Question 1

A profit-maximising monopoly produces a lower output level than would be produced if the industry was perfectly competitive.

Accepted Answer

A monopoly has market power and can set higher prices than a perfectly competitive industry. In order to maximize profits, the monopoly will produce where marginal revenue equals marginal cost, which will result in a lower output level and higher prices compared to a perfectly competitive industry where price is equal to marginal cost.

Question 2

Figure 8-11  Figure 8-11 shows the cost and demand curves for a monopolist.
-Refer to Figure 8-11.What is the amount of consumer surplus if,instead of a monopoly,the industry was organised as a perfectly competitive industry?

Accepted Answer

In a perfectly competitive industry, consumer surplus is maximized because the price equals marginal cost. The consumer surplus is the area above the price level and below the demand curve, which is typically larger than in a monopoly.

Question 3

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

Accepted Answer

When a market shifts from perfect competition to monopoly, the firm gains market power and can charge a higher price. This results in a decrease in consumer surplus as consumers must pay a higher price. Additionally, the monopoly may reduce output in order to maximize profits, resulting in a decrease in economic efficiency and potentially a deadweight loss. Producer surplus, on the other hand, will increase as the monopoly firm is able to charge a higher price and earn greater profits. Therefore, Choice B is the best option because it captures the decrease in consumer surplus, increase in producer surplus, and reduction in economic efficiency that typically result from a shift from perfect competition to monopoly.

Question 4

A market economy benefits from market power

Accepted Answer

If firms with market power reinvest their profits into research and development, they can improve their products or services, increase efficiency, and potentially lower prices for consumers. This can ultimately benefit the overall economy by increasing productivity and economic growth. However, if market power becomes too excessive, it can lead to negative consequences such as reduced competition and higher prices for consumers, which would undermine the benefits of a market economy.

Question 5

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

Accepted Answer

Under perfect competition, firms produce at the point where marginal cost (MC) equals price (P), resulting in higher output and lower prices. In contrast, a monopolist charges a higher price and produces less than a perfectly competitive industry, resulting in decreased consumer welfare. This occurs because the monopolist faces a downward sloping demand curve and can charge a higher price by restricting output. Thus, choice C is the correct answer. Choices A and B are incorrect, as a monopoly charges a higher price and produces less than a perfectly competitive market. Choice D is also incorrect, as a monopoly charges a higher price and produces less than a perfectly competitive market.

Question 6

Suppose a monopoly is producing its profit-maximising output level.Now suppose the government imposes a lump-sum tax on the monopoly,independent of its output.As a result,the monopolist will increase the price of its product to cover its higher cost.

Accepted Answer

A lump-sum tax is not related to the output level of the monopoly, so it will not affect the monopolist's profit-maximizing output or the price of the product. The tax will simply reduce the monopoly's profits by the amount of the tax.

Question 7

Figure 8-11  Figure 8-11 shows the cost and demand curves for a monopolist.
-Refer to Figure 8-11.If the firm maximises its profits,the deadweight loss to society due to this monopoly is equal to the area

Accepted Answer

The answer of Figure 8-11  Figure 8-11 shows the...

Question 8

If a per-unit tax on output sold is imposed on a monopoly's product,the monopolist will increase its market price by the full amount of the tax.

Accepted Answer

The answer of If a per-unit tax on output sold...

Question 9

The ability of a firm to charge a price greater than marginal cost is called

Accepted Answer

The answer of The ability of a firm to charge...

Question 10

In reality,because few markets are perfectly competitive,some loss of economic efficiency occurs in the market for nearly every good or service.

Accepted Answer

This is because there are various market structures, such as monopolies and oligopolies, where firms have market power and can charge higher prices and/or produce less efficiently than in a perfectly competitive market. This results in a deadweight loss, which is a loss of economic efficiency.

Question 11

If the market for a product begins as perfectly competitive and then becomes a monopoly,there will be a reduction in economic efficiency and a deadweight loss.

Accepted Answer

In a perfectly competitive market, economic efficiency is maximized and there is no deadweight loss. However, when the market shifts to a monopoly, the monopolist reduces output and raises price, leading to a reduction in efficiency and deadweight loss.

Question 12

Which of the following statements is true?

Accepted Answer

A monopolist will maximize its profits by producing where marginal revenue equals marginal cost, regardless of whether a tax has been imposed. This is the basic rule for profit maximization for all firms.

Question 13

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?

Accepted Answer

Economic surplus is maximised under perfectly competitive conditions because firms are price takers and produce at the point where marginal cost equals marginal revenue, which is also the point where social benefit equals social cost. In a monopoly, the firm has market power and can set a higher price than the marginal cost, leading to reduced output and deadweight loss. Therefore, economic surplus under monopoly conditions is less than under perfect competition, and there is a deadweight loss.

Question 14

Figure 8-11  Figure 8-11 shows the cost and demand curves for a monopolist.
-Refer to Figure 8-11.Assume the firm maximises its profits.What is the amount of consumer surplus?

Accepted Answer

Consumer surplus is the area below the demand curve and above the price charged by the monopolist. In this case, the consumer surplus is the area of the triangle below the demand curve and above the monopolist's price, which is (1/2) x (30-12) x (18) = $186. To find this, we calculate the difference between the highest price a consumer would be willing to pay (which is given by the demand curve) and the actual price charged by the monopolist (which is given by the marginal revenue curve).

Question 15

Figure 8-11  Figure 8-11 shows the cost and demand curves for a monopolist.
-Refer to Figure 8-11.If this industry were organised as a perfectly competitive industry,the market output and market price would be

Accepted Answer

In a perfectly competitive market, the market price is determined by the intersection of market demand and market supply. In this case, the market demand curve is the same as the demand curve facing the monopolist. Therefore, the market output would be where the demand curve intersects with the marginal cost curve (MC) at point E, which has an output of 83 and a price of $22.

Question 16

Whenever a firm can charge a price greater than marginal cost

Accepted Answer

The answer of Whenever a firm can charge a price...

Question 17

Suppose a monopoly is producing its profit-maximising output level.Now suppose the government imposes a lump-sum tax on the monopoly,independent of its output.As a result,the monopoly's profit will fall.

Accepted Answer

A lump-sum tax is a fixed amount of tax that must be paid regardless of the quantity produced. Since the tax is not dependent on output, it will reduce the monopoly's profit regardless of their output level. Therefore, the statement is true.

Question 18

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

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 19

In evaluating the degree of economic efficiency in a market,we can state that the size of the deadweight loss in a market will be smaller

Accepted Answer

Deadweight loss occurs when the marginal cost (MC) of producing a good or service is less than the price consumers are willing to pay (P). In other words, there is a gap between the cost of producing the good and the price consumers are paying for it. The smaller the difference between MC and P, the more efficient the market is because there is less waste due to overproduction or underconsumption. Therefore, in evaluating the degree of economic efficiency in a market, the size of the deadweight loss will be smaller when the difference between MC and P is smaller, as stated in option C.

Question 20

The only firms that do not have market power are

Accepted Answer

In perfectly competitive markets, firms are price takers and have no control over the market price. Therefore, they do not have market power. Choices A, B, and D describe situations where firms may have some market power.

Quiz 8: Technology, production, and Costs