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Chapter 9: Monopoly

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1

Anything that prevents new firms from competing on an equal basis with existing firms in an industry is called a barrier to entry.
a.
True
b.
False

a. True

2

A monopolist is
a.
one of a large number of small firms that produce a homogeneous good
b.
one of a small number of large firms that produce a differentiated good
c.
a single seller of a product with many close substitutes
d.
one of a small number of large firms that produce a homogeneous good
e.
a single seller of a product with no close substitutes

e.a single seller of a product with no close substitutes

3

Which of the following is true of monopoly?
a.
There are no barriers to entry.
b.
The firm is a price taker.
c.
There are no close substitutes for the product being produced.
d.
There are many firms in the industry.
e.
The firm faces a horizontal demand curve.

c.There are no close substitutes for the product being produced.

4

Which of the following could be true of perfect competition but not of monopoly?
a.
The government licenses production of the good to a few firms.
b.
The government grants a patent for the good.
c.
A firm can earn economic profit in the long run.
d.
If price falls below average variable cost, it pays to shut down.
e.
There are no barriers to entry.

e.There are no barriers to entry.

5

Innovation is the process of turning an invention into a marketable product.
a.
True
b.
False

a. True

6

Which of the following is true?
a.
Patents reduce a firm's incentive to develop new products.
b.
Patents are given for new works of art or literature.
c.
Patents give a permanent exclusive right to produce a new good.
d.
Patents give a temporary exclusive right to produce a new good.
e.
Patents guarantee economic profits.

d.Patents give a temporary exclusive right to produce a new good.

7

U.S. patent laws establish property rights for inventors of new products
a.
forever
b.
until a superior invention comes along
c.
for 3 years
d.
for 10 years
e.
for 20 years

e.for 20 years

8

Patent laws promote technical progress in all of the following ways except one. Which is the exception?
a.
They allow other firms to copy successful products as soon as they are marketed.
b.
They prevent duplication of inventions.
c.
They provide a stimulus to innovation.
d.
They provide the inventor with a temporary monopoly.
e.
They increase a firm's incentive to incur the up-front costs of developing new products.

a.They allow other firms to copy successful products as soon as they are marketed.

9

Patent laws
a.
reduce incentive to innovate by restricting market entry
b.
reduce incentive to innovate by making it difficult to use the patented innovation
c.
increase incentive to innovate by restricting entry into a market
d.
increase incentive to innovate by giving a firm permanent and exclusive production rights
e.
give a firm the right to provide a wide variety of goods or services

c.increase incentive to innovate by restricting entry into a market

10

Patents stimulate investment
a.
by giving inventors an incentive to incur up-front costs of developing new products
b.
by giving tax breaks to inventors
c.
by guaranteeing a profit from new products
d.
by lowering interest rates
e.
through government payments that cover costs of research and development

a.by giving inventors an incentive to incur up-front costs of developing new products

11

Which of the following prevents potential competitors from entering a monopolist's market?
a.
legal restrictions
b.
diseconomies of scale
c.
product differentiation
d.
stable market demand
e.
rising marginal cost

a.legal restrictions

12

Willie Stand obtains a patent on his new invention, the bipod. After twenty years,
a.
he can renew his patent
b.
new entrants will begin bipod production if price exceeds average variable cost
c.
new entrants will drive up the price of the bipod
d.
Willie will eventually earn no more than a normal profit
e.
Willie will continue to earn a positive economic profit, because entry will not affect the price of bipods

d.Willie will eventually earn no more than a normal profit

13

A natural monopoly is based on economies of scale.
a.
True
b.
False

a. True

14

In the monopoly market structure, 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 enter and leave the industry in the long run only
d.
may freely enter and leave the industry in the short run only
e.
have no incentive to enter the industry, even if economic profits are present

a.cannot profitably enter the industry, even in the long run

15

Which of the following is not considered a barrier to entry?
a.
patents
b.
government licenses
c.
economies of scale
d.
diseconomies of scale
e.
control over essential resources

