Chapter 15 - Monopolies
Assuming that Jerry's Bicycle Shop operates in a competitive market for bicycles, which of the following statements is(are) true? (i) He chooses the price at which he sells his bicycles. (ii) He chooses the quantity of bicycles that he supplies. (iii) His market is characterized by one or more barriers to entry. a. (i) only b. (ii) only c. (i) and (ii) only d. (ii) and (iii) only
b. (ii) only
An industry is a natural monopoly when (i) government assists the firm in maintaining the monopoly. (ii) a single firm owns a key resource. (iii) a single firm can supply a fixed number of goods or services at a smaller cost than could two or more firms. a. (i) only b. (iii) only c. (i) and (ii) d. (ii) and (iii)
b. (iii) only
The market demand curve for a monopolist is typically a. unitary elastic at the point of profit maximization. b. downward sloping. c. horizontal. d. vertical.
b. downward sloping.
Monopoly firms have a. downward-sloping demand curves and they can sell as much output as they desire at the market price. b. downward-sloping demand curves and they can sell only a limited quantity of output at each price. c. horizontal demand curves and they can sell as much output as they desire at the market price. d. horizontal demand curves and they can sell only a limited quantity of output at each price.
b. downward-sloping demand curves and they can sell only a limited quantity of output at each price.
A monopolist's marginal revenue is less than price because (i) to sell additional units of the good, the price charged on all units must decrease. (ii) with the sale of an additional unit, the monopolist receives less revenue for each of the previous units it planned to sell. (iii) of the upward-sloping average revenue curve. a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. All of the above are correct.
a. (i) and (ii)
To define a monopoly, we cite the following characteristics: (i) The firm is the sole seller of its product. (ii) The firm's product does not have close substitutes. (iii) The firm generates a large economic profit. (iv) The firm is located in a small geographic market. a. (i) and (ii) b. (i) and (iii) c. (ii) and (iv) d. All of the above are correct.
a. (i) and (ii)
Which of the following statements is (are) true of a monopoly? (i) A monopoly has the ability to set the price of its product at whatever level it desires. (ii) A monopoly's total revenue will always increase when it increases the price of its product. (iii) A monopoly can earn unlimited profits. a. (i) only b. (ii) only c. (i) and (ii) d. (ii) and (iii)
a. (i) only
Young Johnny inherited the only local cable TV company in town after his father passed away. The company is completely unregulated by the government and is therefore free to operate as it wishes. Assuming that Johnny understands the true power of his new monopoly, he is probably most excited about which of the following statements? (i) He will be able to set the price of cable TV service at whatever level he wishes. (ii) The customers will be forced to purchase cable TV service at whatever price he wants to set. (iii) He will be able to achieve any profit level that he desires. a. (i) only b. (ii) only c. (i) and (iii) d. All of the above are correct.
a. (i) only
For a profit-maximizing monopolist, a. P > MR = MC. b. P = MR = MC. c. P > MR > MC. d. MR < MC < P.
a. P > MR = MC.
Which of the following items is a primary source of barriers to entry? a. The costs of production make a single firm more efficient than a large number of firms. b. A single firm hires all the people who have the management skills that are important in the industry. c. Contracts among firms prohibit them from competing with one another in the production and sale of certain products. d. All of the above are correct.
a. The costs of production make a single firm more efficient than a large number of firms.
It is possible for a natural monopoly to evolve into a competitive market a. as a market expands. b. as patent and copyright laws change. c. as technological advances give rise to economies of scale. d. None of the above are correct; it is not possible for a natural monopoly to evolve into a competitive market.
a. as a market expands.
The laws governing patents and copyrights a. can lead to monopolies. b. are intended to serve private interests, not the public interest. c. have costs, but no benefits. d. All of the above are correct.
a. can lead to monopolies.
A natural monopolist's ability to price its product is a. constrained by the market demand curve. b. constrained by market supply. c. not affected by market demand. d. enhanced by regulatory control of the government.
a. constrained by the market demand curve.
