Ch. 13 Monopolies

If the quantity demanded for a hand-carved pineapple is 2 at a price of $16, and the quantity demanded will increase to 3 if the sellers lowers the price to $14, what is the seller's marginal revenue from selling 3 units of pineapple?

$10

GlaxoSmithKline (GSK) maximizes profit by producing a quantity of 800 pills where marginal cost is $2 and average cost is $4. Consumer are willing to pay as much as $10 per pill when the quantity supplied is 800 pills. What is the maximum amount of profit that GSK can earn under these conditions?

$4,800

Monopolies can arise naturally when:

A large firm can produce at lower cost than other small firms

What defines a monopoly that has economies of scale?

A single firm that can supply the market at a lower cost than two or more firms

In a graph showing a straight-line market demand curve, the marginal revenue curve is:

A straight line that begins at the same point as the demand curve on the y-axis but with twice the slope

When a monopolist maximizes social surplus, it produces at an optimal Q where:

AR = MC

Typical evidence for the existence of market power would be market prices:

Above production costs

A monopoly is able to mark up the price above marginal cost:

At will regardless of price-elasticity

Without competition, there is a tendency for a government-run or regulated monopoly to:

Become inefficient by passing higher costs on to consumers

When a monopolist decreases the price of its good, consumers:

Buy more

Which of the following is not a reason that monopolies arise? A) Patents B) Economies of scale C) Excess competition D) Control of natural resources

C) Excess competition

Which of the following is NOT a source of monopoly power? A) Laws preventing entry of competitors B) Economies of scale C) Innovation D) Inelastic demand for the product

D) Inelastic demand for the product

Which of the following is NOT a source of monopoly power? A) Innovation B) Patents C) Economies of scale D) Marketing

D) Marketing

Monopolies may be created when one firm owns an input that is difficult to duplicate and the:

Demand for the product is inelastic

High prices charged by monopolists will cause the monopolist':

Gaines to be less than the consumer losses

If a monopolist faces a straight-line downward sloping demand curve, the price of the units it sells is always:

Greater than marginal revenue

One way that has been suggested to eliminate deadweight loss from monopoly power without reducing incentives to innovation is to:

Have government pay monopolists to acquire the patent rights

Deregulation of cable TV rates led to:

Higher prices for cable TV

In a purely monopolized environment where each monopolist succeeds at raising its price, the result would be:

Higher prices spread throughout the economy resulting in increased poverty

Which of the following statements is true? I. Government ownership is a potential solution to the natural monopoly problem II. Regulated monopolies have little incentive to reduce costs, as they simply pass the higher costs on to consumers III. Government ownership of utilities worked well for several decades

I, II, and III

Which of the following statements is correct? Once a patent expires: I. Monopoly profits increase II. Deadweight loss is eliminated III. Generic equivalents appear quickly

II. Deadweight loss is eliminated III. Generic equivalents appear quickly

A firm would prefer that its product demand curve is:

Inelastic

With health insurance, medical treatments are paid by someone other than the patient, which will make consumers with serious diseases relatively:

Insensitive to the price of pharmaceuticals

Saudi Arabia has market power in the world's oil markets because:

It controls a significant fraction of the world's oil supply

Under monopoly, the portion of the outgoing consumer surplus that is not transferred to the monopoly firm or still considered consumer surplus is:

Known as deadweight loss

A consumer is ________ likely to be sensitive to price if the purchase ________ covered by insurance.

Less; is

Many people argue that the US government should control pharmaceutical prices. What would most likely happen as a result of this policy?

Lower prices would mean lower profits and hence less incentive for firms to engage in research and development of new drugs.

What is the profit maximization condition for a monopolist?

MR = MC

To maximize profit a monopolist will produce the level of output where:

Marginal revenue is equal to marginal cost

Modern theories of economic growth emphasize that monopolies:

May sometimes be necessary for economic growth

Assuming the same cost structure, a competitive market produces ________ output at ________ prices than a monopoly market.

More; lower

The stated reason for resorting to regulation of public utilities rather than promoting competition through antitrust is that the industry in question is believed to be a:

Natural monopoly

Today anything beyond the most basic tier cable service is predominantly free of regulation and cable companies are free to charge a market rate for their services. As a result:

Prices have risen since deregulation, but so have the number of channels and the quality of programming

Economic theory suggests that a natural monopoly should be:

Regulated to take advantage of economies of scale

When a pharmaceutical company discovers a new drug, patent law gives it market power by guaranteeing:

Sole ownership of the right to sell the drug for a limited number of years

A profit-maximizing monopolist's total profit can be found by calculating:

TR-TC

Monopoly power is best described as:

The ability to earn economic profits without causing new firms to enter the market

In a monopoly market:

The lure of above-normal profits may give a firm an incentive to develop new products and technologies

When the demand curve for the profit-maximizing monopolist's production is relatively inelastic:

The product does not have good substitutes

A natural monopoly occurs when:

There are economies of scale over the relevant range of output

Suppose that the government decided to reduce pharmaceutical patent protection by requiring companies to sell their drugs at marginal cost. What are the likely consequences of such a policy?

There would be an increase in consumer surplus, the deadweight loss in the market would decline, and the future supply of new drugs would decrease

True of false: Consumer surplus under competition is greater than consumer surplus under monopoly

True

True or false: If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling more units at a lower price per unit.

True

True or false: Monopoly profit encourages firms to research and develop new drugs.

True

True or false: The more inelastic the demand curve, the greater the monopolist's markup

True

The marginal revenue curve is a straight line beginning at the same point on the:

Vertical axis as the demand curve but with twice the slope

A monopolist can raise its price further above marginal cost, the more _________ its _________ is.

inelastic; demand

When a good has relatively few substitutes:

monopolists will tend to increase their markup for the good

Cable deregulation has __________, whereas deregulation of electricity has __________.

worked well; not worked well