Multiple Choice Tutorial Chapter 9 Monopoly 1 In

Multiple Choice Tutorial Chapter 9 Monopoly

1. In the market structure of monopoly, new firms a. cannot profitably enter the industry, even in the long run b. may freely enter and leave the industry in both the short run and the long run c. may freely leave and enter the industry in the long run only d. have no incentive to enter the industry, even if economic profits are present A. A monopoly is a monopoly because of huge barriers to entry, for one reason or another. 2

2. Which of the following is not considered a barrier to entry? a. patents b. government licenses c. economies of scale d. diseconomies of scale D. Economies of scale exist when factors cause reduction in a firm’s average cost as the scale of operations increases in the long run. Diseconomies of scale exist when factors cause a firm’s average cost to increase as the scale of operations increases in the long run. 3

3. Which of the following conditions would be least likely to lead to the market structure of monopoly? a. the firm has patent protection for certain basic production processes b. the firm has control over the entire supply of a basic input required to produce the product c. firms can freely enter and leave the industry in the long run d. significant economies of scale exist, leading to declining average costs throughout the relevant range of production C. Same as question #1. 4

4. Which of the following describes the market structure of monopoly? a. many firms with some control over price, and considerable product differentiation b. many firms with no control over price, producing identical products c. a few firms with some control over price, producing highly differentiated products d. a single firm producing all of the output for the industry, with strong control over price D. Monopolies can be in a local market. For example, if there is only one doctor in a town that is a long way from any other towns, the doctor can be a monopoly because of the 5 town’s isolation.

5. Patents are designed to a. repay inventors for the resources spent in research and development, by giving them temporary monopolies b. encourage the immediate and widespread copying and use of new innovations and new technologies throughout the economy c. work with antitrust laws to eliminate monopolies in the U. S. d. create and maintain perfectly competitive industries A. Without patents a person could spend money and time on an invention, but as soon as the invention becomes marketable, someone else could copy it and be a competitor. 6

6. Natural monopolies form when a. small firms merge to form larger firms b. the firm has control over the entire supply of a basic input required to produce the product c. the firm’s monopoly position is created and enforced by the government d. long-run average cost declines as the firm expands output D. As a firm grows several things can happen that lower costs. For example, greater use of the state of the art capital, better use of by-products, more division of labor, lower costs of raw materials as they can be bought in bulk. 7

7. Unlike perfectly competitive firms, monopolists can a. earn positive short-run economic profit even if price is less than average variable cost at all rates of output b. sell any quantity of output at any price they choose c. earn long-run economic profits d. reduce the sales of other firms in the industry through advertising C. Long-run economic profits can be made because of such huge barriers to entry; other firms cannot enter into the industry to partake in the monopolist profits. 8

8. Firms can earn economic profits even in the long run if a. they charge the highest price possible b. there is a cost-reducing technological change c. there are significant barriers to entry d. marginal revenue equals marginal cost C. If it were not for the barriers to entry, other firms could enter the industry, the supply curve would shift to the right, and prices and profits would be suppressed. 9

9. In the long run, which of the following is not a problem for a monopolist earning economic profits? a. other firms have an incentive to create new substitutes for the monopolist’s product b. technological change tends to break down barriers to entry c. all profit will gradually be converted to consumer surplus C. Consumer surplus is the difference between the maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays. Consumer surplus falls on the demand side, whereas economic profits fall on the supply side. 10

10. The demand curve facing a nondiscriminating monopolist a. is the market demand curve b. is the same as the demand curve facing a perfectly competitive firm c. is the same as its marginal revenue curve A. A discriminating monopolist will charge different consumers different prices, a nondiscriminating monopolist will charge the same price to all consumers. For a nondiscriminating monopolist demand determines price, ultimately the consumers determines what price they are willing to pay. 11

11. For a nondiscriminating monopolist, describe the relationship between market price (P), average revenue (AR), and marginal revenue (MR). a. P = AR = MR b. P > AR = MR c. P = AR > MR C. Price equals average revenue (AR) because all units are sold for the same price, therefore, total revenue (TR) divided by quantity (Q) will always get us back to the price. AR > MR because in order to sell more units a firm has to lower price and that price cut has to apply to all identical units at one point in time. 12

Price Quantity 90 1 80 2 70 3 60 4 50 5 12. From the above demand schedule for a monopolist, what is the marginal revenue associated with the sale of the fourth unit? a. $10 b. $30 c. $60 B. TR at 3 units is 210; TR at 4 units is 240; 240 minus 210 equals 30. 13

