Verified Test Bank Monopoly Chapter 7

Chapter 07 Test Bank KEY

1. Market power exists if a firm can alter

A. its costs of production.

B. the market price.

C. its own supply curve.

D. the production function.

2. If a seafood restaurant can raise the price of its fried shrimp without losing all of its customers, then the restaurant definitely

A. has market power.

B. is experiencing economies of scale.

C. is using predatory pricing.

D. has a monopoly.

3. Which of the following firms is likely to have the greatest market power?

A. a farmer who can sell as much lettuce as he can grow

B. a single soft drink company serving a campus with no barriers to entry

C. the sole producer of the latest computer microchip technology

D. a regulated natural monopoly selling natural gas service

4. The total quantities of a good that people are willing and able to buy at alternative prices defines

A. market equilibrium.

B. marginal revenue.

C. market supply.

D. market demand.

5. Which of the following is about market demand?

A. It is typically horizontal.

B. It is downward-sloping.

C. It is inconsistent with the law of demand.

D. It represents the quantity of a good people are willing, but not necessarily able, to buy.

6. The demand curve for an individual monopolist

A. does not exist.

B. slopes upward to the right.

C. is the same as the market demand curve.

D. is the same as the marginal revenue curve.

7. A patent

A. is a government grant of exclusive ownership of an innovation.

B. requires a firm to share its innovations with others.

C. protects a perfectly competitive firm from competition.

D. is an illegal method to protect an innovative idea.

8. Which of the following might be used to protect a monopoly from competition?

A. a horizontal demand curve

B. marginal revenue

C. a patent

D. a contestable market

9. If the entire output of a market is produced by a single seller, the firm

A. is a monopoly.

B. is competitive.

C. is an oligopolist.

D. faces a perfectly vertical demand curve.

10. An industry dominated by one firm is

A. monopolistic competition.

B. perfect competition.

C. a monopoly.

D. an oligopoly.

11. Which of the following is likely to be a monopolist?

A. a small firm with a patent granting it the exclusive right to produce a drug

B. a large firm, such as HP, that produces a substantial portion of the printer market

C. Bell Helicopter which is one of the largest producers of helicopters in the world

D. a major car manufacturer such as General Motors

12. Which of the following is likely to be a monopolist?

A. a potato chip company that sells a high quantity of chips, but competes with other chip producers

B. a farmer who specializes in growing organic fruits and vegetables

C. the sole producer of a new medical device for people with limited mobility

D. the chemical company in a small town that employs most of the town's workforce

13. Which of the following is NOT for a monopoly?

A. The demand curve for the monopoly and the market are the same.

B. It has no direct competitors.

C. It can use its market power to charge higher prices than a competitive firm.

D. It is a price taker.

14. Monopolists are price

A. takers, as are perfectly competitive firms

B. takers, but perfectly competitive firms are price makers

C. makers, but perfectly competitive firms are price takers

D. makers as are perfectly competitive firms

15. Which of the following is least likely a characteristic of a monopoly?

A. high barriers to entry

B. differentiated products

C. ownership of essential resources

D. large economics of scale

16. For a monopolist, the demand curve facing the firm is

A. the same as for the perfectly competitive firm.

B. the same as the market demand curve.

C. always below marginal revenue.

D. perfectly elastic.

17. At all quantities, the demand curve for a monopolist generally

A. is steeper than the marginal revenue curve.

B. lies below the marginal revenue curve.

C. is the same as the marginal revenue curve.

D. lies above the marginal revenue curve.

18. Since a monopoly has market power

A. its demand curve is upward-sloping.

B. its marginal revenue curve is below its demand curve.

C. it must hold price constant in order to sell an additional unit of output.

D. its costs of production are minimal.

19. The change in total revenue that results from a one-unit increase in quantity sold is

A. marginal cost.

B. marginal revenue.

C. marginal profit.

D. total revenue.

20. For a monopolist, marginal revenue is

A. equal to price, just as it is for a perfectly competitive firm.

B. constant up to the rate of output that maximizes total revenues.

C. always less than price, after the first unit.

D. the same as the demand curve.

21. In order to sell one additional unit of output, a profit-maximizing monopolist must

A. increase the size of its factory.

B. reduce marginal cost.

C. increase marginal revenue.

D. reduce the price of all units sold.

22. For a monopolist, after the first unit of output, marginal revenue is always

A. constant.

B. increasing.

C. less than price.

D. greater than marginal cost.

23. The marginal revenue of a monopolist is

A. less than price because a monopolist is a price taker.

B. less than price because to sell more output the firm must reduce the price on all units sold.

C. above price because the firm is a price setter.

D. always equal to price.

24. Suppose a monopoly firm produces software and can sell 10 items per month at a price of $50 each. In order to increase sales by one item per month, the monopolist must lower the price of its software by $1 to $49. The marginal revenue of the 11th item is

A. $1.

B. $39.

C. $49.

D. $50.

25. Suppose a monopoly firm produces a medical device and can sell 15 items per month at a price of $2,000 each. In order to increase sales by one item per month, the monopolist must lower the price of its medical device by $100 to $1,900. The marginal revenue of the 16th item is

