Microeconomics Chapter 15 practice questions
A Disney World guidebook notes that families have many different ticket options to choose from and that "adding to the complexity, Disney's reservation agents are trained to avoid answering . . . which ticket option is 'best.' Many families, we suspect, become overwhelmed . . . and simply purchase a more expensive ticket with more features than they'll use." Can the complexity of Disney's ticket options be a form of price discrimination? If so, which people are likely to pay the higher ticket prices and which people the lower ticket prices? A. Yes, consumers who are unwilling to spend the time required to determine the pricing option that is "best" for them have a more inelastic demand (and are willing to pay higher prices) than those consumers who spend the time needed to determine their best pricing options. B. No, although the ticket options may be complex, Disney is simply offering different options to help guests maximize their Disney World experience, and while these options might be more expensive, purchasing an "add on" is not required to enter a Disney theme park. C. Yes, consumers who are unwilling to spend the time required to determine the pricing option that is "best" for them have a more elastic demand (and are willing to pay higher prices) than those consumers who spend the time needed to determine their best pricing options. D. No, since Disney is charging every family the same price for the various ticket options, it would not be considered price discrimination, and furthermore, the fact that guests are willing to pay the higher prices is an example of consumer choice and not pricing strategies.
A
According to Joseph Schumpeter, what does economic progress depend on? A. technological change in the form of new products B. competition, especially price competition C. the initial endowment of economic resources, such as the amount of labor and capital available D. government protection of competition
A
Airlines have begun selling more "basic economy" tickets. According to a columnist in the Wall Street Journal, these tickets are usually the lowest-priced seats available on a flight, but the tickets "lack advance seat assignments, typically board in the last group, often prohibit carry-on bags in overhead bins and aren't eligible for upgrades or any kind of changes." Many corporate travel officers block employees from buying these tickets: "Whatever savings come from paying $50 to $100 less each way could be obliterated by a business traveler missing one flight and having to buy a new ticket that costs more than $1,000." The columnist concludes that basic economy tickets are a new means for airlines to practice price discrimination. Source: Scott McCartney, "The Secret Other Reason Basic Economy Is Everywhere," Wall Street Journal, April 4, 2018. Briefly explain his reasoning. Selling basic economy tickets is a way for airlines to price discriminate because A. the airlines can charge lower prices to travelers who have a more elastic demand for airline travel. B. the airlines can charge lower prices to travelers who have a less elastic demand for airline travel. C. it encourages leisure travelers to engage in arbitrage. D. The columnist is incorrect. Airlines are simply offering price-conscious consumers an opportunity to save money
A
How did De Beers attempt to convince consumers that used diamonds were not good substitutes for new diamonds? A. De Beers developed the slogan "a diamond is forever" to increase sentimental value. B. De Beers claimed that used diamonds were "blood diamonds." C. De Beers claimed that their diamonds are mined under ethical, environmentally friendly conditions. D. De Beers eliminated microscopic branding from their diamonds. E. Both a and b.
A
If you own the only hardware store in a small town, do you have a monopoly? A. Yes. You would have a monopoly if your profits are not competed away in the long run. B. Yes. You have a monopoly because there are no substitutes for hardware. C. No. You do not have a monopoly because there are substitutes for hardware. D. No. You would not have a monopoly if you could not ignore the actions of competitors. E. Both a and b.
A
In discussing Senator Elizabeth Warren's proposal to treat technology firms like Google and Facebook as public utilities, an article on bloomberg.com observes, "Public utility regulation is usually an acknowledgement that monopolies occur naturally in some markets and the best thing to do is to come up with a way to live with them." a. In what ways are Google and Facebook like public utilities? Google and Facebook are like public utilities because A. they have grown large enough to have economies of scale that allow them to monopolize the industry they are in. B. they dominate the market by buying startups that they believe may eventually become significant competitors. C. they achieve large market shares by creating network externalities that allow them to monopolize the industry they are in. D. they are both regulated in a way that is similar to how the government regulates public utilities.
A
In early 2017, a headline in the Wall Street Journal read: "Pricey Virtual-Reality Headsets Slow to Catch On." Source: Sarah E. Needleman, "Pricey Virtual-Reality Headsets Slow to Catch On," Wall Street Journal, February 14, 2017. Is it possible that Sony, Facebook, and the other firms producing virtual-reality headsets were better off keeping prices high when initially offering them for sale even if the result was a smaller quantity sold? Briefly explain. A. Firms may have been better off charging a higher price initially if the elasticity of demand was more inelastic. B. Firms may been have better off keeping prices high if consumers of virtual-reality headsets were more price sensitive. C. These firms were better off charging high prices initially because price discrimination is not possible in the market for virtual-reality headsets. D. If these firms wanted to maximize profits across time, they should have charged a lower price to ensure that early adopters would purchase the product.
A
In the book publishing industry, how are firms able to price discriminate across time? A. An author's most devoted book fans want to buy the author's books as soon as they are published. B. The existence of large economies of scale in book publishing. C. Inflation results in increases in prices over time. D. There are substantial differences in the cost of hardcover versus paperback copies.
A
In the long run, the monopolist can earn A. zero or positive economic profit. B. only zero economic profit. C. only negative economic profit. D. None of the above.