d.diseconomies of scale

16

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 with no differentiation
c.
a few firms with some control over price, producing similar products which are close substitutes
d.
a few firms with no control over price, producing highly differentiated products
e.
a single firm producing all of the output for the industry

e.a single firm producing all of the output for the industry

17

Natural monopolies form when
a.
small firms merge to form larger firms
b.
one firm has control over the entire supply of a basic input required to produce the product
c.
one firm's monopoly position is created and enforced by the government
d.
one firm receives patent protection for certain basic production processes
e.
long-run average cost declines as a firm expands output

e.long-run average cost declines as a firm expands output

18

Which of the following could not bar entry into an industry?
a.
economies of scale
b.
diseconomies of scale
c.
patents
d.
licenses
e.
one firm's control of essential resources

b.diseconomies of scale

19

Which of the following would probably not be considered a natural monopoly?
a.
a municipal water company
b.
the local telephone industry
c.
the cable television industry
d.
natural gas and electric companies
e.
the automobile industry

e.the automobile industry

20

A natural monopoly results when a firm has
a.
a license
b.
a patent
c.
official approval to produce a product
d.
decreasing average costs over the range of market demand
e.
exclusive use of a natural resource

d.decreasing average costs over the range of market demand

21

If a firm is a natural monopoly, its
a.
long-run average cost declines over the full range of market demand
b.
long-run average cost increases over the full range of market demand
c.
fixed cost declines over the full range of market demand
d.
fixed cost increases over the full range of market demand
e.
long-run average cost declines and marginal cost rises over the full range of market demand

a.long-run average cost declines over the full range of market demand

22

DeBeers is a natural monopoly in the world's diamond trade.
a.
True
b.
False

b. False

23

De Beers Consolidated Mines has monopoly power
a.
because of economies of scale
b.
through its control over key patents
c.
through its control of an essential resource
d.
through government-imposed barriers to entry
e.
because of its reputation for supplying high-quality diamonds

c.through its control of an essential resource

24

Jewelers are willing to hold large inventories of diamonds
a.
because the demand for diamonds is large and growing
b.
because that minimizes the fixed cost of producing diamond jewelry
c.
because, given De Beers' control of the market, they are confident that the price of diamonds will not plummet rapidly
d.
because, given De Beers' control of the market, they are confident that the price of diamonds will rise rapidly
e.
because that is what their customers expect them to do

c.because, given De Beers' control of the market, they are confident that the price of diamonds will not plummet rapidly

25

One important source of challenge to De Beers' control of the diamond market is
a.
the additional market supply from Russia, Australia, and Canada
b.
the emerging auction markets for diamonds in France and Spain
c.
the growing demand for diamonds in industrial uses
d.
that its South African mines are not producing as many diamonds as they did decades ago
e.
antitrust legislation in the United States

a.the additional market supply from Russia, Australia, and Canada

26

A monopolist has complete control over both price and quantity of output.
a.
True
b.
False

b. False

27

Maximizing total revenue is the same as maximizing profit.
a.
True
b.
False

b. False

28

A price searcher is any firm that has no control over price and must accept the market price as given.
a.
True
b.
False

b. False

29

The demand curve a monopolist uses in making an output decision is
a.
the same as the demand curve facing a perfectly competitive firm
b.
vertical because there are no close substitutes for its product
c.
horizontal because there are no close substitutes for its product
d.
the same as the market demand curve
e.
perfectly inelastic

d.the same as the market demand curve

30

The demand curve a monopolist faces
a.
is more elastic than a perfectly competitive firm's demand curve
b.
is the market demand curve
c.
is as elastic as a perfectly competitive firm's demand curve
d.
is not affected by the prices of complements
e.
will not shift in response to a change in consumer tastes