A. $100.

B. $400.

C. $1,900.

D. $2,000.

26. Suppose a monopoly pharmaceutical company produces a drug and sells 100 prescriptions for $25 each. In order to sell 101 prescriptions, the monopolist must lower the price to $24 per prescription. The marginal revenue of the 101st prescription is

A. −$76.

B. $24.

C. $25.

D. $2,424.

27. Which of the following is for a monopolist?

A. It is a price taker.

B. Profit is maximized at a production level where marginal cost equals marginal revenue.

C. The firm faces a horizontal demand curve.

D. It will earn zero economic profit in the long run.

28. Which of the following do a monopolist and a competitive firm generally have in common?

A. predatory pricing

B. barriers to entry

C. marginal cost pricing

D. the quest for profits

29. Why would a monopolist never set a price on a point in the inelastic portion of the demand curve?

A. Marginal revenue would be negative and therefore well below the marginal cost curve.

B. The point where marginal revenue equals marginal cost would be below the shutdown point.

C. The demand curve would be below the average total cost curve.

D. The monopolist would be operating at a loss.

30. For a firm, the price of a product is $10, and marginal revenue equals marginal cost at $7 and a quantity of 400 lbs. If the firm's profit at that level of production is $800, find the average total cost.

A. $7

B. $8

C. $9

D. $10

31. A monopolist sets price at a point on the _______ curve, corresponding to the rate of output determined by the intersection of _______.

A. demand; marginal revenue and marginal cost

B. marginal revenue; marginal revenue and marginal cost

C. average total cost; price and marginal cost

D. demand; average total cost and marginal cost

32. A monopolist sets its price

A. below the demand curve.

B. without constraints since there is no competition.

C. on the demand curve, at the rate of output where marginal revenue equals marginal cost.

D. at the minimum of the long-run average total cost curve.

33. The price charged by a profit-maximizing monopolist occurs at

A. the minimum of the average total cost curve.

B. the price where marginal cost equals marginal revenue.

C. a price on the demand curve above the intersection where marginal revenue equals marginal cost.

D. a price on the average cost curve below the point where marginal revenue equals marginal cost.

34. In terms of pricing, which of the following is NOT for a monopolist?

A. In the long run, economic profit is impossible.

B. Marginal revenue is always less than the price charged.

C. If marginal revenue is greater than marginal cost, increasing output will increase profits (decrease loss).

D. Maximum profit (minimum loss) occurs at the output level where marginal revenue equals marginal cost.

35. Which of the following is for a monopoly?

A. The intersection of total revenue and total cost establishes the profit-maximizing rate of output.

B. The demand curve indicates the highest price consumers are willing to pay for the rate of output.

C. Several different prices are compatible with the profit-maximizing rate of output.

D. The total revenue curve indicates the highest price consumers are willing to pay for the rate of output.

36. Total profit can be calculated as

A. average total cost multiplied by price.

B. total revenue divided by the quantity sold.

C. the difference between price and average total cost multiplied by the quantity sold.

D. price and average total cost added together and then multiplied by the quantity sold.

37. For a monopoly in long-run equilibrium, economic profits are likely to be

A. greater than zero.

B. zero.

C. less than zero.

D. predatory.

38. A monopolist

A. maximizes profit at the output where price equals marginal cost.

B. charges a higher price than a competitive firm, ceteris paribus.

C. is a price taker since it has market power.

D. cannot earn an economic profit in the long run.

39. Which of the following statements is assuming the same cost and demand conditions?

A. A monopoly produces less output than a competitive firm.

B. A monopoly cannot earn an economic profit in the long run.

C. A monopoly charges a lower price than a competitive firm.

D. A monopoly maximizes profit where price equals marginal cost.

40. A monopoly realizes larger profits than a comparable competitive market by charging a _______ price and producing _______ output.

