Transcript Economics - A Contemporary Introduction

Multiple Choice Tutorial
Chapter 9
Monopoly
1. In the market structure of monopoly, new
firms
a. cannot profitably enter the industry, even
in the long run
b. may freely enter and leave the industry in
both the short run and the long run
c. may freely leave and enter the industry in
the long run only
d. have no incentive to enter the industry,
even if economic profits are present
A. A monopoly is a monopoly because of huge
barriers to entry, for one reason or another.
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2. Which of the following is not considered a
barrier to entry?
a. patents
b. government licenses
c. economies of scale
d. diseconomies of scale
D. Economies of scale exist when factors cause
reduction in a firm’s average cost as the scale
of operations increases in the long run.
Diseconomies of scale exist when factors
cause a firm’s average cost to increase as the
scale of operations increases in the long run.
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3. Which of the following conditions would be
least likely to lead to the market structure of
monopoly?
a. the firm has patent protection for certain
basic production processes
b. the firm has control over the entire supply
of a basic input required to produce the
product
c. firms can freely enter and leave the
industry in the long run
d. significant economies of scale exist, leading
to declining average costs throughout the
relevant range of production
C. Same as question #1.
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4. Which of the following describes the market
structure of monopoly?
a. many firms with some control over price,
and considerable product differentiation
b. many firms with no control over price,
producing identical products
c. a few firms with some control over price,
producing highly differentiated products
d. a single firm producing all of the output for
the industry, with strong control over price
D. Monopolies can be in a local market. For
example, if there is only one doctor in a town
that is a long way from any other towns, the
doctor can be a monopoly because of the
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town’s isolation.
5. Patents are designed to
a. repay inventors for the resources spent in
research and development, by giving them
temporary monopolies
b. encourage the immediate and widespread
copying and use of new innovations and
new technologies throughout the economy
c. work with antitrust laws to eliminate
monopolies in the U.S.
d. create and maintain perfectly competitive
industries
A. Without patents a person could spend money
and time on an invention, but as soon as the
invention becomes marketable, someone else
could copy it and be a competitor.
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6. Natural monopolies form when
a. small firms merge to form larger firms
b. the firm has control over the entire supply
of a basic input required to produce the
product
c. the firm’s monopoly position is created and
enforced by the government
d. long-run average cost declines as the firm
expands output
D. As a firm grows several things can happen that
lower costs. For example, greater use of the
state of the art capital, better use of byproducts, more division of labor, lower costs of
raw materials as they can be bought in bulk. 7
7. Unlike perfectly competitive firms,
monopolists can
a. earn positive short-run economic profit
even if price is less than average variable
cost at all rates of output
b. sell any quantity of output at any price
they choose
c. earn long-run economic profits
d. reduce the sales of other firms in the
industry through advertising
C. Long-run economic profits can be made
because of such huge barriers to entry; other
firms cannot enter into the industry to
partake in the monopolist profits.
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8. Firms can earn economic profits even in the
long run if
a. they charge the highest price possible
b. there is a cost-reducing technological
change
c. there are significant barriers to entry
d. marginal revenue equals marginal cost
C. If it were not for the barriers to entry, other
firms could enter the industry, the supply
curve would shift to the right, and prices and
profits would be suppressed.
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9. In the long run, which of the following is not a
problem for a monopolist earning economic
profits?
a. other firms have an incentive to create new
substitutes for the monopolist’s product
b. technological change tends to break down
barriers to entry
c. all profit will gradually be converted to
consumer surplus
C. Consumer surplus is the difference between the
maximum amount that a consumer is willing to
pay for a given quantity of a good and what the
consumer actually pays. Consumer surplus falls
on the demand side, whereas economic profits fall
on the supply side.
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10. The demand curve facing a
nondiscriminating monopolist
a. is the market demand curve
b. is the same as the demand curve facing a
perfectly competitive firm
c. is the same as its marginal revenue curve
A. A discriminating monopolist will charge
different consumers different prices, a
nondiscriminating monopolist will charge the
same price to all consumers. For a
nondiscriminating monopolist demand
determines price, ultimately the consumers
determines what price they are willing to pay.
