ECON CHAPTER 15

A perfectly competitive firm produces where a. marginal cost equals price, while a monopolist produces where price exceeds marginal cost. b. marginal cost equals price, while a monopolist produces where marginal cost exceeds price. c. price exceeds marginal cost, while a monopolist produces where marginal cost equals price. d. marginal cost exceeds price, while a monopolist produces where marginal cost equals price.

A

Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly a. is often not in the best interest of society. b. maximizes total economic well-being. c. is efficient. d. benefits consumers more so than the producer.

A

Deadweight loss a. measures monopoly inefficiency. b. exceeds monopoly profits. c. equals monopoly profits. d. equals monopoly revenues minus profits.

A

Refer to Figure 15-1. The shape of the average total cost curve in the figure suggests an opportunity for a profit-maximizing monopolist to take advantage of a. economies of scale. b. diseconomies of scale. c. diminishing marginal product. d. increasing marginal cost.

A

Refer to Figure 15-3. Which panel could represent the demand curve facing the soybean industry? a. Panel A b. Panel B c. Panel C d. Panel D

A

Refer to Figure 15-8. What is the monopoly price and quantity? a. price = A; quantity = X b. price = B; quantity = Y c. price = B; quantity = X d. price = C; quantity = X

A

Refer to Scenario 15-5. How much additional profit can the airline earn by charging each customer their willingness to pay relative to charging a flat price of $600 per ticket? a. $15,000 b. $25,000 c. $40,000 d. $70,000

A

The fundamental source of monopoly power is a. barriers to entry. b. profit. c. decreasing average total cost. d. a product without close substitutes.

A

Which of the following statements is (are) true of a monopoly? (i) A monopoly has the ability to set the price of its product at whatever level it desires. (ii) A monopoly's total revenue will always increase when it increases the price of its product. (iii) The more a monopoly increases output, the higher the profits. a. (i) only b. (ii) only c. (i) and (ii) only d. (ii) and (iii) only

A

Price discrimination is the business practice of a. bundling related products to increase total sales. b. selling the same good at different prices to different customers. c. pricing above marginal cost. d. hiring marketing experts to increase consumers' brand loyalty.

B

Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the marginal cost curve for this firm a. must lie entirely above the average total cost curve. b. must lie entirely below the average total cost curve. c. must be upward sloping. d. does not exist.

B

Monopolies are inefficient because they (i) eliminate barriers to entry. (ii) price their product at a level where marginal revenue exceeds marginal cost. (iii) restrict output below the socially efficient level of production. a. (i) and (ii) only b. (ii) and (iii) only c. (iii) only d. (i), (ii), and (iii)

C

Refer to Scenario 15-5. How much profit will the airline earn if it engages in price discrimination? a. -$5,000 b. $40,000 c. $55,000 d. $75,000

C

Refer to Scenario 15-5. How much profit will the airline earn if it sets the price of each ticket at $300? a. -$15,000 b. -$5,000 c. $25,000 d. $45,000

C

Refer to Table 15-1. If the monopolist sells 8 units of its product, how much total revenue will it receive from the sale? a. $14 b. $40 c. $112 d. $164

C

Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized, mutually beneficial trades are a. not a concern if a market is perfectly competitive. b. a deadweight loss to society. c. a function of the reduction in the quantity produced by a monopolist in comparison to a competitive market. d. All of the above are correct.

D

The amount that producers receive for a good minus their costs of producing it equals a. quantity supplied. b. supply price. c. deadweight loss. d. producer surplus.

D

"Monopolists do not worry about efficient production and minimizing costs since they can just pass along any increase in costs to their consumers." This statement is a. false; price increases will mean fewer sales, which may lower profits. b. true; this is the primary reason why economists believe that monopolies result in economic inefficiency. c. false; the monopolist is a price taker. d. true; consumers in a monopoly market have no substitutes to turn to when the monopolist raises prices.

