly. In this case, it is the area 0P₁FH.

Question 14

The most profitable price for a monopolist is
A)the highest price a consumer is willing to pay for the monopolist's product.
B)the price at which demand is unit elastic.
C)a price that maximizes the quantity sold.
D)found where the profit-maximizing quantity hits the demand curve.

Accepted Answer

The most profitable price for a monopolist is found where the profit-maximizing quantity hits the demand curve. This is because at this point, the marginal revenue (the additional revenue obtained from selling one additional unit) equals the marginal cost (the additional cost incurred from producing one additional unit), which is the point of profit maximization. Option A is incorrect because the highest price a consumer is willing to pay may not necessarily maximize profit. Option B is incorrect because a unit-elastic demand means that a change in price will result in an equal change in quantity demanded, which may not necessarily lead to profit maximization. Option C is incorrect because maximizing the quantity sold does not necessarily maximize profit.

Question 15

Figure 15-10
 
-Refer to Figure 15-10.The deadweight loss due to a monopoly is represented by the area
A)FHE.
B)FGE.
C)GEH.
D)FQ₁Q₂E.

Accepted Answer

The deadweight loss due to a monopoly is represented by the area FHE. This is because the monopoly restricts output to Q1, which is less than the competitive output of Q2. As a result, consumers are willing to pay more for the good than the monopoly is charging, but they are unable to do so because the monopoly has restricted output. The area FHE represents the difference between the price consumers are willing to pay and the price they actually pay, and it is a measure of the deadweight loss due to the monopoly.

Question 16

Assume a hypothetical case where an industry begins as perfect competition and then becomes a monopoly.Which of the following statements comparing the conditions in the industry under both market structures is true?
A)A monopoly will produce more and charge a higher price than would a perfectly competitive industry producing the same good.
B)A monopoly will produce more and advertise more than would a perfectly competitive industry producing the same good.
C)A monopoly will produce less and charge a higher price than would a perfectly competitive industry producing the same good.
D)A monopoly will produce less and charge a lower price than would a perfectly competitive industry producing the same good.

Accepted Answer

In a perfectly competitive market, firms compete with each other and there are no barriers to entry or exit, so firms cannot charge a price above the market price. As a result, the industry produces at the efficient level of output and charges a price equal to the minimum of the average cost curve. In contrast, a monopoly has market power, meaning that it can charge a higher price than would prevail in a competitive market. Since a monopoly is the sole provider of the good, it can restrict output to drive up the price. Thus, a monopoly will produce less than a competitive market and charge a higher price.

Question 17

Table 15-4
  
Shakti Inc. has been granted a patent for its Arnica toothache balm. Table 15-4 shows the demand and the total cost schedule for the firm.
-Refer to Table 15-4.What is the economically efficient output level?
A)5 units
B)6 units
C)7 units
D)8 units

Accepted Answer

The answer of Table 15-4
  
Shakti Inc. has been...

Question 18

Figure 15-11
  
In 2011, Verizon was granted permission to enter the market for cable TV in Upstate New York, ending the virtual monopoly that Time Warner Cable had in most local communities in the region. Figure 15-11 shows the cable television market in Upstate New York.
-Refer to Figure 15-11.Suppose the local government imposes a $2.50 per month tax on cable companies.What happens to the price charged by the cable company following the imposition of this tax?
A)The price rises from PM to (PM + $2.50).
B)The price rises from PM but it increases by an amount less than $2.50.
C)The price rises from PM but it increases by an amount greater than $2.50 to reflect the monopoly's markup.
D)The price remains at PM.

Accepted Answer

The answer of Figure 15-11
  
In 2011, Verizon was...

Question 19

Figure 15-10
 
-Refer to Figure 15-10.Compared to a perfectly competitive market, consumer surplus is lower in a monopoly by an amount equal to the
A)area FHE.
B)area FGE.
C)area P₁P₂EF.
D)area P₁P₂GF.

Accepted Answer

In a monopoly, the price is higher and the quantity is lower compared to a perfectly competitive market. The reduction in consumer surplus is represented by the area between the monopoly price and the competitive price over the quantity sold, which is area P₁P₂EF.

Question 20

Assume a hypothetical case where an industry begins as perfect competition and then becomes a monopoly.As a result of this change
A)price will be higher, output will be lower, and the deadweight loss will be eliminated.
B)consumer surplus will be smaller, producer surplus will be greater, and there will be a reduction in economic efficiency.
C)price will be higher, consumer surplus will be greater, and output will be greater.
D)consumer surplus will be smaller and producer surplus will be greater. There will be a net increase in economic surplus.

Accepted Answer

The change from perfect competition to monopoly would result in a reduction in economic efficiency as the firm now has market power to set higher prices and produce less output. This would lead to a transfer of consumer surplus to producer surplus, resulting in a smaller consumer surplus and a greater producer surplus. Moreover, the deadweight loss due to the monopoly power would result in a net loss of economic surplus. Thus, option B is the best answer.

Quiz 15: Monopoly and Antitrust Policy

Table 15-4 Shakti Inc. has been granted a patent for its Arnica toothache balm. Table 15-4 shows the demand and the total cost schedule for the firm. -Refer to Table 15-4.What is the amount of Shakti's profit?

The size of a deadweight loss in a market is reduced by

Firms do not have market power in which of the following market structures?

Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly.Which of the following statements regarding economic surplus in each market structure is true?

A market economy benefits from market power

Market power refers to

Figure 15-10 -Refer to Figure 15-10.What is the area that represents consumer surplus under a monopoly?

Table 15-4 Shakti Inc. has been granted a patent for its Arnica toothache balm. Table 15-4 shows the demand and the total cost schedule for the firm. -Refer to Table 15-4.What is Shakti's profit-maximizing output?

Which of the following statements is consistent with the views of Joseph Schumpeter?

Table 15-4 Shakti Inc. has been granted a patent for its Arnica toothache balm. Table 15-4 shows the demand and the total cost schedule for the firm. -Refer to Table 15-4.What is the amount of the deadweight loss generated by Shakti when it produces the monopoly output?

Figure 15-10 -Refer to Figure 15-10.What is the area that represents producer surplus under a monopoly?

The most profitable price for a monopolist is

Figure 15-10 -Refer to Figure 15-10.The deadweight loss due to a monopoly is represented by the area

Assume a hypothetical case where an industry begins as perfect competition and then becomes a monopoly.Which of the following statements comparing the conditions in the industry under both market structures is true?

Table 15-4 Shakti Inc. has been granted a patent for its Arnica toothache balm. Table 15-4 shows the demand and the total cost schedule for the firm. -Refer to Table 15-4.What is the economically efficient output level?

Figure 15-10 -Refer to Figure 15-10.Compared to a perfectly competitive market, consumer surplus is lower in a monopoly by an amount equal to the

Assume a hypothetical case where an industry begins as perfect competition and then becomes a monopoly.As a result of this change