A. higher; the same level of

B. higher; more

C. lower; more

D. higher; less

41. Obstacles that make it difficult or impossible for would-be producers to enter a market are known as

A. barriers to entry.

B. monopoly profits.

C. entry blockades.

D. entry tariffs.

42. Which of the following is NOT about barriers to entry?

A. They allow a firm to control or restrict the amount of goods supplied in the market.

B. They allow a firm to earn economic profit in the long run.

C. They cause price to be lower and output higher than if they didn't exist.

D. They make it difficult for potential producers to enter a given market.

43. Under both monopoly and perfect competition, a firm

A. is a price taker.

B. is a price maker.

C. operates where marginal revenue equal marginal cost.

D. will in the long-run earn economic profits.

44. Which of the following is NOT an effective barrier to entry?

A. low capital requirements

B. exclusive licensing

C. patent protection

D. threat of entry

45. Which of the following helps to keep potential competitors out of a monopoly market?

A. bundled products

B. the profit motive

C. rising average total costs

D. a high price for the good

46. Which of the following is NOT a barrier to entry into a monopoly market?

A. the exclusive right to produce a good

B. the existence of substitute goods

C. legal action against new firms that enter the market

D. a patent on important technology

47. Which of the following is NOT a barrier to entry into a monopoly market?

A. a patent

B. economic profits

C. exclusive licensing

D. a government franchise

48. As noted in the text, which of the following allowed Polaroid to win the monopoly power battle with Kodak?

A. a government franchise

B. natural monopoly

C. a patent

D. exclusive licensing

49. Which of the following practices is Microsoft accused of using to restrict competition?

A. the threat of legal action

B. bundling products

C. exclusive licensing

D. government franchises

50. As noted in the text, which of the following was used by Nintendo to control the video game market?

A. a natural monopoly

B. economies of scale

C. a government franchise

D. exclusive licensing

51. As noted in the text, which of the following protects the U.S. Postal Service as the provider of first-class mail?

A. a government franchise

B. a patent

C. marginal cost pricing

D. predatory pricing

52. Which of the following is consistent with a perfectly competitive industry?

A. marginal cost pricing

B. high barriers to entry

C. economic profit in the long run

D. production and supplies are constrained

53. Which of the following is similar for both a competitive industry and a monopoly?

A. the level of economic profits in the long run

B. continuous pressure to improve product quality

C. profits signal consumers' demand for more output

D. in the long run, average total costs are minimized

54. In comparison to a competitive industry, how is a monopoly different?

A. High prices and profits signal consumers’ demand for more output.

B. Firms try to operate where marginal cost equals marginal revenue.

C. The product is standardized or unique.

D. During price adjustments, price is always greater than marginal cost.

55. Which of the following is consistent with a monopoly industry?

A. there are many firms

B. barriers to entry keep potential competitors out of the market

C. there is pressure to reduce costs and improve product quality

D. zero economic profit in the long run

56. Which of the following is NOT consistent with a monopoly industry?

A. production and supplies are constrained

B. barriers to entry keep potential competitors out of the market

C. there is no pressure to reduce costs or improve product quality

D. many firms produce identical or similar products

57. Compared to a competitive market with the same long-run costs and market demand, a monopolist has

A. less pressure to reduce costs and less incentive to improve quality.

B. less pressure to reduce costs and more incentive to improve quality.

C. more pressure to reduce costs and less incentive to improve quality.

D. more pressure to reduce costs and more incentive to improve quality.

58. Which of the following does not have the power to set prices?

A. a duopoly

B. a monopoly

C. an oligopoly

D. a perfect competitor

59. Suppose two firms dominate a market and control price and output. This type of market is called

A. a duopoly.

B. a monopoly.

C. monopolistically competitive.

D. an oligopoly.

60. Suppose a market is dominated by three firms. This type of market is called

A. perfect competition.

B. a monopoly.

C. monopolistic competition.

D. an oligopoly.

61. The market structure of the U.S. soft drink industry is most likely

A. perfectly competitive.

B. a monopoly.

C. monopolistically competitive.

D. an oligopoly.

62. Which market structure is characterized by a few interdependent firms?

A. monopolistic competition

B. oligopoly

C. monopoly

D. perfect competition

63. Suppose a market has many firms and each firm has some brand image. This type of market is likely

A. a duopoly.

B. a monopoly.

C. monopolistically competitive.

D. an oligopoly.

64. A market made up of many firms, each of which has some distinct brand image, is called

A. a price-setting market.

B. a monopolistically competitive market.

C. a perfectly competitive market.

D. an oligopoly.

65. The market structure of the U.S. fast-food industry is most likely

A. perfectly competitive.

B. a monopoly.

C. monopolistically competitive.

D. an oligopoly.

66. Firms that have significant market power tend to

A. produce at minimum average total costs.

B. pursue cost reductions.

C. pursue product improvements.

D. inhibit economic growth.

67. Marginal cost pricing refers to the

A. offer of goods at prices equal to their marginal cost.

B. sale of goods at the highest possible price.

C. rate of output at which marginal cost equals marginal revenue.

D. offer of goods at a price above marginal cost.

68. Which of the following is an advantage of the competitive market structure?

A. Competitive firms have greater ability to pursue research and development.

B. Larger companies can produce goods more efficiently than smaller firms.

C. Competitive firms practice marginal cost pricing.

D. Competitive firms make better use of economies of scale.

69. In which of the following industries is marginal cost pricing most likely?

A. wheat

B. automobiles

C. breakfast cereals

D. computer software

70. In which of the following industries is marginal cost pricing most likely?

A. laundry detergent

B. toothpaste

C. air travel

D. corn

71. Which of the following is an argument in support of monopolies?

A. They increase output and raise prices, contributing to greater consumption of scarce resources.

B. They are protected from competition so they have greater ability to pursue research and development.

