Chapter 12: Monopoly

A social planner would choose the same outcome as that which results in a monopolistic /the perfectly competitive ​equilibrium, because that outcome maximizes /minimizes social surplus.

A social planner would choose the same outcome as that which results in the perfectly competitive equilibrium, because that outcome maximizes social surplus.

People who need​ life-saving drugs cannot do without them and surely will be willing to pay very high prices for them. So why​ can't producers of​ life-saving drugs charge any price that they wish​ to? A. A​ monopolist, such as one selling​ life-saving drugs, still faces​ downward-sloping demand curves. B. Monopolists that sell​ life-saving drugs face a horizontal supply curve. C. If the producers of​ life-saving drugs raise the​ price, the price effect always dominates and total revenue falls. D. The government will force monopolies to lower drug prices if they charge too much.

A. A​ monopolist, such as one selling​ life-saving drugs, still faces​ downward-sloping demand curves.

Why is electricity generation better off as a natural​ monopoly? A. Industries like electricity generation experience economies of scale since they have high fixed costs.​ Thus, it is cheaper to have a single firm provide a larger quantity. B. It experiences diseconomies of scale since the marginal cost curve is​ upward-sloping, indicating that normal market forces break down and only one firm can profitably produce. C. It experiences constant returns to scale since it is sanctioned by the​ government, allowing a single provider to charge a lower price. D. It experiences constant returns to scale since marginal costs are​ constant, allowing any number of providers to produce an efficient amount.

A. Industries like electricity generation experience economies of scale since they have high fixed costs.​ Thus, it is cheaper to have a single firm provide a larger quantity.

Priceline is a Web site that sells flights and hotel bookings based on the price that a consumer states that he or she is willing to pay. So consumers who want to book a flight or a hotel room need to tell Priceline the price that they are willing to​ pay, and the seller lets Priceline know whether it is willing to accept that price. Which of the following outcomes is likely using this form of​ pricing? A. Producer surplus will​ rise, since some price offers by consumers will be higher than the price that Priceline would have​ charged, causing consumer surplus to shrink. B. Producer surplus will​ fall, since some price offers by consumers will be below the price that Priceline would have​ charged, causing consumer surplus to rise. C. Consumer and producer surplus will​ rise, since consumers will only offer prices they are willing and able to​ pay, while firms will only accept offers that are beneficial to them. D. Consumer and producer surplus will​ fall, since without a set price for the good neither side will achieve their ideal price level.

A. Producer surplus will​ rise, since some price offers by consumers will be higher than the price that Priceline would have​ charged, causing consumer surplus to shrink..

Which of the following best describes the relationship between price​ (P), marginal revenue​ (MR), and total revenue​ (TR) for a​ monopolist? A. When MR is​ positive, TR is​ rising, and when MR is​ negative, TR is falling. B. When MR is​ rising, TR is​ rising, and when MR is​ falling, TR is falling. C. As MR​ falls, TR rises. D. They are all equal for a monopolist.

A. When MR is​ positive, TR is​ rising, and when MR is​ negative, TR is falling.

When comparing the graph of your ATC curve for a natural monopoly with that of a firm in perfect​ competition, we see that​ ____________. A. a natural monopoly has a​ downward-sloping ATC​ curve, while a firm in perfect competition has a​ U-shaped curve. B. a natural monopoly has a​ U-shaped ATC​ curve, while a firm in perfect competition has a​ downward-sloping curve. C. a natural monopoly has an​ upward-sloping ATC​ curve, while a firm in perfect competition has a​ U-shaped curve. D. the ATC curves are identical.

A. a natural monopoly has a​ downward-sloping ATC​ curve, while a firm in perfect competition has a​ U-shaped curve. Remember that a natural monopoly is characterized by substantial fixed costs and economies of​ scale, while a competitive firm faces both economies of scale and diseconomies of scale over its range of outputs.

In​ 1999, Priceline attempted to replicate this pricing strategy with groceries and gasoline. Using this pricing strategy with these two goods soon proved unprofitable. What could explain​ this? The marginal cost of selling an airplane seat or a hotel room is relatively ​small/ high, while the marginal cost of selling groceries and gasoline is relatively small/high.

Airplane seat: small Groceries or gasoline: high

Both competitive firms and monopolies produce at the level where marginal cost equals marginal revenue. ​Then, other things remaining the​ same, why is price lower in a competitive market than in a​ monopoly? A. Competitive markets face perfectly inelastic demand and marginal​ revenue, while monopolies face perfectly elastic demand and marginal revenue. B. Competitive markets face perfectly elastic demand and marginal​ revenue, while monopolies face​ downward-sloping demand and marginal revenue. C. The government puts a cap on how much a competitive firm can​ charge, while a monopolist can charge any price it chooses. D. A competitive market sets its price where marginal cost equals​ demand, while a monopolist sets its price where marginal cost equals marginal revenue.

B. Competitive markets face perfectly elastic demand and marginal​ revenue, while monopolies face​ downward-sloping demand and marginal revenue.