b.is the market demand curve

31

The demand curve faced by a firm with a patent on a marketable product
a.
is horizontal
b.
is vertical
c.
slopes upward
d.
slopes downward
e.
is nonexistent

d.slopes downward

32

A monopolist's demand curve is
a.
its marginal cost curve
b.
its marginal revenue curve
c.
identical to the market demand curve
d.
the same as the demand curve of a firm in perfect competition
e.
nonexistent

c.identical to the market demand curve

33

For a monopolist, P < MR at all quantities.
a.
True
b.
False

b. False

34

In order to sell an additional unit of its product, a monopolist must decrease price on all units.
a.
True
b.
False

a. True

35

Average revenue equals the change in total revenue divided by the change in the quantity of output produced.
a.
True
b.
False

b. false

36

Average revenue, demand, and price are all depicted by the same curve for a monopoly.
a.
True
b.
False

a. True

37

A profit-maximizing monopolist will always operate where demand is unit elastic.
a.
True
b.
False

b. False

38

Which of the following is true of marginal revenue for a monopolist that charges a single price?
a.
P = MR because there are no close substitutes for the monopolist's product.
b.
P > MR because the monopolist must decrease price on all units sold in order to sell an additional unit.
c.
P < MR because the monopolist must decrease price on all units sold in order to sell an additional unit.
d.
AR = MR because there are no close substitutes for the monopolist's product.
e.
P = MR only at the profit-maximizing quantity.

b.
P > MR because the monopolist must decrease price on all units sold in order to sell an additional unit.

39

If a monopolist must lower the price on all units in order to sell an additional unit,
a.
it is impossible for the monopolist to maximize profit
b.
the monopolist will always lose profit when it increases quantity
c.
the monopolist will always lose revenue when it increases quantity
d.
price will always be greater than marginal revenue
e.
price will always be less than marginal revenue

d.price will always be greater than marginal revenue

40

For a monopolist, marginal revenue is
a.
equal to price
b.
greater than price
c.
less than price
d.
represented by a horizontal curve
e.
equal to average revenue

c.less than price

41
card image

In Exhibit 9-1, total revenue from selling 5 units is
a.
$20
b.
$140
c.
$100
d.
$10
e.
$5

c.$100

42
card image

In Exhibit 9-1, the marginal revenue of the third unit is
a.
$20
b.
$120
c.
$100
d.
$40
e.
$0

a.$20

43
card image

In Exhibit 9-1, the marginal revenue of the sixth unit is
a.
$10
b.
$60
c.
$100
d.
$40
e.
-$40

e.-$40

44

For a monopolist,
a.
P = MR = AR
b.
P = MR > AR
c.
P > MR = AR
d.
P = MR < AR
e.
P = AR > MR

e. P = AR > MR

45
card image

Between which quantities in Exhibit 9-2 is demand unit elastic?
a.
1 and 2
b.
2 and 3
c.
3 and 4
d.
4 and 5
e.
5 and 6

c. 3 and 4

46
card image

In Exhibit 9-2, the marginal revenue of the fourth unit is
a.
$12
b.
$3
c.
$4
d.
-$4
e.
$0

e.$0

47
card image

In Exhibit 9-2, the average revenue of the fourth unit is
a.
$12
b.
$3
c.
$4
d.
-$4
e.
$0

b.$3

48
card image

The price elasticity of demand between P = $3 and P = $2 in Exhibit 9-2 is
a.
9/5
b.
$1.80
c.
5/9
d.
$0.56
e.
1

c. 5/9

49
card image

From the following demand schedule for a monopolist, what is the marginal revenue associated with the sale of the fourth unit?

