Question 1

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 2

Suppose the firms in a monopolistically competitive market are incurring economic losses.What will happen to move the market to its long-run equilibrium?

Accepted Answer

In the long-run, firms in a monopolistically competitive market will exit the market if they are experiencing economic losses. This will reduce the number of firms in the market, leading to a decrease in supply and an increase in market price. As the market price increases, economic losses for the remaining firms will decrease until they reach zero. At this point, the market will be in long-run equilibrium. Therefore, option C stating that firms will continue to exit the market until economic losses are equal to zero is the best choice. Options A, B, and D are incorrect because they do not accurately describe the process of reaching long-run equilibrium in a monopolistically competitive market.

Question 3

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 4

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 monopolist has complete control over a market, they often produce fewer units of output than would be produced by a competitive market. This reduction in output means that consumers are unable to purchase some units of output for which they would have been willing to pay a price equal to or greater than the marginal costs of production. Therefore, consumers lose out in this situation.

Question 5

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 6

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

Accepted Answer

Patents and copyrights provide legal protection and financial incentives for inventors and creators to invest time and resources into developing and producing new ideas and works. Without these protections, individuals may be unwilling to share their valuable creations for fear of others stealing or replicating them without compensation. Therefore, patents and copyrights do create incentives for individuals to create information that might not be produced otherwise.

Question 7

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 limit the number of people who can legally practice medicine, reducing the competition and potentially increasing the profits of those who are licensed.

Question 8

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

The answer of So long as a monopolist finds itself...

Question 9

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 will always set a price that is above its marginal cost in order to maximize its profits. This is because, at the profit-maximizing quantity, marginal revenue will equal marginal cost, but the monopolist will set the price above marginal cost in order to capture some of the consumer surplus.

Question 10

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

This is the standard condition for a monopolist to earn economic profit in the short run. If price is equal to or lower than average total cost at the level of output where marginal revenue equals marginal cost, the monopolist would be incurring losses. Therefore, price has to exceed average total cost at this level of output for the monopolist to be able to earn economic profit.

Question 11

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 difficult for new firms to enter an industry and compete with existing firms, which reduces the competition and therefore maintains the economic profits of price-setter firms.

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 restrict competition by limiting the entry of new competitors and giving the patent holder a monopoly over their invention.

Question 13

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 14

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

Accepted Answer

In a monopoly, the firm has market power to set prices higher than the competitive market price. This leads to a higher price and a lower output level compared to a perfectly competitive market with the same demand and cost conditions where the market determines the price and firms are price takers.

Question 15

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 16

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

Just because a firm is able to set its own prices does not guarantee that it will make a profit. The firm still needs to consider factors such as demand, production costs, and competition to determine a price that will maximize profit. Additionally, market conditions can change over time, making it difficult to maintain a profitable price-setting strategy.

Question 17

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

Accepted Answer

In an imperfectly competitive market, the firm has some degree of market power, which means it can influence the price of its product. As a result, the demand curve the firm faces is downward sloping, indicating that as the price increases, the quantity demanded decreases.

Question 18

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 has the ability to influence the price of its product in the market and must find the optimal combination of price and quantity that maximizes profits based on the demand curve it faces.

Question 19

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 20

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 lower production costs, allowing firms to potentially lower prices for consumers. However, larger firms with economies of scale may also have more market power and could increase prices for consumers.

Quiz 8: Market Structure: Monopoly and Monopolistic Competition