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Multiple Choice TutorialChapter 9Monopoly
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1. In the market structure of monopoly, new firmsa. cannot profitably enter the industry, even
in the long runb. may freely enter and leave the industry in
both the short run and the long runc. may freely leave and enter the industry in
the long run onlyd. 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.
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2. Which of the following is not considered a barrier to entry?a. patentsb. government licensesc. economies of scaled. 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.
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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 processesb. 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.
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4. Which of the following describes the market structure of monopoly?
a. many firms with some control over price, and considerable product differentiationb. many firms with no control over price,
producing identical productsc. a few firms with some control over price,
producing highly differentiated productsd. a single firm producing all of the output
for the industry, with strong control over priceD. 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 town’s isolation.
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5. Patents are designed toa. 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.
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6. Natural monopolies form whena. small firms merge to form larger firmsb. 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.
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7. Unlike perfectly competitive firms, monopolists cana. 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 profitsd. reduce the sales of other firms in the
industry through advertisingC. 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.
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8. Firms can earn economic profits even in the long run ifa. they charge the highest price possibleb. there is a cost-reducing technological
changec. there are significant barriers to entryd. 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.
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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 productb. technological change tends to break down
barriers to entryc. all profit will gradually be converted to
consumer surplusC. 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.
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10. The demand curve facing a nondiscriminating monopolista. is the market demand curveb. is the same as the demand curve facing a
perfectly competitive firmc. 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.
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11. For a nondiscriminating monopolist, describe the relationship between market price (P), average revenue (AR), and marginal revenue (MR).
a. P = AR = MRb. P > AR = MRc. 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.
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12. From the above demand schedule for a monopolist, what is the marginal revenue associated with the sale of the fourth unit?a. $10b. $30c. $60B. TR at 3 units is 210; TR at 4 units is 240;
240 minus 210 equals 30.
Price9080706050
Quantity12345
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13. If marginal revenue equals price for all units, it must be true that the firma. is a monopolistb. is a perfect competitorc. 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.
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14. If a firm’s demand curve slopes downward, the firm’sa. marginal revenue will rise as price is
reducedb. marginal revenue will generally be less
than pricec. 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.
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15. A firm facing a downward-sloping demand curve sells 50 units of output at $10 each. The firm’s marginal revenue isa. $500b. more than $10 but less than $500c. $10d. 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.
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16. In the short run, if a monopolist is producing where price equals marginal cost, a. it is maximizing its profitb. it should produce more output to maximize
profitc. it should produce less output to maximize
profitC. 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.
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17. Nondiscriminating monopoly is similar to perfect competition in thata. they have the same level of barriers to
entryb. they have a similar number of firms in the
industryc. price equals marginal revenue for bothd. 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.
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18. Negative marginal revenue means thata. the firm is maximizing its economic profitb. the firm is maximizing its total revenuec. total revenue is increasing at an increasing
rate as output increasesd. 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.
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19. Total revenue for a monopolist is greatest wherea. marginal revenue is positiveb. marginal revenue is zeroc. marginal revenue is negatived. 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.
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20. Where demand is inelastic,a. marginal revenue is positive and total
revenue is inversely related to priceb. marginal revenue is positive and total
revenue is directly related to pricec 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.
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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 monopolistb. the firm’s demand curve is elasticc. the firm’s demand curve is unit elasticd. the firm’s demand curve is inelastic
D. 110 X $4 = $440; 100 X $5 = $500This demand curve is inelastic because as the
price increased, total revenue increased.
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22. Unlike firms in a perfectly competitive industry, monopolists have control over a. the price they charge for the productb. the quantity of output they producec. 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.
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23. A nondiscriminating monopolist a. has absolute control over both price and
quantity of outputb. has no control over either price or quantity
of outputc. 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.
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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 constantb. P is constant, but MR decreasesc. P decreases, but MR is constantd. 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.
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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 costb. reducing output would increase both total
revenue and total costc. 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.
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D = AR
MR
ATCMCMR = MC
Q
P
AVC
$18$16
$11$8
Exhibit 22-1
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17
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26. The profit-maximizing monopoly illustrated in Exhibit 22-1 willa. close immediatelyb. earn an economic profitc. break evend. 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.
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27. The production level which will maximize the total profit (or minimize loss) for the monopoly in Exhibit 22-1 isa. 0b. 22c. 17d. 12
C. 17 units is where MR = MC.
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28. The profit-maximizing (or loss-minimizing) price the monopoly will charge in Exhibit 22-1 isa. $22b. $11c. $16d. $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.
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29. In attempting to maximize profit, the firm in Exhibit 22-1 will have an economica. profit of $85b. loss of $48c. loss of $132d. loss of $34
D. AR at 17 units is $16; ATC at 17 units is $18. $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
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30. At the profit-maximizing (or loss-minimizing) level of production, the monopoly in Exhibit 22-1 will have total revenue ofa. $308b. $187c. $216d. $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
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31. At the profit-maximizing (or loss-minimizing) level of production, the monopoly in Exhibit 22-1 will have total cost ofa. $264b. $306c. $216d. $187
B. The average total cost at 17 units is $18; $18 times 17 units equals $306
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32. At the profit-maximizing (or loss-minimizing) level of production, the monopoly in Exhibit 22-1 will have aa. profit per unit of output of $2b. loss per unit of output of $2c. loss per unit of output of $5d. 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.
