Monopoly Chapter 15 Exam Questions - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 15 – Monopoly
TRUE/FALSE
1. A price-maker can charge a price above marginal cost.
DIF: Easy TOP: Monopoly versus competition
2. The De Beers Diamond company advertises heavily to promote the sale of all diamonds, not just its own. This is evidence that they have a monopoly position to some degree.
DIF: Easy TOP: Monopoly versus competition
3. Apple is likely to charge a price above marginal cost for the iPhone.
DIF: Easy TOP: Introduction
4. If a resource can be traded internationally, then it is less likely that a single domestic supplier will be able to price at the monopoly price.
DIF: Easy TOP: Why monopolies arise
5. Competitive firms maximise profit by setting MR = MC. This is not always true for monopoly firms.
DIF: Easy TOP: Profit maximisation
6. If the current price charged by a monopolist is $5 and marginal cost is $3, then increasing output will always lead to an increase in profit as P>MC.
DIF: Easy TOP: A monopoly’s revenue
7. If a firm’s average total cost is everywhere decreasing, then this is likely to lead to a natural monopoly.
DIF: Easy TOP: Natural monopolies
8. Suppose the market for coffee cups is a monopoly. If a consumer’s willingness to pay is below the market price, then it is not possible for a mutually beneficial trade to occur.
DIF: Moderate TOP: Price discrimination
9. Adult and concession prices for movie tickets are examples of perfect price discrimination.
DIF: Moderate TOP: Price discrimination
10. Airlines often separate their customers into business travellers and personal travellers by giving a discount to those travellers who stay over a Saturday night.
DIF: Easy TOP: Price discrimination
11. The monopolist’s demand curve slopes downwards whenever marginal costs are increasing.
DIF: Easy TOP: A monopoly’s revenue
12. A natural monopoly can arise when a single firm has equal or greater average total costs than two or more firms.
DIF: Moderate TOP: Natural monopolies
13. In a monopoly, the firm demand-curve and market demand-curve are identical.
DIF: Easy TOP: Monopoly vs competition
14. When a firm operates under conditions of a monopoly, its price is unconstrained.
DIF: Moderate TOP: A monopoly’s revenue
15. Patent and copyright laws are major sources of government created monopolies.
DIF: Easy TOP: Government-created monopolies
16. The key difference between a competitive firm and a monopoly firm is the ability to select the level of production.
DIF: Moderate TOP: A monopoly’s revenue
17. Suppose demand for a monopoly’s product is perfectly elastic. In this case the monopoly should set P = MR = MC and the monopoly market outcome will be identical to the competitive market outcome.
DIF: Difficult TOP: A monopoly’s profit
18. When a natural monopoly exists, it is always more cost-effective for two or more private firms to produce the product.
DIF: Easy TOP: Natural monopolies
19. When a firm operates under conditions of a monopoly, its price is constrained by marginal cost.
DIF: Moderate TOP: A monopoly’s revenue
20. When a firm operates under conditions of a monopoly, its price is constrained by demand.
DIF: Moderate TOP: A monopoly’s revenue
21. A regulated natural monopoly maximises total welfare by charging a price equal to marginal cost.
DIF: Easy TOP: Welfare costs of monopoly
22. Monopolies are inefficient because at the profit maximising quantity there will still be consumers whose willingness-to-pay is higher than the product’s marginal cost.
DIF: Easy TOP: The welfare cost of monopoly
23. When a monopolist increases the number of units it sells, there are two effects on revenue: the output effect and the price effect.
DIF: Moderate TOP: A monopoly’s revenue
24. A monopoly firm has an upward-sloping supply curve.
DIF: Moderate TOP: FYI: Why a monopoly does not have a supply curve
25. Total economic loss due to monopoly pricing is equal to the loss to producer surplus minus the loss in consumer surplus.
DIF: Moderate TOP: The deadweight loss
26. A profit-maximising monopolist chooses the output level where marginal revenue equals marginal cost and chooses the corresponding price off the market demand curve.
DIF: Moderate TOP: Profit maximisation
27. A profit-maximising monopolist chooses the output level where marginal revenue equals marginal cost and chooses the corresponding price off the marginal-revenue curve.
DIF: Moderate TOP: Profit maximisation
28. Total welfare when a monopoly can perfectly price discriminate is at least as high as when a monopoly must set one price.
DIF: Moderate TOP: Price discrimination
29. Discount coupons have the ability to help a supermarket price discriminate.
DIF: Moderate TOP: Price discrimination
30. If a firm is in a competitive market, it is not able to price discriminate.
DIF: Moderate TOP: Price discrimination
MULTIPLE CHOICE
1. Which of the following statements about a firm’s market pricing of its product is true?
A. | a competitive firm is a price taker and a monopoly is a price maker |
B. | a competitive firm is a price maker and a monopoly is a price taker |
C. | both competitive firms and monopolies are price makers |
D. | both competitive firms and monopolies are price takers |
DIF: Easy TOP: Introduction
2. Khan is a wholesale imported fish distributor. He sells his imported fish to all the restaurants in town and he is the only distributor of a specialty imported fish. Assuming that Khan is maximising his profit, which of the following statements is true?