A
In what ways are Google and Facebook different from public utilities? Google and Facebook are different from public utilities because A. they do not charge consumers a fee to use their services. B. they have control of a vital resource in production—technology—so they earn larger profits than public utilities. C. they depend more on achieving and maintaining economies of scale than do public utilities. D. they earn an economic profit that cannot be competed away, even in the long run.
A
In 2019, Noëlle Santos opened The Lit. Bar bookstore in the Bronx borough of New York City. Her bookstore is the only one located in the Bronx, which has a population of about 1.5 million. Source: Ginia Bellafante, "A Bookstore, Finally, Comes to the Bronx,"New York Times, April 25, 2019. Should the only bookstore in the Bronx, or any other city, be considered a monopoly? A. No, in the narrow definition of the term, The Lit. Bar bookstore would be considered a monopoly only if it had no close substitutes. B. Yes, since The Lit. Bar bookstore is the only bookstore in the Bronx, barriers to entering the market must be high enough to keep out competing bookstores. C. Yes, according to the narrow definition of the term, since The Lit. Bar bookstore is the only supplier of books in the Bronx, it would be considered a monopoly. D. No, The Lit. Bar bookstore would be considered a monopoly only if it were located in a small town, and the Bronx has a population of about 1.5 million.
A
Most cities own the water system that provides water to homes and businesses. Some cities charge a flat monthly fee, while other cities charge by the gallon. Which method of pricing is more likely to result in economic efficiency in the water market? Economic efficiency is more likely to result in the water market if cities charge A. by the gallon because homes and businesses will not consume gallons of water for which marginal benefit is less than price. B. by the gallon because the price of consuming additional water to homes and businesses will be lower than if the city charged a flat monthly fee. C. a flat monthly fee because homes and businesses will only consume gallons of water for which marginal benefit is greater than price. D. a flat monthly fee because the price of consuming an additional unit of water to homes and businesses will equal the marginal cost of providing the water. E. by the gallon because homes and businesses will not consume gallons of water for which marginal benefit is greater than price.
A
Need-based financial aid is an example of price discrimination because those with the A. least ability to pay receive the most aid. B. best recommendations get the most aid. C. fewest academic credits get the most aid. D. best academic performance get the most aid
A
Question content area In 2019, the Alliance of American Football (AAF), a professional football league, went out of business. The AAF played its games in the spring, while the National Football League (NFL) plays its games in the fall. In discussing the failure of the AAF, a columnist for the San Antonio Express-News asks the question, "Can any upstart football league take on the NFL monopoly, and win?" The NFL has 32 teams located in cities around the United States. Source: Michael Taylor, "The NFL Monopoly Rolls On,"expressnews.com, April 3, 2019. In what sense can the NFL be considered a monopoly? The NFL can be considered a monopoly because A. few football fans have found the games offered by new leagues to be close substitutes to those offered by the NFL. B. the NFL can charge much higher prices for its tickets than what any upstart football league can charge. C. the NFL has the ability to attract more famous and successful athletes than any upstart football league can attract. D. the NFL is made up of 32 individual teams that work together to form a single professional football league.
A
The article also notes that the Christmas tree vendors must pay rent to the owners of the buildings that front the sidewalks. According to the article, "The most sought-after spots in high-end neighborhoods have created notorious price wars among vendors plotting to outbid one another. The cutthroat competition has increased rents . . . by as much as 500 percent in eight years." Does this additional information affect your answer to part (a)? Briefly explain. A. Yes, since it indicates the price differences may be due to differences in the costs of selling trees in the two neighborhoods. B. No, this indicates that some Christmas tree vendors possess market power, which is a requirement for successful price discrimination. C. Yes, since it indicates that some vendors may have a greater willingness to pay higher rents than other Christmas tree vendors. D. No, regardless of the price of rents that vendors must pay, they are still charging different prices to different people for roughly the same product.
A
Under what circumstances can a firm successfully practice price discrimination? To successfully practice price discrimination, A. some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product. B. arbitrage must be possible. C. a firm must be a price taker. D. both a and b. E. all of the above.
A
What is perfect price discrimination? A. Charging every consumer a different price equal to their willingness to pay. B. Charging consumers who are less price sensitive a higher price and consumers who are more price sensitive a lower price. C. Charging consumers a price equal to consumer surplus. D. Charging consumers different prices across time. E. Charging consumers whose demand is less elastic a lower price and consumers whose demand is more elastic a higher price
A
What is the definition of market power? Market power is the A. ability of a firm to charge a price greater than marginal cost. B. ability of one firm to control other firms in the market. C. ability of a firm to eliminate competition. D. same as inefficiency and is measured by the amount of deadweight loss from a monopoly.
A
What is the purpose of the antitrust laws? Antitrust laws are intended to A. make illegal any attempts to form a monopoly or to collude. B. exempt natural monopolies from government regulations. C. allow firms to buy stock in competitors. D. allow firms to charge buyers different prices. E. both a and b.
A
Which of the following are key results of price discrimination? A. Profits increase and consumer surplus decreases. B. Profits decrease and consumer surplus decreases. C. Profits decrease and consumer surplus increases. D. Profits increase and consumer surplus increases.
A
Which of the following industries uses sophisticated methods to calculate the price of each unit sold each day? A. airlines B. college education C. wheat producers D. All of the above.