Authors are allowed to be monopolists in the sale of their books in order to a. encourage authors to write more and better books. b. correct for the negative externalities that the internet and television impose. c. satisfy literary advocacy groups that exercise their lobbying power. d. promote a society in which people think for themselves and learn from whichever books they please.
a. encourage authors to write more and better books.
Because a monopolist is the sole producer in its market, it can necessarily alter the price of its good (i) without affecting the quantity sold. (ii) without affecting its average total cost. (iii) by adjusting the quantity it supplies to the market. a. (ii) only b. (iii) only c. (i) and (ii) d. (i) and (iii)
b. (iii) only
Which of the following statements is correct? a. A competitive firm is a price maker and a monopoly is a price taker. b. A competitive firm is a price taker and a monopoly is a price maker. c. Both competitive firms and monopolies are price takers. d. Both competitive firms and monopolies are price makers.
b. A competitive firm is a price taker and a monopoly is a price maker.
Which of the following statements is true of a monopoly firm? a. A monopoly firm is a price taker and has no supply curve. b. A monopoly firm is a price maker and has no supply curve c. A monopoly firm is a price maker and has a downward-sloping supply curve. d. A monopoly firm is a price maker and has an upward-sloping supply curve.
b. A monopoly firm is a price maker and has no supply curve
The De Beers diamond monopoly is a classic example of a monopoly that a. is government-created. b. arises from the ownership of a key resource. c. results in very little advertising of the product that the monopolist produces. d. was broken up by the government a long time ago.
b. arises from the ownership of a key resource.
A monopoly's marginal cost will a. be less than its average fixed cost. b. be less than the price per unit of its product. c. exceed its marginal revenue. d. equal its average total cost.
b. be less than the price per unit of its product.
When a monopolist decreases the price of its good, consumers a. continue to buy the same amount. b. buy more. c. buy less. d. may buy more or less, depending on the price elasticity of demand.
b. buy more.
Which of the following is an impossible feat for a monopolist to accomplish? a. control the price of its good b. charge a higher price and continue to sell the same quantity c. operate at a point on the upper half of the demand curve d. All of the above are correct.
b. charge a higher price and continue to sell the same quantity
The defining characteristic of a natural monopoly is a. constant marginal cost over the relevant range of output. b. economies of scale over the relevant range of output. c. constant returns to scale over the relevant range of output. d. diseconomies of scale over the relevant range of output.
b. economies of scale over the relevant range of output.
A firm that has a monopoly on water (which is a necessity) can charge a high price for water a. only if the marginal cost of producing water is high. b. even if the marginal cost of producing water is low. c. only if the firm is a natural monopoly. d. even if the demand for water is low.
b. even if the marginal cost of producing water is low.
Patent and copyright laws are major sources of a. natural monopolies. b. government-created monopolies. c. resource monopolies. d. None of the above are correct.
b. government-created monopolies.
Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds. Then DeBeers, the large diamond company, has a. less incentive to advertise than it would otherwise have. b. less market power than it would otherwise have. c. more control over the price of diamonds than it would otherwise have. d. higher profits than it would otherwise have.
b. less market power than it would otherwise have.
When a firm's average total cost curve continually declines, the firm is a a. government-created monopoly. b. natural monopoly. c. revenue monopoly. d. All of the above are correct.
b. natural monopoly.
For a monopoly firm, which of the following equalities is true? a. price = marginal revenue b. price = average revenue c. price = total revenue d. None of the above are correct.
b. price = average revenue
Economists assume that monopolists behave as a. cost minimizers. b. profit maximizers. c. price maximizers. d. All of the above are correct.
b. profit maximizers.
A natural monopoly arises when a. there are constant returns to scale over the relevant range of output. b. there are economies of scale over the relevant range of output. c. one firm owns a key natural resource. d. the government gives a single firm the exclusive right to produce a particular good or service.
b. there are economies of scale over the relevant range of output.