A. | imported fish prices will equal marginal cost |
B. | imported fish prices will exceed marginal cost |
C. | imported fish prices will be less than marginal cost |
D. | imported fish prices will equal average cost |
DIF: Moderate TOP: Profit maximisation
3. An unregulated monopoly is likely to have its marginal cost set:
A. | above its marginal revenue |
B. | equal to its average total cost |
C. | below its average fixed cost |
D. | below the market price of its goods |
DIF: Easy TOP: Profit maximisation
4. When a firm operates under conditions of a monopoly, its price is:
A. | constrained by marginal cost |
B. | constrained by demand |
C. | constrained only by its social agenda |
D. | not constrained by demand |
DIF: Easy TOP: A monopoly’s revenue
5. A natural monopoly occurs when:
A. | the monopolist product is an organic, pesticide-free product |
B. | firms are characterised by rising marginal-cost curves |
C. | average total cost of production increases as more output is produced |
D. | average total cost of production decreases as more output is produced |
DIF: Easy TOP: Natural monopolies
6. Which of the following is likely to be a natural monopoly?
A. | the distribution of water through pipes to homes and businesses |
B. | the generation of electricity, that is before it is distributed through the power grid |
C. | the manufacture of large cars and trucks |
D. | professional services, such as legal advice and accounting services |
DIF: moderate TOP: Natural monopolies
7. The most important feature of a natural monopoly is:
A. | constant returns to scale over the relevant range of output |
B. | it exploits a natural resource |
C. | diseconomies of scale over the relevant range of output |
D. | economies of scale over the relevant range of output |
DIF: Easy TOP: Natural monopolies
8. Natural monopolies differ from other forms of monopoly because they:
A. | are not worried about competition |
B. | are not subject to barriers to entry |
C. | are not regulated by government |
D. | generally don’t make a profit |
DIF: Moderate TOP: Natural monopolies
9. Patent and copyright laws are major sources of:
A. | government-created monopolies |
B. | natural monopolies |
C. | research and development |
D. | innovation |
DIF: Moderate TOP: Government-created monopolies
10. Encouraging firms to invest in research and development and individuals to engage in creative endeavours such as writing novels is one justification for:
A. | natural monopolies |
B. | government-created monopolies |
C. | resource monopolies |
D. | innovation |
DIF: Moderate TOP: Government-created monopolies
11. A significant difference between a competitive firm and a monopoly firm is the ability to select:
A. | the price of its output |
B. | the level of competition in the market |
C. | the level of production |
D. | the wages of its workers |
DIF: Easy TOP: A monopoly’s revenue
12. The market demand curve for a monopolist is typically:
A. | downward-sloping |
B. | horizontal |
C. | unit elastic |
D. | perfectly elastic at market price |
DIF: Easy TOP: A monopoly’s revenue
13. Suppose that at the current output level the price received by a monopolist for its good is $10, marginal revenue is equal to $6, and marginal cost is $8. To maximise profit the monopolist should:
A. | decrease output |
B. | increase output |
C. | keep output constant |
D. | we cannot say without more information |
DIF: Easy TOP: A monopoly’s revenue
14. If a monopolist faces a downward-sloping market demand curve, its:
A. | average revenue is always less than marginal revenue |
B. | marginal revenue is greater than the price of the units it sells |
C. | marginal revenue is always less than the price of the units it sells |
D. | average revenue is less than the price of its product |
DIF: Moderate TOP: A monopoly’s revenue
15. When a monopolist increases the number of units it sells, there are two effects on revenue, the:
A. | competitive effect and the monopoly effect |
B. | output effect and the price effect |
C. | demand effect and the supply effect |
D. | competition effect and the cost effect |
DIF: Moderate TOP: A monopoly’s revenue
16. The Marginal Revenue curve of a monopoly firm lies below the demand curve because:
A. | in order to increase output the firm must lower its price |
B. | as output increases the firm will need to sell to those who have a lower willingness-to-pay |
C. | monopolies are often regulated by governments that put limits on market prices |
D. | the monopoly must lower its price to discourage firms from entering the market |
DIF: Easy TOP: Profit maximisation
17. For a monopolist, marginal revenue will turn negative when:
A. | the price effect on revenue is greater than the output effect |
B. | the output effect on revenue is greater than the price effect |
C. | demand for the good has turned negative |
D. | An increase in the price results in a fall in demand |
DIF: Moderate TOP: A monopoly’s revenue
18. A profit-maximising monopolist will choose a level of output at where:
A. | marginal revenue equals the price |
B. | average revenue is equal to average total cost |
C. | marginal revenue is equal to marginal cost |
D. | average total cost is at a minimum |
DIF: Easy TOP: Profit maximisation
19. Which of the following statements concerning profit maximisation for a monopoly firm is correct?
A. | P > MR = MC |
B. | P < MR = MC |
C. | P = MR > MC |
D. | P = MR = MC |
DIF: Moderate TOP: Profit maximisation
20. The profit-maximising level of output of a monopoly is determined where the marginal-cost curve crosses the:
A. | average-revenue curve |
B. | demand curve |
C. | marginal-revenue curve |
D. | average-variable-cost curve |
DIF: Easy TOP: Profit maximisation
21. A monopolist is a price:
A. | setter, and therefore has no indifference curve |
B. | setter, and therefore has no variable-cost curve |
C. | setter, and therefore has no supply curve |
D. | setter, and therefore has no demand curve |
DIF: Moderate TOP: FYI: Why a monopoly does not have a supply curve
22. A monopoly’s profit can be calculated as:
A. | (Price – Marginal Cost) * Quantity |
B. | (Price – Average Total Cost) * Quantity |
C. | (Quantity * Price) – Total Variable Costs |
D. | (Marginal Revenue – Average Total Cost) * Quantity |
DIF: Easy TOP: A monopoly’s profit
23. What is the monopolist’s profit under the following conditions? The profit-maximising price charged for goods produced is $40. The intersection of the marginal-revenue and marginal cost-curves occurs where output is 20 units and marginal cost is $25. Average cost for 20 units of output is $15.