A
Which of the following laws was the first to make monopolization illegal? A. the Sherman Act B. the Cellar-Kefauver Act C. the Clayton Act D. the Robinson-Patman Act
A
While in Shanghai, China to teach an MBA course, Craig Richardson, an economics professor from Winston-Salem State University, asked his American students to haggle with sellers in a market where prices for the same items can vary widely. Professor Richardson explained that the same item with the same sticker price at different market stalls can have a final price that varies "by 1,500% or more, depending on the negotiating skills of the buyer." Shanghai merchants A. practice price discrimination because they charge different prices for the same good. B. practice price discrimination because costs vary by vendor. C. do not practice price discrimination because buyers may be able to purchase the same good for the same price. D. do not practice price discrimination because they set the same sticker price for the same good.
A
Why do most regulatory agencies require natural monopolies to charge a price equal to average cost instead? A. Regulating price instead to equal marginal cost would result in the firm suffering a loss. B. Regulating price to equal average cost results in no deadweight loss. C. Regulating price to equal average cost maximizes consumer surplus. D. Regulating price instead to equal marginal cost would result in deadweight loss. E. Both a and b.
A
Why might it be more difficult under the federal antitrust laws for the government to persuade the courts to stop a vertical merger than to persuade the courts to stop a horizontal merger? A. Vertical mergers do not as clearly reduce competition in a way that is likely to increase market power, leading to higher prices and a reduction in consumer surplus. B. Vertical mergers make it harder for the government to define what the relevant market is, leading some markets to be more broadly defined than what they should be. C. Vertical mergers make it harder for the government to define what the relevant market is, leading some markets to be more narrowly defined than what they should be. D. A vertical merger, by giving a firm control of an important supplier—such as giving AT&T control of Time Warner—clearly reduces competition in a way that benefits consumers.
A
Why was De Beers worried that people might resell their old diamonds? If people resell their old diamonds, then A. market competition would increase, decreasing profits. B. market supply would increase, increasing market prices. C. used diamonds would not have a brand name. D. De Beers would become a natural monopoly. E. De Beers would not be able to gain patent protection
A
Will a monopoly that maximizes profit also be maximizing revenue? Briefly explain. A monopoly that maximizes profit A. is not also maximizing revenue because revenue is highest when marginal revenue equals zero. B. is not also maximizing revenue because revenue is highest when marginal revenue is above marginal cost. C. is also maximizing revenue because revenue is highest when the cost of production is minimized. D. is also maximizing revenue because profit and revenue are equal. E. is also maximizing revenue because revenue increases with price.
A
The consumers who are likely to pay the highest prices for similar items in the Shanghai market are those who are (select all that apply) A. unfamiliar with the product. B. familiar with the product. C. most willing to haggle. D. least willing to haggle.
A and D
A monopolist is a price maker because A. when price makers raise their prices, they lose all customers. B. when a monpolist raises its prices, it loses some but not all customers. C. a monopolist can charge any price it wants, regardless of demand. D. a monopolist's price and marginal revenue are the same.
B
A natural monopoly occurs when A. diseconomies of scale are large enough so that one firm can supply the entire market at a lower average total cost than can two or more firms. B. economies of scale are large enough so that one firm can supply the entire market at a lower average total cost than can two or more firms. C. the average variable cost curve is increasing. D. None of the above is true.
B
Because the word discrimination has unfavorable connotations, many firms call their pricing strategies A. price minimization. B. yield management. C. static pricing. D. All of the above.
B
Financial aid is A. good for colleges, but imposes an excessive paperwork burden on students. B. good for both colleges and students because students get an education and colleges get paying students. C. not good for either students or colleges. D. good for students, but a financial strain for colleges.
B
If consumers cannot resell products, which of the following is true? A. Firms can charge only the market price. B. Firms can practice price discrimination. C. Firms must be perfectly competitive. D. The law of one price is contradicted.
B
In June 2018, a federal court judge ruled against the U.S. Department of Justice, which was attempting to block a merger between AT&T and Time Warner. In addition to its wireless business, AT&T owned the DirectTV satellite television service. Time Warner owned HBO, TBS, TNT, and the Warner Brothers film studio. An article in the Wall Street Journal on the judge's ruling noted, "The case marked the first time in 40 years that a court had seen a fully litigated challenge to a so-called vertical merger . . . Such cases are considered more difficult for the government to win than the typical 'horizontal' merger case." a. What is a vertical merger case? A. A vertical merger is a merger between firms that is more likely to be challenged by the government. B. A vertical merger is a merger between firms at different stages in the production of a good. C. A vertical merger is a merger between firms that yields significant consumer benefits. D. A vertical merger is a merger between firms in the same industry.
B
In New York City, many people buy their Christmas trees from sidewalk vendors. An article about these vendors in the New York Times has the headline "How Much for That Tree? $35 in Harlem, or $135 in SoHo." Harlem is a lower-income neighborhood, and SoHo is a higher-income neighborhood. a. Are the sidewalk Christmas tree vendors in New York City practicing price discrimination? Briefly explain. A. Yes, because sidewalk vendors are able to segment the market into low-income and high-income buyers. B. Yes, because, all else equal, they are charging different prices to different people for roughly the same product. C. No, because sidewalk vendors do not possess any market power, which is required to successfully price discriminate. D. No, because consumers will have the same price elasticity of demand for Christmas trees regardless of neighborhood.