A natural monopoly occurs when a. the product is sold in its natural state (such as water or diamonds). b. there are economies of scale over the relevant range of output. c. the firm is characterized by a rising marginal cost curve. d. production requires the use of free natural resources, such as water or air.
b. there are economies of scale over the relevant range of output.
For a monopoly firm, the shape and position of the demand curve play a role in determining (i) the profit-maximizing price. (ii) the shape and position of the marginal cost curve. (iii) the shape and position of the marginal revenue curve. a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. All of the above are correct.
c. (i) and (iii)
If the distribution of water is a natural monopoly, then (i) multiple firms will each have to pay large fixed costs to develop their own network of pipes. (ii) allowing for competition among different firms in the water-distribution industry is efficient. (iii) a single firm can serve the market at the lowest possible average total cost. a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. (i) only
c. (i) and (iii)
The marginal revenue curve for a monopoly firm starts at the same point on the vertical axis as the (i) average revenue curve. (ii) marginal cost curve. (iii) demand curve. a. (i) only b. (i) and (ii) c. (i) and (iii) d. (ii) only
c. (i) and (iii)
Which of the following scenarios best represents a monopoly situation? a. Bill and Tom work separately from one another but both sell a very rare form of the same diamond. They are the only sellers of this type of diamond in town. b. Tom owns a fishing tackle shop in Miami, Florida, in which he sells the top-of-the-line fishing equipment. c. Bill owns the only grocery store in a small community that lies 200 miles from the nearest city. d. None of the above adequately represents a monopoly.
c. Bill owns the only grocery store in a small community that lies 200 miles from the nearest city.
Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, which of the following statements is true? a. Meatball prices will be less than marginal cost. b. Meatball prices will equal marginal cost. c. Meatball prices will exceed marginal cost. d. Meatball prices will be a function of supply and demand and will therefore oscillate around marginal costs.
c. Meatball prices will exceed marginal cost.
When a firm has a natural monopoly, the firm's a. marginal cost always exceeds its average total cost. b. total cost curve is horizontal. c. average total cost curve is downward sloping. d. All of the above are correct.
c. average total cost curve is downward sloping.
A fundamental source of monopoly market power arises from a. perfectly elastic demand. b. perfectly inelastic demand. c. barriers to entry. d. availability of "free" natural resources, such as water or air.
c. barriers to entry.
When a firm operates under conditions of monopoly, its price is a. not constrained. b. constrained by marginal cost. c. constrained by demand. d. constrained only by its social agenda.
c. constrained by demand.
When a monopolist increases the amount of output that it produces and sells, the price of its output a. stays the same. b. increases. c. decreases. d. may increase or decrease depending on the price elasticity of demand.
c. decreases.
A benefit to society of the patent and copyright laws is that those laws a. help to keep prices down. b. help to prevent a single firm from acquiring ownership of a key resource. c. encourage creative activity. d. discourage excessive amounts of output of certain products.
c. encourage creative activity.
Drug companies are allowed to be monopolists in the drugs they discover in order to a. allow drug companies to charge a price that is equal to their marginal cost. b. discourage new firms from entering the drug market. c. encourage research. d. All of the above are correct.
c. encourage research.
A monopolist's average revenue is always a. equal to marginal revenue. b. greater than the price of its product. c. equal to the price of its product. d. less than the price of its product.
c. equal to the price of its product.
Encouraging firms to invest in research and development and individuals to engage in creative endeavors such as writing novels is one justification for a. resource monopolies. b. natural monopolies. c. government-created monopolies. d. breaking up monopolies into smaller firms.
c. government-created monopolies.
Competitive firms have a. downward-sloping demand curves and they can sell as much output as they desire at the market price. b. downward-sloping demand curves and they can sell only a limited quantity of output at each price. c. horizontal demand curves and they can sell as much output as they desire at the market price. d. horizontal demand curves and they can sell only a limited quantity of output at each price.
c. horizontal demand curves and they can sell as much output as they desire at the market price.