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D = ARMR
LRAC
MCMR = MC
Q
P
X
TU
Exhibit 22-2
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H Z R
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33. The monopoly in Exhibit 22-2 would maximize profits by producing level of outputa. Hb. Mc. Zd. zero
A. H is the level of output where MR = MC.
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34. The monopoly in Exhibit 22-2 would maximize profits by charging pricea. Tb. Uc. Vd. X
D. X is the price where MR = MC.
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35. The price and output society would prefer in Exhibit 22-2 would bea. X and H respectivelyb. V and M respectivelyc. U and Z respectivelyd. 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.
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D = AR
MR
ATCMC
Q
P
AVC500
Exhibit 22-3
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97
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36. In order to maximize profits, the monopoly in Exhibit 22-3 should producea. 97 units of outputb. substantially more than 97 units of outputc. less than 97 units of outputd. 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.
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37. If the monopoly in Exhibit 22-3 is currently charging $500, it shoulda. continue charging $500b. charge a slightly higher price c. charge a much lower priced. 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.
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D = AR
MR
ATCMC
Q
P
AVC
70
Exhibit 22-4
Last slide viewed
10
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38. In order to maximize profit, the firms in Exhibit 22-4 should chargea. no more than $70 and produce less than 10b. less than $70 and produce less than 10c. 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.
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39. At the profit-maximizing output and price, the firm in Exhibit 22-4 is earninga. an economic profitb. so much economic loss that it should close
immediatelyc. a break even level of incomed. 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.
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40. At the profit-maximizing price and output, the firm in Exhibit 22-4 hasa. total revenue which exceeds $700b. total costs which exceed $700c. total revenue which is less than $700d. 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.
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41. From the above information, which is the firm’s maximize profit?a. -$10b. $90c. $95
C. Total revenue equals price times quantity and profit is total revenue minus total cost.
Price$110$100$90$80$70
Quantity12345
Total Cost$100$125$175$250$350
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42. From the above information, what should the firm do to maximize short-run profit?a. this firm cannot make a profitb. produce 1 unit of output and set price at $80c. produce 2 units of output and set price at $60d. produce 3 units of output and set price at
$60A. This firm is making less than a normal profit because TR - TC is always negative.
Price$90$80$70$60$50
Quantity01234
Total Cost$150$250$300$400$550
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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 outputb. raise price and decrease outputc. maintain a constant price and increase
outputd. 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.
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44. A nondiscriminating monopolist should shut down in the short runa. if marginal revenue is less than priceb. if its price (or demand curve) is less than
average total costc. if its price (or demand curve) is less than
averaged fixed costd. 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.
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45. All firms maximize profit in whicha. price equals marginal costb. total revenue is maximizedc. average total cost is minimizedd. 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 same in both cases.
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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 weekb. continue producing 10,000 units per weekc. produce less than 10,000 units per week,
but more than zerod. shut downC. This firm should produce less because
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).
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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 demandb. it can charge and receive any price it wants
because it is a monopolyc. 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.
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48. Monopolistsa. are guaranteed to earn positive short-run
economic profitb. 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, thus the supply curve does not decline.
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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 zerob. demand curve is elasticc. demand curve is unit elasticd. 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.
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50. If the marginal cost curve shifts upward, a profit-maximizing, nondiscriminating monopolist is likely to respond in the short-run by
a. raising price and increasing outputb. raising price and decreasing outputc. keeping price constant and increasing
outputB. 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.
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51. Compared to a perfectly competitive market, a monopoly would tend to producea. more output and charge a higher priceb. the same amount of output, but charge a
higher pricec. less output and charge a higher priced. 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.
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52. If a perfectly competitive industry is monopolized, consumer surplusa. can be expected to decreaseb. will usually remain constantc. can be expected to increased. 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.
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53. The welfare loss of monopoly is also calleda. converted consumer surplusb. deadweight lossc. economic profit under monopolyd. 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.
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54. Deadweight loss representsa. consumer surplus foregone on units of
output not produced under monopolyb. consumer surplus converted to an
economic profit under monopolyc. producer surplus foregone on units of
output not produced under monopolyd. producer surplus converted to an economic
profit under monopoly
A. See previous answer.
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55. The actual welfare loss from monopoly in the U.S. may be greater than calculated estimates because somea. monopolies experience strong economies of
scaleb. monopolists spend resources to secure and
maintain their monopolyc. 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.
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56. Rent seeking involves activities undertaken toa. influence public policy in favor of one’s
financial gainb. reduce costs and increase profit through
greater efficiencyc. raise price and increase profit by
restricting outputd. increase market demand through
advertisingA. 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.
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57. The U.S. Postal Servicea. has as much monopoly power now as it had
100 years agob. has lost much of its market power due to
new competitors and new technologiesc. has increased its prices by less than the rate
of inflation during the past 25 yearsd. 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.
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58. Price discrimination occurs when a monopolist chargesa. different prices to different buyers for
different productsb. 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.
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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-slopingb. the firm must exhibit strong economies of
scalec. there must be different groups of buyers
with different price elasticities of demandd. the firm must be able to prevent reselling
of the productB. Price discrimination for a monopolist has
nothing to do with economies of scale.
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60. If a monopolist can engage in perfect price discrimination,a. consumer surplus is maximizedb. deadweight loss is maximizedc. allocative efficiency is maximizedd. the marginal revenue curve is exactly the
same as the firm’s demand curveD. 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 on previous units of output.
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