B
Natural gas pipelines are a natural monopoly because A. most of the costs incurred by firms that operate natural gas pipelines are the variable costs of building the pipelines. B. the average total cost curve for moving natural gas through a pipeline is still falling at the point where it crosses the demand curve. C. the average total cost curve for moving natural gas through a pipeline is still rising at the point where it crosses the demand curve. D. the marginal cost curve for moving natural gas through a pipeline is still falling at the point where it crosses the demand curve.
B
Perfect price discrimination is A. unlikely to occur because firms are typically able to keep consumers who buy a product at a low price from reselling it. B. unlikely to occur because firms typically do not know how much each consumer is willing to pay. C. likely to occur because it results in economic efficiency. D. likely to occur because it results in higher profits. E. both a and b.
B
Quora.com is a website where people post questions and users suggest answers. One user posted the following question: "If monopolies are price makers, why don't they charge an infinite price?" a. What does the person posting the question mean by a "price maker"? By a "price maker," the person posting the question means A. a firm that has total control over its price—that is, it can charge any price it wants, regardless of demand. B. a firm that has some control over its price—that is, if it raises its price, it will lose some, but not all, of its customers. C. a firm that takes the lead in announcing a price change that other firms in the industry then match. D. a firm that has no control over its price—that is, it must accept the market price if it is to sell any units of its product.
B
Some people—usually business travelers—have a very strong desire to fly to a particular city on a particular day, and airlines charge these travelers higher ticket prices than they charge other people, such as families who are planning vacations months in advance. Some people really like Big Macs and other people only rarely eat Big Macs, preferring to eat other food for lunch on most days. Consider the following possible explanations of why airlines can charge different people different prices, while McDonald's can't. Which is correct? A. Most people don't pay attention to prices when buying plane tickets, so the airlines can charge different prices without it being noticed. B. Since people can't resell airline tickets, they cannot buy them at a low price and resell them at a high price, whereas people can resell hamburgers. C. In most cities, there are laws against charging different people different prices for food products. D. People don't like hamburgers as much as they used to, so McDonald's has to keep cutting the prices they charge everyone.
B
Suppose that the quantity demanded per day for a product is 60 when the price is $35. The following table shows costs for a firm with a monopoly in this market. Part 2 Quantity (Per Day), Total Cost 60 $1,800 80 2,000 100 4,000 120 6,600 Briefly explain whether this firm has a natural monopoly in this market. A. This firm has a natural monopoly because the total cost of production increases with output. B. This firm has a natural monopoly because it produces at lower average total cost than two or more firms would. C. This firm has a natural monopoly because it produces at higher average total cost than two or more firms would. D. This firm does not have a natural monopoly because the total cost of production increases with output. E. This firm does not have a natural monopoly because it is experiencing diseconomies of scale.
B
Using the broader definition of monopoly, in which of the following cases could we argue that Microsoft has a monopoly in computer operating systems? A. If there are no barriers to entry in the market for computer operating systems. B. If Apple's computer operating system and the Linux operating system were not considered close substitutes for Windows. C. If Microsoft charged prices similar to those that Apple and Linux charge for their operating systems in order to compete. D. If Apple and Linux started to produce operating systems similar to Windows.
B
Which of the following is a result of perfect price discrimination? A. price greater than marginal cost B. zero consumer surplus C. maximum consumer surplus D. infinite producer surplus
B
Which of the following is most likely to increase market power? A. divestitures B. horizontal mergers C. vertical mergers D. stricter enforcement of antitrust laws
B
Why are the analysts quoted in the article using "monopoly" in this context? In this sense, the analysts mean that A. Apple has economies of scale that are so large that few other firms can compete with it. B. the iOS operating system is a significant barrier to other firms competing with Apple in the smartphone industry. C. consumers have benefited more from using the iOS operating system than from using other operating systems. D. The analyst's use of the term is incorrect. After all, every smartphone has an operating system with unique features.
B
A column in the Washington Post argues that "network externalities turn market forces on their head." Consider two new products—product A and product B—neither of which receives patent protection. Assume that there are no network externalities when consumers use product A, whereas there are very large network externalities when consumers use product B. Source: Daniel W. Drezner, "The Best Work on Political Economy in 2018," Washington Post, December 31, 2018. Briefly explain how market forces will determine the level of competition in equilibrium in industry A and in industry B. We would expect that, in equilibrium, the market for product A will be _______ competitive than the market for product B. This is because __________. A. less; the very large network externalities in market B will discourage consumers from using product B B. less; the very large network externalities in market B will make it easier for new firms to enter the market C. more; the very large network externalities in market B will make it difficult for new firms to enter the market D. more; the very large network externalities in market B will encourage consumers to use product A
C
A monopoly is a market structure that is characterized by A. many sellers selling differentiated products. B. a single seller of a good or service that has many close substitutes. C. a single seller of a good or service that does not have a close substitute. D. None of the above.
C
An article in the Wall Street Journal discussing the smartphone market notes that industry analysts make the following observation: Apple's "biggest advantage has been its role as the only seller of devices featuring its iOS operating system. The iOS monopoly means users who switch to a rival device would have to learn a new system and potentially give up some stored information, analysts say." Source: Tripp Mickle, "Diverging Fortunes: High Prices Propel Apple, Sink Samsung," Wall Street Journal, August 1, 2018. Does Apple have a monopoly on smartphones? A. Yes, since few large firms are able to maintain a dominant position in the market due to Apple's popularity, it has a monopoly on smartphones. B. No, even though Apple has a patent on iOS, other firms can copy and sell their own versions of the operating system. C. No, Apple is not the only producer of smartphones in the market, so it does not have a monopoly on smartphones. D. Yes, since Apple can ignore the pricing decisions of other producers in the smartphone market, it has a monopoly on smartphones.
