Chapter 12

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Which of the following describes why marginal revenue is less than price for monopolists?

Because the lower price of the extra unit of output also applies to all prior units of output

How does a monopolist change the price of its product?

By changing the quantity of the product it produces.

How can imperfect competitors influence price?

By changing the quantity they produce

With a fixed downward-sloping demand curve, how can a monopolist increase sales?

By charging a lower price

In general, how do economists think that the government should address monopolies?

By judging them on a case-by-case basis

How is economic profit determined?

By multiplying per-unit profit by the total quantity produced

A recent trend in the United States is to industries in which competition seems possible.

Deregulation

Which of the following are examples of X-inefficiencies that may be found in regulated firms?

Nicer-than-typical office buildings More managers and staff than necessary Higher-than-competitive wages

Which of the following competitors are imperfect?

Oligopolists Monopolistic competitors Pure monopolists

If the objective of government is to achieve allocative efficiency, what kind of price should government establish for the monopolist?

One that is equal to its marginal cost.

Which of the following is considered a barrier to entry into an industry?

Ownership of essential property

What is a company engaging in when it charges some customers one price and other customers a different price?

Price discrimination

Which of the following are potential solutions to the economic losses incurred by a regulated monopoly caused by socially optimal pricing?

Price discrimination Public subsidies

A firm's manager is given the following information: To sell 4 units of output, a price of $132 must be charged; this level of output reflects marginal revenue of $102 and marginal costs of $60. If the firm wants to sell 5 units of output, a price of $122 must be charged; this reflects marginal revenue of $82 and marginal costs of $70. To sell 6 units of output, a price of $112 must be charged; at this level of output, marginal revenue will be $62 and marginal costs $80. What should the manager do?

Produce 5 units of output and charge $122.

Why does an inventor need to have her or his invention protected from rivals?

Rivals will use the invention without having shared in the effort and expense of developing it.

Which of the following have helped firms achieve economies of scale?

Specialized inputs Learning by doing Simultaneous consumption

Two solutions to the economic losses caused by socially optimal pricing are providing public and condoning price discrimination.

Subsidies

What did American Express do when it prevented the merchants who signed up to accept American Express credit cards from promoting rival cards to their customers?

The company created a barrier to trade.

Which of the following contribute to the complexities involved in fair-return pricing?

The difficulty of determining what the fair-return price should be Large rate-setting bureaucracies Rate decisions that require extensive public input through letters and hearings

If a firm is found guilty of achieving a monopoly through anticompetitive actions, then which of the following may occur?

The firm may be expressly prohibited from engaging in certain business activities. The firm may be broken into two or more competing firms.

Why are efforts to enter such industries as commercial aircraft or household laundry equipment so rare?

The industries require economies of scale to be profitable, which is expensive and risky to establish.

Which statement about demand curves in a pure monopoly is true?

The monopolist's demand curve is also the industry demand curve.

Which of the following explains the reasons for short-run losses and long-run bankruptcy when a socially optimal price is forced on a monopoly?

The regulated price may be so low that average total costs are not covered.

Which of the following explains why a pure monopolist is able to maintain an economic profit in the long run?

There are no new entrants to increase supply, drive down price, and eliminate profit.

Which of the following reasons explains why a professional sports team can be considered a monopoly?

They are the sole suppliers of specific services in a large geographic area.

When faced with continuing losses, what do the owners of a monopoly do?

They move their resources to alternative industries in the long run.

True or false: Price discrimination is common in international trade due in part to differences in demand elasticity.

True

How much will a profit-seeking monopolist produce if producing is preferable to shutting down?

Up to the output at which marginal revenue equals marginal cost

Which of the following factors explains the trend of federal, state, and local governments to abandon price regulation if the possibility of competition looks promising?

Various forms of X-inefficiency

Hiring incompetent relatives and poor supervision of workers can result in ______.

X-inefficiency

The trend of federal, state, and local governments abandoning price regulation if the possibility of competition looks promising is due to _____.

X-inefficiency

When a firm produces a specific output level at a higher cost than the necessary cost for that level of output, it is called ______.

X-inefficiency

Dentsply, a dominant American maker of false teeth, unlawfully prevented independent distributors of false teeth from carrying competing brands. This action is an example of _______.

a created entry barrier

monopolist will never choose a price-quantity combination where price reductions cause:

a decrease in total revenue

A monopolist will not seek the highest price possible because

a monopolist seeks maximum profit, not maximum price.