A

A monopolist maximizes profits by a. producing an output level where marginal revenue equals marginal cost. b. charging a price equal to marginal revenue and marginal cost. c. charging a price where marginal cost equals average total cost. d. Both a and b are correct.

A

For a monopoly, a. average revenue exceeds marginal revenue. b. average revenue equals marginal revenue. c. average revenue is less than marginal revenue. d. price equals marginal revenue.

A

Suppose ABC Aluminum Inc. owns 80% of the world's bauxite, a mineral used in the production of aluminum. Which of the following reasons describes the fundamental barrier to entry for the aluminum industry? a. monopoly resources b. government regulation c. the production process d. Both a and b are correct.

A

Suppose a monopolist chooses the price and production level that maximizes its profit. From that point, to increase society's economic welfare, output would need to be increased as long as a. average revenue exceeds marginal cost. b. average revenue exceeds average total cost. c. marginal revenue exceeds marginal cost. d. marginal revenue exceeds average total cost.

A

When a monopolist reduces the quantity of output it produces and sells, the a. price of its output increases. b. price of its output remains constant. c. price of its output decreases. d. profits for the firm always decrease.

A

Which of the following are necessary characteristics of a monopoly? (i) The firm is the sole seller of its product. (ii) The firm's product does not have close substitutes. (iii) The firm generates a large economic profit. (iv) The firm is located in a small geographic market. a. (i) and (ii) only b. (i) and (iii) only c. (i), (ii), and (iii) only d. (i), (ii), (iii), and (iv)

A

Which of the following is not an example of a barrier to entry? a. A soybean farmer is the first in her county to use a new brand of fertilizer. b. Microsoft obtains a copyright for its Windows operating system. c. A pharmaceutical company obtains a patent for a new medication to treat migraine headaches. d. A taxi cab driver in New York City obtains a license to legally provide transportation in New York City.

A

A benefit of a monopoly is a. efficient production. b. decreasing long-run marginal costs. c. profit that can be invested in research and development. d. All of the above are correct.

C

A benefit to society of the patent and copyright laws is that those laws a. help to keep prices down. b. help to prevent a single firm from acquiring ownership of a key resource. c. encourage creative activity. d. discourage the production of inefficient products.

C

A competitive firm a. and a monopolist are price takers. b. and a monopolist are price makers. c. is a price taker, whereas a monopolist is a price maker. d. is a price maker, whereas a monopolist is a price taker.

C

A monopoly a. can set the price it charges for its output and earn unlimited profits. b. takes the market price as given and earns small but positive profits. c. can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits. d. can set the price it charges for its output but faces a horizontal demand curve so it can earn unlimited profits.

C

Encouraging firms to invest in research and development and individuals to engage in creative endeavors such as writing novels is one justification for a. resource monopolies. b. natural monopolies. c. government-created monopolies. d. breaking up monopolies into smaller firms.

C

For a firm to price discriminate, a. it must be a natural monopoly. b. it must be regulated by the government. c. it must have some market power. d. consumers must tell the firm what they are willing to pay for the product.

C

For a monopoly market, total surplus can be defined as the value of the good to a. producers minus the cost incurred by consumers. b. producers plus the cost incurred by consumers. c. consumers minus the costs of producing the good. d. consumers plus the cost of producing the good.

C

Microsoft faces very little competition from other firms for its Windows software. Why isn't the price of the software $1,000 per copy? a. because the government would not allow such a high price b. because stockholders would not allow such a high price c. because the company would sell so few copies that they would earn higher profits by selling at a lower price d. All of the above are correct.

C

Refer to Figure 15-5. A profit-maximizing monopoly will produce an output level of a. Q1. b. Q2. c. Q3. d. Q4.

C

Refer to Figure 15-5. A profit-maximizing monopoly's profit is equal to a. P2 x Q3. b. (P2-P4) x Q3. c. (P2-P5) x Q3. d. (P1-P6) x Q1.