C
Assume that an industry that began as a perfectly competitive industry becomes a monopoly. Compared to when the industry was perfectly competitive, the monopolist will A. produce more output and increase producer surplus. B. produce less output and decrease producer surplus. C. charge a higher price and produce less output. D.charge a higher price and increase consumer surplus.
C
For most of the 1800s, the United States did not recognize the copyrights of books written by foreign authors. As a result, many U.S. publishers printed "pirated"—unauthorized—editions of Charles Dickens and other British authors without paying them royalties. A history of book publishing notes that: "[U.S.] publishers claimed that pirating [foreign] works allowed their prices to remain low, which in turn made the works more accessible to the public at large." There were (eventually successful) attempts in Congress to recognize foreign copyrights in exchange for other countries recognizing U.S. copyrights. At the time, one U.S. publisher described these efforts as the "clamor of two hundred authors against the interests of fifty-five million people." Do copyright laws benefit authors at the expense of readers? A. Yes, since copyrights are granted by the government, it creates a barrier to entry for future writers, implying that fewer books will be written. B. Yes, copyright laws encourage authors to charge higher prices for their books, so readers must spend more to purchase each book. C. Not necessarily, since fewer books are likley to be written without copyright laws, thus providing readers with more books to read. D. Probably not, since readers always have the option of obtaining a pirated version of the book to read.
C
Harvard Business School started using case studies—descriptions of strategic problems encountered at real companies—in their courses in 1912. Today, Harvard Business Publishing (HBP) sells its case studies to about 4,000 colleges worldwide. HBP is the sole publisher of the Harvard Business School's case studies. What criteria would you use to determine whether HBP has a monopoly on the sale of business case studies to be used in college courses? A. The availability of any substitutes, the ability to set prices, and the persistence of normal profits. B. The ability to set prices, the persistence of economic profits, and the availability of any complements. C. The ability to ignore the actions of other firms, the persistence of economic profits, and the availability of close substitutes. D. The persistence of economic profits, the availability of close substitutes, and a high price elasticity of demand.
C
If a market is a monopoly, will a negative externality in production always lead to production beyond the level of economic efficiency? A. No, a monopoly will always produce the efficient level of output in the presence of a negative externality. B. Yes, a monopoly will always produce beyond the efficient level of output in the presence of a negative externality. C. No, a monopoly may produce an inefficiently high or low level of output in the presence of a negative externality. D. No, a monopoly will always produce below the efficient level of output in the presence of a negative externality.
C
If so, why does the U.S. Constitution give Congress the right to enact copyright laws? A. Enacting copyright laws encourages authors to produce more books, which lowers the average costs of efficiency. B. Without copyright laws, there would be fewer pirated editions available, thus limiting the public's accessibility to these works. C. Without copyedit laws, individuals may be less likely to invest in creating new books, films, and software. D. Copyright laws allow authors to charge higher prices for their books and thus generate higher sales tax revenue.
C
In the United States, the loss in economic efficiency due to market power is A. large. B. zero. C. small. D. None of the above.
C
In 2019, the Rock and Roll Hall of Fame and Museum in Cleveland, Ohio, charged the following admission prices: Adults - 26 College students (nonresidents - 24 seniors (65 and older) - 24 college students (residents) - 21 children between 6 and 12 - 16 Using the admission fees as a guide, rank these groups based on their elasticities of demand from most to least elastic. A. adults; seniors; college students (non-residents); college students (residents); children 6 to 12 years old B. children 6 to 12 years old; college students (non-residents); college students (residents); seniors; adults C. children 6 to 12 years old; college students (residents); college students (non-residents)/seniors; adults D. adults; college students (non-residents)/seniors; college students (residents); children 6 to 12 years old
C
Provide an answer to this person's question. A monopolist cannot charge an infinite price because A. it faces a horizontal demand curve, so sales will drop to zero if it attempt to charge more than the market price. B. it faces a U-shaped demand curve, so to sell more units of the product, it must lower its price. C. it faces a downward-sloping demand curve, so to sell more units of the product, it must lower its price. D. The Quora.com post is incorrect. In all cases, if monopolies are price makers, then they can charge any price they want.
C
Suppose that Congress decides to end the USPS's monopoly on making deliveries to residential mailboxes. Consumer surplus and economic efficiency will A. increase so long as the two firms cooperate. B. decrease so long as residential mail delivery is not a natural monopoly. C. increase so long as residential mail delivery is not a natural monopoly. D. decrease so long as the two firms compete.
C
Use your graph to explain why society is worse off when a monopolist charges a price that earns monopoly profits rather than when price is set at the "competitive level." A. Producer surplus is smaller. B. Firm profits are larger. C. Economic surplus is reduced. D. The deadweight loss is eliminated.
C
What is a merger between firms in the same industry called? A. a conglomerate B. a divestiture C. a horizontal merger D. a vertical merger
C
What is a monopoly? A monopoly is A. a firm in a competitive market with many other sellers. B. a firm in a market with other firms that sell similar but not identical products. C. a firm that is the only seller of a good or service that does not have a close substitute. D. a firm that is the only buyer of a factor of production. E. a firm in a market with a small number of independent firms that compete.