a.
$10
b.
$30
c.
$60
d.
$240
e.
marginal revenue cannot be determined from the information given

b. $30

50

As a monopolist increases the quantity of output produced, 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 P falls faster than MR
e.
both P and MR decrease, but MR falls faster than P

e.both P and MR decrease, but MR falls faster than P

51

For a monopolist, as output expands, price and marginal revenue become more divergent (i.e., are farther apart).
a.
True
b.
False

a. True

52

A monopolist's marginal revenue curve is flatter than its demand curve.
a.
True
b.
False

b. False

53

On a graph, to determine the price a profit-maximizing monopolist would charge, find the quantity at which MC and MR intersect and read up to the demand curve.
a.
True
b.
False

a. True

54

A monopolist maximizes total revenue at the quantity where marginal revenue equals zero.
a.
True
b.
False

a. True

55

The demand curve facing a monopolist is perfectly elastic.
a.
True
b.
False

b. False

56

If all of a monopolist's costs are fixed costs, it will produce where demand is unit elastic.
a.
True
b.
False

a. True

57

The demand curve facing a single-price monopolist
a.
is the same as its average revenue curve
b.
is the same as its marginal revenue curve
c.
is the same as the perfect competitor's demand curve
d.
lies above its average revenue curve
e.
lies below its marginal revenue curve

a.is the same as its average revenue curve

58

The demand curve facing a monopolist
a.
is kinked at the market price
b.
is perfectly elastic
c.
lies above its marginal revenue curve
d.
lies below its marginal revenue curve
e.
is the same as its marginal revenue curve

c.lies above its marginal revenue curve

59

For a monopolist,
a.
marginal revenue and price are constant as quantity increases
b.
marginal revenue falls but price is constant as quantity increases
c.
marginal revenue is constant but price falls as quantity increases
d.
both marginal revenue and price fall as quantity increases, but price falls faster
e.
both marginal revenue and price fall as quantity increases, but marginal revenue falls faster

e.both marginal revenue and price fall as quantity increases, but marginal revenue falls faster

60

Suppose that a monopolist must choose between two points on its demand curve; it can sell 100 units for $3 each, or it can sell 160 units for $2 each. Which of the following is true?
a.
The monopolist is facing an elastic demand.
b.
The monopolist is facing unit elastic demand.
c.
The monopolist is facing inelastic demand.
d.
The monopolist is facing perfectly elastic demand.
e.
The elasticity of demand cannot be determined with the information given.

a.The monopolist is facing an elastic demand.

61

Suppose that a monopolist must choose between two points on its demand curve: it can sell 100 units for $3 each, or it can sell 140 units for $2 each. Which of the following is true?
a.
The monopolist is facing elastic demand.
b.
The monopolist is facing unit elastic demand.
c.
The monopolist is facing inelastic demand.
d.
The monopolist is facing perfectly elastic demand.
e.
The elasticity of demand cannot be determined with the information given.

c. The monopolist is facing inelastic demand.

62

Suppose that a monopolist must choose between two points on its demand curve: it can sell 100 units for $3 each, or it can sell 150 units for $2 each. Which of the following is true?
a.
The monopolist is facing elastic demand.
b.
The monopolist is facing unit elastic demand.
c.
The monopolist is facing inelastic demand.
d.
The monopolist is facing perfectly elastic demand.
e.
The elasticity of demand cannot be determined with the information given.

b.The monopolist is facing unit elastic demand.

63

For a monopolist, if marginal revenue is $40, total revenue is
a.
increasing
b.
decreasing
c.
zero
d.
positive
e.
negative

a.increasing

64

What is the relationship between price elasticity of demand and the monopolist's revenue?
a.
marginal revenue is maximized where demand is unit elastic.
b.
average revenue is maximized where demand is unit elastic.
c.
marginal revenue is negative where demand is inelastic.
d.
average revenue is negative where demand is inelastic.
e.
marginal revenue is lowest where demand is unit elastic.

c.marginal revenue is negative where demand is inelastic.