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11. For a nondiscriminating monopolist,
describe the relationship between market
price (P), average revenue (AR), and marginal
revenue (MR).
a. P = AR = MR
b. P > AR = MR
c. P = AR > MR
C. Price equals average revenue (AR) because all
units are sold for the same price, therefore,
total revenue (TR) divided by quantity (Q) will
always get us back to the price. AR > MR
because in order to sell more units a firm has to
lower price and that price cut has to apply to all
identical units at one point in time.
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Price Quantity
90
1
80
2
70
3
60
4
50
5
12. From the above demand schedule for a
monopolist, what is the marginal revenue
associated with the sale of the fourth unit?
a. $10
b. $30
c. $60
B. TR at 3 units is 210; TR at 4 units is 240;
240 minus 210 equals 30.
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13. If marginal revenue equals price for all
units, it must be true that the firm
a. is a monopolist
b. is a perfect competitor
c. faces a perfectly inelastic demand curve
B. A characteristic of a perfect competitor is
that it can sell all it produces at the market
price. Therefore, it has no incentive to lower
price. Also, it has no incentive to charge a
higher price because it would not sell any
units; consumers could buy identical goods
from its competitors. Therefore, the amount
of the price is always added to total revenue
with each unit sold. The demand curve is
perfectly elastic.
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14. If a firm’s demand curve slopes downward,
the firm’s
a. marginal revenue will rise as price is
reduced
b. marginal revenue will generally be less
than price
c. total revenue will decline continuously as
price is reduced
B. With a downward sloping demand curve
more units can be sold as the price declines.
Therefore, MR < P because once the price is
lowered the new price must apply to all
identical units at one point in time.
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15. A firm facing a downward-sloping demand
curve sells 50 units of output at $10 each. The
firm’s marginal revenue is
a. $500
b. more than $10 but less than $500
c. $10
d. less than $10
D. For example, at 50 units the price is $10 and
TR = $500 (10 X 50). Let’s suppose that this
firm lowers price to $9 and 51 units are sold.
TR at $9 is 9 times 51 which equals $459. So
MR (revenue made on the last unit) is $-41
(459 - 500) when the price is $9, so MR < P.
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16. In the short run, if a monopolist is producing
where price equals marginal cost,
a. it is maximizing its profit
b. it should produce more output to maximize
profit
c. it should produce less output to maximize
profit
C. As long as MR > MC a firm should produce
that last unit, if MR < MC a firm should not
produce that last unit. Because P = MC in this
question, MR < MC and the firm should not
produce that last unit; if it does produce that
last unit it will lose money on that last unit.
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17. Nondiscriminating monopoly is similar to
perfect competition in that
a. they have the same level of barriers to
entry
b. they have a similar number of firms in the
industry
c. price equals marginal revenue for both
d. price equals average revenue for both
D. A nondiscriminating monopolist charges the
same price for all units of output at one point
in time. Because all units are sold for the
same price, TR / Q (AR) will always = P.
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18. Negative marginal revenue means that
a. the firm is maximizing its economic profit
b. the firm is maximizing its total revenue
c. total revenue is increasing at an increasing
rate as output increases
d. total revenue is decreasing as output
increases
D. Negative MR means that money is lost on
that last unit of output, therefore, if the last
unit is produced TR will decline.
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19. Total revenue for a monopolist is greatest
where
a. marginal revenue is positive
b. marginal revenue is zero
c. marginal revenue is negative
d. demand is perfectly elastic
B. Profits are maximized at the level of output
where MR = MC; up to this point money was
made on each unit of output and beyond this
point money is lost on each unit. At that unit
where MR = MC no money is made on that
last unit, therefore, MR is zero.
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20. Where demand is inelastic,
a. marginal revenue is positive and total
revenue is inversely related to price
b. marginal revenue is positive and total
revenue is directly related to price
c marginal revenue is negative, so total
revenue decreases as price falls.