A natural monopolist may obtain substantial economic profit by setting a price ______.

above average total cost (ATC)

If the objective of government is to achieve efficiency, it should establish a legal price for the monopolist that is equal to its marginal cost.

allocative

At the profit-maximizing (loss-minimizing) output for a monopoly, if average revenue is less than average total costs, then the monopoly is experiencing

an economic loss

Because a monopoly is a price maker and prices its products in the elastic portion of the demand curve, its output is less than that required to achieve minimum average total cost. In addition, the monopoly's price will exceed its marginal cost at this level of output. Monopoly therefore creates

an efficiency loss

Monopoly is a legitimate concern because monopolists charge prices that are higher than marginal costs, which results in _______.

an underallocation of resources to the monopolized product

The monopolist's level of output is not at the minimum point of ______, meaning it will not be productively efficient.

average total cost

Which of the following are assumptions made in the model of pure monopoly?

a) Patents, economies of scale, and resource ownership secure the firm's monopoly c) The firm is a single-price monopolist; it changes the same price for all units of output e) No unit of government regulates the firm

As an example of ______, the Federal Communications Commission licenses only so many radio and television stations in each geographic area.

barriers to entry

What is the term for factors that prohibit firms from entering an industry?

barriers to entry

What is the shape of the product demand curve for a pure monopolist?

downward sloping

Price makers are firms with:

downward sloping demand curves

A firm positions itself in the best profit-maximizing (or loss-minimizing) level of production if the amount of output reflects the point at which the last unit's marginal revenue is equal to its marginal cost because

each unit of output after the MR = MC amount will earn less revenue than its costs. each unit of output prior to MR = MC earns more revenue for the firm than its costs.

A firm positions itself in the best profit-maximizing (or loss-minimizing) level of production if the amount of output reflects the point at which the last unit's marginal revenue is equal to its marginal cost because

each unit of output prior to MR = MC earns more revenue for the firm than its costs. each unit of output after the MR = MC amount will earn less revenue than its costs.

Total ______ is found by multiplying per-unit profit by the profit-maximizing output.

economic profit

Which of the following is more likely for a pure monopolist than for a pure competitor?

economic profit

Modern technology can be a cause of extensive ______.

economies of scale

The demand curve intersects the natural monopolist's long-run average total cost curve at a point where long-run average total costs are still falling, due to ______.

economies of scale

What term is used to describe declining average total costs with added firm size?

economies of scale

The monopolist wants a price-quantity combination to fall in the _____ section of its demand curve, where a lower price means _____ total revenue.

elastic; greater

Production occurs up to that level of output at which price ______ marginal cost, resulting in allocative efficiency under pure competition.

equals

In a pure monopoly, marginal revenue is less than price for every unit of output except which one?

first

X-inefficiency occurs when a firm operates at a cost that is (higher/lower) than the lowest cost for a particular level of output.

higher

Compared to a pure competitor, a monopolist finds it profitable to charge a ______ price and supply a ______ quantity.

higher, lower

One option for dealing with an unsustainable monopoly due to emerging new technology is to _____ the monopoly and allow ______ to take place.

ignore; creative destruction

Which type of competitors can influence price through their own output decisions?

imperfect

Which of the following is a reason for a monopolist to use price discrimination?

increase its profits

For a pure monopolist, total revenue ______.

increases at a diminishing rate

When demand is elastic and marginal revenue is positive, total revenue must be

increasing

The firm and ______ are synonymous in pure monopoly.

industry

When comparing the demand curve for a perfectly competitive firm to the demand curve of a monopolist, the monopolist's demand curve would be more ______.

inelastic

As an example of price discrimination, airlines charge higher fares to business travelers whose demand for travel is and offer lower, more restricted fares to vacationers and others with more demand.

inelastic; elastic

A firm can be expressly prohibited from engaging in certain business activities or can be broken into two or more competing firms when it

is found guilty of monopoly abuse.

In many large cities, the number of taxicabs allowed to operate is limited by the local government through the ______.

issuing licenses

A monopolist does not have a supply curve because:

it does not equate price with marginal cost there is no single, unique price associated with each level of output

When marginal revenue is negative, what is happening to total revenue?

it is diminishing

The profit-maximizing monopolist avoids the inelastic segment of its demand curve because

it would mean lowering price and increasing output, which leads to less total revenue.

