CHAPTER TWELVE QUESTION POOL

Question 1

A monopoly’s marginal cost will

a) be less than the price per unit of its product.
b) exceed its marginal revenue.
c) equal its average total cost.
d) be less than its average fixed cost.

Answer 1

A

Question 2

The problem with monopolies is their ability

(i) to do away with barriers to entry.
(ii) to price their product at a level that exceeds marginal cost.
(iii) to restrict output below the socially efficient level of production.
a) (ii) and (iii)
b) (iii) only
c) (i), (ii), and (iii)
d) (i) and (ii)

Answer 2

A

Question 3

When a monopolist increases the amount of output that it produces and sells, the price of its
output
a) increases.
b) decreases.
c) may increase or decrease depending on the price elasticity of demand.
d) stays the same.

Answer 3

B

Question 4

If a price increase leads to a higher revenue for a monopolist, which of the following
statements is correct?
a) This change will reduce the profit of the monopolist.
b) The price effect is bigger than the quantity effect.
c) The monopolist must have chosen a point on the elastic part of the demand curve before the
price change.
d) The quantity effect is bigger than the price effect

Answer 4

B

Question 5

Consider a monopolist with the cost function C(Q) = 20q. Market demand is P (Q) = 300 −
5Q. Which quantity Q maximizes the monopolist’s profit?
a) 48
b) 28
c) 200
d) 56

Answer 5

B

Question 6

Which of the following is NOT a natural barrier to entry?

a) A price floor
b) Economies of scale
c) Control of key resources for production by one firm
d) Network externalities

Answer 6

A

Question 7

A monopoly faces market demand Q (P) = 30 − P and has the cost function C (Q) = 0.5�!.
The government wants to impose a price ceiling on the monopolist to maximize social
surplus. What price ceiling should it choose?
a) 20
b) 15
c) 18
d) 10

Answer 7

B

Question 8

Consider a monopoly. When the monopolist sets a price of €6, it sells 1400 units of its
product. When the monopolist raises the price to €10, it sells 500 units of the product. What is
the price effect of the price change?
a) €2000
b) €9000
c) €5400
d) €6750

Answer 8

A

Question 9

Monopolists…

a) maximize social surplus.
b) encourage the entry and exit of new firms.
c) set price lower than marginal revenue.
d) produce goods that do not have close substitutes.

Answer 9

D

Question 10

Consider a monopolist with the cost function C(Q) = 2Q. Market demand is Q (P) = 20 − 2P.
Which price will the monopolist choose?
a) 18
b) 6
c) 4.5
d) 16

Answer 10

B

Question 11

Which of the following statements is NOT correct?
a) Patent laws are a barrier to entry.
b) The term “natural monopoly” means that a single firm can serve the entire market at a
lower cost than a larger number of firms could.
c) Network externalities are characterized by economies of scale.
d) Control over key resources for the production of a good is a source of market power.

Answer 11

C

Question 12

Consider a monopolist who sets the profit maximizing price. The monopolist does not have
fixed costs. Marginal costs are MC = 2. The elasticity of demand at the profit maximizing
price is εD = −2. What is the profit maximizing price?
a) The question cannot be answered with the given information.
b) 4
c) 2
d) 4/3

Answer 12

B

Question 13

Which of the following statements correctly identifies a similarity between monopoly and
perfect competition?
a) Production is expanded until marginal revenue equals marginal cost in both market
structures.
b) Firms face an upward sloping demand curve and a downward sloping marginal revenue
curve in both the market structures.
c) Entry is restricted in both market structures.
d) Price equals marginal cost in both market structures.

Answer 13

A

Question 14

Consider a monopolist with the cost function C(Q) = 4Q. Market demand is Q (P) = 48 − 2P.
What is the deadweight loss from the monopoly?
a) 200
b) 150
c) 100
d) 50

Answer 14

C

Question 15

Which of the following statements is NOT correct?
a) Governments sometimes grant legal market power in order to spur innovation.
b) Network externalities do not favor the rise of monopolies.
c) Economies of scale usually occur when fixed costs are high.
d) When there are economies of scale a single firm can supply a product for the entire market
at lower cost than two or more firms.

Answer 15

B

Question 16

The rise of eBay to near monopoly status is mainly attributed to…

a) legal market power.
b) economies of scale.
c) network externalities.
d) collusion.

Answer 16

C

Question 17

Consider our discussion of monopolies in class. Which of the following statements is correct?
a) At the profit-maximizing output level for a monopolist, the market price is lower than the
marginal revenue.
b) A network externality refers to a situation where the government intervenes to prevent the
concentration of market power in the hands of a few firms.
c) A natural monopoly is a market in which one firm can provide a good or service at a lower
cost than two or more firms.
d) A monopolist will choose a higher mark-up over marginal cost the lower the elasticity is
(e.g., the mark-up will be lower for ED” = -2 than for ED” = -1.5).

Answer 17

C

Question 18

A monopoly faces market demand Q(P) = 50 – 0.5P and has the cost function C(Q) = 60Q.
What is the monopolist’s profit?
a) 200
b) 1500
c) 100
d) 500

Answer 18

A