C. Inelastic demand is the type of demand that
exists when a change in price has relatively
little effect on the quantity demanded; the
percent change in quantity demanded is less
than the percent change in price. When price
increases, total revenue increases, when price
decreases, total revenue decreases.
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21. A firm can sell 110 unit of output at $4 or 100
units at $5. Which of the following is true?
a. the firm is a monopolist
b. the firm’s demand curve is elastic
c. the firm’s demand curve is unit elastic
d. the firm’s demand curve is inelastic
D. 110 X $4 = $440; 100 X $5 = $500
This demand curve is inelastic because as the
price increased, total revenue increased.
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22. Unlike firms in a perfectly competitive
industry, monopolists have control over
a. the price they charge for the product
b. the quantity of output they produce
c. the prices they pay for resources
A. A firm in a perfectly competitive industry is a
price taker, it has no incentive to charge any
other price but the market price. Firms in the
other type markets are price makers, because
they have more control over their price they
can make the price of their products. However,
no matter the market, profits are maximized or
losses are where MR = MC.
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23. A nondiscriminating monopolist
a. has absolute control over both price and
quantity of output
b. has no control over either price or quantity
of output
c. is limited to choosing any price-quantity
combination on the market demand curve
C. Even a monopolist is subject to the demand
curve it faces. Beyond some price consumers
can choose to buy less, find substitutes, or
simply not buy at all. The more elastic the
demand curve, the more responsive
consumers will be to a price change.
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24. As a nondiscriminating monopolist increases
the quantity of output, what happens to price
(P) and marginal revenue (MR)?
a. both P and MR remain constant
b. P is constant, but MR decreases
c. P decreases, but MR is constant
d. both P and MR decrease, but MR falls
faster than P
D. This is because both the demand curve
and the marginal revenue curve are
downward sloping; but the MR curve is
underneath the demand curve and more
steeply sloped.
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25. If a monopolist is producing at a rate of
output in which market demand is inelastic,
a. reducing output would reduce both total
revenue and total cost
b. reducing output would increase both total
revenue and total cost
c. reducing output would increase total
revenue and reduce total cost
C. Because demand curves are downward
sloping (negative slope) a decrease in
quantity results in an increase in the price.
Total costs decrease because fewer units are
being produced.
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P
Last slide viewed
MC ATC
MR = MC
$18
$16
AVC
$11
$8
Exhibit 22-1
D = AR
Q
17
MR
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26. The profit-maximizing monopoly illustrated
in Exhibit 22-1 will
a. close immediately
b. earn an economic profit
c. break even
d. incur an economic loss
D. An economic loss is being incurred because
at the level of output where MR = MC, ATC
is greater than AR.
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27. The production level which will maximize
the total profit (or minimize loss) for the
monopoly in Exhibit 22-1 is
a. 0
b. 22
c. 17
d. 12
C. 17 units is where MR = MC.
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28. The profit-maximizing (or loss-minimizing)
price the monopoly will charge in Exhibit 22-1
is
a. $22
b. $11
c. $16
d. $18
C. To determine the profit maximizing (or loss
minimizing) price first locate the quantity
where MR = MC. Then draw a vertical line,
where the vertical line intersects the demand
curve (demand always determines price)
draw a horizontal line to the price axis.
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29. In attempting to maximize profit, the firm in