The price-discriminating monopolist charges a higher price to customers who have ______ elastic demand and a lower price to customers who have ______ elastic demand.

less; more

When a monopolist charges a higher price than a purely competitive firm would, the monopolist essentially ______.

levies a "private tax" on consumers

What are the two legal barriers to entry created by the government?

licenses and patents

With a fixed downward sloping demand curve, the pure monopolist can only increase sales by charging a ______ price.

lower

Monopolists use economies of scale to block the entry of new firms into an industry by ______.

lowering prices so that another firm cannot compete

Firms with downward-sloping product demand curves are called price

makers

The socially optimal price is where a monopoly's price is equal to

marginal cost

In a pure monopoly, ______ is less than the price for every unit of output except the first.

marginal revenue

Which of the following can be a cause of extensive economies of scale?

modern technology

A(n) ______ is able to maintain an economic profit in the long run because there are no new entrants to increase supply, drive down price, and eliminate economic profit.

monopoly

Network effects may drive a market toward , because consumers tend to choose standard products that everyone else is using.

monopoly

Slashing prices is an example of an entry barrier created by a(n)

monopoly

Which form of industry is most likely to have the highest barriers to entry?

monopoly

A ______ monopoly is subject to rate regulations.

natural

For which of the following market structures does government policy allow for expansion and only eventual regulation of prices and operations?

natural monopoly

What may occur when only a single firm can achieve the economies of scale necessary to compete in an industry?

natural monopoly

When the market demand curve crosses the long-run average total cost curve where average total costs are declining, the firm is called a(n)

natural monopoly

Because Intel provides 80% of the central microprocessors used in personal computers, it is a:

near-monopoly

What is the term used to describe a situation where a single firm has the bulk of sales in a specific market?

near-monopoly

effects exist if the value of a product to each user increases as the total number of users increase.

network

Which of the following may make a pure monopoly unsustainable over the long-run?

new technology

Which characteristic of pure monopoly requires a consumer to buy the monopolized product or do without it entirely?

no close substitutes

In the long run, a monopolist must obtain, at a minimum, a(n) ______ profit to prevent going out of business.

normal

In general, as shown in the figure, a fair return price will lead to ______ and a socially optimal price will lead to ______.

normal profit; economic loss

In the long run, only ______ for a pure competitor are possible, whereas a monopoly earns ______.

normal profits; economic profits

A monopolist uses the profit-maximizing rule of marginal revenue equals marginal cost to determine the profit-maximizing and .

output, price

The exclusive right of an inventor to use, or to allow another to use, her or his invention is called:

patent

The pharmaceutical industry is an example of an industry that has achieved self-sustaining monopoly power through ______ on drugs.

patents

Which of the following is considered a barrier to entry protecting an inventor from its rivals?

patents

Fair return pricing is a result of the Supreme Court ruling that regulatory agencies must ______.

permit a "fair return" to utility owners

The strongest barriers to entry effectively block all ______.

potential competition

At a pure monopolist's profit-maximizing output (Qm), its exceeds marginal cost, resulting in allocative inefficiency.

price

Drawing a vertical line from the profit-maximizing output on the horizontal axis to the demand curve represents the ______.

price

At the profit-maximizing output (Qm), a monopolist's ______ is higher than marginal cost; therefore, a monopolist has allocative inefficiency.

price (Pm)

Market segregation must exist in order for a monopolist to ______.

price discriminate

A Russian aluminum producer selling aluminum for less in the United States than in Russia because demand in the United States is elastic, whereas demand in Russia is less elastic is an example of ______ in international trade.

price discrimination

Baseball ticket sellers charge a different price for adults and children. Ballpark concession stands charge the same prices for products sold to any customer. The baseball ticket sellers are providing a successful example of

price discrimination

What is the term used to refer to charging different prices to different buyers of a specific product?

price discrimination

A regulated monopoly is likely to suffer losses when ______.

price is set to marginal cost (P = MC) price is set to achieve the most efficient allocation of resources

Monopolists use economies of scale to block the entry of new firms into an industry by reducing ______ so that other firms cannot compete.

prices

In pure competition, ______ efficiency is achieved because free entry and exit forces firms to operate where average total cost is at a minimum.

productive

An unregulated monopolist uses the marginal revenue equals marginal cost (MR = MC) rule to determine the ______.

profit-maximizing output and price

Monopolies that produce standardized products engage mainly in ______.

