Question 1

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 allocates resources to the highest valued uses. However, under monopoly conditions, the firm restricts output and charges a higher price, resulting in less consumer surplus and less total economic surplus. This reduction in economic surplus is called the deadweight loss. Therefore, option D is the correct choice.

Question 2

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) the price for which marginal revenue equals marginal cost.

Accepted Answer

The most profitable price for a monopolist is the price for which marginal revenue equals marginal cost, as this ensures that the monopolist is producing at the level where they are maximizing their profits. This is because marginal revenue represents the additional revenue generated by selling one more unit of a product, while marginal cost represents the additional cost of producing one more unit. When MR=MC, the monopolist is producing at the level where the additional revenue from selling an additional unit is equal to the additional cost of producing that unit, meaning they are maximizing their profits.

Question 3

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 trapezium P₁P₂EF D) the rectangle P₁P₃HF

Accepted Answer

The area that represents consumer surplus under a monopoly is the triangle PS1U1B10S1U1B0PS1U1B11S1U1B0F. This is because consumer surplus is the difference between what consumers are willing to pay and what they actually pay. In this case, the area below the demand curve (PS1) and above the price (U1B10S1U1B0) represents what consumers are willing to pay, while the area below the demand curve and above the monopoly price (U1B11S1U1B0) represents what they actually pay. The difference between the two is the consumer surplus, which is the triangular area PS1U1B10S1U1B0PS1U1B11S1U1B0F.

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 perfect competition, there are many small firms producing identical products, so no single firm has the ability to influence the market price. In monopolistic competition, firms have some degree of market power due to product differentiation. In oligopoly, a few large firms dominate the market and have some market power. In monopoly, a single firm is the only producer in the market and has significant market power.

Question 5

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

A deadweight loss occurs when the quantity of a good traded in a market is below or above the equilibrium quantity, resulting in a loss of efficiency. When the market price is close to the marginal cost, it means that the market is operating efficiently and there is no deadweight loss. Therefore, option C is correct. Option A (government legislating a ceiling price) can lead to a shortage of the good, which can increase the deadweight loss. Option B (government legislating a price floor) can lead to a surplus of the good, which can also increase the deadweight loss. Option D (creative destruction) is not directly related to reducing deadweight loss in a market.

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

Firms with market power have the ability to earn higher profits, which they can use to invest in research and development. This can lead to innovation, which benefits the entire economy. However, if market power becomes too strong, it may lead to negative consequences such as reduced competition and higher prices for consumers, which could eventually require government intervention through the creation of public enterprises as in choice C. Therefore, while market power can bring benefits in the form of innovation, it needs to be balanced with competition to ensure that the benefits of the market economy are widely shared.

Question 7

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?
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, there are many firms producing the same product, which drives the price down to the equilibrium point where marginal cost equals marginal revenue. In contrast, a monopoly has the power to set the price because it is the only seller in the market. Therefore, a monopoly will produce less (closer to the point where marginal cost equals marginal revenue) and charge a higher price than would a perfectly competitive industry producing the same good. This is because, in a monopoly, the firm can restrict output to a level where the marginal revenue exceeds the marginal cost. As a result, the monopolist produces at a lower output level and charges a higher price, leading to higher profits.

Question 8

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 9

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 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 the amount of Shakti's profit?
A) $68
B) $72
C) $124
D) $192

Accepted Answer

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

Question 11

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 P_M to (P_M + $2.50). B) The price rises from P_M but it increases by an amount less than $2.50. C) The price rises from P_M but it increases by an amount greater than $2.50 to reflect the monopoly's markup. D) The price remains at P_M.

Accepted Answer

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

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 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 13

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

The answer of Figure 15-10 
-Refer to Figure 15-10.Compared to...

Question 14

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. This is because firms with market power have control over the market and can charge a higher price without losing customers to competitors.

Question 15

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 16

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 P_M to P_C.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 17

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 trapezium 0P₁FH D) the rectangle P₁P₃HF

Accepted Answer

Producer surplus under a monopoly is represented by the area between the marginal cost curve and the monopolist's price (the area above the supply curve but below the demand curve). In Figure 15-10, this is the trapezium 0P₁FH.

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.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

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

Question 19

Assume a hypothetical case where an industry begins as perfectly competitive 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

When an industry transitions from perfectly competitive to a monopoly, the market power shifts from many sellers competing to a single seller dominating the market. This allows the monopoly to increase prices and reduce output, resulting in a decrease in consumer surplus and an increase in producer surplus. However, because the monopoly restricts output, it also creates a deadweight loss, reducing economic efficiency. Therefore, choice B best describes the outcomes of this hypothetical case.

Question 20

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 answer of Figure 15-10 
-Refer to Figure 15-10.The deadweight...

Quiz 15: Monopoly and Antitrust Policy

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?

The most profitable price for a monopolist is

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

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

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

A market economy benefits from market power

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?

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?

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?

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?

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?

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

Market power refers to

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

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

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

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