Monopoly

Question 1

What is a monopoly?

Answer 1

The only supplier of a good for which there is no close substitute

Question 2

Monopoly output is the:

Answer 2

Market output

Question 3

Monopolists set the price above marginal cost to:

Answer 3

Maximise profits

Question 4

Monopolies maximise profits by setting price or output so that:

Answer 4

MC = MR

Question 5

The profit function is:

Answer 5

TR(Q) - TC(Q)

Question 6

How do we get MC from TC?

Answer 6

dTC/dQ

Question 7

Elasticity of demand equation =

Answer 7

dQ/dp x p/Q <0

Question 8

MR in terms of elasticity =

Answer 8

p(1+(1/E))

Question 9

Wherever MR>0, demand is:

Answer 9

Elastic

Question 10

Wherever MR<0, demand is:

Answer 10

Inelastic

Question 11

What is market power?

Answer 11

The ability of a firm to charge above marginal cost and earn a positive profit

Question 12

What is the Lerner index?

Answer 12

An index of a firm’s market power

Question 13

For a profit maximising firm, the Lerner index ranges from:

Answer 13

0 to 1

Question 14

Elasticity of the market demand curve depends on consumer’s:

Answer 14

Tastes and options

Question 15

Demand becomes more elastic as:

Answer 15

• Better substitutes are introduced
• More firms enter the market with similar products
• Firms providing the same service move closer to the firm

Question 16

As a profit maximising monopoly faces more elastic demand, it must:

Answer 16

Lower its price

Question 17

A monopoly sets the price:

Answer 17

• Above marginal cost

- Above competitive price

Question 18

What is tax incidence?

Answer 18

The change in consumer’s price divided by the change in tax

Question 19

Which type of tax does a government raise under a monopoly?

Answer 19

Ad valorem

Question 20

What are two types of tax?

Answer 20

• Ad volerum

- Specific per unit

Question 21

What is an ad volerum tax?

Answer 21

General tax rates regardless of output

Question 22

What are two key reasons for monopolies existing?

Answer 22

• Cost advantages over other firms

- Governments create monopoly

Question 23

What are sources of cost advantages?

Answer 23

• Control of an essential facility
• Use of superior technology
• Protection from imitation

Question 24

A market has a natural monopoly if:

Answer 24

One firm can produce the total output at a lower cost than several firms could

Question 25

What are three ways that governments create monopolies?

Answer 25

• Making it difficult for firms to obtain licenses to operate
• Granting a firm a right to be a monopoly
• Auctioning the rights to be a monopoly

Question 26

How can a government reduce market power?

Answer 26

• Optimal price regulation
• Nonoptimal price regulation
• Increasing competition