Econ 131 Chapter 10: Monopoly

A government-restrictions monopoly is most likely to result if a single firm: A) is the only seller in a small town or community. B) is investor-owned, but granted the exclusive right by the government to operate in a market. C) experiences long-run increasing economies of scale over a wide range of output. D) has gained control over a strategic input of an important production process.

B) is investor-owned, but granted the exclusive right by the government to operate in a market.

A monopoly responds to a decrease in demand by _______ price and _______ output. A) increasing; decreasing B) increasing; increasing C) decreasing, increasing D)decreasing; decreasing

D)decreasing; decreasing

(Exhibit: Demand, Elasticity, and Total Revenue) At the level of output indicated by point A in Panel (a): A) marginal revenue is zero. B) average revenue is at its maximum. C) total revenue is zero. D)none of the above is true

A) marginal revenue is zero

The two theoretical extremes of the market structure spectrum are occupied on one end by perfect competition and on the other end by: A) monopoly. B) duopoly. C) oligopoly. D) monopolistic competition.

A) monopoly

Situations in which the more users of a product there are, the more useful the product becomes are called: A) network effects. B) monopolies. C) conglomerates. D) exclusive franchises.

A) network effects

An expenditure that has already been made that cannot be recovered is a(n): A) sunk cost. B) accounting outlay. C) indirect expense. D) economy of scale.

A) sunk cost

(Exhibit: Computing Monopoly Profit) When the MR curve crosses the horizontal axis: A) the price elasticity of demand is -1. B) the price elasticity of demand is equal to zero. C) total profit is maximized. D) economic profit is equal to zero.

A) the price elasticity of demand is -1.

Because monopoly firms are price setters: A) they can only sell more by lower price. B) they charge all the market will bear. C) they sell more at higher prices than at lower prices. D) they take the market-determined price as given and sell all they can at that price.

A) they can only sell more by lower price.

(Exhibit: Demand, Elasticity, and Total Revenue) Panels (a) and (b) show that: A) when a demand curve is downward sloping, P < MR. B) a firm will never maximize profits by producing a quantity where the demand curve is in the inelastic range. C) when TR is at a maximum, marginal revenue is negative. D) all of the above are true.

B) a firm will never maximize profits by producing a quantity where the demand curve is in the inelastic range.

In 1999, a judge declared that Microsoft was a monopolist. Assuming that it was maximizing its profits at its chosen level of output, we may conclude that if Microsoft was to increase its price its total revenue would have: A) risen B) fallen C) remained unchanged D) insufficient information upon which to make a determination.

B) fallen

(Exhibit: Computing Monopoly Profit) At point E, the price elasticity of demand is: A) equal to 1. B) in the elastic range. C) in the inelastic range, and if price falls, total revenue will increase. D) in the inelastic range, and if price rises, so will total revenue.

B) in the elastic range.

(Exhibit: Demand, Elasticity, and Total Revenue) As price is reduced from point F to P in Panel (a), total revenue will: A) decrease. B) increase. C) stay the same. D)at first increase and then decrease.

B) increase

In the Case in Point on the Ambassador Bridge, the owner has _____ fares presumably because the demand for use of this bridge is _____. A) increased; elastic B) increased; inelastic C) decreased; elastic D) decreased; inelastic

B) increased; inelastic

A monopoly responds to an increase in demand by _______ price and _______ output. A) increasing; decreasing B) increasing; increasing C) decreasing; increasing D) decreasing, decreasing

B) increasing; increasing

(Exhibit: Demand, Elasticity, and Total Revenue) When price is P and quantity is Q in Panel (a), which of the following is (are) true? A) An increase in price will increase total revenue. B) A decrease in price will increase total revenue. C) P x Q is the maximum amount TR can be. D) B and C are true.

C) P x Q is the maximum amount TR can be.