A. | $300 |
B. | $500 |
C. | $200 |
D. | $40 |
DIF: Moderate TOP: A monopoly’s profit
24. What is the monopolist’s profit under the following conditions? The profit-maximising price charged for goods produced is $14. The intersection of the marginal-revenue and marginal-cost curves occurs where output is 15 units and marginal cost is $7.
A. | $98 |
B. | $105 |
C. | $210 |
D. | there is not enough information to answer this question |
DIF: Difficult TOP: A monopoly’s profit
25. A monopoly will be maximising total welfare if:
A. | price equals marginal revenue |
B. | price equals marginal profit |
C. | price equals marginal cost |
D. | the marginal cost curve intersects the marginal revenue curve |
DIF: Moderate TOP: The welfare costs of monopoly
26. For a monopolist, when does marginal revenue equal demand?
A. | when output is less than profit-maximising output |
B. | when output is greater than profit-maximising output |
C. | when there is a zero output |
D. | marginal revenue is never equal to demand |
DIF: Moderate TOP: A monopoly’s revenue
27. The profits that a monopoly makes are:
A. | a dead-weight loss to society |
B. | a direct transfer of economic surplus from producers to consumers |
C. | a direct transfer of economic surplus from consumers to producers |
D. | the amount by which total surplus is lower as a result of monopoly |
DIF: Moderate TOP: The monopoly’s profit: A social cost?
28. For a profit-maximising monopolist, output should be increased to enhance economic wellbeing as long as:
A. | marginal revenue exceeds marginal cost |
B. | marginal revenue exceeds average total cost |
C. | average revenue exceeds average total cost |
D. | average revenue exceeds marginal cost |
DIF: Difficult TOP: The welfare cost of monopoly
29. The socially efficient level of production occurs where the marginal-cost curve of a monopoly intersects which of the following curves?
A. | demand |
B. | marginal revenue |
C. | supply |
D. | average cost |
DIF: Moderate TOP: The welfare cost of monopoly
30. Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealised mutually beneficial trades are:
A. | a deadweight loss to society |
B. | a sunk cost to society |
C. | of little concern to society because no money was lost |
D. | not considered a cost because they never happened |
DIF: Moderate TOP: The deadweight loss
31. In the market for Jiggly Wigs, the profit-maximising monopolist is charging a price $2 higher than marginal cost. Suppose instead of a monopoly this market was competitive, but the government placed a $2 tax on the competitive price of the good. What can we say about the relative dead-weight losses in the long-run?
A. | the dead-weight loss from monopoly pricing will always be higher |
B. | the dead-weight loss from the tax will always be higher |
C. | the dead-weight loss will be equal in both cases |
D. | we cannot say without more information about the marginal cost curve |
DIF: Difficult TOP: The deadweight loss
32. If a monopolist sells 200 units at $10 per unit and realises an average total cost of $6 per unit, what is the monopolist’s profit?
A. | $800 |
B. | $1400 |
C. | $2000 |
D. | none of the above |
DIF: Easy TOP: A monopoly’s profit
33. Consider a profit-maximising monopoly pricing under the following conditions. The profit-maximising price charged for goods produced is $18. The intersection of the marginal-revenue and marginal-cost curves occurs where output is 10 units and marginal cost is $6. The socially efficient level of production is 14 units. The demand curve and marginal-cost curves are linear. What is the deadweight loss?
A. | $6 |
B. | $24 |
C. | $48 |
D. | not enough information is given to answer this question |
DIF: Difficult TOP: A monopoly’s profit
34. What is the monopolist’s profit under the following conditions? The profit-maximising price charged for goods produced is $22. The intersection of the marginal-revenue and marginal-cost curves occurs where output is 15 units and marginal cost is $6.