13. If marginal revenue equals price for all units, it must be true that the firm a. is a monopolist b. is a perfect competitor c. faces a perfectly inelastic demand curve B. A characteristic of a perfect competitor is that it can sell all it produces at the market price. Therefore, it has no incentive to lower price. Also, it has no incentive to charge a higher price because it would not sell any units; consumers could buy identical goods from its competitors. Therefore, the amount of the price is always added to total revenue with each unit sold. The demand curve is perfectly elastic. 14

14. If a firm’s demand curve slopes downward, the firm’s a. marginal revenue will rise as price is reduced b. marginal revenue will generally be less than price c. total revenue will decline continuously as price is reduced B. With a downward sloping demand curve more units can be sold as the price declines. Therefore, MR < P because once the price is lowered the new price must apply to all identical units at one point in time. 15

15. A firm facing a downward-sloping demand curve sells 50 units of output at $10 each. The firm’s marginal revenue is a. $500 b. more than $10 but less than $500 c. $10 d. less than $10 D. For example, at 50 units the price is $10 and TR = $500 (10 X 50). Let’s suppose that this firm lowers price to $9 and 51 units are sold. TR at $9 is 9 times 51 which equals $459. So MR (revenue made on the last unit) is $-41 (459 - 500) when the price is $9, so MR < P. 16

16. In the short run, if a monopolist is producing where price equals marginal cost, a. it is maximizing its profit b. it should produce more output to maximize profit c. it should produce less output to maximize profit C. As long as MR > MC a firm should produce that last unit, if MR < MC a firm should not produce that last unit. Because P = MC in this question, MR < MC and the firm should not produce that last unit; if it does produce that last unit it will lose money on that last unit. 17

17. Nondiscriminating monopoly is similar to perfect competition in that a. they have the same level of barriers to entry b. they have a similar number of firms in the industry c. price equals marginal revenue for both d. price equals average revenue for both D. A nondiscriminating monopolist charges the same price for all units of output at one point in time. Because all units are sold for the same price, TR / Q (AR) will always = P. 18

18. Negative marginal revenue means that a. the firm is maximizing its economic profit b. the firm is maximizing its total revenue c. total revenue is increasing at an increasing rate as output increases d. total revenue is decreasing as output increases D. Negative MR means that money is lost on that last unit of output, therefore, if the last unit is produced TR will decline. 19

19. Total revenue for a monopolist is greatest where a. marginal revenue is positive b. marginal revenue is zero c. marginal revenue is negative d. demand is perfectly elastic B. Profits are maximized at the level of output where MR = MC; up to this point money was made on each unit of output and beyond this point money is lost on each unit. At that unit where MR = MC no money is made on that last unit, therefore, MR is zero. 20

20. Where demand is inelastic, a. marginal revenue is positive and total revenue is inversely related to price b. marginal revenue is positive and total revenue is directly related to price c marginal revenue is negative, so total revenue decreases as price falls. C. Inelastic demand is the type of demand that exists when a change in price has relatively little effect on the quantity demanded; the percent change in quantity demanded is less than the percent change in price. When price increases, total revenue increases, when price decreases, total revenue decreases. 21

21. A firm can sell 110 unit of output at $4 or 100 units at $5. Which of the following is true? a. the firm is a monopolist b. the firm’s demand curve is elastic c. the firm’s demand curve is unit elastic d. the firm’s demand curve is inelastic D. 110 X $4 = $440; 100 X $5 = $500 This demand curve is inelastic because as the price increased, total revenue increased. 22

22. Unlike firms in a perfectly competitive industry, monopolists have control over a. the price they charge for the product b. the quantity of output they produce c. the prices they pay for resources A. A firm in a perfectly competitive industry is a price taker, it has no incentive to charge any other price but the market price. Firms in the other type markets are price makers, because they have more control over their price they can make the price of their products. However, no matter the market, profits are maximized or losses are where MR = MC. 23

23. A nondiscriminating monopolist a. has absolute control over both price and quantity of output b. has no control over either price or quantity of output c. is limited to choosing any price-quantity combination on the market demand curve C. Even a monopolist is subject to the demand curve it faces. Beyond some price consumers can choose to buy less, find substitutes, or simply not buy at all. The more elastic the demand curve, the more responsive consumers will be to a price change. 24