. (Exhibit: Computing Monopoly Profit) The profit-maximizing price is _______ and will generate total economic profit of _______ . A) P2; EF B) P3; the rectangle P1P2FG C) P3; the rectangle P2P3EF D) P2; FG

C) P3; the rectangle P2P3EF

For a linear demand curve, if MR = 0: A) TR is at its minimum. B) the price elasticity of demand is equal to or greater than -1.0. C) and TR is at its maximum, the demand curve must be downward sloping. D) all of the above are true.

C) and TR is at its maximum, the demand curve must be downward sloping.

(Exhibit: Chip Production) Before the imposition of the pollution fines on the paper mills, the chip firm probably: A) had negative economic profits. B) had zero economic profits. C) had positive economic profits. D) was unable to estimate its own profits.

C) had positive economic profits.

In the _______ range of demand, total revenue _______ with an increase in quantity. A) elastic; decreases B) elastic; does not change C) inelastic; decreases D) inelastic; does not change

C) inelastic; decreases

A monopoly firm will never operate in the _______ range of the _______ curve. A) inelastic; supply B) elastic; demand C) inelastic; demand D) elastic; supply

C) inelastic; demand

In the _______ range of demand, total revenue _______ with an increase in price. A) elastic; increases B) elastic; does not change C) inelastic; increases D) inelastic; does not change

C) inelastic; increases

Monopoly is important to study because it: A) avoids all real-world problems and complexities. B) avoids most real-world problems and complexities. C) is a theoretical model used for analysis. D) is a realistic model of many different markets.

C) is a theoretical model used for analysis

An expenditure that has already been made and cannot be recovered is called a _______ cost. A) nonretrievable B) floating C) sunk D) diseconomy of scale

C) sunk

If a change in fixed cost in the long run raises average total cost above the demand curve: A) price and output will remain unchanged. B) more monopolies will enter. C) the monopoly will go out of business. D) none of the above is true.

C) the monopoly will go out of business.

Which of the following are true? A) Profit-maximizing behavior is based on the marginal decision rule. B) Additional units of a good should be produced as long as MR > MC. C) The profit-maximizing solution occurs where MR = MC. D) All of the above are true.

D) All of the above are true.

Which of the following is (are) true? A) Firms constantly seek out the market power that monopoly offers. B) Economic profits invite continuing attempts to break down the economic barriers that a monopoly may have. C) Technological change and the pursuit of profit work against the entrenched power of monopolies. D) All of the above are true.

D) All of the above are true.

(Exhibit: Demand, Elasticity, and Total Revenue) In Panel (a), which of the following is true? A) Between points A and M, the price elasticity of demand is elastic. B) Between points F and A, the price elasticity of demand is inelastic. C) At any price other than P, total revenue will be greater. D) All of the above statements are false.

D) All of the above statements are false.

Which of the following is (are) true? A) If MR = 0, the price elasticity of demand is also equal to zero. B) If MR < 0, the price elasticity of demand must be between zero and -1. C) If MR > 0, then the price elasticity of demand is in the elastic range. D) B and C are true.

D) B and C are true.

If your local government gives you the exclusive right to sell breakfast bagels in your community, your monopoly would result from: A) sunk costs. B) location. C) economies of scale. D) government restrictions.

D) Government restrictions

Which of the following is true? A) Instead of applying the marginal decision rule, monopoly firms just set the price as high as possible. B) If demand is downward sloping, P = MR. C) If demand is downward sloping, P = ATC. D) If demand is downward sloping, P > MR.

D) If demand is downward sloping, P > MR.

When MR is _______ , the price elasticity of demand is _______. A) greater than zero; elastic B) less than zero; inelastic C) equal to zero; unit elastic D) all of the above are true

D) all of the above are true

The Case in Point on the Ambassador Bridge suggests that the source of monopoly power in this case is: A) location. B) substantial sunk costs. C) government licensing D) both A and B above.

D) both A and B above.

If a monopolist is producing a quantity that generates MC > MR, then profit: A) is maximized. B) is maximized only if MC = P. C) can be increased by increasing production. D) can be increased by decreasing production.

D) can be increased by decreasing production.