A. | there is not enough information is given to answer this question |
B. | $180 |
C. | $240 |
D. | $270 |
DIF: Moderate TOP: A monopoly’s profit
35. Given that monopoly firms do not have to compete with other firms, the outcome in a monopoly market is best described as:
A. | not in the best interest of society |
B. | in the best interest of society |
C. | efficient, but not equitable |
D. | equitable, but not efficient |
DIF: Moderate TOP: Introduction
36. The simplest way for a monopoly to arise is for a single firm to:
A. | own a key resource |
B. | inflate its prices |
C. | cut production to increase demand for a product |
D. | collude with the other producers in town |
DIF: Easy TOP: Introduction
37. It is very rare for monopolies to arise from exclusive ownership of a resource because:
A. | actual economies are quite small |
B. | the natural scope of many such markets is often local |
C. | few firms own a resource for which there are no close substitutes |
D. | all of the above are true |
DIF: Easy TOP: Why monopolies arise
38. A government created monopoly arises when:
A. | government spending in a certain industry gives rise to monopoly power |
B. | the government gives a firm the exclusive right to sell some good or service |
C. | the government exercises its market control by encouraging competition among sellers |
D. | all of the above could qualify as government created monopolies |
DIF: Easy TOP: Why monopolies arise
39. A perfectly price-discriminating monopolist is able to:
A. | maximise profit, but not produce a level of output consistent with optimal social wellbeing |
B. | produce a level of output consistent with optimal social wellbeing, but not maximise profit |
C. | exercise illegal preferences over the gender of its employees |
D. | maximise profit and produce a level of output more consistent with optimal social wellbeing |
DIF: Moderate TOP: Price discrimination
40. Suppose there is one firm in a market. If this firm sells the same good at different prices to different customers, then this practice is called:
A. | price determination |
B. | predatory pricing |
C. | variable pricing |
D. | price discrimination |
DIF: Easy TOP: Price discrimination
41. Price discrimination is a rational strategy for a profit-maximising monopolist when:
A. | there is no opportunity for arbitrage across market segmentations |
B. | there is an opportunity for arbitrage across market segmentations |
C. | consumers are unable to be segmented into identifiable markets |
D. | they want to increase the deadweight loss that results from profit-maximising behaviour |
DIF: Moderate TOP: Price discrimination
42. If a monopolist is able to perfectly price discriminate:
A. | consumer surplus is increased and deadweight loss is transformed into monopoly profit |
B. | consumer surplus is decreased and deadweight loss is increased |
C. | consumer surplus is increased and deadweight loss is increased |
D. | consumer surplus and deadweight losses are transformed into monopoly profits |
DIF: Moderate TOP: Price discrimination
43. The practice of selling the same goods to different customers at different prices, but with the same marginal cost, is known as:
A. | price discrimination |
B. | monopoly pricing |
C. | arbitrage |
D. | price segregation |
DIF: Easy TOP: Price discrimination
44. In theory, perfect price discrimination:
A. | increases the monopolist’s profits |
B. | decreases consumer surplus |
C. | decreases deadweight loss |
D. | does all of the above |
DIF: Easy TOP: Price discrimination
45. For price discrimination to be feasible it is necessary for the firm to:
A. | have a flexible wage policy |
B. | have perfect information about consumer demand |
C. | have some market power |
D. | have exclusive control over a natural resource |
DIF: Easy TOP: Price discrimination
46. A rational pricing strategy for a profit-maximising monopolist is:
A. | synergy pricing |
B. | price discrimination |
C. | price segregation |
D. | average cost pricing |
DIF: Moderate TOP: Price discrimination
47. Price discrimination requires the firm to:
A. | differentiate between different units of its product |
B. | engage in arbitrage |
C. | separate customers according to their willingness to pay |
D. | separate customers according to their age |
DIF: Moderate TOP: Price discrimination
48. When deciding what price to charge consumers, the monopolist may choose to charge them different prices based on:
A. | the customers’ geographical location |
B. | the customers’ age |
C. | the customers’ income |
D. | all of the above |
DIF: Moderate TOP: Price discrimination
49. In which of the following situations will a firm be unable to price discriminate?
A. | when different groups of consumers can be separated based on an observable characteristic |
B. | when consumers can communicate price information, but are unable to trade |
C. | when there are large differences in the willingness to pay of different consumers |
D. | when trading of the good is possible between consumers |
DIF: Moderate TOP: Price discrimination
50. Which of the following can eliminate the inefficiency inherent in monopoly pricing?
A. | arbitrage |
B. | price discrimination |
C. | cost-plus pricing |
D. | regulation |
DIF: Moderate TOP: Price discrimination
Graph 15-1
51. Refer to Graph 15-1. The shape of the average-total-cost curve reveals information about the nature of the ‘barrier to entry’ that might exist in a monopoly market. Which of the following monopoly types best coincides with the figure?