C

Refer to Figure 15-7. In order to maximize profits, the monopolist should charge a price of a. $9. b. $12. c. $20. d. $23.

C

Refer to Table 15-1. If the monopolist wants to maximize its revenue, how many units of its product should it sell? a. 4 b. 5 c. 6 d. 8

C

Scenario 15-2 Consider a local, privately-owned electrical cooperative named Poweshiek Power Company (PPCo). PPCo has just completed a clean-coal-burning electrical power plant in Iowa. Currently, PPCo can meet the electricity needs of all residents in the county. In fact, its capacity far exceeds the needs of the county. After just a few years of operation, the shareholders of PPCo experienced incredibly high rates of return on their investment due to the profitability of the corporation. 33. Refer to Scenario 15-2. Which of the following statements is most likely to be true? (i) New entrants to the market know they will have a smaller market share than PPCo currently has. (ii) PPCo is most likely experiencing rising marginal cost. (iii) PPCo is a natural monopoly. (iv) PPCo is most likely experiencing declining average total cost. a. (i) and (ii) only b. (i), (ii), and (iii) only c. (i), (iii) and (iv) only d. (i), (ii), (iii), and (iv)

C

Scenario 15-5 An airline knows that there are two types of travelers: business travelers and vacationers. For a particular flight, there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for a ticket. There are 150 seats available on the plane. Suppose the cost to the airline of providing the flight is $20,000, which includes the cost of the pilots, flight attendants, fuel, etc. 97. Refer to Scenario 15-5. How much profit will the airline earn if it sets the price of each ticket at $600? a. -$5,000 b. $15,000 c. $40,000 d. $60,000

C

Which of the following is a characteristic of a monopoly? a. low fixed costs as a portion of total costs b. free entry and exit c. barriers to entry d. declining marginal cost

C

Which of the following is not a characteristic of a monopoly? a. barriers to entry b. one seller c. one buyer d. a product without close substitutes

C

Which of the following is not a characteristic of a monopoly? a. the seller has market power b. one seller c. free entry and exit d. a product without close substitutes

C

Which of the following is not a difference between monopolies and perfectly competitive markets? a. Monopolies can earn profits in the long run while perfectly competitive firms break even. b. Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost. c. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not. d. Monopolies face downward sloping demand curves while perfectly competitive firms face horizontal demand curves.

C

Which of the following statements is not correct? a. Consumers will likely benefit in the form of lower prices from buying a product made by a natural monopoly than if the market were served by several firms. b. Monopolists typically charge higher prices than competitive firms. c. Monopolists typically produce larger quantities of output than competitive firms. d. Consumers may benefit from monopolies if the firms invest their higher profits into something that benefits society such as medical research.

C

A monopoly firm can sell 150 units of output for $10 per unit. Alternatively, it can sell 151 units of output for $9.98 per unit. The marginal revenue of the 151st unit of output is a. -$6.98. b. -$0.02. c. $2.45. d. $6.98.

D

Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly is often a. not in the best interest of society. b. one that fails to maximize total economic well-being. c. inefficient. d. All of the above are correct.

D

Most markets are not monopolies in the real world because a. firms usually face downward-sloping demand curves. b. supply curves slope upward. c. firms usually equate price with marginal cost. d. there are reasonable substitutes for most goods.

D

Patents, copyrights, and trademarks a. are examples of government-created monopolies. b. are examples of barriers to entry. c. allow their owners to charge higher prices. d. All of the above are correct.

D

Price discrimination a. is illegal in the United States and Europe. b. can occur in both perfectly competitive and monopoly markets. c. is illogical because it does not maximize profits. d. can maximize profits if the seller can prevent the resale of goods between customers.

D

Refer to Table 15-1. When 4 units of output are produced and sold, what is average revenue? a. $17 b. $21 c. $23 d. $26

D

The simplest way for a monopoly to arise is for a single firm to a. decrease its price below its competitors' prices. b. decrease production to increase demand for its product. c. make pricing decisions jointly with other firms. d. own a key resource.