(Exhibit: Computing Monopoly Profit) Total economic profit at the profit-maximizing level of output is: A) EF. B) EF times Q. C) price minus average total cost times the quantity where MR = MC. D) described by B and C.

D) described by B and C.

A restricted-input monopoly is most likely to result if a single firm: A) is the only seller in a small town or community. B) is investor owned, but granted the exclusive right by the government to operate in a market. C) experiences long-run increasing economies of scale over a wide range of output. D) has gained control over a strategic factor of production.

D) has gained control over a strategic factor of production.

A sunk-cost monopoly is most likely to result if a single firm: A) is the only seller in a small town or community. B) is investor owned, but granted the exclusive right by the government to operate in a market. C) experiences long-run increasing economies of scale over a wide range of output. D) has made extensive investments in advertising to establish brand-name recognition among consumers.

D) has made extensive investments in advertising to establish brand-name recognition among consumers.

The XYZ Company is a profit-maximizing firm with a monopoly in the production of pennants. The firm sells its pennants for $10 each. We can conclude that the XYZ Company is producing a level of output at which: A) average total cost equals $10. B) average total cost is greater than $10. C) marginal revenue equals $10. D) marginal cost equals marginal revenue.

D) marginal cost equals marginal revenue.

The power a firm has to set is own price is called: A) competition. B) discrimination. C) legislative control. D) monopoly power.

D) monopoly power

The demand curve for a monopoly is: A) the MR curve above the AVC curve. B) the MR curve above the horizontal axis. C) the entire MR curve. D) none of the above.

D) none of the above

For a demand curve that is linear and downward sloping, if P > MR, the price elasticity of demand is: A) elastic. B) inelastic. C) equal to -1. D) none of the above is necessarily true.

D) none of the above is necessarily true.

A monopoly can be temporary because of: A) high barriers to entry. B) privileges granted by the government. C) economies of scale. D) technological change or economic profits, which attract rivals

D) technological change or economic profits, which attract rivals

In the _______ range of demand, total revenue _______ with an increase in quantity. A) elastic; decreases B) elastic; does not change C) inelastic; increases D) unit elastic; does not change

D) unit elastic; does not change

A demand curve that is linear and downward sloping: A) means that marginal revenue is equal to price. B) means that total revenue is always upward sloping. C) will result in a marginal revenue that is greater than price. D)has a price elasticity of demand that is equal to -1 when marginal revenue is equal to zero.

D)has a price elasticity of demand that is equal to -1 when marginal revenue is equal to zero.

. (Exhibit: Demand, Elasticity, and Total Revenue) If price is lower than P, an increase in price (but not above P) will result in: A) a decrease in TR. B) an increase in TR. C) no change in TR. D) none of the above, necessarily; it depends on the quantity sold.

an increase in TR.

If you are the only seller of gasoline in a smaller town or community, your monopoly would result from: A) sunk costs. B) location. C) economies of scale. D) government restrictions.

B) location

(Exhibit: A Profit-Maximizing Monopoly Firm) This profit-maximizing monopoly firm's cost per unit at its profit-maximizing quantity is: A) $8. B) $15. C) $16. D) $18.

C) $16

. (Exhibit: A Profit-Maximizing Monopoly Firm) This profit-maximizing monopoly firm's price per unit is: A) $20. B) $26. C) $29. D) $35.

C) $29

Suppose that you build a high-speed, magnetically powered transportation system from New York to Los Angeles. High fixed costs resulting from the enormous quantity of capital used in this system enable decreasing average cost for any conceivable level of demand. Your monopoly would result from: A) sunk costs. B) location. C) economies of scale. D) government restrictions.

C) economies of scale

In 1999, a judge declared that Microsoft was a monopolist. Assuming that it was maximizing its profits at its chosen level of output, we may conclude that the absolute value of the price elasticity of demand for its systems was:

C) greater than 1.

Suppose that a profit-maximizing monopoly firm experiences a substantial technological change that reduces its marginal and average total costs by $40. If the firm has been operating for over 10 years, it probably: A) had negative economic profits. B) had zero economic profits. C) had positive economic profits. D) was unable to estimate its own profits.

