ECON102 Chapter 9
Suppose the marginal cost of production increases. Which of these steps will be taken by a monopolist in the short run? • It will increase its output to benefit from economies of scale. • It will reduce its output to extract a higher price from customers. • It will reduce its price to expand revenue possibilities. • It will charge different prices to different consumers to increase producer surplus.
It will reduce its output to extract a higher price from customers. A monopolist will restrict the supply of its output in the market in order to extract a higher price from the consumers who demand the product.
Which of the following will happen if a monopolist starts practicing perfect price discrimination? • The marginal revenue curve becomes horizontal. • The demand curve also becomes the marginal revenue curve. • The marginal revenue curve becomes flatter than the demand curve. • The marginal revenue curve becomes steeper than the demand curve.
The demand curve also becomes the marginal revenue curve. If a monopolist can charge a different price for each unit it sells, its marginal revenue from selling one more unit will equal the price of that unit. Thus, the demand curve will become its marginal revenue curve.
Which of these is a valid comparison between the demand curves faced by a monopolist and a perfectly competitive firm? • The demand curve faced by a monopolist is less price elastic than that of a competitive firm. • The demand curve faced by a monopolist is more price elastic than that of a competitive firm. • The demand curve faced by a monopolist is unit price elastic, while that of a competitive firm is perfectly price inelastic. • The demand curve faced by a monopolist is perfectly price elastic, while that of a competitive firm is perfectly price inelastic.
The demand curve faced by a monopolist is more price elastic than that of a competitive firm. The demand curve faced by a monopolist slopes downward, while the same faced by a perfectly competitive firm is horizontal and parallel to the output axis.
Which of these is true for a nonprice-discriminating monopolist whose average revenue is equal to the average total cost at the profit-maximizing output? • The monopolist earns an economic profit. • The monopolist should stall production at least in the short run. • The monopolist earns a normal profit. • The monopolist should increase its output at least in the short run.
The monopolist earns a normal profit. A monopolist will earn no economic profit if the price of its product is below its average total cost. However, if price is above the average variable cost of production, it will continue to operate in the short run.
Which of the following is true of a patent in the United States? a. It results in a decline in the long-run average cost of production of a firm. b. It results in a decline in the long-run marginal cost of production of a firm. c. It grants the holder the exclusive right to sell a product for 20 years. d. It grants a firm the right to charge different groups of consumers different prices for the same product.
c. It grants the holder the exclusive right to sell a product for 20 years.
A monopolist might keep prices below the profit-maximizing level: a. to attract new firms to the market. b. to increase producer surplus. c. because of government intervention and scrutiny. d. due to diseconomies of scale.
c. because of government intervention and scrutiny.
The deadweight or social loss of a monopoly: a. arises due to productive inefficiency. b. arises due to the high costs of production incurred by monopolists. c. arises as monopolists face a relatively elastic demand curve. d. arises as monopolists restrict output and increase prices.
d. arises as monopolists restrict output and increase prices.
Legal restrictions such as patents: • lower a producer's variable cost of production. • are provided to writers for new works of art or literature. • make a producer's supply curve less price elastic. • give producers a temporary exclusive right to produce a new good.
give producers a temporary exclusive right to produce a new good.
A monopolist is said to have market power because: • it earns an economic profit both in the long run and in the short run. • it has complete control over product price. • it uses the latest technology in production. • it undertakes large-scale production.
it has complete control over product price. A monopolist faces a downward-sloping demand curve which provides it with some power to set the price of its product. It can choose any price-quantity combination on this demand curve.
A profit-maximizing monopolist will choose to supply the output at which: • average revenue equals average cost. • marginal revenue equals marginal cost. • total revenue equals total cost. • marginal cost equals average cost.
marginal revenue equals marginal cost. According to the golden rule of profit maximization, the profit-maximizing output occurs where marginal revenue equals marginal cost.
In order to maximize total revenue, a monopolist always chooses to produce: • on the elastic portion of the marginal cost curve. • on the inelastic portion of the marginal revenue curve. • on the inelastic portion of the demand curve. • on the elastic portion of the demand curve.
on the elastic portion of the demand curve. A profit-maximizing monopolist would never expand output to the inelastic range of demand because doing so would reduce total revenue.