A. | natural monopoly |
B. | government-created monopoly |
C. | ownership of a key resource by a single firm |
D. | none of the above |
DIF: Moderate TOP: Natural monopolies
52. Refer to Graph 15-1. The shape of the average-total-cost curve in the figure suggests an opportunity for a profit-maximising monopolist to exploit:
A. | price discrimination |
B. | average cost pricing |
C. | economies of scale |
D. | diminishing marginal product |
DIF: Moderate TOP: Natural monopolies
53. When an industry is a natural monopoly:
A. | an increase in the number of firms may lead to a lower average cost |
B. | an increase in the number of firms will lead to a higher average cost |
C. | the firm has control over a natural resource |
D. | it is characterised by diseconomies of scale |
DIF: Easy TOP: Natural monopolies
54. A firm that is a natural monopoly:
A. | is not likely to be concerned about new entrants eroding its monopoly power |
B. | is not enjoying economies of scale |
C. | it tends to drive down wages |
D. | can lower its average total cost if more firms enter the market |
DIF: Easy TOP: Natural monopolies
55. In many cases additional firms do not try to compete with a natural monopoly because:
A. | the natural monopoly doesn’t make a huge profit |
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. | they fear retaliation in the form of pricing wars from the natural monopolist |
DIF: Moderate TOP: Natural monopolies
56. Competitive firms have:
A. | horizontal demand curves and can sell only a limited amount at each price |
B. | horizontal demand curves and can sell as much as they want at the market price |
C. | downward-sloping demand curves and can sell as much as they want at the market price |
D. | downward-sloping demand curves and can sell only a limited amount at each price |
DIF: Moderate TOP: Monopoly versus competition
57. A firm in a competitive market sells a product that has many substitutes. This means the demand curve such a firm faces is:
A. | unit inelastic |
B. | downward sloping |
C. | perfectly elastic |
D. | above the marginal-revenue curve |
DIF: Easy TOP: Monopoly versus competition
58. Monopoly firms have:
A. | horizontal demand curves and can sell only a limited amount at each price |
B. | horizontal demand curves and can sell as much as they want at each price |
C. | downward-sloping demand curves and can sell as much as they want at each price |
D. | downward-sloping demand curves and can sell only a limited amount at each price |
DIF: Easy TOP: A monopoly’s revenue
59. Suppose a monopolist lowers the price of its good, this would cause consumers to:
A. | buy more |
B. | buy less |
C. | continue to buy the same amount |
D. | buy more or less, depending on elasticity of demand |
DIF: Easy TOP: Monopoly versus competition
60. When a monopolist reduces the amount of output that it sells, the price of its output:
A. | increases |
B. | decreases |
C. | stays the same |
D. | may increase or decrease, depending on the elasticity of demand |
DIF: Easy TOP: A monopoly’s revenue
61. Which of the following is an impossible feat for a monopolist to accomplish?
A. | control of the price of its good |
B. | maximisation of its profit |
C. | operation at any point on the demand curve |
D. | charging a higher price and continuing to sell the same quantity |
DIF: Moderate TOP: A monopoly’s revenue
Table 15-1
Quantity | Price | Total revenue | Average revenue | Marginal revenue |
1 | 47 | 47 | ||
2 | 88 | 44 | 41 | |
3 | 41 | |||
4 | 29 | |||
5 | 35 | 23 | ||
6 | 192 | |||
7 | 29 | 11 | ||
8 | 5 | |||
9 | 207 | 23 | -1 | |
10 | 20 | 200 |
62. Refer to Table 15-1. If the monopolist sells eight units of its product, how much revenue will it receive from the sale?
A. | 5 |
B. | 26 |
C. | 208 |
D. | not enough information is given to answer this question |
DIF: Difficult TOP: A monopoly’s revenue
63. Refer to Table 15-1. If the monopolist wants to maximise its revenue, how many units of its product should it sell?
A. | one |
B. | six |
C. | eight |
D. | ten |
DIF: Difficult TOP: A monopoly’s revenue
64. Refer to Table 15-1. What is the average revenue received from selling four units of the monopolist’s product?
A. | 29 |
B. | 38 |
C. | 35 |
D. | 152 |
DIF: Difficult TOP: A monopoly’s revenue
65. Refer to Table 15-1. What is the marginal revenue for the monopolist from the sixth unit sold?
A. | 19 |
B. | 23 |
C. | 17 |
D. | 32 |
DIF: Difficult TOP: A monopoly’s revenue
66. Marginal revenue for a monopolist is computed as:
A. | total revenue / quantity sold |
B. | total costs / quantity sold |
C. | (average revenue quantity) / price |
D. | the change to total revenue per unit change in quantity sold |
DIF: Easy TOP: A monopoly’s revenue
67. For a monopoly firm, which of the following equalities is true?
A. | price = marginal revenue |
B. | price = total revenue |
C. | price = average revenue |
D. | none of the above |
DIF: Moderate TOP: A monopoly’s revenue
68. Which of the following curves can plausibly go negative?
A. | marginal revenue |
B. | marginal cost |
C. | average variable cost |
D. | quantity supplied |
DIF: Moderate TOP: Profit maximisation
Graph 15-2
This graph reflects the cost and revenue structure for a monopoly firm. Use the graph to answer the following question(s).
69. Refer to Graph 15-2. The demand curve for a monopoly firm is depicted by curve:
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: Profit maximisation
70. Refer to Graph 15-2. The marginal-revenue curve for a monopoly firm is depicted by curve:
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: Profit maximisation
71. Refer to Graph 15-2. The marginal-cost curve for a monopoly firm is depicted by curve:
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: Profit maximisation
72. Refer to Graph 15-2. The average-total-cost curve for a monopoly firm is depicted by curve:
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: Profit maximisation
73. Refer to Graph 15-2. If the monopoly firm is currently producing output at a level of Q3, reducing output will always cause profit to:
A. | increase as long as output is at least Q2 |
B. | increase as long as output is at least Q1 |
C. | remain unchanged |
D. | decrease |
DIF: Moderate TOP: Profit maximisation
74. Refer to Graph 15-2. Profit can always be increased by decreasing the level of output by one unit if the monopolist is currently operating at a level of output in which:
A. | curve C > curve B |
B. | curve B > curve C |
C. | curve B > curve D |
D. | curve D > curve B |
DIF: Difficult TOP: Profit maximisation
75. Refer to Graph 15-2. The number of consumers who did not buy the good despite a willingness-to-pay greater than marginal cost is given by:
A. | Q2 – Q0 |
B. | Q3 – Q1 |
C. | Q4 – Q1 |
D. | Q4 – Q2 |
DIF: Moderate TOP: Profit maximisation
76. Refer to Graph 15-2. Profit will be maximised by charging a price equal to:
A. | P0 |
B. | P1 |
C. | P2 |
D. | P3 |
DIF: Moderate TOP: Profit maximisation
77. Identify the true statement from the following list.
A. | a monopoly firm is a price taker and has no supply curve |
B. | a monopoly firm has an downward-sloping supply curve and is a price maker |
C. | a monopoly firm has an upward-sloping supply curve and is a price taker |
D. | a monopoly firm has no supply curve and is a price maker |
DIF: Moderate TOP: Why a monopoly does not have a supply curve
78. Supply curves tell us how much producers are willing to supply at any given price. Hence monopoly firms have:
A. | steeper supply curves than competitive firms |
B. | flatter supply curves than competitive firms |
C. | vertical supply curves |
D. | no supply curves |
DIF: Moderate TOP: FYI: Why a monopoly does not have a supply curve
79. A firm’s supply curve in a competitive market dictates the amount it will supply whereas in a monopoly market, the:
A. | same is true |
B. | decision about how much to supply cannot be separated from the demand curve it faces |
C. | supply curve conceptually makes sense, but in practice is never used |
D. | supply curve will have limited predictive capacity |
DIF: Moderate TOP: FYI: Why a monopoly does not have a supply curve
Graph 15-3
This graph reflects the cost and revenue structure for a monopoly firm. Use the graph to answer the following question(s).
80. Refer to Graph 15-3. A profit-maximising monopoly would have a total revenue equal to:
A. | (P3 – P0) Q2 |
B. | (P3 – P0) Q4 |
C. | P3 Q2 |
D. | P2 Q4 |
DIF: Difficult TOP: A monopoly’s profit
81. Refer to Graph 15-3. A profit-maximising monopoly would have a total cost equal to:
A. | P0 Q1 |
B. | P0 Q2 |
C. | P0 Q3 |
D. | (P1 – P0) Q2 |
DIF: Difficult TOP: A monopoly’s profit
82. Refer to Graph 15-3. A profit-maximising monopoly would have profit equal to:
A. | (P3 – P0) Q2 |
B. | (P3 – P0) Q4 |
C. | P3 Q2 |
D. | P2 Q4 |
DIF: Difficult TOP: A monopoly’s profit
83. Refer to Graph 15-3. Profit on a typical unit sold for a profit-maximising monopoly would equal:
A. | P3 – P2 |
B. | P3 – P0 |
C. | P2 – P1 |
D. | P2 – P0 |
DIF: Difficult TOP: A monopoly’s profit
84. Refer to Graph 15-3. At the profit-maximising level of output, average revenue is equal to:
A. | P3 |
B. | P2 |
C. | P1 |
D. | P0 |
DIF: Difficult TOP: A monopoly’s profit
85. Suppose a pesticide company discovers and patents a new weed killer. This patent gives the company:
A. | a monopoly right to sell the weed killer for an unlimited number of years |
B. | a monopoly right to sell the weed killer for a limited number of years |
C. | partial ownership of the right to sell the weed killer for a limited number of years |
D. | partial ownership of the right to sell the weed killer for an unlimited number of years |
DIF: Moderate TOP: Government-created monopolies
86. Due to the nature of the patent laws on pharmaceuticals, the market for such drugs:
A. | switches from competitive to monopolistic once the firm’s patent runs out |
B. | switches from monopolistic to competitive once the firm’s patent runs out |
C. | always remains a monopolistic market |
D. | always remains a competitive market |
DIF: Moderate TOP: Government-created monopolies
87. Generic drugs enter the pharmaceutical drug market once:
A. | the ingredients to the name brand drug have been discovered |
B. | the patent on the name brand drug expires |
C. | 10 years have passed |
D. | they are patented |
DIF: Moderate TOP: Government-created monopolies
88. In a monopoly, consumers will purchase if their willingness-to-pay is above:
A. | price |
B. | firm profit |
C. | marginal cost |
D. | marginal revenue |
DIF: Easy TOP: The welfare cost of monopoly
89. The amount that producers receive for a good minus their costs of producing it equals producer:
A. | cost |
B. | surplus |
C. | gain |
D. | margin |
DIF: Easy TOP: The welfare cost of monopoly
90. For a monopoly market, total surplus can be defined as the value of the good to:
A. | consumers minus the costs of making the good |
B. | consumers plus the cost of making the good |
C. | producers minus the cost incurred by consumers |
D. | producer plus the cost incurred by consumers |
DIF: Moderate TOP: The welfare cost of monopoly
Graph 15-4
This graph depicts the demand and marginal-cost curves of a profit-maximising monopolist. Use the graph to answer the following question(s).