24. As a nondiscriminating monopolist increases the quantity of output, what happens to price (P) and marginal revenue (MR)? a. both P and MR remain constant b. P is constant, but MR decreases c. P decreases, but MR is constant d. both P and MR decrease, but MR falls faster than P D. This is because both the demand curve and the marginal revenue curve are downward sloping; but the MR curve is underneath the demand curve and more steeply sloped. 25

25. If a monopolist is producing at a rate of output in which market demand is inelastic, a. reducing output would reduce both total revenue and total cost b. reducing output would increase both total revenue and total cost c. reducing output would increase total revenue and reduce total cost C. Because demand curves are downward sloping (negative slope) a decrease in quantity results in an increase in the price. Total costs decrease because fewer units are being produced. 26

P Last slide viewed MC ATC MR = MC $18 $16 AVC $11 $8 Exhibit 22 -1 D = AR 17 MR Q 27

26. The profit-maximizing monopoly illustrated in Exhibit 22 -1 will a. close immediately b. earn an economic profit c. break even d. incur an economic loss D. An economic loss is being incurred because at the level of output where MR = MC, ATC is greater than AR. 28

27. The production level which will maximize the total profit (or minimize loss) for the monopoly in Exhibit 22 -1 is a. 0 b. 22 c. 17 d. 12 C. 17 units is where MR = MC. 29

28. The profit-maximizing (or loss-minimizing) price the monopoly will charge in Exhibit 22 -1 is a. $22 b. $11 c. $16 d. $18 C. To determine the profit maximizing (or loss minimizing) price first locate the quantity where MR = MC. Then draw a vertical line, where the vertical line intersects the demand curve (demand always determines price) draw a horizontal line to the price axis. 30

29. In attempting to maximize profit, the firm in Exhibit 22 -1 will have an economic a. profit of $85 b. loss of $48 c. loss of $132 d. loss of $34 D. AR at 17 units is $16; ATC at 17 units is $18 minus $16 equals $2, which is the average loss at 17 units. Total loss is the number of units times the average loss; $17 X $2 = $34 31

30. At the profit-maximizing (or lossminimizing) level of production, the monopoly in Exhibit 22 -1 will have total revenue of a. $308 b. $187 c. $216 d. $272 D. Total revenue is price times quantity. The loss minimizing price here is $16 and the loss minimizing output is 17 units. 16 X 17 = $272 32

31. At the profit-maximizing (or lossminimizing) level of production, the monopoly in Exhibit 22 -1 will have total cost of a. $264 b. $306 c. $216 d. $187 B. The average total cost at 17 units is $18; $18 times 17 units equals $306 33

32. At the profit-maximizing (or lossminimizing) level of production, the monopoly in Exhibit 22 -1 will have a a. profit per unit of output of $2 b. loss per unit of output of $2 c. loss per unit of output of $5 d. profit per unit of output of $5 B. Loss per unit equals AR minus ATC at the level of output where MR = MC. In this case AR equals $16 and ATC equals $18; $18 minus $16 = $2. 34

P Last slide viewed MC MR = MC X LRAC U T D = AR MR Exhibit 22 -2 H ZR Q 35

33. The monopoly in Exhibit 22 -2 would maximize profits by producing level of output a. H b. M c. Z d. zero A. H is the level of output where MR = MC. 36

34. The monopoly in Exhibit 22 -2 would maximize profits by charging price a. T b. U c. V d. X D. X is the price where MR = MC. 37

35. The price and output society would prefer in Exhibit 22 -2 would be a. X and H respectively b. V and M respectively c. U and Z respectively d. T and R respectively D. At price T and quantity R, AR = AC so the firms are making a normal profit, the minimum amount of money that will keep producers the incentive to stay in business. 38

P Last slide viewed MC ATC 500 Exhibit 22 -3 AVC D = AR 97 MR Q 39

36. In order to maximize profits, the monopoly in Exhibit 22 -3 should produce a. 97 units of output b. substantially more than 97 units of output c. less than 97 units of output d. no output A. Locate where MR = MC and draw a vertical line down to the horizontal axis. The number of units you come out at is 97 units. 40

37. If the monopoly in Exhibit 22 -3 is currently charging $500, it should a. continue charging $500 b. charge a slightly higher price c. charge a much lower price d. charge a slightly lower price A. Locate where MR = MC, then draw a vertical line up and down from this point. Because demand determines the price, this vertical line intersects the demand curve at a much higher price than $500. 41