Sandra Martin is the owner of the only diamond jewelry showroom in a town. She supplies jewelry mostly to the upscale residents of this town but is interested in expanding her customer base to middleclass households as well. Recently, she announced a 10 percent discount on the making charges for her new customers but continued to charge the same price to existing customers. This is an example of: • price discrimination • predatory pricing • monopolistic pricing • output discrimination
price discrimination
Unlike a monopoly, in a perfectly competitive market, _____. • if price falls below the average variable cost, it pays to shut down • economic profit is always positive in the long run • only government license holders can produce a good • there are no barriers to the entry of new firms
there are no barriers to the entry of new firms
Which of these steps will be taken by a monopolist when the total variable cost of production falls due to a decline in the price of one or more resources used in production? • The monopolist will reduce its scale of operation. • The monopolist will reduce the usage of those resources. • The monopolist will increase the price of its product and create a supply bottleneck. • The monopolist will marginally reduce the price of its product to attract new customers.
The monopolist will marginally reduce the price of its product to attract new customers. For a given demand curve, a monopolist can increase the demand for its product by lowering its price. It will lower the market price of the product when the total cost of production falls to restrict competitors from entering the market.
A monopolist's profit-maximizing level of output occurs at the point where: a. marginal revenue equals marginal cost. b. price equals marginal cost. c. average total cost is at a minimum. d. price equals average revenue.
a. marginal revenue equals marginal cost.
A monopolist is likely to shut down in the short run if: a. the average variable cost curve is below the average revenue curve at all output rates. b. the average variable cost curve is above the average revenue curve at all output rates. c. the marginal cost curve is below the average revenue curve at all output rates. d. the marginal cost curve is above the average revenue curve at all output rates.
b. the average variable cost curve is above the average revenue curve at all output rates.
For a monopolist, _____. a. the demand curve lies above the average revenue curve b. the demand curve lies below the average revenue curve c. marginal revenue is more than average revenue d. marginal revenue is less than average revenue
d. marginal revenue is less than average revenue
When the demand for the good produced by a monopoly is price elastic, a decrease in price will: • increase the marginal revenue. • decrease the total revenue. • increase the total revenue. • increase the average revenue.
increase the total revenue. When demand is price elastic, marginal revenue is positive, and total revenue increases as the price falls.
Unlike a perfectly competitive firm, the marginal revenue curve of a monopolist: • lies below the average revenue curve. • lies above the average revenue curve. • coincides with the average cost curve. • coincides with the marginal cost curve.
lies below the average revenue curve.
Which of these conditions can lead to the formation of a natural monopoly? • Increasing marginal returns • Diminishing marginal returns • Diseconomies of scale • Economies of scale
Economies of scale
Which of these is a form of price discrimination? • Cheaper rates for oranges in winter • Higher prices of imported goods compared to domestically produced goods • Cheaper call rates for long-distance night calls • Higher prices of life-saving drugs compared to regular medicines
Cheaper call rates for long-distance night calls A cellular service provider who announces cheaper call rates for night calls is practicing price discrimination.
Which of the following groups of customers would be charged the lowest price by a monopolist for its product? • Dentists • Salaried individuals • Businessmen • College students
College students A profit-maximizing monopolist will charge a lower price to the group with a more elastic demand. College students, senior citizens, and unemployed people are more sensitive to changes in the price level.
Which of these is a likely impact of perfect price discrimination by a profit-maximizing monopolist? • Consumer surplus becomes equal to producer surplus. • Consumer surplus becomes larger than producer surplus. • Economic profit falls to zero. • Consumer surplus falls to zero.
Consumer surplus falls to zero. By charging a different price for each unit sold, a perfectly discriminating monopolist is able to convert every dollar of consumer surplus into economic profit.
Which of the following is a difference between monopoly and perfect competition? a. A perfectly competitive firm is a price maker, while a monopolist is a price taker. b. A perfectly competitive firm faces a downward-sloping demand curve, while a monopolist faces a horizontal demand curve. c. A perfectly competitive firm's marginal revenue equals price, while a monopolist's marginal revenue is less than price. d. A perfectly competitive firm's average revenue is less than price, while a monopolist's average revenue is greater than price.
c. A perfectly competitive firm's marginal revenue equals price, while a monopolist's marginal revenue is less than price.
For a monopolist that charges a single price to all consumers, marginal revenue: • is always equal to the price of the product. • is less than average revenue. • is always equal to the marginal cost. • is more than average revenue.
is less than average revenue. The marginal revenue of a monopolist equals the price minus the revenue forgone by selling all previous units for a lower price. Because a monopolist's marginal revenue equals the price minus the loss, marginal revenue is always less than the price or the average revenue.