C. They contribute to efficient production when there are diseconomies of scale.

D. They provide the economic profit necessary for survival and efficient production in a market.

72. The argument that concentration of market power enhances research and development efforts may be weak because

A. monopolies cannot afford basic research.

B. no one has attempted to gather any empirical evidence.

C. a monopoly may have no clear incentive to pursue new research and development.

D. no existing monopoly has a research and development program.

73. An industry in which one firm can achieve economies of scale over the entire range of output is referred to as

A. a natural monopoly.

B. perfectly competitive.

C. a neutral monopoly.

D. a contestable market.

74. If an increase in the size of a factory results in reductions in minimum average costs, this is known as

A. marginal cost pricing.

B. diminishing marginal returns.

C. rising average total cost.

D. economies of scale.

75. Which of the following is an argument in support of market power?

A. marginal cost pricing

B. economies of scale

C. price fixing

D. predatory pricing

76. In some situations a monopoly might be considered more desirable than a perfectly competitive firm

A. because a monopoly has more incentive to keep costs down.

B. because a monopoly is the best way to increase output above the competitive level of production.

C. if economies of scale exist and can only be realized by a single firm.

D. since price is less than marginal revenue for a monopoly.

77. A natural monopoly is a firm that

A. produces a large volume of output and drives out most of its competitors.

B. can produce the entire market supply more efficiently than any number of smaller firms.

C. has government assistance in erecting high barriers to entry.

D. guarantees the lowest price for consumers.

78. Consumers may not experience the benefits of economies of scale if a natural monopoly

A. raises price and fails to pass cost savings on to consumers.

B. engages in marginal cost pricing.

C. raises output beyond efficient levels.

D. is regulated by the government.

79. A contestable market is

A. a perfectly competitive market.

B. an imperfectly competitive situation with high barriers to entry.

C. an imperfectly competitive situation that is subject to entry.

D. a market with only one producer.

80. A monopoly may not be a problem if

A. the structure of a market is competitive.

B. firms can exit from the market.

C. antitrust regulations are enforced.

D. potential competition exists.

81. Carla’s Crop Dusting Service charges competitive prices even though it has no competition. This is most likely because

A. there are no economies of scale in the industry.

B. it operates in a contestable market.

C. it is a natural monopoly.

D. it exercises predatory pricing.

82. If you want to fly to Los Angeles, a place most airlines fly in and out of, the airline industry is likely _____, but if you want to fly to a small town in North Dakota, where only one airline flies, the airline industry is likely _____.

A. competitive; duopolistic

B. competitive; monopolistic

C. monopolistic; competitive

D. monopolistic; oligopolistic

83. Temporary price reductions designed to drive out competition are called

A. marginal cost pricing.

B. monopoly pricing.

C. predatory pricing.

D. price fixing.

84. If American Airlines engages in predatory pricing, it might

A. lower fares when a new carrier enters the market and then raise fares as soon as the new carrier gains sufficient business.

B. raise fares when a new carrier enters the market and then lower fares once the new carrier leaves the market.

C. lower fares when a new carrier enters the market and then raise fares once the new carrier is driven out of business.

D. lower fares permanently once a new carrier enters the market in order to keep up in the expanding airline industry.

85. Monopoly Costs and Revenue

Refer to the Monopoly Costs and Revenue table. Profit maximization is achieved at a production rate of

A. 1 plane per month.

B. 2 planes per month.

C. 3 planes per month.

D. 4 planes per month.

86. Monopoly Costs and Revenue

Refer to the Monopoly Costs and Revenue table. The maximum profit that can be achieved is

A. $7 million per month.

B. $10 million per month.

C. $11 million per month.

D. $21 million per month.

87. Monopoly Costs and Revenue

Refer to the Monopoly Costs and Revenue table. A monopolist achieves the most profitable rate of output by applying which of the following rules? 

A. Average variable cost equals price.

B. Average total cost equals price.

C. Marginal revenue equals marginal cost.

D. Average total cost and average variable cost are both at a minimum.

88. Monopoly Costs and Revenue 2

Refer to the table. Profit maximization is achieved at a rate of

A. 1 unit of output.

B. 2 units of output.

C. 3 units of output.

D. 4 units of output.

89. Monopoly Costs and Revenue 2

Refer to the table. Using the profit-maximization rule, a monopolist will charge a price of

A. $90.

B. $80.

C. $70.

D. $60.

90. Monopoly Costs and Revenue 2

Refer to the table. At the profit-maximizing rate of output, marginal cost is

A. $50.

B. $60.

C. $70.

D. $80.

91. Monopoly Costs and Revenue 2

Refer to the table. At the profit-maximizing rate of output, marginal revenue is

A. $20.

B. $40.

C. $60.

D. $80.

92. The following table shows some costs and prices faced by a company that produces submarines.

Refer to the table. The profit-maximizing rate of production is

A. 1 submarine per year.

B. 3 submarines per year.

C. 4 submarines per year.

D. 5 submarines per year.

93. The following table shows some costs and prices faced by a company that produces submarines.

Refer to the table. A profit-maximizing monopolist will produce at the level of output where

A. Marginal cost equals marginal revenue.

B. Price equals marginal cost.

C. Total cost is minimized.

D. Total revenue is maximized.

94. The following table shows some costs and prices faced by a company that produces submarines.

Refer to the table. At the profit-maximizing rate of output, marginal cost is equal to _____ and marginal revenue is equal to _____.

A. $30 million; $90 million

B. $50 million; $50 million

C. $40 million; $70 million

D. $70 million; $30 million

95. The following table shows some costs and prices faced by a company that produces submarines.

_____ _____

Refer to the table. If the firm produces 5 submarines per year, marginal revenue is equal to

A. −$30 million.

B. $10 million.

C. $90 million.

D. $250 million.

96. The following table shows some costs and prices faced by a company that produces submarines.

_____ _____

Refer to the table. At an output rate of 4 submarines per year, marginal revenue is equal to

A. $30 million.

B. $60 million.

C. $70 million.

D. $240 million.

97.