In order to sell more of its product, a monopolist must a. sell to the government. b. sell in international markets. c. lower its price. d. use its market power to force up the price of complementary products.
c. lower its price.
A profit-maximizing monopolist will produce the level of output at which a. average revenue is equal to average total cost. b. average revenue is equal to marginal cost. c. marginal revenue is equal to marginal cost. d. total revenue is equal to opportunity cost.
c. marginal revenue is equal to marginal cost.
If a profit-maximizing monopolist faces a downward-sloping market demand curve, its a. average revenue is less than the price of the product. b. average revenue is less than marginal revenue. c. marginal revenue is less than the price of the product. d. marginal revenue is greater than the price of the product.
c. marginal revenue is less than the price of the product.
Marginal revenue can become negative for a. both competitive and monopoly firms. b. competitive firms, but not for monopoly firms. c. monopoly firms, but not for competitive firms. d. neither competitive nor monopoly firms.
c. monopoly firms, but not for competitive firms.
For a monopolist, marginal revenue is a. positive when the demand effect is greater than the supply effect. b. positive when the monopoly effect is greater than the competitive effect. c. negative when the price effect is greater than the output effect. d. negative when the output effect is greater than the price effect.
c. negative when the price effect is greater than the output effect.
Because many good substitutes exist for a competitive firm's product, the demand curve that it faces is a. unit-elastic. b. perfectly inelastic. c. perfectly elastic. d. inelastic only over a certain region.
c. perfectly elastic.
When a pharmaceutical company discovers a new drug, patent law gives the monopoly a. partial ownership of the right to sell the drug for a limited number of years. b. partial ownership of the right to sell the drug for an unlimited number of years. c. sole ownership of the right to sell the drug for a limited number of years. d. sole ownership of the right to sell the drug for an unlimited number of years.
c. sole ownership of the right to sell the drug for a limited number of years.
A government-created monopoly arises when a. government spending in a certain industry gives rise to monopoly power. b. the government exercises its market control by encouraging competition among sellers. c. the government gives a firm the exclusive right to sell some good or service. d. All of the above could qualify as government-created monopolies.
c. the government gives a firm the exclusive right to sell some good or service.
Additional firms often do not try to compete with a natural monopoly because a. they fear retaliation in the form of pricing wars from the natural monopolist. b. they are unsure of the size of the market in general. c. they know they cannot achieve the same low costs that the monopolist enjoys. d. the natural monopoly doesn't make a huge profit.
c. they know they cannot achieve the same low costs that the monopolist enjoys.
Which of the following statements is true? (i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. a. (i) only b. (iii) only c. (i) and (ii) d. (ii) and (iii)
d. (ii) and (iii)
A firm that is a natural monopoly a. is not likely to be concerned about new entrants eroding its monopoly power. b. is taking advantage of economies of scale. c. would experience a higher average total cost if more firms entered the market. d. All of the above are correct.
d. All of the above are correct.
Allowing an inventor to have the exclusive rights to market her new invention will lead to (i) a product that is priced higher than it would be without the exclusive rights. (ii) desirable behavior in the sense that inventors are encouraged to invent. (iii) higher profits for the inventor. a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. All of the above are correct.
d. All of the above are correct.
Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly is often a. not in the best interest of society. b. one that fails to maximize total economic well-being. c. inefficient. d. All of the above are correct.
d. All of the above are correct.
In practice, monopolies rarely arise from exclusive ownership of a resource because a. actual economies are quite large. b. the natural scope of many such markets is often worldwide. c. few firms own a resource for which there are no close substitutes. d. All of the above are correct.
d. All of the above are correct.
Which of the following is an example of a barrier to entry? (i) A key resource is owned by a single firm. (ii) The costs of production make a single producer more efficient than a large number of producers. (iii) The government has given the existing monopoly the exclusive right to produce the good. a. (i) and (ii) b. (ii) and (iii) c. (i) only d. All of the above are correct.
d. All of the above are correct.