D

A benefit of a monopoly is a. lower prices. b. a wide variety of similar products. c. decreasing long-run average total costs. d. greater creativity by authors who can copyright their novels.

D

A monopoly can earn positive profits because it a. can sell unlimited quantities at any price it chooses. b. takes the market price as given and can sell unlimited quantities. c. can set the price it charges for its output but faces a horizontal demand curve. d. can maintain a price such that total revenues will exceed total costs.

D

Consumers' willingness to pay for a good minus the amount they actually pay for it equals a. consumer surplus. b. consumer benefit. c. price discriminant. d. deadweight loss.

A

. Refer to Figure 15-3. Which of the following statements is correct? a. Panel C represents the typical demand curve for a perfectly competitive firm, and Panel B represents the typical demand curve for a monopoly. b. Panel B represents the typical demand curve for a perfectly competitive firm, and Panel A represents the typical demand curve for a monopoly. c. Panel A represents the typical demand curve for a perfectly competitive firm, and Panel C represents the typical demand curve for a monopoly. d. Panel C represents the typical demand curve for a perfectly competitive firm, and Panel D represents the typical demand curve for a monopoly.

B

37. An industry is a natural monopoly when (i) the government assists the firm in maintaining the monopoly. (ii) a single firm owns a key resource. (iii) a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. a. (ii) only b. (iii) only c. (i) and (ii) only d. (ii) and (iii) only

B

A firm cannot price discriminate if a. its has declining marginal revenue. b. it operates in a competitive market. c. buyers only reveal the price they are willing to pay for the product. d. it has a constant marginal cost.

B

A monopolist can sell 300 units of output for $45 per unit. Alternatively, it can sell 301 units of output for $44.60 per unit. The marginal revenue of the 301st unit of output is a. -$120.00. b. -$75.40. c. -$0.40. d. $75.40.

B

A monopoly firm is a price a. taker and has no supply curve. b. maker and has no supply curve c. taker and has an upward-sloping supply curve. d. maker and has an upward-sloping supply curve.

B

A natural monopoly occurs when a. the product is sold in its natural state, such as water or diamonds. b. there are economies of scale over the relevant range of output. c. the firm is characterized by a rising marginal cost curve. d. production requires the use of free natural resources, such as water or air.

B

A perfectly competitive market a. may not be in the best interests of society, whereas a monopoly market promotes general economic well-being b. promotes general economic well-being, whereas a monopoly market may not be in the best interests of society. c. and a monopoly market are equally likely to promote general economic well-being. d. is less likely to promote general economic well-being than a monopoly market.

B

Because a monopolist does not face competition from other firms, the outcome in a market with a monopoly a. does not illustrate profit maximization. b. is often not in the best interest of society. c. is characterized by unlimited profits. d. would be improved if the government produced the product rather than a private firm.

B

Economists assume that monopolists behave as a. cost minimizers. b. profit maximizers. c. price maximizers. d. maximizers of social welfare.

B

Refer to Figure 15-1. The shape of the average total cost curve reveals information about the nature of the barrier to entry that might exist in a monopoly market. Which of the following monopoly types best coincides with the figure? a. ownership of a key resource by a single firm b. natural monopoly c. government-created monopoly d. a patent or copyright monopoly

B

Refer to Figure 15-3. Which panel could represent the demand curve facing a soybean farmer? a. Panel A b. Panel B c. Panel C d. Panel D

B

Refer to Figure 15-5. A profit-maximizing monopoly will charge a price of a. P1. b. P2. c. P3. d. P4.

B

Refer to Figure 15-5. A profit-maximizing monopoly's total revenue is equal to a. P1 x Q1. b. P2 x Q3. c. P3 x Q4. d. (P2-P4) x Q3.

B

Refer to Figure 15-7. A profit-maximizing monopolist would incur total costs of a. $81. b. $120. c. $144. d. $240.