P Last slide viewed MC ATC 70 AVC D = AR Exhibit 22 -4 10 Q MR 42

38. In order to maximize profit, the firms in Exhibit 22 -4 should charge a. no more than $70 and produce less than 10 b. less than $70 and produce less than 10 c. more than $70 and produce more than 10 d. $70 and produce 10 D. Locate where MR = MC, then draw a vertical line up and down. Where this vertical line intersects the horizontal axis is the profit maximizing output; where the vertical line intersects the demand curve, draw a horizontal line across to the vertical axis, where it intersects with the vertical axis is the profit maximizing price. 43

39. At the profit-maximizing output and price, the firm in Exhibit 22 -4 is earning a. an economic profit b. so much economic loss that it should close immediately c. a break even level of income d. an accounting loss but not an economic loss A. An economic profit is being made because on that vertical line where MR = MC, AR is greater than ATC, therefore, revenues are greater than costs, so an economic profit is being made. 44

40. At the profit-maximizing price and output, the firm in Exhibit 22 -4 has a. total revenue which exceeds $700 b. total costs which exceed $700 c. total revenue which is less than $700 d. total revenue equal to $700 D. Total revenue equals average revenue times quantity. Because average revenue always equals the price, AR = $70 and quantity equals 10, so $70 X 10 = $700. 45

Price $110 $100 $90 $80 $70 Quantity 1 2 3 4 5 Total Cost $100 $125 $175 $250 $350 41. From the above information, which is the firm’s maximize profit? a. -$10 b. $90 c. $95 C. Total revenue equals price times quantity and profit is total revenue minus total cost. 46

Price $90 $80 $70 $60 $50 Quantity 0 1 2 3 4 Total Cost $150 $250 $300 $400 $550 42. From the above information, what should the firm do to maximize short-run profit? a. this firm cannot make a profit b. produce 1 unit of output and set price at $80 c. produce 2 units of output and set price at $60 d. produce 3 units of output and set price at $60 A. This firm is making less than a normal profit because TR - TC is always negative. 47

43. A nondiscriminating monopolist earning positive short-run profit determines that its current marginal cost is $15 and its current marginal revenue is $20. To maximize profit a firm should a. raise price and increase output b. raise price and decrease output c. maintain a constant price and increase output d. reduce price and increase output D. As long as MR > MC is a firm should produce that unit. An increase in output means a lower price because of the downward sloping demand curve. 48

44. A nondiscriminating monopolist should shut down in the short run a. if marginal revenue is less than price b. if its price (or demand curve) is less than average total cost c. if its price (or demand curve) is less than averaged fixed cost d. if its price (or demand curve) is less than average variable cost D. If price is less than average variable cost (AVC) at the level of output where MR = MC, losses are greater than fixes costs, so the firm would lose more money by staying open than if it were to close down. 49

45. All firms maximize profit in which a. price equals marginal cost b. total revenue is maximized c. average total cost is minimized d. marginal cost equals marginal revenue D. This, of course, is the key to profit maximization. A firm will continue producing additional units as long as MR > MC, and will lose money on that last unit when MR < MC. At that unit of output where MR = MC no money is made nor is any money lost on that last unit. Therefore, profits are maximized at the last unit where MR > MC or at the level of output where MR = MC because profit is the 50 same in both cases.

46. A firm is making a loss determines the marginal cost is $35, average variable cost is $20, average total cost is $50, marginal revenue is $30, and average revenue is $40. This firm should a. produce more than 10, 000 units per week b. continue producing 10, 000 units per week c. produce less than 10, 000 units per week, but more than zero C. Thisdown firm should produce less because d. shut MR < MC and it should continue operating because its losses are less than its fixed costs. Its average fixed cost is $30 ($50 $20) and its average loss is $10 ($40 - $50). 51

47. A nondiscriminating, profit-maximizing monopolist will charge a higher price and produce a lower quantity than would be the case in a perfectly competitive industry because a. it controls demand b. it can charge and receive any price it wants because it is a monopoly c. the shapes of its cost and revenue curves dictate a higher price and lower quantity at the level of output where MR = MC C. Both a monopoly and firms as a part of a perfectly competitive market have an incentive to produce at the level of output where MR = MC and demand determines the price for both. The difference is in its cost and revenue curves. 52

48. Monopolists a. are guaranteed to earn positive short-run economic profit b. may earn positive short-run economic profit, although long-run economic profit is always zero c. may earn positive profit both in the short run and long run d. earn zero economic profit both in the short run and in the long run C. Positive economic profits can be made even in the long run for a monopolist because of large barriers to entry, even when profits are being made other firms will not enter into the industry, 53 thus the supply curve does not decline.