The price charged by a monopoly is: • less than its average revenue. • equal to its marginal revenue. • more than its marginal revenue. • less than its average revenue.
more than its marginal revenue. For a monopolist, marginal revenue is less than the price, or average revenue.
Which of these is true of a government license? • It allows a monopolist to practice price discrimination. • It reduces the barriers to entry and exit of firms in the long run. • It allows firms to charge prices above the competitive level. • It reduces the short-run profit of a monopolist.
It allows firms to charge prices above the competitive level. A license may not grant a monopoly, but it does block entry and often gives firms the power to charge prices above the competitive level without losing all their customers. Thus, a license can serve as an effective barrier against new competitors.
Which of these is true of the demand curve faced by a monopolist? • It slopes upward. • It is perfectly price inelastic. • It is perfectly price elastic. • It slopes downward.
It slopes downward. reflecting law of demand
A price-discriminating monopolist supplies its product to students studying medicine and to health care providers. In order to maximize profit, a monopolist will charge a higher price to: • students who are more sensitive to price. • health care providers who are less sensitive to price. • students who are less sensitive to price. • health care providers who are more sensitive to price.
health care providers who are less sensitive to price. Profit maximization by a price-discriminating monopolist would imply charging a higher price to the group with less elastic demand, that is, charging more to the group less sensitive to the price.
The deadweight loss of a monopoly is: • the sum of the gain in both the consumer surplus and the producer surplus. • the difference between the total loss in consumer surplus and the gain in producer surplus. • the sum of the loss in both the consumer surplus and the producer surplus. • the difference between the gain in consumer surplus and the loss in producer surplus.
the difference between the total loss in consumer surplus and the gain in producer surplus.
For a monopolist who does not price discriminate, economic profit is maximized in the short run at a price of $200. Which of these can be concluded from the given information? • Average revenue of the firm at that output level is $200. • Average cost of producing that output is $200. • Marginal revenue of the firm at that output level is $200. • Marginal cost of producing that output is $200.
Average revenue of the firm at that output level is $200. At the profit-maximizing output, marginal cost is equal to marginal revenue but is less than the average revenue. The price at the profit maximizing output is equal to the average revenue of the firm.
Suppose a perfectly competitive firm is able to add a new dimension to its existing product through innovation. This gives the firm some market power, allowing it to control the price and output of the product. Which of these will be a likely impact on the consumer surplus? • Consumer surplus will increase. • Consumer surplus will be more than the producer surplus. • Consumer surplus will decrease. • Consumer surplus will remain unchanged.
Consumer surplus will decrease.
Which of these will guarantee positive economic profits to a monopolist in the long run? • Creating barriers to the entry of new firms in the market • Experiencing diseconomies of scale in production • Facing a perfectly price elastic demand curve • Reducing the marginal cost of production
Creating barriers to the entry of new firms in the market If a monopoly is insulated from competition by high barriers that block new entry, economic profit can persist into the long run.
Which of the following is true of a patent law? • It encourages investment in research and innovation. • It lowers a firm's average cost of production. • It lowers the barrier to entry of new firms in an industry. • It gives a firm permanent and exclusive production rights.
It encourages investment in research and innovation. Patent laws encourage inventors to invest the time and money required to discover and develop new products and processes. If other firms could simply copy successful products, inventors would have less incentive to incur the up-front costs of invention.
Identify a valid difference between the equilibrium price-output combinations of a monopolist and a perfectly competitive firm. • The equilibrium output is comparatively lower and the equilibrium price is higher for a monopolist. • The equilibrium output is identical in both markets but the equilibrium price is comparatively higher for a monopolist. • The equilibrium output and the equilibrium price are both comparatively higher for a monopolist. • The equilibrium output and the equilibrium price are both comparatively lower for a monopolist.
The equilibrium output is comparatively lower and the equilibrium price is higher for a monopolist.
Which of these describes the allocative inefficiency that results from the price-output decision of a profit maximizing monopolist? • The decline in marginal revenue • The loss in producer surplus • The loss in consumer surplus • The decline in marginal cost
The loss in consumer surplus The monopolist restricts quantity below what would maximize social welfare. The loss in consumer surplus that results from the output decision under a monopoly is partly covered by the gain in producer surplus; the rest is a deadweight loss on the society. Thus the monopoly output results in allocative inefficiency.
Under which of the following situations is a monopolist likely to keep its price below the profit maximizing level? • When there is threat of competition from other producers • When the price of a resource used in production increases • When there is short-run economic profit • When the demand for the product is price inelastic
When the demand for the product is price inelastic A monopolist might keep the price below the profit-maximizing level to avoid attracting competitors to the market.
