ch 11

Question 1

For a monopoly, marginal revenue is less than price because
A) the firm is a price taker.
B) the firm must lower price if it wishes to sell more output.
C) the firm can sell all of its output at any price.
D) the demand for the firm’s output is perfectly elastic.

Answer 1

B) the firm must lower price if it wishes to sell more output.

Question 2

For a monopoly, marginal revenue is less than price because
A) the demand for the firm’s output is downward sloping.
B) the firm has no supply curve.
C) the firm can sell all of its output at any price.
D) the demand for the firm’s output is perfectly elastic

Answer 2

A) the demand for the firm’s output is downward sloping.

Question 3

Marginal Revenue is
A) the increase in total revenue from selling one more unit of output.
B) equal to P(1+1/ε).
C) equal to P when the price elasticity of demand is infinite.
D) All of the above.

Answer 3

D) All of the above.

Question 4

At an output level of 100, a monopolist faces MC = 15 and MR = 17. At output level q = 101, the monopolist’s MC = 16 and MR = 15. To maximize profits, the firm
A) should produce 100 units.
B) should produce 101 units.
C) cannot maximize profits.
D) is not a monopoly.

Answer 4

A) should produce 100 units.

Question 5

If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization
A) is achieved when 21 units are produced.
B) is achieved by setting price equal to 21.
C) is achieved only by shutting down in the short run.
D) cannot be determined solely from the information provided.

Answer 5

A) is achieved when 21 units are produced.

Question 6

Suppose a monopolist has TC = 40 + 10Q + Q2, and the demand curve it faces is
p = 130 - 2Q. What is the profit-maximizing price and output?
A) P = 50; Q = 20
B) P = 110; Q = 40
C) P = 90; Q = 40
D) P = 90; Q = 20

Answer 6

D) P = 90; Q = 20

Question 7

Suppose a monopolist has TC = 40 + 10Q + Q2, and the demand curve it faces is
p = 130 - 2Q. What is the maximum profit achieved by this monopoly?
A) Profit = 1160
B) Profit = 1240
C) Profit = 1450
D) Profit = 1800

Answer 7

A) Profit = 1160

Question 8

The ability of a monopoly to charge a price that exceeds marginal cost depends on
A) the price elasticity of supply.
B) price elasticity of demand.
C) slope of the demand curve.
D) shape of the marginal cost curve.

Answer 8

B) price elasticity of demand.

Question 9

The Lerner Index is
A) the ratio of the difference between price and marginal cost to price.
B) equal to (Price - MC)/Price.
C) a measure of market power.
D) All of the above.

Answer 9

D) All of the above.

Question 10

Market power guarantees profit.
A) True, which is why firm’s locate as far away from each other as possible.
B) False, market power guarantees price greater than marginal cost.
C) True, market power guarantees price greater than average cost.
D) False, market power guarantees price equal to average cost.

Answer 10

B) False, market power guarantees price greater than marginal cost.

Question 11

If a monopoly can produce a good at zero marginal cost, then its Lerner Index is
A) zero.
B) one.
C) infinity.
D) undetermined.

Answer 11

B) one.

Question 12

The loss associated with the fact that at the profit-maximizing quantity consumers value the goods more than it cost to produce them is called
A) deadweight loss.
B) comparative loss.
C) Lerner Loss.
D) Consumer Value Loss.

Answer 12

A) deadweight loss.

Question 13

) If the government desires to raise a certain amount of revenue by taxing a monopoly, an ad valorem tax will
A) generate the same loss of consumer surplus as a specific tax.
B) generate a greater loss of consumer surplus than a specific tax.
C) generate a smaller loss of consumer surplus than a specific tax.
D) generate no loss of consumer surplus.

Answer 13

C) generate a smaller loss of consumer surplus than a specific tax.

Question 14

The producer surplus to a monopolist must be
A) less than zero or the firm is in violation of anti-trust statutes.
B) at least as great as the producer surplus in a competitive market.
C) positive, otherwise why would the monopoly produce?
D) the same as for a competitive market.

Answer 14

B) at least as great as the producer surplus in a competitive market.

Question 15

When government imposes a tax on a monopoly,
A) the deadweight loss increases.
B) consumer surplus shrinks.
C) producer surplus decreases.
D) All of the above are correct.

Answer 15

D) All of the above are correct.