public relations advertising

Entry is totally blocked to competitors in a(n) ______.

pure monopoly

Which of the following exists when a single firm is the sole producer of a product for which there are no close substitutes?

pure monopoly

How common are examples of pure monopoly?

rare

What has traditionally been used to control natural monopolies?

rate regulation

Higher-than-competitive wages, nicer-than-typical office buildings, and more managers and staff than are necessary are all examples of X-inefficiency found in firms.

regulated

What is it called when a firm spends significant money to maintain a monopoly through government legislation?

rent-seeking expenditures

Which of the following add nothing to the firm's output, but increase the firm's costs?

rent-seeking expenditures

What leads to most patentable inventions and products?

research and development

At output levels prior to MR=MC, marginal ______ is higher in comparison to marginal ______.

revenue - cost

Microsoft is a firm that benefits from ______ consumption.

simultaneous

What is the term used to refer to a product's ability to satisfy a large number of consumers at the same time?

simultaneous consumption

The ______ price is where a monopoly's price is equal to marginal cost.

socially optimal

To guard against excessively high prices to consumers, the government ______.

specifies the price natural monopolies may charge

Natural gas and electricity are both examples of which type of monopoly?

standardized

A pure monopoly exists when a single firm is the sole producer of a product for which there are no close ___.

substitutes

One reason that fair return pricing is so complex is because regulatory commissions must set prices that are ______ costs to create fair returns; therefore, regulated monopolists have little incentive to minimize average total costs.

sufficiently greater than

Which of the following does the monopolist not have?

supply curve

What does a price that exceeds marginal cost indicate for a product sold by a monopolist firm?

that resources for the product are underallocated

In a purely competitive industry:

the demand curve for each individual firm is perfectly elastic, while that for the industry is downward-sloping

A natural monopoly's economies of scale refers to one firm's ability to achieve the lowest long-run average total cost, also known as

the minimum efficient scale at a high level of output.

Comparing total revenue and total cost at each possible level of production and choosing the output with the greatest possible difference is another way to determine:

the profit-maximizing output

In price discrimination, the price differences are not justified by ______ differences.

to cost

The key difference between a pure monopolist and a purely competitive seller lies on the ______ side of the market.

to demand

Marginal revenue is the change in ______ revenue associated with a single-unit change in output.

total

What is the effect on total profit when a firm charges a higher price to groups with inelastic demand and a lower price to groups with elastic demand instead of charging a everyone a single monopoly price?

total profit increases

The profit-maximizing level of output can be determined by comparing ______.

total revenue and total cost at each possible level of production and choosing the output with the greatest positive difference

Patents provide the inventor with a monopoly position for what length of time?

twenty years

How common are examples of less pure forms of monopoly?

very common

At approximately how many units of output will total revenue be maximized (round up)?

9

Which of the following describes what "no close substitutes" means as it relates to consumers and a pure monopoly?

A consumer must either buy the monopolized product or do without it entirely.

Why might a monopolist accept a less-than-maximum per-unit profit?

Additional sales more than compensate for the lower profit per unit.

For the monopolist, less total revenue caused by a lower price and greater output is the reason for which of the following?

Avoiding the inelastic segment of the industry's demand curve.

Which of the following is the best example of simultaneous consumption?

Microsoft produces a new edition of Windows once, and millions of consumers use it.

Which of the following competitors are imperfect?

Monopolistic competitors Pure monopolists Oligopolists

Which of the following are conditions necessary for price discrimination?

Monopoly power No resale Market segregation

The practice of charging different prices to different buyers for a specific product is known as price .

discrimination

Competitors include pure monopolists, oligopolistic, and monopolistic competitors

Imperfect

Which of the following are entry barriers created by monopolists?

Increased advertising Price reductions

What is true of total revenue when marginal revenue is positive?

It is increasing

Which are types of barriers to entry?

Legal Economic Technological

How do economies of scale affect long-run average total costs for a firm?

Long-run average total costs decline over a wide range of output.

Which are reasons that costs differ between a purely competitive firm and a pure monopoly?

Monopoly-preserving expenditures The "very long run" perspective

Based on the figure of the ATC curve of a chosen industry, the per-unit cost for one producer selling 200 units of output would be $10. If the industry instead supported two producers, each with an output of 100 units, the average per-unit cost for each firm would likely be ______.

$15

In a given industry, one producer of 200 units of output can achieve an economy of scale yielding an average per-unit cost of $10. Based on the figure of the ATC curve of the industry, what would the likely per-unit cost be with four producers, each producing 50 units?