B

Refer to Figure 15-7. In order to maximize profits, the monopolist should produce a. 9 units. b. 12 units. c. 15 units. d. more than 15 units.

B

Refer to Figure 15-8. What area represents the total surplus lost due to monopoly pricing? a. the rectangle (A-C)*X b. the triangle 1/2[(A-C)*(Y-X)] c. the triangle 1/2[(A-B)*(Y-X)] d. the rectangle (A-C)*X plus the triangle 1/2[(A-C)*(Y-X)]

B

Refer to Figure 15-8. What is the area of deadweight loss? a. the rectangle (A-C)*X b. the triangle 1/2[(A-C)*(Y-X)] c. the triangle 1/2[(A-B)*(Y-X)] d. the rectangle (A-C)*X plus the triangle 1/2[(A-C)*(Y-X)]

B

Refer to Figure 15-8. What is the socially efficient price and quantity? a. price = A; quantity = X b. price = B; quantity = Y c. price = B; quantity = X d. price = C; quantity = X

B

Refer to Table 15-1. Assume this monopolist's marginal cost is constant at $12. What quantity of output (Q) will it produce and what price (P) will it charge? a. Q = 4, P = $29 b. Q = 4, P = $26 c. Q = 5, P = $23 d. Q = 7, P = $17

B

Refer to Table 15-1. What is the marginal revenue for the monopolist for the sixth unit sold? a. $3 b. $5 c. $11 d. $17

B

Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds. Then DeBeers, a large diamond company, has a. less incentive to advertise than it would otherwise have. b. less market power than it would otherwise have. c. more control over the price of diamonds than it would otherwise have. d. higher profits than it would otherwise have.

B

The defining characteristic of a natural monopoly is a. constant marginal cost over the relevant range of output. b. economies of scale over the relevant range of output. c. constant returns to scale over the relevant range of output. d. diseconomies of scale over the relevant range of output.

B

The market demand curve for a monopolist is typically a. unit price elastic. b. downward sloping. c. horizontal. d. vertical.

B

The practice of selling the same goods to different customers at different prices, but with the same marginal cost, is known as a. price segregation. b. price discrimination. c. arbitrage. d. monopoly pricing.

B

When a certain monopoly sets its price at $8 it sells 64 units. When the monopoly sets its price at $9 it sells 62 units. The marginal revenue for the firm over this range is a. $18. b. $23. c. $46. d. $92.

B

Which of the following is a characteristic of a natural monopoly? a. Fixed costs are typically a small portion of total costs. b. Average total cost declines over large regions of output. c. The product sold is a natural resource such as diamonds or water. d. All of the above are correct.

B

Which of the following is not a reason for the existence of a monopoly? a. patents b. marginal-cost pricing c. economies of scale d. trademarks

B

Which of the following would be most likely to have monopoly power? a. an online bookstore b. a municipal water company c. a local restaurant d. a grocery store

B

. If government officials break up a natural monopoly into four smaller firms, then a. each firm will be unable to maximize profits due to increased competition. b. competition will force firms to produce surplus output, which drives up price. c. the average cost of production will increase. d. consumers will benefit from lower average total costs.

C

For a monopoly, the level of output at which marginal revenue equals zero is also the level of output at which a. average revenue is zero. b. profit is maximized. c. total revenue is maximized. d. marginal cost is zero.

C

Refer to Figure 15-5. A profit-maximizing monopoly's total cost is equal to a. P2 x Q3. b. P4 x Q3. c. P5 x Q3. d. (P2-P5) x Q3.

C

Refer to Figure 15-5. At the profit-maximizing level of output, a. marginal revenue is equal to P3. b. marginal cost is equal to P3. c. average revenue is equal to P2. d. average total cost is equal to P6.

C

Refer to Figure 15-5. Profit on a typical unit sold for a profit-maximizing monopoly would equal a. P1-P6. b. P2-P4. c. P2-P5. d. P2-P3.