91. Refer to Graph 15-4. A benevolent social planner would cause the monopoly firm to operate at an output level:
A. | above Q0 |
B. | equal to Q0 |
C. | below Q0 |
D. | equal to zero |
DIF: Moderate TOP: The welfare cost of monopoly
92. Refer to Graph 15-4. If the monopoly operates at an output level below Q0, decreasing output would:
A. | raise the price and raise total surplus |
B. | lower the price and raise total surplus |
C. | raise the price and lower total surplus |
D. | lower the price and lower total surplus |
DIF: Moderate TOP: The welfare cost of monopoly
93. Refer to Graph 15-4. The marginal revenue curve will be:
A. | steeper than the demand curve |
B. | of equal gradient as the demand curve |
C. | flatter than the demand curve |
D. | in some places steeper and in others flatter than the demand curve |
DIF: Easy TOP: The welfare cost of monopoly
94. The profit-maximising level of output for a monopoly firm is where:
A. | marginal revenue equals average total cost |
B. | marginal revenue equals marginal cost |
C. | marginal cost equals average revenue |
D. | average total cost equals demand |
DIF: Easy TOP: Profit maximisation
95. If a monopoly sells its good at a level that is below the socially optimal level, the price:
A. | will equal the intersection of average revenue and marginal cost |
B. | will be inefficiently high |
C. | will be inefficiently low |
D. | may be inefficiently low or high because a monopolist is a price maker |
DIF: Moderate TOP: The monopoly’s profit: A social cost?
96. A monopoly generates inefficiency because:
A. | the high prices cause some people to choose to go without the good |
B. | the monopoly owner earns an abnormally large profit |
C. | the monopoly pays its workers very low wages |
D. | of all of the above |
DIF: Moderate TOP: The monopoly’s profit: A social cost?
Graph 15-5
This graph depicts the demand, marginal-revenue and marginal-cost curves of a profit-maximising monopolist. Use the graph to answer the following question(s).
97. Refer to Graph 15-5. Which of the following areas represents the deadweight loss due to monopoly pricing?
A. | rectangle ACDB |
B. | rectangle CFGD |
C. | triangle BDE |
D. | triangle BGE |
DIF: Difficult TOP: The deadweight loss
98. Refer to Graph 15-5. Compared to the monopoly outcome, an economy designed by a social planner would have a total surplus greater by an amount equal to:
A. | rectangle ACDB |
B. | rectangle CFGD |
C. | triangle BDE |
D. | triangle BGE |
DIF: Difficult TOP: The deadweight loss
99. Monopoly firms can employ their market power to charge a price that is:
A. | above marginal cost |
B. | equal to marginal cost |
C. | above average revenue |
D. | too high for most consumers to afford |
DIF: Easy TOP: The monopoly’s profit: A social cost?
100. Compared to the output in a competitive market, monopoly pricing has the consequence of the market output being:
A. | greater than the social optimum |
B. | equal to the social optimum |
C. | less than the social optimum |
D. | all of the above are possible |
DIF: Moderate TOP: The monopoly’s profit: A social cost?
101. Excessive monopoly profits themselves represent:
A. | a deadweight loss |
B. | a shrinkage in total surplus |
C. | a shrinkage in consumer surplus |
D. | all of the above |
DIF: Moderate TOP: The monopoly’s profit: A social cost?
102. Total economic loss due to monopoly pricing is equal to:
A. | the deadweight loss |
B. | the loss to consumer and producer surplus combined |
C. | the loss to total surplus |
D. | all of the above |
DIF: Moderate TOP: The monopoly’s profit: A social cost?
103. The inefficiency of a deadweight loss stems from the fact that:
A. | consumers buy fewer units when the monopoly firm raises its price |
B. | high monopoly prices take money from consumers’ pockets and put it in the pocket of the monopoly owners |
C. | consumers who still buy the product at the high price are worse off |
D. | all of the above are true |
DIF: Moderate TOP: The monopoly’s profit: A social cost?
104. When the government creates a monopoly, the social loss may include:
A. | high monopoly profits |
B. | falling marginal cost |
C. | the cost of lawyers and lobbyists to convince lawmakers to continue its monopoly |
D. | all of the above |
DIF: Moderate TOP: The monopoly’s profit: A social cost?
105. Price discrimination is not possible if a firm:
A. | is regulated by the government |
B. | operates in a competitive market |
C. | has perfect information about consumer demand |
D. | faces a downward-sloping demand curve |
DIF: Easy TOP: Price discrimination
106. The process of buying a good in one market at a low cost and selling the good in another market for a higher cost in order to profit from the price difference is known as:
A. | conspiracy |
B. | sabotage |
C. | collusion |
D. | arbitrage |
DIF: Easy TOP: Price discrimination
107. Arbitrage is the process by which:
A. | a good is purchased for a low price in one market and sold for a higher price in another market |
B. | a good is purchased for a high price in one market and sold for a lower price in another market |
C. | a good is purchased for a low price in one market and sold for the same price in the same market |
D. | a good is purchased for a high price in one market and sold for the same price in the same market |
DIF: Moderate TOP: Price discrimination
108. Perfect price discrimination describes a situation in which the monopolist:
A. | knows the exact willingness to pay of each of its customers |
B. | cannot charge each customer a different price |
C. | collects a part but not all of the consumer surplus in the form of higher profit |
D. | all of the above are correct |
DIF: Easy TOP: Price discrimination
Graph 15-6
This graph depicts the demand, marginal-revenue and marginal-cost curves of a profit-maximising monopolist. Use the graph to answer the following question(s).