C) had positive economic profits.

Which of the following is (are) true concerning monopoly? A) It is at the opposite end of the spectrum from a perfectly competitive firm. B) A monopoly has no rivals. C) A monopoly does not need to worry about other firms entering the industry. D) All of the above are true.

It is at the opposite end of the spectrum from a perfectly competitive firm. A monopoly has no rivals. A monopoly does not need to worry about other firms entering the industry.

(Exhibit: Demand, Elasticity, and Total Revenue) At point G in Panel (b), which of the following is (are) true? A) Profit is maximized. B) To maximize profit, the firm should not produce any more or less. C) The quantity is the same as the quantity when MR = 0. D) All of the above are true.

The quantity is the same as the quantity when MR = 0.

A monopoly is a market characterized by:

a product with no close substitutes a single seller a large number of small firms

(Exhibit: Demand, Elasticity, and Total Revenue) If price is higher than P, a decrease in price (but not below P) will result in: A) an increase in TR. B) a decrease in TR. C) no change in TR. D) none of the above, necessarily; it depends on the quantity sold.

A) an increase in TR.

Conditions that prevent the entry of new firms in a monopoly market are: A) barriers to entry. B) terms of sale. C) labor market stipulations. D) production controls.

A) barriers of entry

. A downward-sloping demand curve exists for: A) a monopoly, but not for a perfectly competitive firm. B) a perfectly competitive firm, but not for a monopoly. C) both a monopoly and a perfectly competitive firm. D) either a monopoly or a perfectly competitive firm, depending on the costs of production.

A) a monopoly, but not for a perfectly competitive firm.

The demand curve facing a monopolist is: A) downward sloping. B) vertical. C) horizontal. D)upward sloping.

A) downward sloping

A firm that confronts economies of scale: A) at lower levels of output and then encounters diseconomies of scale at higher levels of output is a natural monopoly. B) over the entire range of outputs demanded is called a natural monopoly. C) at any particular level of output is called a natural monopoly. D) has a continually rising long-run average cost curve.

B) over the entire range of outputs demanded is called a natural monopoly.

. A monopolist is a: A) price taker. B) price setter. C) cost maximizer. D) quantity taker.

B) price setter

(Exhibit: Demand, Elasticity, and Total Revenue) In Panel (a), Curve C is: A) the average revenue curve. B) the slope of the total revenue curve. C) the change in quantity divided by the change in total revenue. D) the marginal cost curve.

B) the slope of the total revenue curve.

The Aluminum Company of America gained monopoly power because: A) of its strategic location. B) the considerable finances required to enter into the aluminum industry kept other firms out. C) it had exclusive ownership of a resource required to produce aluminum. D) it had been granted an exclusive franchise by Congress to sell aluminum in the United States.

C) it had exclusive ownership of a resource required to produce aluminum.

Marginal revenue for a monopolist is: A) equal to price. B) greater than price. C) less than price. D) equal to average revenue.

C) less than price.

(Exhibit: Computing Monopoly Profit) Producing at point N would: A) result in MR = MC. B) result in positive economic profits. C) never be profit maximizing, since at this output MR < 0 and MC > 0. D) result in the firm breaking even.

C) never be profit maximizing, since at this output MR < 0 and MC > 0.

If your farm has the only known source of a rare cocoa bean needed to make chocolate-covered peanuts, your monopoly would result from: A) sunk costs. B) location. C) restricted ownership of inputs. D) government restrictions.

C) restricted ownership of inputs.

Which of the following is (are) true? A) A profit-maximizing monopoly firm will select a price and quantity in the inelastic range of its demand curve. B) A profit-maximizing monopoly firm will select a price and quantity in the elastic range of its demand curve. C) Any firm will maximize profits by producing the quantity of output where MR > MC. D) B and C are true.

A profit-maximizing monopoly firm will select a price and quantity in the elastic range of its demand curve.