All of the following statements about the​ monopolist's demand curve are​ true, except: A. If the price is below the​ mid-point of the demand​ curve, the price effect dominates. B. If the price effect​ dominates, lowering price increases revenue. C. If the quantity effect​ dominates, lowering price increases revenue. D. If the price is above the​ mid-point of the demand​ curve, the quantity effect dominates.

B. If the price effect​ dominates, lowering price increases revenue.

If a monopoly selling 300 computers at ​$3,000 decides to lower its price to ​$2,000 in order to sell 100 more​ computers, then the firm A. is creating a surplus. B. has negative marginal revenue. C. has elastic demand. D. is maximizing profits.

B. has negative marginal revenue. Because total revenue is failing

Eliminating a monopoly A. reduces consumer surplus. B. increases market quantity. C. increases marginal cost. D. redistributes deadweight loss.

B. increases market quantity. Eliminating a monopoly will result in an increase of consumer​ surplus, a reduction of producer​ surplus, and an increase in market quantity that eliminates deadweight loss.

Network externalities and economies of scale both can contribute to the formation of a monopoly.​ However, they differ in that network externalities deal with A. decreasing costs and economies of scale deal with increasing costs. B. increasing benefits and economies of scale deal with decreasing costs. C. decreasing costs and economies of scale deal with increasing benefits. D. increasing costs and economies of scale deal with decreasing costs.

B. increasing benefits and economies of scale deal with decreasing costs. Economies of scale arise when the​ firm's ATC curve decreases over the important range of output. Network externalities arise from consumer benefits increasing as a product or service is used thus driving up the value of the product or service.

Natural market power is created by​ ___________, and arises due to​ ____________. A. foreign​ competition; patents. B. market​ forces; economies of scale. C. the​ government; copyrights. D. ​advertising; a change in consumer preferences.

B. market​ forces; economies of scale.

Total revenue for a monopolist is maximized A. only if the slope is positive. B. only if marginal revenue is zero. C. on the elastic portion of the demand curve. D. where marginal revenue and demand are equal.

B. only if marginal revenue is zero

A local bar sells half−price drinks to women on Tuesdays. This is an example of​ ___________. A. second​-degree price discrimination. B. third​-degree price discrimination. C. ​first-degree price discrimination. D. perfect price discrimination.

B. third​-degree price discrimination.

To restrict a​ firm's monopoly​ power, why​ can't antitrust authorities just set a floor or a ceiling in the​ market? A. It is difficult to set a fair​ price, so regulators do not get involved in the pricing decisions of any monopolists. B. Floors or ceilings lead to inefficiency and deadweight​ loss, which can be avoided if the monopoly sets its own price. C. It is difficult to set a fair​ price, and even if regulators​ did, the firm would then have no incentive to innovate. D. The government does not have the power to dictate what a firm can​ charge; it can only stop mergers.

C. It is difficult to set a fair​ price, and even if regulators​ did, the firm would then have no incentive to innovate. B is true but it is not true that there is no inefficiencies if monopolies set their own prices

How does a natural monopoly differ from a firm that becomes a monopoly due to network​ effects? A. Natural monopolies result from economies of​ scale, while network effects come from diseconomies of scale. B. Natural monopolies result from the benefits to consumers from having many people use a​ service, while network effects come from economies of scale. C. Natural monopolies result from economies of​ scale, while network effects come from the benefits to consumers from having many people use a service. D. They do not differ. Both are directly the result of the advantages of producing under economies of scale.

C. Natural monopolies result from economies of​ scale, while network effects come from the benefits to consumers from having many people use a service.

An example of an industry or service that is a natural monopoly is​ ____________. A. landscapers. B. hair stylists. C. a natural gas pipeline. D. tax preparation.

C. a natural gas pipeline.

A significant difference between monopolies and competitive firms is that A. the competitive firm must drop its price to sell more while the monopolist can keep price constant. B. low entry barriers exist for​ monopolies, but not for competitive firms. C. a​ monopoly's demand curve is the​ industry's demand​ curve, while the competitive​ firm's demand curve is perfectly elastic. D. competitive firms control market​ supply, but monopolies do not.

C. a​ monopoly's demand curve is the​ industry's demand​ curve, while the competitive​ firm's demand curve is perfectly elastic.

Monopolists do not use a supply curve because they A. produce to where marginal revenue is greater than the additional cost per unit. B. are​ price-takers. C. do not vary production based on market price. D. set price without regard for demand.

C. do not vary production based on market price. In a competitive​ market, a supply curve shows all price and quantity combinations at which firms will produce.​ Monopolists, as​ price-makers, do not vary their production based on market price because they set the price.

By forcing monopolists to set price equal to marginal​ cost, A. production is guaranteed. B. economic profit is guaranteed. C. economic loss can occur. D. deadweight loss can not occur.

C. economic loss can occur.

In​ reality, practicing price discrimination is difficult​ because: A. the monopolist​ doesn't know each​ consumer's income level. B. the monopolist​ doesn't know which demographics fit his consumer base. C. the monopolist​ doesn't know each​ consumer's willingness to pay. D. the monopolist​ doesn't know the demographics of his consumer base.