Refer to the figure. The profit-maximizing level of output for this monopolist is

A. 2 units per hour.

B. 3 units per hour.

C. 4 units per hour.

D. Between 3 and 4 units per hour.

98.

Refer to the figure. The optimal price that this monopolist would charge in order to maximize profits would be

A. $5.00 per unit.

B. $7.00 per unit.

C. $9.00 per unit.

D. between $6.00 and $7.00 per unit.

99.

Refer to the figure. At the profit-maximizing level of output for a monopolist, marginal cost is

A. $5.00 per unit.

B. $7.00 per unit.

C. $9.00 per unit.

D. between $6.00 and $7.00 per unit.

100.

Refer to the figure. If this industry were perfectly competitive, the profit-maximizing level of output would be

A. 2 units per hour.

B. 3 units per hour.

C. 4 units per hour.

D. between 3 and 4 units per hour.

101.

Refer to the figure. If this firm were forced to behave as if it were in a perfectly competitive market, the profit-maximizing price would be

A. $5.00 per unit.

B. $7.00 per unit.

C. $9.00 per unit.

D. between $6.00 and $7.00 per unit.

102.

Refer to the figure. The profit-maximizing rate of output for this monopolist is

A. 3 units per hour.

B. 4 units per hour.

C. between 3 and 4 units per hour.

D. between 4 and 5 units per hour.

103.

Refer to the figure. The price charged by this profit-maximizing monopolist is

A. $9.00 per unit.

B. $10.00 per unit.

C. $10.50 per unit.

D. $11.00 per unit.

104.

Refer to the figure. At the profit-maximizing rate of output for a monopolist, marginal cost is

A. $9.00 per unit.

B. $10.00 per unit.

C. $10.50 per unit.

D. $11.00 per unit.

105.

Refer to the figure. The profit per unit for this profit-maximizing monopolist is closest to

A. $1.00 per unit.

B. $3.50 per unit.

C. $7.50 per unit.

D. $8.00 per unit.

106.

Refer to the figure. If this monopolist is forced to behave as if it operate in perfect competition, the profit-maximizing rate of output is

A. 3 units per hour.

B. 4 units per hour.

C. Between 3 and 4 units per hour.

D. Between 4 and 5 units per hour.

107.

Refer to the figure. If this monopolist is forced to behave as if it operate in perfect competition, the profit-maximizing price is

A. $9 per unit.

B. $11 per unit.

C. Between $9 and $10 per unit.

D. Between $10 and $11 per unit.

108.

Refer to the figure. The profit-maximizing rate of output for this monopolist is

A. 3 units per hour.

B. 4 units per hour.

C. 5 units per hour.

D. 6 units per hour.

109.

Refer to the figure. The price charged by this profit-maximizing monopolist is

A. $6 per hour.

B. $7 per hour.

C. $8 per hour.

D. $9 per hour.

110.

In the figure, at the profit maximizing level of output for a monopolist, marginal cost is

A. $6 per hour.

B. $7 per hour.

C. $8 per hour.

D. $9 per hour.

111.

Refer to the figure. Profit per unit for this profit-maximizing monopolist is

A. $3 per unit.

B. $6 per unit.

C. $7 per unit.

D. $9 per unit.

112.

Refer to the figure. If this monopolist were forced to behave as if it operated in perfect competition, the profit-maximizing rate of output would be

A. 3 units per hour.

B. 4 units per hour.

C. 5 units per hour.

D. 6 units per hour.

113.

Refer to the figure. If this monopolist were forced to behave as if it operated in perfect competition, the profit-maximizing price would be

A. $6 per unit.

B. $7 per unit.

C. $8 per unit.

D. $9 per unit.

114. A News Wire article reported that Microsoft had "an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance." This passage suggests that Microsoft was able to erect barriers to entry and behave like

A. A perfectly contestable market.

B. A perfectly competitive market.

C. A natural monopoly.

D. A monopoly.

115. A News Wire article in the text is titled "OPEC Eases Oil Restraints." OPEC recently voted to increase their production of oil to prevent other firms and countries from taking advantage of high oil prices that attracted new oil producers. OPEC did this so that it could remain in which market structure?

A. Monopoly.

B. Perfect competition.

C. Monopolistic competition.

D. Oligopoly.

116. A News Wire article in the text, titled "Tuna Firms Guilty of Price Fixing", discusses price fixing by producers in the canned tuna market. Which of the following best characterizes which market structure could be successful in price fixing?

A. Monopolistic competition could be successful, but perfect competition could not.

B. Perfect competition could be successful, but monopoly could not.

C. Oligopoly could be successful, but perfect competition could not.

D. Perfect competition could be successful, but monopolistic competition could not.

117. A monopolist has market power because it faces a downward-sloping demand curve.

Unlike a firm operating in a competitive market, the monopolist is able to adjust the quantity to affect the market price.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Define what a monopoly is.
Topic: Monopoly Structure

118. Although there are other pizza restaurants in town, Pecos' Pizza Place is the oldest and largest so it is a monopoly.