Exhibit 22-1 will have an economic
a. profit of $85
b. loss of $48
c. loss of $132
d. loss of $34
D. AR at 17 units is $16; ATC at 17 units is $18.
$18 minus $16 equals $2, which is the average
loss at 17 units. Total loss is the number of
units times the average loss; $17 X $2 = $34
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30. At the profit-maximizing (or lossminimizing) level of production, the monopoly
in Exhibit 22-1 will have total revenue of
a. $308
b. $187
c. $216
d. $272
D. Total revenue is price times quantity. The
loss minimizing price here is $16 and the loss
minimizing output is 17 units. 16 X 17 = $272
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31. At the profit-maximizing (or lossminimizing) level of production, the monopoly
in Exhibit 22-1 will have total cost of
a. $264
b. $306
c. $216
d. $187
B. The average total cost at 17 units is $18;
$18 times 17 units equals $306
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32. At the profit-maximizing (or lossminimizing) level of production, the monopoly
in Exhibit 22-1 will have a
a. profit per unit of output of $2
b. loss per unit of output of $2
c. loss per unit of output of $5
d. profit per unit of output of $5
B. Loss per unit equals AR minus ATC at the
level of output where MR = MC. In this case
AR equals $16 and ATC equals $18; $18
minus $16 = $2.
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P
Last slide viewed
MC
MR = MC
X
LRAC
U
T
D = AR
Q
MR
Exhibit 22-2
H
ZR
35
33. The monopoly in Exhibit 22-2 would
maximize profits by producing level of output
a. H
b. M
c. Z
d. zero
A. H is the level of output where MR = MC.
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34. The monopoly in Exhibit 22-2 would
maximize profits by charging price
a. T
b. U
c. V
d. X
D. X is the price where MR = MC.
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35. The price and output society would prefer in
Exhibit 22-2 would be
a. X and H respectively
b. V and M respectively
c. U and Z respectively
d. T and R respectively
D. At price T and quantity R, AR = AC so the
firms are making a normal profit, the
minimum amount of money that will keep
producers the incentive to stay in business.
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P
Last slide viewed
MC ATC
500
AVC
D = AR
Exhibit 22-3
97 MR
Q
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36. In order to maximize profits, the monopoly
in Exhibit 22-3 should produce
a. 97 units of output
b. substantially more than 97 units of output
c. less than 97 units of output
d. no output
A. Locate where MR = MC and draw a
vertical line down to the horizontal axis. The
number of units you come out at is 97 units.
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37. If the monopoly in Exhibit 22-3 is currently
charging $500, it should
a. continue charging $500
b. charge a slightly higher price
c. charge a much lower price
d. charge a slightly lower price
A. Locate where MR = MC, then draw a
vertical line up and down from this point.
Because demand determines the price, this
vertical line intersects the demand curve at a
much higher price than $500.
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P
Last slide viewed
MC ATC
70
AVC
D = AR
Q
Exhibit 22-4
10
MR
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38. In order to maximize profit, the firms in
Exhibit 22-4 should charge
a. no more than $70 and produce less than 10
b. less than $70 and produce less than 10
c. more than $70 and produce more than 10
d. $70 and produce 10
D. Locate where MR = MC, then draw a
vertical line up and down. Where this vertical
line intersects the horizontal axis is the profit
maximizing output; where the vertical line
intersects the demand curve, draw a
horizontal line across to the vertical axis,
where it intersects with the vertical axis is the
profit maximizing price.
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39. At the profit-maximizing output and price,
the firm in Exhibit 22-4 is earning
a. an economic profit
b. so much economic loss that it should close
immediately
c. a break even level of income
d. an accounting loss but not an economic loss
A. An economic profit is being made because
on that vertical line where MR = MC, AR is
greater than ATC, therefore, revenues are
greater than costs, so an economic profit is
being made.
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40. At the profit-maximizing price and output,
the firm in Exhibit 22-4 has
a. total revenue which exceeds $700
b. total costs which exceed $700
c. total revenue which is less than $700
d. total revenue equal to $700
D. Total revenue equals average revenue times
quantity. Because average revenue always
equals the price, AR = $70 and quantity
equals 10, so $70 X 10 = $700.
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Price
$110
$100
$90
$80
$70
Quantity
1
2
3
4
5
Total Cost
$100
$125
$175
$250
$350
41. From the above information, which is the
firm’s maximize profit?
a. -$10
b. $90
c. $95
C. Total revenue equals price times quantity
and profit is total revenue minus total cost.