Question 16

A flour mill holding exclusive contracts to 95% of the wheat in a large geographic area may operate as a flour-producing monopoly locally because
A) the mill has a very inelastic supply curve.
B) the mill is a natural monopoly.
C) the mill controls a key input.
D) the government will declare it a monopoly.

Answer 16

C) the mill controls a key input.

Question 17

Which of the following total cost functions suggests the presence of a natural monopoly?
A) TC = 2Q
B) TC = 100 + 2Q
C) TC = 100 + 2Q2
D) All of the above.

Answer 17

B) TC = 100 + 2Q

Question 18

The situation in which one firm can produce the total output of the market at a lower cost than several firms is called a
A) natural monopoly.
B) pure monopoly.
C) ruling monopoly.
D) cost monopoly.

Answer 18

A) natural monopoly.

Question 19

Which of the following is most likely the most beneficial form of monopoly advantage?
A) better production methods
B) input hoarding
C) decreasing returns to scale
D) government protection

Answer 19

A) better production methods

Question 20

Government actions that create monopolies
A) spur product innovation by the monopoly.
B) create deadweight loss.
C) result in lower average costs of production.
D) ensure that firms price at marginal cost.

Answer 20

B) create deadweight loss.

Question 21

Optimal price regulation sets price equal to
A) marginal cost.
B) average variable cost.
C) average cost.
D) minimum average cost.

Answer 21

A) marginal cost.

Question 22

If the government regulates the price a monopoly can charge, and the price ceiling is set below what the competitive market price would be, then
A) a shortage will exist.
B) a surplus will exist.
C) producer surplus is maximized.
D) consumer surplus is maximized.

Answer 22

A) a shortage will exist.

Question 23

The government forcing a monopoly telecommunications company to allow other firms to use its cables is an attempt to
A) regulate prices.
B) decrease the monopoly market power by eliminating a natural monopoly.
C) decrease the monopoly market power by increasing competition.
D) None of the above.

Answer 23

C) decrease the monopoly market power by increasing competition.

Question 24

When attempting price regulation, a government faces what problem(s)?
A) limited information
B) bribes
C) uncooperative firms
D) All of the above.

Answer 24

D) All of the above.

Question 25

If the government attempts to force a natural monopoly to charge a price equal to marginal cost,
A) the natural monopoly will shut down.
B) the natural monopoly will still make high profits.
C) the natural monopoly’s marginal cost curve will shift up.
D) total welfare is maximized

Answer 25

A) the natural monopoly will shut down.

Question 26

If the government wants to regulate a natural monopoly, it will force the firm to set price equal to
A) average cost.
B) marginal cost.
C) marginal revenue.
D) None of the above.

Answer 26

A) average cost.

Question 27

A dominant firm’s residual demand curve is
A) the horizontal difference between the market demand curve and the supply curve of the fringe firms.
B) the vertical difference between the market demand curve and the supply curve of the fringe firms.
C) the demand curve left for the fringe firms after the dominant firm has determined an output level.
D) None of the above.

Answer 27

A) the horizontal difference between the market demand curve and the supply curve of the fringe firms.

Question 28

What is one problem with trying to regulate a monopoly’s price?
A) The government needs information on the monopoly’s marginal cost.
B) The government needs information on the price people are willing to pay.
C) The government needs to identify which firm is a monopolist.
D) Anything that the government does is problematic.

Answer 28

A) The government needs information on the monopoly’s marginal cost.

Question 29

The situation where one person’s demand for a good depends on the consumption of the good by others is called a
A) network externality.
B) network internality.
C) consumption externality.
D) production externality

Answer 29

A) network externality.

Question 30

The situation in which a person places greater value on a good as more and more people possess it is called the
A) Bandwagon Effect.
B) Greater Value Effect.
C) Snob Effect.
D) Behavioral Effect.

Answer 30

A) Bandwagon Effect.

Question 31

The situation in which a person places greater value on a good as fewer and fewer people possess it is called the
A) Bandwagon Effect.
B) Greater Value Effect.
C) Snob Effect.
D) Behavioral Effect.

Answer 31

C) Snob Effect.

Question 32

The two-period dynamic monopoly model is more useful than the static monopoly model in analyzing monopoly behavior when
A) the product produced requires a bandwagon effect.
B) the product produced generates a positive network externality.
C) the monopoly initially uses a lower introductory price.
D) All of the above situations.

Answer 32

D) All of the above situations.