C
What is the difference between a horizontal merger and a vertical merger? A horizontal merger is a merger A. between firms of different sizes, while a vertical merger is a merger between firms of the same size. B. between firms that have market power, while a vertical merger is a merger between firms that are price takers. C. between firms in the same industry, while a vertical merger is a merger between firms at different stages of the production of a good. D. that would increase efficiency, while a vertical merger is a merger that would decrease efficiency. E. between firms in different industries, while a vertical merger is a merger between firms in the same industry.
C
What is the value of the Herfindahl-Hirschman Index (HHI) when there are four firms in an industry and each firm has an equal market share? A. 4 B. 625 C. 2,500 D. 4,000
C
Why would AT&T buying Time Warner be an example of a vertical merger? It is an example of a vertical merger because A. the merger led to intense deal making between other firms in the industry. B. AT&T and Time Warner were offering complementary products to their customers. C. AT&T and Time Warner were operating at different stages in producing and delivering television programs. D. the merger led to more competition in the industry.
C
Why wouldn't another entrepreneur have already opened a bookstore in the Bronx before Santos did? It is likely that another entrepreneur did not already open a bookstore in the Bronx due to A. barriers to entry being so high that no other bookstores could enter the market. B. government regulations being in place to prevent other bookstores from entering the market. C. competition from online booksellers and bookstores in other New York City boroughs. D. the rising costs of production associated with operating in the Bronx borough of New York City.
C
A column on bloomberg.com argues that natural gas pipelines "are a natural monopoly. Almost all of the costs are the fixed ones involved in building them; as long as there's spare capacity, the incremental expense of moving an extra cubic meter of gas down the line is infinitesimal." Source: David Fickling, "China's Pipeline Champion Misses an Opportunity," bloomberg.com, June 12, 2018. Briefly explain why the cost structure of pipelines as the columnist describes it makes pipelines a natural monopoly. Be sure to define "natural monopoly" in your answer. A natural monopoly arises when A. variable costs are very large relative to fixed costs. B. one firm can supply the entire market at a lower average variable cost than can two or more firms. C. a firm has no variable costs of production. D. one firm can supply the entire market at a lower average total cost than can two or more firms.
D
A task force established by the Trump administration to evaluate the USPS recommended that Congress consider making the USPS a private firm, although the Postal Rate Commission might keep the authority to regulate the prices the new firm would charge. The administration noted that the "USPS is caught between a mandate to operate like a business but with the expenses and the political oversight of a public agency." Source: Jennifer Smith, "Trump's Fix for Postal Service: Privatize It," New York Times, June 22, 2018; and Task Force on the United States Postal System, "United States Postal Service: A Sustainable Path Forward," December 2018. a. Suppose that Congress allowed the USPS to retain its monopoly on deliveries to residential mailboxes but also allowed it to operate as a private business without needing to have its prices approved by the Postal Rate Commission and without having to meet the universal service obligation that Congress requires of it. What changes might the USPS make in how it operates? If Congress allowed the USPS to operate as a private firm, the USPS would be likely to A. raise the rates of some services if it were allowed to do so. B. deliver mail seven days a week rather than six days a week. C. eliminate some services that under the universal service obligation it is obligated to provide. D. Only A and C are correct. E. All of the above are correct.
D
Does a monopolist have a supply curve? Briefly explain. (Hint: Look again at the definition of a supply curve in Chapter 3 and consider whether this applies to a monopolist.) A monopolist A. does not have a supply curve because it does not have a demand curve. B. does not have a supply curve because it does not maximize profits. C. has a supply curve equal to its marginal cost curve. D. does not have a supply curve because it is a price maker with one profit-maximizing price-quantity combination. E. has a supply curve equal to its marginal revenue curve.
D
From an economic perspective, A. Hasbro would realize losses from being denied rights to Anspach's copyright. B. Anspach was a controlling shareholder in Hasbro. C. Anspach refused to pay Hasbro the trademark rights for his game. D. losing the trademark on its Monopoly game would have cost Hasbro millions of dollars per year as other companies could have begun to market similar games using the same title.
D
If patents reduce competition, why does the federal government grant them? The federal government grants patents A. to create network externalities. B. to increase the number of close substitutes available. C. to encourage firms to collude. D. to encourage firms to spend money on research to create new products. E. to prevent natural monopolies.
D
Is perfect price discrimination economically efficient? Perfect price discrimination is A. efficient because it converts into producer and consumer surplus what had been deadweight loss. B. inefficient because it results in no consumer surplus. C. inefficient because it converts into producer surplus a portion of deadweight loss. D. efficient because it converts into producer surplus what had been consumer surplus and deadweight loss. E. inefficient because it restricts output below the equilibrium level and creates deadweight loss.
D
Jason Furman and Tim Simcoe, who served on President Barack Obama's Council of Economic Advisors, wrote, "Economists have studied [price discrimination] for many years, and while big data seems poised to revolutionize pricing practice, it has not altered the underlying principles...Those principles suggest that [price discrimination] is often good for both firms and their customers." Furman and Simcoe describe "need-based financial aid for college students" as an example of price discrimination that is good for consumers. What do Furman and Simcoe mean by "underlying principles"? A. When prices reflect the benefit a buyer receives from a good, sellers can serve customers who would otherwise get priced out of the market. B. When prices reflect a seller's costs, sellers can serve customers who would otherwise get priced out of the market. C. When prices reflect the quality of a seller's good, sellers can serve customers who would otherwise get priced out of the market. D. When prices reflect a buyer's ability to pay, sellers can serve customers who would otherwise get priced out of the market.