$20

Which of the following are examples of geographic monopolies?

-A small town with one railroad -A small town served by one airline -A small town with one restaurant

Which of the following are the main characteristics of a pure monopoly?

-Absolute control over the price -Presence of a single seller -Unavailability of close substitutes for its products -Blocked entry for other firms

Which of the following are forms of price discrimination?

-Charging differnt costumers differnt prices -Charging each costumer the maximum price he/she is willing to pay. -Charging each costumer one price for the first unit and a lower price for subsequent units

Which of the following are reasons monopoly is not widespread in the United States?

-Patents eventually expire -Barriers to entry are seldom completely successful

Which of the following are reasons for a monopoly's loss of economic profit?

-change in tastes reducing demand -upward-shifting curves caused by escaliting resource price

Which of the following are reasons that a monopolist is considered a price maker?

-the monopolist exerts control over the price -the monopolist controls the total quantity supplied

Which of the following is a reason for a monopoly's loss of economic profit?

Changes in tastes that reduce demand for a product

It is difficult to start up a major league sports team because existing professional teams have contracts with the best players and long-term leases on stadiums. Which barrier to entry does this illustrate?

Control of a key resource

Why do costs differ between a purely competitive firm and a pure monopoly?

Economies of scale A factor called "X-inefficiency"

Which of the following steps are necessary to determine the profit-maximizing level of output, profit-maximizing price, and economic profit in pure monopoly?

Employ the profit-maximizing rule of MR=MC. Identify the profit-maximizing price and output by finding the price/output combination at MR=MC.

If producing is preferable to shutting down, a profit-seeking monopolist will produce up to the output at which _______.

MR = MC

Most regulatory agencies in the United States establish a(n) -return price that a utility company is allowed to earn.

Fair

True or false: A monopolist will charge the highest price possible.

False

True or false: Economists agree that government should eliminate all monopolies.

False

True or false: In the United States, most regulatory agencies do not establish a fair return price.

False

True or false: It is more profitable for competitive producers to sell a smaller output at a higher price than it is for pure monopolists.

False

True or false: Price discrimination is always legal in the United States.

False

True or false: When a firm with low marginal costs and fixed development costs adds more customers, the average total cost of output increases.

False

True or false: Price discrimination is not practiced very often in the US economy.

False (price discrimination is widely practiced in the US economy)

True or false: A firm is producing 24 units of output. At the 24th unit of output, marginal revenue is $5, and marginal cost is $4; at the 25th unit of output, marginal revenue is $4.50, and marginal cost is $4.50; at the 26th unit of output, marginal revenue is $4, and marginal cost is $5. This firm made the correct choice by producing only 24 units of output and then stopping.

False -> MR = MC means maximum profit

Which of the following two terms are synonymous in a pure monopoly?

Firm and industry

How does a monopoly generally transfer income?

From consumers to the owners of the monopoly

Which of the following are characteristics of public utilities?

Government owned or regulated Monopolies or near monopolies

Which of the following lead to declines in long-run average total costs?

Greater use of specialized inputs Spreading of product development costs Network effects

Which of the following can cause X-inefficiency?

Hiring incompetent relatives Maintaining a poorly motivated work force Avoiding business risk

Simultaneous is a product's ability to satisfy a large number of consumers at the same time.

consumption

In a monopoly, the average total cost of output declines as more customers are added because marginal ______.

costs are low with simultaneous consumption.

Marginal revenue is less than price at every unit of output because the monopolist

could have sold these prior units at a higher price if it had not produced and sold the extra output.

A natural monopoly occurs when the market demand curve crosses the long-run average total cost (ATC) curve where average total costs are still ______.

declining

Economies of scale refer to ______ average total costs with added firm size.

declining

With a natural monopoly the demand curve intersects the long-run average total cost curve where the long-run average total cost curve is still

declining

What aspect of the market defines the crucial difference between a pure monopolist and a purely competitive seller?

demand curve

Long-distance phone calls, natural gas distribution, wireless communication, and cable television are all examples of

deregulated natural monopolies

Monopolists that have ______ products engage mainly in advertising their products' attributes, while those that have ______ products engage primarily in public relations advertising.

differentiated; standardized

New firms have difficulty achieving the large size necessary to acquire economies of scale due to the ______.

difficulty of securing large amounts of financing


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