Pecos’ Pizza Place is likely operating in a monopolistic competitive industry because if profits were to get high enough, even more pizza restaurants would enter the market relatively easily.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-01 Define what a monopoly is.
Topic: Monopoly Structure

119. The demand curve for a monopolist's product is the same as the market demand curve for the product.

Since a monopolist is the dominant firm in the market, the firm’s demand curve is effectively the same as the market demand curve.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Define what a monopoly is.
Topic: Monopoly Structure

120. Marginal revenue is the additional revenue from producing one more unit of output.

Marginal revenue is defined as the change in total revenue that results from one additional unit of output.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Explain why price exceeds marginal revenue in monopoly.
Topic: Monopoly Structure

121. The marginal revenue curve for a monopolist is greater than the price because the monopolist faces a downward sloping demand curve for its product.

The marginal revenue curve for a monopolist is always less than the price because with each additional unit of output sold, the monopolist must lower price not just on the new units, but those that would already have been sold at higher prices as well.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Explain why price exceeds marginal revenue in monopoly.
Topic: Monopoly Structure

122. For a monopoly, a firm’s marginal revenue is always equal to price.

The marginal revenue curve for a monopolist is always less than the price because with each additional unit of output sold, the monopolist must lower price not just on the new units, but those that would already have been sold at higher prices as well.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Explain why price exceeds marginal revenue in monopoly.
Topic: Monopoly Structure

123. According to the profit-maximization rule, a firm should produce at the rate of output where marginal revenue equals marginal cost.

At any point past the point where at a rate of output marginal revenue equals marginal cost, the additional revenue added will be less than the additional cost added and so total profit will decline.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Describe how a monopoly sets output and price.
Topic: Monopoly Behavior

124. For a monopoly, profits are maximized at the output level where price and marginal cost are equal.

For a monopoly profits are maximized at an output level where marginal revenue and marginal cost are equal. There is a difference between the price a monopolist can charge and the marginal revenue from the last unit produced, unlike in perfect competition.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Describe how a monopoly sets output and price.
Topic: Monopoly Behavior

125. For both perfectly competitive and monopoly firms, price will exceed marginal cost at the profit-maximizing output.

All firms in any industry attempt to operate at a point where marginal revenue equals marginal cost to maximize profits but for the perfect competitor price, which equals marginal revenue, will equal marginal cost.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Describe how a monopoly sets output and price.
Topic: Monopoly Behavior

126. In order to sell additional output, a monopolist must lower its price.

Since the marginal utility of an additional unit declines, a consumer will not purchase another unit unless the price is lower.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Describe how a monopoly sets output and price.
Topic: Monopoly Behavior

127. A monopolist produces more output at a lower price than a competitive market would, ceteris paribus.

A monopolist produces less output at a higher price than a competitive market would since its marginal revenue curve crosses the marginal cost curve at a lower output level.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Barriers to Entry

128. If a market changes from perfectly competitive to monopolistic, output will increase and the price will decrease, ceteris paribus.

A monopolist produces less output at a higher price than a competitive market would since its marginal revenue curve crosses the marginal cost curve at a lower output level.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Barriers to Entry

129. Barriers to entry are obstacles that make it difficult or impossible for additional producers to enter a market.

As barriers to entry get stronger, a market is more likely to be less competitive.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Barriers to Entry

130. Barriers to entry are not strong enough to protect monopoly profits.

As barriers to entry get stronger, a market is more likely to be less competitive.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Barriers to Entry

131. Patents, legal harassment, and bundling products are all examples of barriers to entry in monopoly markets.

There are a number of other barriers to entry as well, but patents, legal harassment, and bundling products are all examples.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Barriers to Entry

132. Monopoly profits are an example of a barrier to entry in monopoly markets.

Economic profits are a characteristic of a monopoly market, but by themselves they do not prevent new entrants from coming into the market.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Barriers to Entry

133. In a competitive industry, barriers to entry prevent new suppliers from entering the market.

A competitive industry is characterized by low barriers to entry and so new firms can enter relatively easily.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Comparative Outcomes

134. For a profit-maximizing monopolist, price exceeds marginal cost at all times.

For a profit-maximizing firm, marginal revenue must equal marginal cost in order to maximize profits. For the monopolist, price, which is determined by demand, exceeds marginal revenue and therefore marginal cost.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Comparative Outcomes

135. In an oligopoly, one firm controls the entire market.

An oligopoly is composed of a small number of dominant firms.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Comparative Outcomes

136. An oligopolist may decide to coordinate with others in the industry in order to maximize profits.

Collusion occurs when oligopolies coordinate with one another in order to maximize profits.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Comparative Outcomes

137. In monopolistic competition there is more price-setting power than in perfect competition.

In monopolistic competition, considerable emphasis is placed on advertising, brand names, and trademarks in order to have more price-setting power as each of these help to separate a firm from competitors.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Comparative Outcomes

138. Monopolies tend to inhibit technology and innovation by keeping competition out of the market.

In general, monopolies prefer the status quo and do not want innovation to alter the characteristics of the market.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-05 Discuss the pros and cons of monopoly structures.
Topic: Any Redeeming Qualities?

139. In order to survive the competition, monopolies must engage in research and design activity.

In general, monopolies prefer the status quo and do not want innovation to alter the characteristics of the market.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-05 Discuss the pros and cons of monopoly structures.
Topic: Any Redeeming Qualities?