D
Price discrimination might be legally acceptable but ethically unacceptable when A. arbitrage would occur. B. markets cannot be segmented. C. different prices are due to differences in cost. D. price discrimination seems unfair.
D
The Department of Justice and the FTC consider markets as highly concentrated if the postmerger HHI for a proposed horizontal merger is A. below 500. B. between 1,500 and 2,500. C. between 500 and 1,500. D. above 2,500.
D
The government can block the entry to a market through A. granting a patent. B. granting a copyright. C. granting a public franchise. D. All of the above.
D
The more cell phones in use, the more valuable they become to consumers. This is an example of A. what happens when a firm is granted a patent. B. natural monopoly. C. what happens when a firm has control of a key resource. D. network externalities.
D
What information would you need in order to determine whether consumers would be better off if Google and Facebook were broken up or regulated as public utilities rather than being allowed to continue operating as they do now? In order to determine if consumers would be better off breaking up Google or Facebook, we would need to A. look at the consumer benefits provided by these services and how they might be reduced if the firms were broken up. B. determine if they are allowing fake advertising on their sites or if there are lapses in protecting users' privacy. C. look at the services that each one offers and the price that consumers pay for these services. D. Only A and C are correct. E. All of the above are correct.
D
What is the relationship between a monopolist's demand curve and its marginal revenue curve? A. A monopolist's marginal revenue curve has half the slope of its demand curve, because to sell more output, a monopoly must lower price. B. A monopolist's demand curve is the same as its marginal revenue curve. C. A monopolist's demand curve is downward sloping and its marginal revenue curve is upward sloping. D. A monopolist's marginal revenue curve has twice the slope of its demand curve, because to sell more output, a monopoly must lower price. E. A monopolist's marginal revenue curve has twice the slope of its demand curve due to constant returns to scale.
D
What term describes laws aimed at promoting competition among firms? A. merger legislation B. collusion C. laws of comparative advantage D. antitrust laws
D
When a firm's demand curve slopes downward and the firm decides to cut price, which of the following happens? A. It sells fewer units but receives higher revenue per unit. B. It sells more units and receives higher revenue per unit. C. It sells fewer units and receives lower revenue per unit. D. It sells more units but receives lower revenue per unit.
D
Which Congressional Act was passed in 1936 to outlaw price discrimination that reduces competition? A. the Celler-Kefauver Act B. the Clayton Act C. the Sherman Act D. the Robinson-Patman Act
D
Which of the following are effects of monopoly? A. Monopoly causes a reduction in economic efficiency. B. Monopoly causes a reduction in consumer surplus. C. Monopoly causes an increase in producer surplus. D. All of the above are effects of monopoly.
D
Which of the following rights is given to the holder of a patent? A. a public franchise B. control over a key resource used in production of a good or service C. the right to earn profits from creation of the product indefinitely D. the exclusive right to a new product for a limited period
D
Who is in charge of enforcing them? A. The Federal Trade Commission. B. The Antitrust Division of the U.S. Department of Justice. C. The U.S. Department of Transportation. D. Both a and b. E. All of the above.
D
Why might it be difficult for new leagues to enter the market for professional football in the United States? It might be difficult for new entrants to compete with the NFL because A. the government has granted the NFL a public franchise that makes it the only professional provider of football. B. economies of scale are so large with the NFL that there is not enough "room" in the market for other leagues. C. the NFL produces a superior product compared to its rivals' products. D. the NFL has control over a key resource—ownership or long-term leases on large stadiums in major cities.
D
he president of a foundation connected with the technology industry argued against Warren's proposal, noting, "The proposal ignores the fact that many of the services big tech companies now provide free used to cost consumers money." What services do Google and Facebook provide now for free that consumers had to pay for prior to the development of the Internet? Examples of services that Google and Facebook provide for free that were not free before include A. messaging. B. navigation services. C. video chat. D. All of the above are correct.
D
Explain why market power leads to deadweight loss. Firms with market power create deadweight loss because they A. charge a price that is equal to marginal cost to maximize economic surplus. B. produce where marginal revenue is greater than marginal cost to maximize profits. C. produce more than a perfectly competitive industry would to maximize profits. D. charge a price that is less than marginal cost to maximize profits. E. charge a price that is greater than marginal cost to maximize profits.
E
In what other ways could the Department of Justice and the Federal Trade Commission evaluate Google's situation in the context of the antitrust laws? The DOJ and the FTC could A. look at whether Google is suppressing competition by, for instance, buying other potential competitors. B. calculate the cross-price elasticity of demand to determine how close substitutes two services are. C. study the advertising market to see if firms will be able to find more alternatives to Google in the future. D. Only A and C are correct. E. All of the above are correct.
E
The great baseball player Ty Cobb was known for being very thrifty. Near the end of his life he was interviewed by a reporter who was surprised to find that Cobb used candles, rather than electricity, to light his home. From Ty Cobb's point of view, was the local electric company a monopoly? For Cobb, the local electric company A. was a monopoly because it was the only source of electricity. B. was a monopoly because it charged high prices for electricity. C. was not a monopoly because it earned no economic profit. D. was a monopoly because it produced a homogeneous good. E. was not a monopoly because candles were a good substitute for electricity.