(Exhibit: Computing Monopoly Profit) In order to obtain maximum profits, the monopoly should produce the output determined by point _______ . A) G B) N C) H D) K

A) G

The marginal revenue curve for a price setter will always: A) bisect any horizontal line drawn between the vertical axis and the demand curve. B) bisect any vertical line drawn between the horizontal axis and the demand curve. C) lie above and to the right of the demand curve. D) be less steeply sloped than the demand curve.

A) bisect any horizontal line drawn between the vertical axis and the demand curve.

When a monopoly changes price to respond to a change in marginal cost, the _______ in _______ is _______ than the _______ . A) change; price; less; the change in marginal cost B) increase; price; greater; change in output C) decrease; output; greater; change in output D) change; price; equal to; change in marginal cost

A) change; price; less; the change in marginal cost

The XYZ Company is a profit-maximizing firm with a monopoly in the production of pennants. The firm sells its pennants for $10 each. We can conclude that the XYZ Company is experiencing: A) diminishing marginal returns to its variable factor(s) of production. B) increasing marginal returns to its variable factor(s) of production. C) constant marginal returns to its variable factor(s) of production. D) entry by rival firms whenever profits become positive.

A) diminishing marginal returns to its variable factor(s) of production.

The XYZ Company is a profit-maximizing firm with a monopoly in the production of pennants. The firm sells its pennants for $10 each. We can conclude that the XYZ Company is producing a level of output at which the demand for pennants is: A) elastic. B) unit price elastic. C) inelastic. D) perfectly inelastic.

A) elastic

In the _______ range of demand, total revenue _______ with an increase in price. A) elastic; decreases B) elastic; does not change C) inelastic; decreases D) inelastic; does not change

A) elastic; decreases

In the _______ range of demand, total revenue _______ with an increase in quantity. A) elastic; increases B) elastic; does not change C) inelastic; increases D) inelastic; does not change

A) elastic; increases

A type of firm that usually has a natural monopoly in most of its markets is a(n): A) electric utility. B) major automobile producer. C) major retail establishment. D) commercial airline.

A) electric utility

A monopoly responds to an increase in marginal cost by _______ price and _______ output. A) increasing; decreasing B) increasing; increasing C) decreasing; increasing D) decreasing; decreasing

A) increasing; decreasing

If a monopolist is producing a quantity that generates MC = MR, then profit: A) is maximized. B) is maximized only if MC = P. C) can be increased by increasing production. D) can be increased by decreasing production.

A) is maximized.

A firm that faces a downward-sloping demand curve is a: A) price setter. B) quantity minimizer. C) quantity taker. D) price taker.

A) price setter

(Exhibit: Chip Production) If in response to its reduction in cost, Sandy Chip changes its price in a profit-maximizing way, then we can predict that its total economic profit will: A) rise. B) fall. C) remain unchanged. D) It is not possible to make a determination from the information given.

A) rise.

(Exhibit: Chip Production) If in response to its reduction in cost, Sandy Chip changes its price in a profit-maximizing way, then we can predict that its total output will: A) rise. B) fall. C) remain unchanged. D) It is not possible to make a determination from the information given.

A) rise.

(Exhibit: Chip Production) Suppose Sandy Chip lowers its price in response to the reduction in its costs of production. Lowering its price will cause the chip firm's total revenue to: A) rise. B) fall. C) remain unchanged. D) It is not possible to make a determination from the information given.

A) rise.

Suppose that your firm has spent several decades establishing a well-known brand name through advertising. If other firms are prevented from entering your industry because of high advertising expense, your monopoly would result from: A) sunk costs. B) location. C) economies of scale. D) government restrictions.

A) sunk cost

If a firm possesses monopoly power, it means that: A) the firm can set its own price based on its output decision. B) the firm's demand curve is always elastic. C) the firm is necessarily a monopoly. D) A and C are true.

A) the firm can set its own price based on its output decision.