109. Refer to Graph 15-6. If the monopoly firm is NOT allowed to price discriminate, what will the consumer surplus be?
A. | ABC |
B. | ADF |
C. | CEF |
D. | consumer surplus will equal zero |
DIF: Difficult TOP: Price discrimination
110. Refer to Graph 15-6. If the monopoly firm perfectly price discriminates, what will the consumer surplus be?
A. | ABC |
B. | ADF |
C. | CEF |
D. | consumer surplus will equal zero |
DIF: Difficult TOP: Price discrimination
111. Refer to Graph 15-6. What is the deadweight loss equal to when the monopolist does NOT price discriminate?
A. | ABC |
B. | ADF |
C. | CEF |
D. | deadweight loss will equal zero |
DIF: Difficult TOP: Price discrimination
112. Refer to Graph 15-6. What is the deadweight loss equal to when the monopolist engages in perfect price discrimination?
A. | ABC |
B. | ADF |
C. | CEF |
D. | deadweight loss will equal zero |
DIF: Difficult TOP: Price discrimination
113. Refer to Graph 15-6. Monopoly profit without price discrimination equals:
A. | ABC |
B. | BDEC |
C. | ADEC |
D. | ADF |
DIF: Moderate TOP: Price discrimination
114. Refer to Graph 15-6. Monopoly profit with perfect price discrimination equals:
A. | ABC |
B. | BDEC |
C. | ADEC |
D. | ADF |
DIF: Difficult TOP: Price discrimination
115. Refer to Graph 15-6. If the monopolist engages in perfect price discrimination, then the prices it charges will be equal to:
A. | a single price equal to b |
B. | a single price equal to d |
C. | a range of prices between b and d |
D. | a range of prices between a and d |
DIF: Moderate TOP: Price discrimination
116. Many bus companies allow discount tickets to be sold to students because:
A. | education laws mandate such discounts |
B. | it signals that the companies care about education |
C. | they are profit maximisers |
D. | students have argued forcefully for the right to cheaper tickets |
DIF: Moderate TOP: Price discrimination
117. Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you fly back. What is the reason for this price discrepancy?
A. | airlines are attempting to charge people based on their willingness to pay |
B. | airlines are practicing imperfect price discrimination to raise their profits |
C. | airlines charge a different rate based on the different nature of peoples’ travel needs |
D. | all of the above are true |
DIF: Moderate TOP: Price discrimination
118. When a local grocery store offers discount coupons in the Sunday paper, it is most likely trying to:
A. | offer its customers a reward for reading the paper |
B. | reduce prices for all customers |
C. | price discriminate |
D. | gain some pricing power over the other grocery stores in town |
DIF: Moderate TOP: Price discrimination
119. Discount coupons have the ability to help a grocery store:
A. | maximise its profit |
B. | price discriminate |
C. | target their customers based on their individual willingness to pay |
D. | do all of the above |
DIF: Moderate TOP: Price discrimination
120. When AT&T had a monopoly on telephones as a result of patents, it:
A. | kept prices above the competitive level |
B. | created a shift in the demand for telephones |
C. | compelled consumers to search for telephone substitutes |
D. | compelled consumers to look after their telephones |
DIF: Easy TOP: Case study: Bell’s monopoly and the price of telephone calls
121. Price discrimination explains why high-ranking universities often set rules that determine prices of admission based on the students:
A. | final high-school exam results |
B. | sex |
C. | age |
D. | financial resources |
DIF: Moderate TOP: Price discrimination
SHORT ANSWER
1. Describe how government is involved in creating a monopoly. Why might the government create one? Give an example.
DIF: Moderate TOP: Introduction
2. Consider the following diagram of a monopoly.
Assuming that the monopoly is at its profit-maximising point, identify the values of its marginal revenue, marginal cost, average revenue and price.
DIF: Moderate TOP: Profit maximisation
3. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from taxation?
DIF: Moderate TOP: The deadweight loss
4. Calculate the deadweight loss due to profit-maximising monopoly pricing under the following conditions.
The price charged for goods produced is $10. The intersection of the marginal-revenue and marginal-cost curves occurs where output is 100 units and marginal revenue is $5. The socially efficient level of production is 110 units. The demand curve is linear and downward-sloping and the marginal-cost curve is linear and upward-sloping.
DIF: Difficult TOP: The deadweight loss
5. Consider the following graph of a monopoly.
Use the graph to identify the marginal-revenue curve, the average-revenue curve, the average-total-cost curve and the marginal-cost curve. Then identify the price a profit-maximising monopolist would charge and the output it would produce.
DIF: Difficult TOP: A monopoly’s profit
6. Perfect price discrimination leads to zero consumer surplus. With this in mind, why do economists argue that perfect price discrimination maximises total welfare?
DIF: Moderate TOP: The welfare cost of monopoly
7. One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel, and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy.
DIF: Difficult TOP: Price discrimination
8. Consider the following graph of a monopoly.
Identify the firm’s total revenue, total cost and total profit at the profit-maximising point. What is the value of the unit-profit?
DIF: Moderate TOP: A monopoly’s profit