E
What are the four most important ways a firm becomes a monopoly? The four main reasons a firm becomes a monopoly are: A. the lack of patents and copyrights, control of a key resource, network externalities, and economies of scale. B. the government blocks entry, control of a key resource, network externalities, and diseconomies of scale. C. antitrust legislation, control of a key resource, arbitrage, and economies of scale. D. antitrust legislation, control of a key resource, no close substitutes, and economies of scale. E. the government blocks entry, control of a key resource, network externalities, and economies of scale.
E
What is a public franchise? A public franchise is A. an entity through which the government directly provides certain services to consumers. B. a firm that is the only buyer of a factor of production. C. a firm that can supply the entire market at a lower average total cost than can two or more firms. D. a firm that is the only seller of a good or service that does not have a close subsitute. E. a firm designated by the government as the only legal provider of a good or service.
E
What is price discrimination? Price discrimination is when A. firms charge a higher price for a product when it is first introduced and a lower price later. B. firms charge a higher price to customers whose demand is less elastic and a lower price to consumers whose demand is more elastic. C. Firms charge each consumer a different price equal to that consumer's willingness to pay. D. both a and b. E. all of the above.
E
What is "natural" about a natural monopoly? A natural monopoly A. is the only firm legally allowed to produce a product due to a government copyright. B. produces a product whose usefulness increases with the number of consumers who use it. C. develops automatically due to diseconomies of scale. D. is a public franchise. E. develops automatically due to economies of scale
E
Why do you think the same method of pricing isn't used by all cities? A. Cities are unaware of which pricing system is more likely to result in economic efficiency. B. Cities have different marginal costs of providing water. C. Cities know their marginal cost of providing water. D. Cities are price takers in the water market. E. Both a and b.
E
Why would it be economically efficient to require a natural monopoly to charge a price equal to marginal cost? A. Economic efficiency requires the last unit of a good produced to provide an additional benefit to consumers greater than the additional cost of producing it. B. Economic efficiency requires the last unit of a good produced to provide an additional benefit to consumers equal to the average cost of producing it. C. Economic efficiency requires natural monopolies to earn zero economic profits. D. Economic efficiency requires the total benefit of producing a good to equal the total cost of producing it. E. Economic efficiency requires the last unit of a good produced to provide an additional benefit to consumers equal to the additional cost of producing it.
E
Will it be maximizing production? Briefly explain. A monopoly that maximizes profit A. is also maximizing production because revenue increases with output. B. is also maximizing production because the average cost of production decreases with output. C. is also maximizing production because marginal cost decreases with output. D. is not also maximizing production because demand decreases with output. E. is not also maximizing production because price must be reduced to sell additional output.
E
Which type of merger is more likely to increase the market power of a newly merged firm? _____ mergers are more likely to increase market power.
Horizontal
True/False: one way for a firm to become a monopoly is by controlling a key resource
True
The Department of Justice and the Federal Trade Commission must define the relevant market when determining whether to allow a merger. How do economists identify the relevant market? The relevant market has been identified if
a price increase results in higher profits; otherwise the market is too narrow
Are all public franchises natural monopolies? All public franchises _____ natural monopolies, and all natural monopolies ______ public franchises
are not; are not
b. Who might gain and who might lose if Congress ended the USPS's monopoly on deliveries to residential mailboxes and made the USPS a private firm, entirely free from government regulation? In the table below, indicate whether each of the following groups would likely gain or lose if the USPS lost its monopoly on mail deliveries to residential mailboxes. Gain or Lose? Private firms allowed to access residential mailboxes Individuals who receive services provided under the universal service obligation Mail customers living in remote or rural areas The United States Postal Service Publishers of newspapers and magazines
gain lose lose impossible to know lose
How were De Beers' profits affected? De Beers _____ profitable
has remained
In 2019, Disney offered a complex variety of ticket options for admission to Walt Disney World. a. Disney charged different prices for 1-day tickets to its Disney World parks, depending on the time of the year. Summer and the winter holiday season had the highest ticket prices, while most weeks in the winter and spring had the lowest. But people buying tickets that could be used for more than 1 day paid the same price whatever time of the year they attended. Briefly explain what assumptions Disney must be making for this pricing strategy to increase its profit. Disney must believe demand during the summer and winter seasons is _____ elastic than during other times of the year.
less
Which are more economically efficient, perfeclty competitive markets or monopolies? Compared to monopolies, perfectly competitive markets are ...
more economically efficient because they result in more economic surplus
How did De Beers' strategy affect the demand curve for new diamonds? The demand for new diamonds has_______
remained unchanged
The total deadweight loss from market power for the economy is ____
small
A columnist on forbes.com offers the following advice to retailers practicing price discrimination: "Consumers don't much like the idea of other people getting better deals than are offered to them, and retailers need to be careful not to turn differentiated pricing into discriminatory pricing. There has to be a legal and ethical rationale for offering different prices to different customers." What would be a legally acceptable reason for offering different prices to different customers? What would be a legally unacceptable reason? A legally acceptable reason for offering different prices to different customers would be differences in _________, and a legally unacceptable reason for offering different prices would be differences in _____.
willingness to pay; race