Microsoft holds patents on Windows, but another source of its monopoly power identified in the book is: A) the network effects associated with the standards set by Windows. B) its willingness to use catalog sales as its primary form of retail sales. C) its exclusive franchise from the government. D) its restricted ownership of silica, the principle ingredient in manufacturing computer chips.

A) the network effects associated with the standards set by Windows.

(Exhibit: A Profit-Maximizing Monopoly Firm) This profit-maximizing monopoly firm's profit per unit is: A) $5. B) $13. C) $14. D) $20.

B) $13

Suppose that a monopolist increases production from 10 units to 11 units. If the market price declines from $20 per unit to $19 per unit, marginal revenue for the eleventh unit is: A) $1. B) $9. C) $19. D) $20.

B) $9

. (Exhibit: A Profit-Maximizing Monopoly Firm) The profit-maximizing firm in this exhibit will produce _______ units of output per week: A) 160 B) 220 C) 250 D)300

B) 220

(Exhibit: Computing Monopoly Profit) Which of the following is (are) true? A) Lowering the price from the profit-maximizing price will decrease total revenue. B) Marginal profit when the price is P3 is equal to zero. C) The profit-maximizing condition for any firm is MR > MC. D) All of the above are true.

B) Marginal profit when the price is P3 is equal to zero.

. In the short run, a monopoly will stop producing if: A) P < ATC. B) P < AVC. C) P > MR. D) P > ATC.

B) P < AVC.

A demand curve that is downward sloping will ensure that: A) P = MR. B) P > MR. C) P < MR. D) P = MC.

B) P > MR.

(Exhibit: Demand, Elasticity, and Total Revenue) At point A on the demand curve in Panel (a), the price elasticity of demand is: A) greater than -1. B) equal to -1. C) less than -1. D) none of the above.

B) equal to -1.

(Exhibit: Chip Production) With the reduction in its costs, Sandy Chip will probably: A) lower its price by $20. B) lower its price, but by less than $20. C) lower its price, but by more than $20. D) It is not possible to make a determination from the information given.

B) lower its price, but by less than $20.

Most electric, gas, and water companies are examples of: A) unregulated monopolies. B) natural monopolies. C) restricted-input monopolies. D) sunk-cost monopolies.

B) natural monopolies

. A monopoly is likely to _______ and _______ than otherwise equivalent competitive firms. A) produce more; charge more B) produce less; charge more C) produce more; charge less D) produce less; charge less

B) produce less; charge more

Which of the following is (are) true? A) A monopoly firm is a price taker. B) MR > P if the demand curve is downward sloping. C) MR = MC is a profit-maximizing rule for any firm. D) All of the above are true.

C) MR = MC is a profit-maximizing rule for any firm.

A natural monopoly exists whenever a single firm: A) is owned and operated by the federal or local government. B) is investor owned but granted the exclusive right by the government to operate in a market. C) confronts economies of scale over the entire range of production that is relevant to its market. D) has gained control over a strategic input of an important production process.

C) confronts economies of scale offer the entire range of production that is relevant to its market

A natural monopoly is most likely to result if a single firm: A) is the only seller in a community. B) is investor-owned, but is granted the exclusive right by the government to operate in a market. C) experiences economies of scale over a wide range of output. D) has gained control over a strategic input of an important production process.

C) experiences economies of scale over a wide range of output

Barriers to entry are characteristics of a particular market: A) in which the industry can make it so difficult for entry that only a few firms can do so, and this leads to monopoly power. B) that block new firms from entering. C) which include economies of scale, location advantages, and high sunk costs. D) all of the above are true.

D) all of the above

The demand curve facing a price setter: A) is vertical. B) is horizontal. C) is upward sloping. D) is downward sloping.

D) is downward sloping

Marginal revenue is _______ in the _______ range of the demand curve, _______ in the _______ range of the demand curve and _______ where demand is unit price elastic. A) positive; positive, negative, negative; greater than zero B) negative; inelastic; positive; elastic; zero C) positive; inelastic; negative; positive; zero D) negative; positive; positive; negative; less than zero

negative; inelastic; positive; elastic;