49. If all costs are fixed and marginal cost is zero for a nondiscriminating monopolist, the firm will maximize profit in which the a. price of the product is zero b. demand curve is elastic c. demand curve is unit elastic d. demand curve is inelastic C. A unit elastic demand curve is the type of demand that exists when a percent change in price causes an equal (but of opposite sign) percent change in quantity demanded; the elasticity value is minus one. In other words, the revenue lost by a lower price is exactly offset by an increase in revenue do to the increase in quantity sold. 54

50. If the marginal cost curve shifts upward, a profit-maximizing, nondiscriminating monopolist is likely to respond in the shortrun by a. raising price and increasing output b. raising price and decreasing output c. keeping price constant and increasing output B. Anytime the MC curve shifts upward it will intersect the MR curve at a lower quantity. When you draw a vertical line from this intersection to the demand curve and then move horizontally to the vertical axis, you will come out at a higher price. 55

51. Compared to a perfectly competitive market, a monopoly would tend to produce a. more output and charge a higher price b. the same amount of output, but charge a higher price c. less output and charge a higher price d. less output and charge a lower price C. MR = MC dictates a higher price and a lower quantity than what would be the case under conditions of perfect competition. 56

52. If a perfectly competitive industry is monopolized, consumer surplus a. can be expected to decrease b. will usually remain constant c. can be expected to increase d. drops from a high value to zero A. Consumer surplus is the difference between the maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays. Consumer surplus will decline because under a monopoly consumers will have to pay a higher price than under perfect competition. 57

53. The welfare loss of monopoly is also called a. converted consumer surplus b. deadweight loss c. economic profit under monopoly d. producer surplus B. Deadweight loss is a loss of consumer surplus and producer surplus that is not transferred to anyone else; it can result from monopolization of an industry. Welfare is lost because under a monopoly consumers are offered fewer units and have to pay a higher price than otherwise. 58

54. Deadweight loss represents a. consumer surplus foregone on units of output not produced under monopoly b. consumer surplus converted to an economic profit under monopoly c. producer surplus foregone on units of output not produced under monopoly d. producer surplus converted to an economic profit under monopoly A. See previous answer. 59

55. The actual welfare loss from monopoly in the U. S. may be greater than calculated estimates because some a. monopolies experience strong economies of scale b. monopolists spend resources to secure and maintain their monopoly c. monopolists may purposely keep price lower than its profit-maximizing level, in order to increase barriers to entry B. The resources used by a monopoly to retain its monopolistic position are resources that could have been used to provide the consumer with more and better goods and services. 60

56. Rent seeking involves activities undertaken to a. influence public policy in favor of one’s financial gain b. reduce costs and increase profit through greater efficiency c. raise price and increase profit by restricting output d. increase market demand through advertising A. Rent seeking are activities undertaken by individuals or firms to influence public policy in a way that will directly or indirectly redistribute income to them. 61

57. The U. S. Postal Service a. has as much monopoly power now as it had 100 years ago b. has lost much of its market power due to new competitors and new technologies c. has increased its prices by less than the rate of inflation during the past 25 years d. is more mechanized and more computerized than its potential competitors B. Especially in the area of packages, the U. S. consumer has more choice of carriers than ever before. 62

58. Price discrimination occurs when a monopolist charges a. different prices to different buyers for different products b. different prices to different groups of buyers, based on differences in the cost of providing the commodity to the buyer c. different prices to different groups of buyers for reasons unrelated to the cost of providing the commodity to the buyer C. For example, a doctor in an isolated town may charge a wealthy person more for an operation than he will charge a poor person. 63

59. Which of the following is not a condition required for a monopolist to price discriminate? a. the demand curve facing the firm must be downward-sloping b. the firm must exhibit strong economies of scale c. there must be different groups of buyers with different price elasticities of demand d. the firm must be able to prevent reselling of the product B. Price discrimination for a monopolist has nothing to do with economies of scale. 64

60. If a monopolist can engage in perfect price discrimination, a. consumer surplus is maximized b. deadweight loss is maximized c. allocative efficiency is maximized d. the marginal revenue curve is exactly the same as the firm’s demand curve D. Marginal revenue is less than price for a nondiscriminating monopolist because when it lowers price, the price cut has to apply to all units of output, therefore revenue is lost on previous units of output. But a discriminating monopolist can lower price on the present unit and not have to lower price 65 on previous units of output.

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