Which of the following statements is (are) true of monopolies? a. Monopolies are constrained by market demand. b. Monopolies benefit from barriers to entry. c. Monopolies have the ability to set the prices of their products. d. All of the above are correct.
d. All of the above are correct.
Which of the following statements is true about patents and copyrights? (i) They both have benefits and costs. (ii) They lead to higher prices. (iii) They enhance the ability of monopolists to earn above-average profits. a. (i) and (ii) b. (ii) and (iii) c. (ii) only d. All of the above are correct.
d. All of the above are correct.
When an industry is a natural monopoly, a. it is characterized by constant returns to scale. b. it is characterized by diseconomies of scale. c. a larger number of firms may lead to a lower average cost. d. a larger number of firms will lead to a higher average cost.
d. a larger number of firms will lead to a higher average cost.
Natural monopolies differ from other forms of monopoly because they a. are not subject to barriers to entry. b. are not regulated by government. c. generally don't make a profit. d. are generally not worried about competition eroding their monopoly position in the market.
d. are generally not worried about competition eroding their monopoly position in the market.
The fundamental cause of monopoly is a. incompetent management in competitive firms. b. the zero-profit feature of long-run equilibrium in competitive markets. c. advertising. d. barriers to entry.
d. barriers to entry.
Marginal revenue for a monopolist is computed as a. average revenue divided by quantity sold. b. average revenue times quantity divided by price. c. total revenue divided by quantity sold. d. change in total revenue per one unit increase in quantity sold.
d. change in total revenue per one unit increase in quantity sold.
In a competitive market, a firm's supply curve dictates the amount it will supply. In a monopoly market the a. same is true. b. supply curve conceptually makes sense, but in practice is never used. c. supply curve will have limited predictive capacity. d. decision about how much to supply is impossible to separate from the demand curve it faces.
d. decision about how much to supply is impossible to separate from the demand curve it faces.
When a monopolist increases the amount of output that it produces and sells, its average revenue a. increases and its marginal revenue increases. b. increases and its marginal revenue decreases. c. decreases and its marginal revenue increases. d. decreases and its marginal revenue decreases.
d. decreases and its marginal revenue decreases.
When a single firm can supply a product to an entire market at a smaller cost than could two or more firms, the industry is called a a. resource industry. b. exclusive industry. c. government monopoly. d. natural monopoly.
d. natural monopoly.
When a natural monopoly exists, it is a. always cost effective for government-owned firms to produce the product. b. never cost effective for one firm to produce the product. c. always cost effective for two or more private firms to produce the product. d. never cost effective for two or more private firms to produce the product.
d. never cost effective for two or more private firms to produce the product.
Supply curves tell us how much producers are willing to supply at any given price. Hence, monopoly firms have a. vertical supply curves. b. steeper supply curves than competitive firms c. flatter supply curves than competitive firms. d. no supply curves.
d. no supply curves.
When a monopolist increases the number of units it sells, there are two effects on revenue. They are the a. demand effect and the supply effect. b. competition effect and the cost effect. c. competitive effect and the monopoly effect. d. output effect and the price effect.
d. output effect and the price effect.
The simplest way for a monopoly to arise is for a single firm to a. decrease its prices without consulting other firms. b. decrease production to increase demand for its product. c. jointly make pricing decisions with other firms. d. own a key resource.
d. own a key resource.
Due to the nature of the patent laws on pharmaceuticals, the market for such drugs a. always remains a competitive market. b. always remains a monopolistic market. c. switches from competitive to monopolistic once the firm's patent runs out. d. switches from monopolistic to competitive once the firm's patent runs out.
d. switches from monopolistic to competitive once the firm's patent runs out.
The key difference between a competitive firm and a monopoly firm is the ability to select a. the level of competition in the market. b. the level of production. c. inputs in the production process. d. the price of its output.
d. the price of its output.