Which of the following is true of a monopolist? a. A monopolist has the exclusive right to supply a good or service if it has a patent on the good or service. b. A monopolist cannot increase profit by charging higher prices to those who value the product more. c. A monopolist cannot increase profit by charging a different price for each unit sold. d. A monopolist can choose only the quantity produced in a market and not the market price.
a. A monopolist has the exclusive right to supply a good or service if it has a patent on the good or service.
Which of the following is an example of price discrimination? a. Charging lower admission prices to movies from senior citizens b. Charging lower prices for DVD players with fewer features than for higher-priced DVD players c. Charging higher prices for houses in California than for those in Nebraska d. Charging different prices for different types of haircuts
a. Charging lower admission prices to movies from senior citizens
Which of the following correctly describes price discrimination? a. Selling the same good or service for different prices to different consumers for reasons unrelated to cost b. Buying a good at a lower cost in one market and selling it at a higher price in another market c. Selling the same good or service for the same price to different consumers d. Charging higher prices for goods and services that are exported compared to those sold in the domestic market
a. Selling the same good or service for different prices to different consumers for reasons unrelated to cost
A monopolist produces: a. less output than a perfectly competitive firm and charges a higher price. b. less output than a perfectly competitive firm and charges a lower price. c. more output than a perfectly competitive firm and charges a higher price. d. more output than a perfectly competitive firm and charges a lower price.
a. less output than a perfectly competitive firm and charges a higher price.
Allocative inefficiency arises in a: a. monopoly as it produces less output than a perfectly competitive firm and charges a higher price. b. perfectly competitive market as it produces more output than a monopoly and charges a higher price. c. monopoly only if it experiences diseconomies of scale. d. perfectly competitive market only if it faces a labor shortage.
a. monopoly as it produces less output than a perfectly competitive firm and charges a higher price.
Which of the following is a similarity between a monopoly firm and a perfectly competitive firm? a. The demand curve is perfectly elastic for both firms. b. The demand curve is the average revenue curve for both firms. c. Marginal revenue equals price for both firms. d. Marginal revenue is less than price for both firms.
b. The demand curve is the average revenue curve for both firms.
A monopolized market is characterized by: a. a sole supplier, no close substitutes, and free entry. b. a sole supplier, no close substitutes, and barriers to entry. c. a sole supplier, many close substitutes, and barriers to entry. d. a sole supplier, a few close substitutes, and free entry.
b. a sole supplier, no close substitutes, and barriers to entry.
The demand curve faced by a monopolist is the same as the: a. demand curve faced by a perfectly competitive firm. b. market demand curve. c. marginal cost curve. d. marginal revenue curve.
b. market demand curve.
Which of the following is likely to ensure that a monopolist earns positive economic profits in the long run? a. A horizontal market demand curve b. Exchange of technological know-how with rival firms c. High barriers that block new entry d. Allowing rival firms to produce close substitute products
c. High barriers that block new entry
The supply curve for a monopolist: a. is the marginal cost curve that lies above the average variable cost curve. b. is the marginal cost curve that lies below the average variable cost curve. c. cannot be constructed. d. is vertical.
c. cannot be constructed.
To practice price discrimination, a firm must: a. face an inelastic demand curve. b. charge the same price to all its existing customers. c. have different groups of customers with different price elasticities of demand. d. sell a product that has close substitutes and many complements.
c. have different groups of customers with different price elasticities of demand.
The output produced by a profit-maximizing monopolist: a. exceeds the level that would maximize social welfare. b. is allocatively efficient. c. is less than the level that would maximize social welfare. d. is distributionally efficient.
c. is less than the level that would maximize social welfare.
A firm that is the only seller in a market _____. a. is likely to charge the highest possible price b. will maximize social welfare and expand output to the point where social welfare is maximized c. is likely to charge a price that is limited by consumer demand d. will maximize consumer surplus
c. is likely to charge a price that is limited by consumer demand
The demand curve faced by a monopolist who can practice perfect price discrimination: • is a ray from the origin. • coincides with the marginal cost curve. • is horizontal. • coincides with the marginal revenue curve.
coincides with the marginal revenue curve. If a monopolist can charge a different price for each unit it sells, its marginal revenue from selling one more unit will equal the price of that unit. Thus, the demand curve will become its marginal revenue curve.