C

Refer to Figure 15-7. A profit-maximizing monopolist would earn profits of a. $96. b. $117. c. $120. d. $126.

C

Refer to Scenario 15-5. How much additional profit can the airline earn by charging each customer their willingness to pay relative to charging a flat price of $300 per ticket? a. $10,000 b. $15,000 c. $30,000 d. $45,000

C

If a monopolist can practice perfect price discrimination, the monopolist will a. eliminate consumer surplus. b. eliminate deadweight loss. c. maximize profits. d. All of the above are correct.

D

Perfect price discrimination a. increases profits to the firm. b. increases total surplus. c. decreases consumer surplus. d. All of the above are correct.

D

Price discrimination is a rational strategy for a profit-maximizing monopolist when a. the monopolist finds itself able to produce only limited quantities of output. b. consumers are unable to be segmented into identifiable markets. c. the monopolist wishes to increase the deadweight loss that results from profit-maximizing behavior. d. there is no opportunity for arbitrage across market segments.

D

Refer to Figure 15-7. A profit-maximizing monopolist would earn total revenues of a. $81. b. $144. c. $225. d. $240.

D

When a monopolist increases the amount of output that it produces and sells, average revenue a. increases, and marginal revenue increases. b. increases, and marginal revenue decreases. c. decreases, and marginal revenue increases. d. decreases, and marginal revenue decreases.

D

When a natural monopoly exists, it is a. always cost effective for government-owned firms to produce the product. b. never cost effective for one firm to produce the product. c. always cost effective for two or more private firms to produce the product. d. never cost effective for two or more private firms to produce the product.

D

When deciding what price to charge consumers, the monopolist may choose to charge them different prices based on the customers' a. geographical location. b. age. c. income. d. All of the above are correct.

D

Which of the following can defeat the profit-maximizing strategy of price discrimination? a. consumer surplus b. deadweight loss c. market power d. arbitrage

D

Which of the following is a characteristic of a monopoly? a. rising average total costs b. one buyer c. rising fixed costs d. a product without close substitutes

D

Which of the following is a characteristic of a natural monopoly? a. Average cost exceeds marginal cost over large regions of output. b. Increasing the number of firms increases each firm's average total cost. c. One firm can supply output at a lower cost than two firms. d. All of the above are correct.

D

Which of the following is not a reason for the existence of a monopoly? a. sole ownership of a key resource b. patents c. copyrights d. diseconomies of scale

D

Which of the following is not an example of price discrimination? a. A movie theater charges a lower price for a child's ticket than for an adult's ticket. b. A university rebates part of the cost of tuition in the form of financial aid for needy students. c. A local pizza chain offers a "buy three get one free" deal. d. An ice cream parlor charges a higher price for ice cream than for sherbet.

D

The socially efficient level of production occurs where the marginal cost curve intersects a. average variable cost. b. average total cost. c. demand. d. marginal revenue.

C

A monopolist produces a. more than the socially efficient quantity of output but at a higher price than in a competitive market. b. less than the socially efficient quantity of output but at a higher price than in a competitive market. c. the socially efficient quantity of output but at a higher price than in a competitive market. d. possibly more or possibly less than the socially efficient quantity of output, but definitely at a higher price than in a competitive market.

B

Monopoly firms have a. downward-sloping demand curves, so they can sell as much output as they desire at the market price. b. downward-sloping demand curves, so they can sell only the specific price-quantity combinations that lie on the demand curve. c. horizontal demand curves, so they can sell as much output as they desire at the market price. d. horizontal demand curves, so they can sell only a limited quantity of output at each price.

B

The profit-maximization problem for a monopolist differs from that of a competitive firm in which of the following ways? a. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost. b. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a monopolist maximizes profit at the point where average revenue exceeds marginal cost. c. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profit-maximizing level of output is smaller than it is for larger levels of output. d. For a profit-maximizing competitive firm, thinking at the margin is much more important than it is for a profit-maximizing monopolist.

B