65

Suppose it costs Minnie's Mini-Golf (a monopolist) not a penny more to let another person on the course. If Minnie's faces a linear (downward-sloping) market demand curve, it will maximize profit by choosing the point on the demand curve at which
a.
marginal revenue is greatest
b.
price elasticity is unit elastic
c.
price elasticity is inelastic
d.
price exceeds average total cost by the greatest amount
e.
price exceeds marginal cost by the greatest amount

b.price elasticity is unit elastic

66

A profit-maximizing monopolist
a.
never produces on the inelastic portion of the demand curve because it can increase profit by increasing output
b.
never produces on the inelastic portion of the demand curve because marginal revenue exceeds marginal cost
c.
always produces on the inelastic portion of the demand curve
d.
never produces on the elastic portion of the demand curve because there are no substitutes for the good it produces
e.
never produces on the inelastic portion of the demand curve because marginal revenue is negative there

e. never produces on the inelastic portion of the demand curve because marginal revenue is negative there

67
card image

What is the revenue-maximizing output for the monopolist represented in Exhibit 9-4, assuming it does not price discriminate?
a.
0 units
b.
2 units
c.
3 units
d.
4 units
e.
5 units

e. 5 units

68
card image

What is the profit-maximizing or loss-minimizing output for the monopolist represented in Exhibit 9-4, assuming it does not price discriminate?
a.
0 units
b.
2 units
c.
3 units
d.
4 units
e.
5 units

c. 3 units

69

A monopolist's demand curve
a.
is horizontal at the market price
b.
lies above its marginal revenue curve
c.
is the same as its marginal cost curve
d.
indicates that the firm must raise price to sell additional units
e.
lies above the marginal cost curve at all levels of output

b.lies above its marginal revenue curve

70

A profit-maximizing monopolist never produces along the __________ portion of the demand curve because marginal revenue is __________ there.
a.
elastic; positive
b.
elastic; negative
c.
inelastic; negative
d.
inelastic; positive
e.
inelastic; zero

c. inelastic; negative

71

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
d.
marginal revenue will always be greater than its demand
e.
average revenue will increase continuously as output increases

b. marginal revenue will generally be less than price

72

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
e.
zero

d. less than $10

73

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 increasing at a decreasing rate as output increases
e.
total revenue is decreasing as output increases

e. total revenue is decreasing as output increases

74

If a monopolist is producing a rate of output at which market demand is inelastic,
a.
it may or may not be maximizing its short-run profit
b.
reducing output would reduce both total revenue and total cost
c.
reducing output would increase both total revenue and total cost
d.
reducing output would increase total revenue and reduce total cost
e.
increasing output will increase its short-run economic profit

d. reducing output would increase total revenue and reduce total cost

75

Monopolists always earn positive short-run economic profit.
a.
True
b.
False

b. False

76

A profit-maximizing monopoly will always produce at the minimum point of its average total cost (ATC) curve.
a.
True
b.
False

b. False

77

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
d.
P > AR > MR
e.
P = AR < MR

c. P = AR > MR

78

Which of the following does a monopoly control, that a perfectly competitive firm does not control?
a.
how much to produce
b.
technology
c.
what price to charge
d.
what inputs to use
e.
plant size

c. what price to charge

79

A monopolist maximizes profit at the quantity where its total revenue curve equals total cost.
a.
True
b.
False

b. False

80

A monopolist maximizes profit at the quantity where the slope of its total revenue curve equals the slope of its total cost curve.
a.
True
b.
False

a. True

81

Which of the following is not true of monopolists?
a.
The entry of new firms is not a major concern.
b.
Monopolists seek to maximize profits.
c.
Monopolists can charge any price they want and make a profit.
d.
Monopolists can choose any point on the market demand curve.
e.
Monopolists can raise price more than 10 percent.

c. Monopolists can charge any price they want and make a profit.