140. Economies of scale occur when the long-run average cost curve slopes downward.

By definition, economies of scale occur when long-run average costs decline as output levels rise.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-05 Discuss the pros and cons of monopoly structures.
Topic: Any Redeeming Qualities?

141. When there are economies of scale, a firm can simply increase the amount of capital used in production and unit costs will decline.

Economies of scale means that there are cost savings associated with scaling up. As a result, a firm that invests in new capital will see average costs (unit costs) decline.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-05 Discuss the pros and cons of monopoly structures.
Topic: Any Redeeming Qualities?

142. A natural monopoly uses legal harassment and bundling of products to keep others out of the market.

A natural monopoly uses economies of scale to keep others out of the market as the continuously declining average total costs allow the monopolist to set prices lower than any viable entrant could charge.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-05 Discuss the pros and cons of monopoly structures.
Topic: Any Redeeming Qualities?

143. Even when a market appears to be a monopoly it can be contestable if there are many potential entrants.

Many times a firm will not use monopoly pricing power in order to keep competing firms out of a market. The example of OPEC expanding production to keep lower prices is an example of this.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-05 Discuss the pros and cons of monopoly structures.
Topic: Any Redeeming Qualities?

144. Monopoly markets cannot be contestable since there is only one firm.

Any market can be contestable given enough time for technology to change.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-05 Discuss the pros and cons of monopoly structures.
Topic: Any Redeeming Qualities?

145. Why does a monopolist demand curve lie above the marginal revenue curve whereas in a competitive market the demand curve and marginal revenue curve are equal? Would it be possible that the marginal revenue curve and demand curve be the same for a monopolist?

The difference lies in what happens to price as a firm expands output. A perfectly competitive market is so small relative to the market that it can produce as much or as little as it wants without altering the market price at all. As a result, the marginal revenue and demand curves are the same because there are an infinite number of consumers (from the small firm’s perspective) that will buy whatever the firm produces, so long as it charges the market price. For a monopolist, demand will always lie above marginal revenue because it effectively faces the entire, downward-sloping demand curve. This shows that in order to sell more units to new customers, the monopolist must lower price. By doing this, though, the monopolist also ends up charging less for the goods they would have sold to some consumers, even at a higher price. As a result, as output expands, marginal revenue will fall faster than price when the monopolist expands output, so the company must lose more and more on already sold units that are now sold at lower prices.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 07-02 Explain why price exceeds marginal revenue in monopoly.
Topic: Monopoly Structure

146. List some of the barriers to entry for a monopolist. Explain how each barrier can preserve a monopoly.

Barriers to entry are such things as: patent protection, exclusive licensing, bundled products, economies of scale, and high capital requirements to enter the industry. The important point about barriers is that they make it difficult for a firm to enter. For example, a patent is a legal protection from the government and is similar to exclusive licensing that would be issued by another firm—they generate legal monopoly rights for specific firms. Bundled products are used to force consumers to use all of the firm’s products, not just the ones that they want and this may prevent new entrants if they cannot similarly bundle their products. Some industries require significant amounts of fixed capital to make it economically feasible to operate and some industries require a large amount of capital just to enter, both of which will make it difficult for new firms to enter as well.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-01 Define what a monopoly is.
Topic: Barriers to Entry

147. Use the following demand schedule for a monopolist to calculate total revenue, marginal revenue and the price elasticity of demand between each price level. Instructions: Round your answers to two decimal places.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 07-02 Explain why price exceeds marginal revenue in monopoly.
Topic: Monopoly Structure

148. List and explain some of the benefits of a monopoly. Will a monopolist always charge the highest possible price?

Some of the benefits of a monopoly include research and development. It takes significant capital to fund research and development, and a large company can afford to do so and will likely only engage in this spending if it does not have to worry about spending money to keep other competitors out. Also, monopolies may have the advantage of economies of scale, in that a large company can produce a standardized product at a low unit (average) cost. A monopolist will not always charge the highest price possible since as price rises quantity sold falls under economies of scale. In some cases, then, a higher price may reduce profits. Additionally, the firm seeks to maximize profit by setting marginal revenue and marginal cost equal to one another, which likely does not happen at the highest price possible. Finally, the higher the price goes, the more likely it is that other firms would see a benefit to entering the market. As a result, a monopolist may opt not to charge the highest price possible to deter new entrants from viewing the market favorably.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-05 Discuss the pros and cons of monopoly structures.
Topic: Any Redeeming Qualities?

149. In the following industries, explain what barriers to entry have facilitated the formation of a monopoly. a) City of Eugene Water and Electric Board (EWEB) b) Seattle Seahawks Football Team c) U.S. Postal Service

EWEB has a government franchise and economies of scale, the Seattle Seahawks have an exclusive license to operate, and the Postal Service is also a government franchise with a standardized service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-01 Define what a monopoly is.
Topic: Monopoly Structure

150. If monopolies faced competition from other firms, then its demand curve would become more horizontal.

Competition will make the demand curve more elastic as consumers will have more options to choose from when shopping for a good or service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Comparative Outcomes

151. If a monopoly’s marginal revenue for a product is $25 and the marginal cost is $18, the firm should do which of the following?