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Price
$90
$80
$70
$60
$50
Quantity
0
1
2
3
4
Total Cost
$150
$250
$300
$400
$550
42. From the above information, what should the
firm do to maximize short-run profit?
a. this firm cannot make a profit
b. produce 1 unit of output and set price at $80
c. produce 2 units of output and set price at $60
d. produce 3 units of output and set price at $60
A. This firm is making less than a normal
profit because TR - TC is always negative. 47
43. A nondiscriminating monopolist earning
positive short-run profit determines that its
current marginal cost is $15 and its current
marginal revenue is $20. To maximize profit a
firm should
a. raise price and increase output
b. raise price and decrease output
c. maintain a constant price and increase
output
d. reduce price and increase output
D. As long as MR > MC is a firm should
produce that unit. An increase in output
means a lower price because of the
downward sloping demand curve.
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44. A nondiscriminating monopolist should shut
down in the short run
a. if marginal revenue is less than price
b. if its price (or demand curve) is less than
average total cost
c. if its price (or demand curve) is less than
averaged fixed cost
d. if its price (or demand curve) is less than
average variable cost
D. If price is less than average variable cost
(AVC) at the level of output where MR = MC,
losses are greater than fixes costs, so the firm
would lose more money by staying open than
if it were to close down.
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45. All firms maximize profit in which
a. price equals marginal cost
b. total revenue is maximized
c. average total cost is minimized
d. marginal cost equals marginal revenue
D. This, of course, is the key to profit
maximization. A firm will continue producing
additional units as long as MR > MC, and will
lose money on that last unit when MR < MC.
At that unit of output where MR = MC no
money is made nor is any money lost on that
last unit. Therefore, profits are maximized at
the last unit where MR > MC or at the level of
output where MR = MC because profit is the
same in both cases.
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46. A firm is making a loss determines the
marginal cost is $35, average variable cost is
$20, average total cost is $50, marginal
revenue is $30, and average revenue is $40.
This firm should
a. produce more than 10,000 units per
week
b. continue producing 10,000 units per week
c. produce less than 10,000 units per week,
but more than zero
C.
Thisdown
firm should produce less because
d. shut
MR < MC and it should continue operating
because its losses are less than its fixed
costs. Its average fixed cost is $30 ($50 $20) and its average loss is $10 ($40 - $50).
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47. A nondiscriminating, profit-maximizing
monopolist will charge a higher price and
produce a lower quantity than would be the case
in a perfectly competitive industry because
a. it controls demand
b. it can charge and receive any price it wants
because it is a monopoly
c. the shapes of its cost and revenue curves
dictate a higher price and lower quantity at
the level of output where MR = MC
C. Both a monopoly and firms as a part of a
perfectly competitive market have an incentive
to produce at the level of output where MR =
MC and demand determines the price for both.
The difference is in its cost and revenue curves.
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48. Monopolists
a. are guaranteed to earn positive short-run
economic profit
b. may earn positive short-run economic
profit, although long-run economic profit is
always zero
c. may earn positive profit both in the short
run and long run
d. earn zero economic profit both in the short
run and in the long run
C. Positive economic profits can be made even in
the long run for a monopolist because of large
barriers to entry, even when profits are being
made other firms will not enter into the industry,
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thus the supply curve does not decline.
49. If all costs are fixed and marginal cost is zero
for a nondiscriminating monopolist, the firm
will maximize profit in which the
a. price of the product is zero
b. demand curve is elastic
c. demand curve is unit elastic
d. demand curve is inelastic
C. A unit elastic demand curve is the type of
demand that exists when a percent change in
price causes an equal (but of opposite sign)
percent change in quantity demanded; the
elasticity value is minus one. In other words,
the revenue lost by a lower price is exactly
offset by an increase in revenue do to the
increase in quantity sold.
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50. If the marginal cost curve shifts upward, a
profit-maximizing, nondiscriminating
monopolist is likely to respond in the shortrun by
a. raising price and increasing output
b. raising price and decreasing output
c. keeping price constant and increasing
output
B. Anytime the MC curve shifts upward it will
intersect the MR curve at a lower quantity.