82

Suppose a single firm supplies all the ceramic windlasses in the U.S. The demand curve that firm faces is
a.
elastic everywhere
b.
unit elastic everywhere
c.
inelastic everywhere
d.
perfectly inelastic everywhere
e.
elastic at the profit-maximizing quantity

e.
elastic at the profit-maximizing quantity

83

Which of the following is true at the profit-maximizing quantity for both a perfectly competitive firm and a monopoly?
a.
Price equals marginal cost.
b.
Price is greater than marginal cost.
c.
Marginal revenue equals marginal cost.
d.
Marginal revenue is less than marginal cost.
e.
Marginal revenue is greater than average revenue.

c.
Marginal revenue equals marginal cost.

84

A monopolist
a.
can charge whatever price it wants
b.
charges more than almost any consumer is willing to pay
c.
is constrained by marginal cost in setting price
d.
is constrained by demand in setting price
e.
always earns an economic profit

d.
is constrained by demand in setting price

85

A monopolist earning short-run economic profit determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit?
a.
Raise price and lower output.
b.
Lower price and lower output.
c.
Raise price and raise output.
d.
Lower price and raise output.
e.
Lower output but leave price unchanged.

a.
Raise price and lower output.

86

For a monopolist that does not price discriminate, economic profit is maximized in the short run at a price of $140. Marginal revenue at that output level is
a.
equal to $140
b.
greater than $140
c.
less than $140
d.
less than marginal cost
e.
greater than average revenue

c. less than $140

87
card image

What is the profit-maximizing price for the monopolist in Exhibit 9-6?
a.
$14
b.
$11
c.
$10
d.
$9
e.
$8

d. $9

88
card image

What is the maximum profit the monopolist in Exhibit 9-6 can earn?
a.
-$5
b.
$40.80
c.
$43.60
d.
$44.20
e.
$42.60

d. $44.20

89

Irving R. Associates is granted a patent for a new product for which there are no close substitutes. Which of the following must be true at the profit-maximizing quantity?
a.
Price is equal to marginal cost.
b.
Average revenue is equal to marginal cost.
c.
Marginal revenue is positive.
d.
Marginal revenue is less than marginal cost.
e.
Price is greater than average revenue.

c.
Marginal revenue is positive.

90

A monopolist faces an upward-sloping marginal cost curve. Its profit-maximizing quantity will be
a.
at the minimum point of the marginal cost curve
b.
less than the (total) revenue-maximizing quantity
c.
equal to the (total) revenue-maximizing quantity
d.
in the unit elastic segment of the demand curve
e.
in the inelastic segment of the demand curve

b.
less than the (total) revenue-maximizing quantity

91

One likely result of monopoly power is
a.
a wide variety of substitute products from which consumers can choose
b.
an elimination of barriers to industry entry
c.
a decline in government regulation
d.
a higher price than would exist in a competitive industry
e.
an improvement in allocative efficiency

d.
a higher price than would exist in a competitive industry

92

Which of following is true of monopoly and not of perfect competition?
a.
Profit is maximized where marginal cost equals marginal revenue
b.
The industry demand curve is also the firm's demand curve
c.
Normal profits are made only if average total cost equals average revenue
d.
Profit is maximized in the elastic portion of the demand curve
e.
the firm has no control over the market price

b.
The industry demand curve is also the firm's demand curve

93
card image

Consider Exhibit 9-7. What is the profit-maximizing output for a monopolist that does not price discriminate?
a.
1 unit
b.
2 units
c.
3 units
d.
4 units
e.
5 units

c.
3 units

94
card image

In Exhibit 9-7, what is the profit-maximizing price for a monopolist that does not price discriminate?
a.
$36
b.
$32
c.
$28
d.
$24
e.
$20

c. $28

95
card image

In Exhibit 9-7, how much profit is the monopoly earning at the profit-maximizing quantity?
a.
$16
b.
-$20
c.
$32
d.
$34
e.
-$16

d.
$34

96

At the profit-maximizing quantity in Exhibit 9-8, what is the level of profit?
a.
$20
b.
$30
c.
$0
d.
$70
e.
$40

b. $30

97

If marginal cost is positive, which of the following is true?
a.
A monopolist always produces on the inelastic portion of the firm's demand curve.
b.
A monopolist always produces on the inelastic portion of the market demand curve.
c.
A monopolist always produces on the elastic portion of the market demand curve.
d.
A monopolist always produces on the unit elastic portion of the market demand curve.
e.
The presence of a monopolist increases the elasticity of demand.

c.
A monopolist always produces on the elastic portion of the market demand curve.