C. the monopolist​ doesn't know each​ consumer's willingness to pay.

Edgar says that a single firm in the wind power industry is unlikely to have a significant degree of monopoly power for an extended period of time. Since the cost of producing an additional unit of wind energy is so​ low, a large number of firms can enter the market and compete away economic profits. Do you agree with this​ analysis? A. ​Yes, since diseconomies of scale are likely​ present, the firm cannot be a monopoly. B. ​Yes, if the cost of producing wind energy is​ low, then firms will enter the​ market, indicating no barriers to​ entry, so the firm cannot be a monopoly. C. ​No, Edgar's argument ignores potentially large fixed costs that will act as a barrier to entry. D. ​No, there are no close substitutes for wind power so producers of this good will have monopoly power.

C. ​No, Edgar's argument ignores potentially large fixed costs that will act as a barrier to entry.

In a competitive​ market, a supply curve shows all the price and quantity combinations at which firms will produce. Does a monopoly face a similar supply​ curve? A. ​No, a monopoly has a vertical supply curve that is located where marginal revenue equals marginal cost. B. ​No, a monopoly has a horizontal supply curve that is located where marginal revenue equals marginal cost. C. ​No, a monopoly is a​ price-maker and its production decisions are determined by its​ downward-sloping demand curve. D. ​Yes, since monopolies and competitive firms base production on a given market price that they cannot control.

C. ​No, a monopoly is a​ price-maker and its production decisions are determined by its​ downward-sloping demand curve.

Janet knows a lot of people who do not like​ Marmite®, a yeast extract that is used as a spread on toast. She says that Marmite is so unpopular that​ Unilever, the company that manufactures​ Marmite®, cannot possibly have any monopoly power. Do you agree with this​ analysis? A. ​No, producing​ Marmite® requires low fixed​ costs, so it is likely a regulated natural monopoly that has market power. B. ​Yes, if a good is not widely liked by​ consumers, the producer does not have a monopoly in that good. C. ​No, monopoly power is based on whether a good has any close​ substitutes, not whether your friends like the product. D. ​Yes, since other yeast spreads must be preferred to​ Marmite®, it cannot have a monopoly.

C. ​No, monopoly power is based on whether a good has any close​ substitutes, not whether your friends like the product.

Market power relates to the ability of sellers to affect​ __________, and arises because of​ ____________. A. ​prices; competition from foreign firms. B. consumer​ preferences; the invisible hand. C. ​prices; barriers to entry. D. consumer​ preferences; increased ability of monopolies to advertise.

C. ​prices; barriers to entry.

In which of the following ways is a monopoly beneficial to an​ economy? A. Firms that are allowed monopoly profits search out innovative technologies that they can bring to market. B. With natural​ monopolies, costs may be lower than those that would exist in competitive markets with many producers. C. Monopoly profits give firms more reason to invest in the creation of new products through research and development. D. All of the above.

D. All of the above.

First degree price discrimination A. increases consumer surplus by increasing quantity. B. creates a greater loss of social surplus. C. reduces producer surplus by increasing quantity. D. eliminates deadweight loss by producing to where marginal cost equals price.

D. eliminates deadweight loss by producing to where marginal cost equals price. If a monopolist were able to perfectly price discriminate​ (first degree​ discrimination), then the outcome would be to maximize his own profits and maximize social surplus. With perfect price​ discrimination, production is expanded until the demand curve intersects the marginal cost curve. In doing​ so, producer surplus includes the entire consumer surplus and the deadweight loss because it expands production until P=MC​, and charges each consumer his willingness to pay.

Legal market power is created by​ ___________, and arises due to​ ____________. A. foreign​ competition; patents. B. market​ forces; economies of scale. C. ​advertising; a change in consumer preferences. D. the​ government; copyrights.

D. the​ government; copyrights.

To say that a good has network effects means that the​ ____________. A. good relies on the high prices of substitute goods in order to keep its demand up. B. value of the product decreases as more people use it. C. good is just one of many goods that will be used to make a final good. D. value of the product increases as more people use it.

D. value of the product increases as more people use it.

For a​ monopolist, total revenue is not is calculated the same way as in perfect​ competition; marginal revenue is not is equal to price.

For a​ monopolist, total revenue is calculated the same way as in perfect​ competition; marginal revenue is not equal to price.

The case for a natural monopoly is characterized by high fixed/average costs and decreasing fixed/average costs.

The case for a natural monopoly is characterized by high fixed costs and decreasing average costs.

A copyright

an exclusive right granted by the government to the creator of a literary or artistic work.

If Nike developed a particularly strong weave to the fabric used in their running​ shoes, they could petition the government for a patent/ copyright in order to protect their profits. If a competitor tried to promote their brand of running shoes by using​ Nike's theme song in their​ commercial, Nike could sue for patent/copyright infringement.

patent - copyright

A patent

the privilege granted to an individual or company by the​ government, which gives him or her the sole right to produce and sell a good.