When you draw a vertical line from this
intersection to the demand curve and then
move horizontally to the vertical axis, you
will come out at a higher price.
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51. Compared to a perfectly competitive market,
a monopoly would tend to produce
a. more output and charge a higher price
b. the same amount of output, but charge a
higher price
c. less output and charge a higher price
d. less output and charge a lower price
C. MR = MC dictates a higher price and a
lower quantity than what would be the case
under conditions of perfect competition.
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52. If a perfectly competitive industry is
monopolized, consumer surplus
a. can be expected to decrease
b. will usually remain constant
c. can be expected to increase
d. drops from a high value to zero
A. Consumer surplus is the difference between
the maximum amount that a consumer is
willing to pay for a given quantity of a good
and what the consumer actually pays.
Consumer surplus will decline because under
a monopoly consumers will have to pay a
higher price than under perfect competition.
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53. The welfare loss of monopoly is also called
a. converted consumer surplus
b. deadweight loss
c. economic profit under monopoly
d. producer surplus
B. Deadweight loss is a loss of consumer
surplus and producer surplus that is not
transferred to anyone else; it can result from
monopolization of an industry. Welfare is lost
because under a monopoly consumers are
offered fewer units and have to pay a higher
price than otherwise.
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54. Deadweight loss represents
a. consumer surplus foregone on units of
output not produced under monopoly
b. consumer surplus converted to an
economic profit under monopoly
c. producer surplus foregone on units of
output not produced under monopoly
d. producer surplus converted to an economic
profit under monopoly
A. See previous answer.
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55. The actual welfare loss from monopoly in the
U.S. may be greater than calculated estimates
because some
a. monopolies experience strong economies of
scale
b. monopolists spend resources to secure and
maintain their monopoly
c. monopolists may purposely keep price
lower than its profit-maximizing level, in
order to increase barriers to entry
B. The resources used by a monopoly to retain
its monopolistic position are resources that
could have been used to provide the consumer
with more and better goods and services.
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56. Rent seeking involves activities undertaken
to
a. influence public policy in favor of one’s
financial gain
b. reduce costs and increase profit through
greater efficiency
c. raise price and increase profit by
restricting output
d. increase market demand through
advertising
A. Rent seeking are activities undertaken by
individuals or firms to influence public policy
in a way that will directly or indirectly
redistribute income to them.
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57. The U.S. Postal Service
a. has as much monopoly power now as it had
100 years ago
b. has lost much of its market power due to
new competitors and new technologies
c. has increased its prices by less than the rate
of inflation during the past 25 years
d. is more mechanized and more
computerized than its potential competitors
B. Especially in the area of packages, the U.S.
consumer has more choice of carriers than
ever before.
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58. Price discrimination occurs when a
monopolist charges
a. different prices to different buyers for
different products
b. different prices to different groups of
buyers, based on differences in the cost of
providing the commodity to the buyer
c. different prices to different groups of
buyers for reasons unrelated to the cost of
providing the commodity to the buyer
C. For example, a doctor in an isolated town
may charge a wealthy person more for an
operation than he will charge a poor person.
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59. Which of the following is not a condition
required for a monopolist to price
discriminate?
a. the demand curve facing the firm must be
downward-sloping
b. the firm must exhibit strong economies of
scale
c. there must be different groups of buyers
with different price elasticities of demand
d. the firm must be able to prevent reselling
of the product
B. Price discrimination for a monopolist has
nothing to do with economies of scale.
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60. If a monopolist can engage in perfect price
discrimination,
a. consumer surplus is maximized
b. deadweight loss is maximized
c. allocative efficiency is maximized
d. the marginal revenue curve is exactly the
same as the firm’s demand curve
D. Marginal revenue is less than price for a
nondiscriminating monopolist because when
it lowers price, the price cut has to apply to
all units of output, therefore revenue is lost
on previous units of output. But a
discriminating monopolist can lower price on
the present unit and not have to lower price
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on previous units of output.
END