98

Eli Whitney III receives a patent for the rayon gin, a product for which there are no close substitutes. Eli will maximize his profit when
a.
MR is maximized
b.
MR = MC
c.
MR > MC
d.
MR < MC
e.
P = MR > MC

b.
MR = MC

99

Suppose a monopolist cannot price discriminate. To maximize profit, it will
a. always produce in the inelastic range of its demand curve
b. never produce in the elastic range of its demand curve
c. never produce in the inelastic range of its demand curve
d. never produce in the elastic range of its marginal cost curve
e. produce in the elastic range of the marginal revenue curve

c. never produce in the inelastic range of its demand curve

100

Which of the following is not true of a pure monopoly?
a.
Demand is negatively sloped
b.
Marginal revenue is less than price therefore the firm should consider raising its price until marginal revenue equals demand
c.
Marginal revenue is less than average revenue therefore the firm should consider adjusting its quantity until marginal revenue equals average revenue
d.
It is a price taker
e.
Its position is protected by significant barriers to entry

d. It is a price taker

101

A profit-maximizing monopolist that produces in the short run will
a.
produce the level of output where marginal revenue exceeds marginal cost by the largest amount
b.
increase output as long as the marginal revenue exceeds the marginal cost of producing that unit
c.
produce the level of output where average total cost is at a minimum
d.
increase price as long as the average revenue exceeds the average total cost
e.
produce the level of output where average revenue exceeds average total cost by the largest amount

b. increase output as long as the marginal revenue exceeds the marginal cost of producing that unit

102

In the short run, how will a profit-maximizing monopolist react if its marginal cost suddenly increases? It will
a.
lower price to expand revenue possibilities
b.
restrict output to extract a higher price from customers
c.
maintain the current price if profit is still positive
d.
increase plant size to lower marginal cost
e.
decrease plant size to lower marginal cost

b.
restrict output to extract a higher price from customers

103

Suppose Arf n' Barf restaurant has a monopoly on restaurant food in a certain small town. Their rent, which is one of several fixed costs they pay whether they sell food or not, has gone up. In the short run, the Arf n' Barf should
a.
pay the higher rent and increase menu prices
b.
pay the higher rent and leave menu prices unchanged
c.
pay the higher rent and lower prices
d.
go out of business
e.
shut down

b. pay the higher rent and leave menu prices unchanged

104

Gilligan runs the only dry-cleaning business on a desert isle. If the cost of cleaning fluid falls, he can increase profit by
a. raising price
b. charging the highest price he can
c. using less cleaning fluid
d. lowering price
e. charging a price equal to marginal cost

d. lowering price

105

You are hired as a production analyst at Monopoly-R-Us and you estimate that, at current output, demand is inelastic and marginal cost is positive. You advise your superiors that they can increase profit by
a.
raising price until demand becomes unit elastic
b.
raising price into the elastic range
c.
lowering price until demand becomes unit elastic
d.
lowering price into the elastic range
e.
reduce output without changing price

b.
raising price into the elastic range

106

For a monopolist that produces in the short run and does not price discriminate, price always has to be
a. equal to marginal cost at the profit-maximizing quantity
b. equal to marginal revenue at the profit-maximizing quantity
c. greater than marginal cost at the profit-maximizing quantity
d. less than marginal cost at the profit-maximizing quantity
e. less than marginal revenue at the profit-maximizing quantity