For a monopolist producing output at a level where profit is maximized, _____. a. price equals marginal cost. b. price equals marginal revenue. c. price is less than marginal cost. d. price exceeds marginal cost.
d. price exceeds marginal cost.
A monopoly firm will shut down in the short run if: a. economic profit is zero. b. total revenue exceeds total variable cost. c. accounting profit is zero. d. price falls below the average variable cost.
d. price falls below the average variable cost.
When a monopolist's marginal revenue is zero, _____. a. total revenue is rising b. total revenue is falling c. total revenue is at a minimum d. total revenue is at a maximum
d. total revenue is at a maximum
A monopolist's average revenue curve is the same as: • its demand curve. • its supply curve. • its marginal cost curve. • its marginal revenue curve.
its demand curve.
A price-discriminating monopolist who wants to maximize profits divides its market into two segments. The monopolist's marginal cost of producing each unit of output is $20. If it charges a price of $30 in the market segment where demand is relatively less elastic, its price in the market segment where demand is more elastic will be: • less than $30 but more than $20. • greater than $30. • equal to $10. • less than $20.
less than $30 but more than $20. A monopolist facing two groups of consumers with different demand elasticities may be able to practice price discrimination to increase profit or reduce any loss. With marginal cost the same in both markets, the firm charges a higher price to the group which has less elastic demand.
When a monopolist is forced to keep its price below the profit-maximizing level, _____. • the consumer surplus will decrease • its marginal cost of production will equal the marginal revenue • the deadweight loss will decrease • its average cost of production will equal the average revenue
the deadweight loss will decrease When monopolists keep prices below the profit-maximizing level in response to public scrutiny and political pressure, the deadweight loss is likely to decrease.
The market demand curve in a monopoly is: • more price elastic than the market supply curve. • the same as the demand curve for the monopolist's output. • more price elastic than the market supply curve. • the same as the supply curve of the monopolist's output.
the same as the demand curve for the monopolist's output. A monopoly, by definition, supplies the entire market. So, the demand curve for a monopolist's output is also the market demand curve.
Innovation can be described as the process of: • charging different prices to different consumers. • expanding a firm's scale of operation. • turning an invention into a marketable product. • introducing a new product at a very low price.
turning an invention into a marketable product.
Which of these equations describes the relationship between market price (P), average revenue (AR), and marginal revenue (MR) for a profit-maximizing monopolist who charges a single price? • P = AR > MR • P < AR < MR • P = AR = MR • P < AR = MR
P = AR > MR In a monopoly, the average revenue curve lies above the marginal revenue curve. Thus, price is always more than the marginal revenue.
Magic is the only unisex parlor that specializes in trendy haircuts in a small town. The owner, Florence, manages to earn an economic profit in the short run. However, she notices that her marginal revenue for the sixth customer each day is lower than the marginal cost of haircuts, although the demand for haircuts is quite high. Which of the following steps would be taken by Florence to correct this mismatch? • She would raise the price of haircut and try to increase the number of haircuts done per day. • She would lower the price of haircut and try to decrease the number of haircuts done per day. • She would raise the price of haircut and try to reduce the number of haircuts done per day. • She would lower the price of haircut and try to increase the number of haircuts done per day.
She would raise the price of haircut and try to reduce the number of haircuts done per day. A profit-maximizing monopolist increases output as long as marginal revenue exceeds marginal cost. The profit-maximizing output occurs where marginal revenue equals marginal cost.
Which of these is a likely impact of an increase in output in a monopoly market? • The price of the product, as well as the marginal revenue, decreases, but price falls faster than marginal revenue. • The price of the product, as well as the marginal revenue, increases, but price increases faster than the marginal revenue. • The marginal revenue increases, but the price remains constant. • The price of the product, as well as the marginal revenue, decreases, but marginal revenue falls faster than price.
The price of the product, as well as the marginal revenue, decreases, but marginal revenue falls faster than price. The marginal revenue curve of a monopolist lies below the demand curve. Therefore an increase in output will lower the marginal revenue by a greater extent than the price of the product.
Identify an important feature of a monopoly market. • The product is unique and has no close substitute. • The consumers have perfect information about product quality and price. • There is mobility in the factors of production. • The demand for the product is perfectly price elastic.
The product is unique and has no close substitute.
For a monopolist, marginal revenue is: a. less than price. b. equal to price. c. greater than price. d. greater than average revenue.
a. less than price.
Which of the following is true of the shape of the demand curve facing a monopolist? a. It is horizontal. b. It is downward sloping. c. It is vertical. d. It is upward sloping.
b. It is downward sloping.