A. Sell more output and lower the price.

B. Sell less output and raise the price.

C. Sell the current amount of output and do not change price.

D. Sell more output but do not change the price.

152. Assume the market price is $65, marginal cost is $35, marginal revenue is $35, and average total cost is $39. In this market, the monopolist will

A. operate at a loss.

B. operate at a profit.

C. have zero profits.

D. expand their output.

153. Compared to perfect competition, the monopoly will produce more output and charge a higher price.

Monopolies have market power and no competition. It is not in their best financial interest to overproduce and lower prices of their product.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Comparative Outcomes

154. Explain why cartels resemble monopolies. Why would you not see the formation of cartels in the perfectly competitive market?

Cartels are a group of firms (or countries) that collectively set their combined rate of output so they resemble a monopoly. There is too much competition in perfectly competitive markets for all firms to agree enough to behave like a monopoly.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-05 Discuss the pros and cons of monopoly structures.
Topic: Comparative Outcomes

155. Contrast the market of monopolistic competition with oligopolies.

Firms that are monopolistically competitive have limited market power whereas the oligopoly firms have considerable market power. Oligopolistic firms recognize their mutual interest in higher prices and profits. As a result, they may try to jointly reduce output and raise prices for higher profits. Because of competition, monopolistically competitively firms are unlikely to agree to restricting quantities and increasing prices of their products.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: Comparative Outcomes

156. The demand curve facing a monopoly

A. is equal to the industry demand curve.

B. is horizontal at the going market price.

C. is steeper than the industry demand curve.

D. is flatter than the industry demand curve.

157. A major criticism of monopolies is that they

A. inhibit technological innovation.

B. limit consumption choices.

C. experience economies of scale.

D. both inhibit technological innovation and limit consumption choices.

158. Why do monopolies experience diminishing marginal returns as they increase output?

A. Price always equals marginal revenue for monopolies.

B. Monopolies must lower the price in order to increase quantity demanded.

C. They maximize profits at the rate of output where marginal revenue is greater than marginal cost.

D. All of these choices are correct.

159. In 2009, European courts deemed Microsoft’s behavior monopolistic because it was practicing

A. legal harassment.

B. exclusive licensing.

C. bundling of products.

D. All of these choices are correct.

160. If a firm converts a previously competitive industry into a monopoly without any changes in the cost curves, it will

A. increase market-level output and price to generate more profit.

B. reduce market-level output and raise price to generate more profit.

C. keep market-level output the same but increase price to generate more profit.

D. reduce price and increase market-level output to keep potential competitors from entering the industry.

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Describe how a monopoly sets output and price.
Topic: Monopoly Behavior

161. The market structure for the airline industry is determined by

A. the number of carriers servicing a given route.

B. the fares charged by competing airlines.

C. the number of routes available.

D. the price charge for flights.

162. When a monopoly operates in a contestable market

A. it charges the same price as an ordinary monopoly.

B. it is unable to charge a price above cost without inducing entry by a rival firm.

C. it is able to form a cartel with the other large firms and charge prices considerably above cost.

D. the monopolist will welcome contesting firms.

163. Which of the following statements is ?

A. Perfectly competitive firms produce at the rate of output for which marginal revenue equals marginal cost, but monopolists produce at a rate of output for which marginal revenue is greater than marginal cost.

B. The perfectly competitive price is usually higher than the monopoly price.

C. Both the monopolist and the perfectly competitive firm operate at the rate of output for which marginal revenue equals marginal cost.

D. Monopolistic theory has no relevance to the real world.

Accessibility: Keyboard Navigation
Blooms: Understand
Learning Objective: 07-01 Define what a monopoly is.
Topic: Comparative Outcomes

164. If firms are earning positive economic profits

A. any entry by new firms would tend to erode those profits.

B. barriers to entry would permit those profits to persist.

C. firms must be producing where marginal revenue equals marginal cost, regardless of industry structure.

D. All of these choices are correct.

165. Marginal revenue is the

A. additional revenue from selling one more of a good.

B. change in profits from a one-unit increase in the quantity sold.

C. extra money received when the least important goods are sold.

D. All of these choices are correct.

166. Which of the following is not an example of a natural monopoly?

A. local telephone service

B. cable TV providers

C. public utility companies

D. agricultural farms

167. An industry structure with many firms, each of which has some distinct brand image, is called

A. monopoly.

B. competition.

C. monopolistic competition.

D. oligopoly.

168. Drug companies are willing to spend millions of dollars on developing new drugs because

A. their research will drive their competitors out of business.

B. they can patent any new drug and have a monopoly on its production and sale.

C. they can raise the prices on older drugs whose patents have expired.

D. they can produce unlimited quantities of the new drug.

169. How do monopolists set the output level and price for their products?

A. Output is set at the market equilibrium quantity while price is set at market equilibrium price.

B. Output is set at the intersection of marginal revenue and marginal cost while price is set at market equilibrium price.

C. Output is set at the market equilibrium quantity while price is set at the intersection of marginal revenue and marginal cost.

D. Output is set at the intersection of marginal revenue and marginal cost while price is set based on the demand curve.

170. A natural monopoly achieves _____ over the entire range of market supply.

A. higher costs

B. cost inefficiencies

C. economies of scale

D. maximum profits