c. greater than marginal cost at the profit-maximizing quantity

107

Suppose the only professional hockey team within 500 miles is the Salt Lake City Slappers team. If the State of Utah imposes a profits tax on sports teams, the Slappers will
a.
raise ticket prices
b.
lower ticket prices to boost sales
c.
maintain ticket prices and suffer a loss in profits
d.
expand the number of home hockey games
e.
reduce the number of home hockey games

c. maintain ticket prices and suffer a loss in profits

108

Suppose Bank-in-the-Box is a monopolist in its market area. If the market wage rate of bank tellers rises, the bank will
a.
maintain price and suffer losses
b.
raise price and earn greater profit
c.
raise price but earn less profit
d.
lower price to boost sales
e.
shut down if AVC is less than price

c.
raise price but earn less profit

109

Suppose that at an output of 1,000 units, a monopolist has marginal cost of $40, marginal revenue of $30, average variable cost of $30, and average total cost of $50. In order to maximize profit or minimize loss in the short run, the firm should
a.
shut down
b.
continue to produce 1,000 units
c.
produce fewer than 1,000 units but still operate
d.
produce more than 1,000 units
e.
increase its plant size to gain economies of scale

c.
produce fewer than 1,000 units but still operate

110

A profit-maximizing monopolist produces an output level at which
a.
marginal revenue is the greatest distance from marginal cost
b.
price is less than marginal cost
c.
the value to society of the last unit produced equals marginal cost
d.
marginal revenue equals marginal cost
e.
consumers wish to purchase less than what is produced because of high monopoly prices

d. marginal revenue equals marginal cost

111

A nondiscriminating monopolist earning positive short-run economic 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
e.
shut down

d.
reduce price and increase output

112

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 output
b. raising price and decreasing output
c. keeping price constant and increasing output
d. reducing price and increasing output
e. shutting down

b. raising price and decreasing output

113

A monopolist's supply curve is the portion of its marginal cost curve above average variable cost.
a. True
b. False

b. False

114

Assuming a constant cost industry, consumer surplus would be greater under monopoly than if the industry were perfectly competitive.
a. True
b. False

b. False

115

When a monopolist practices perfect price discrimination,
a.
consumers receive no consumer surplus
b.
there is allocative inefficiency
c.
there is a deadweight loss
d.
profit is lower than for the nondiscriminating monopolist
e.
total revenue is less than for the nondiscriminating monopolist

a. consumers receive no consumer surplus

116

Under perfect price discrimination,
a.
equilibrium quantity and consumer surplus are the same as under perfect competition
b.
equilibrium quantity is greater and consumer surplus is the same as under perfect competition
c.
equilibrium quantity and consumer surplus are less than under perfect competition
d.
equilibrium quantity is the same but consumer surplus is less than under perfect competition
e.
equilibrium quantity is less but consumer surplus is the same as under perfect competition

d. equilibrium quantity is the same but consumer surplus is less than under perfect competition

117

If a monopolist engages in perfect price discrimination,
a.
the marginal revenue curve becomes steeper
b.
the demand curve also becomes the marginal revenue curve
c.
the demand curve is steeper than the marginal revenue curve
d.
the demand curve is not as steep as the marginal revenue curve
e.
there is no way to define its marginal revenue

b. the demand curve also becomes the marginal revenue curve

118

Which of the following is true of perfect price discrimination compared to charging a single price?
a. Output is greater.
b. Output is the same, but profit is higher.
c. Output is lower, but profit is higher.
d. Output is lower, and profit could be higher or lower.
e. Output is the same, but profit is lower.

a. Output is greater.

119

Which of the following is true of perfect price discrimination?
a.
Profit is lower than it would be without discrimination.
b.
Revenue is higher than it would be without discrimination, but profit is lower.
c.
Average revenue and average cost are both higher than they would be without discrimination, so it is not certain whether profit will be higher.
d.
Consumer surplus is zero.
e.
Profit is zero.

d. Consumer surplus is zero.

120

A monopolist that engages in perfect price discrimination
a. divides all buyers into two mutually exclusive groups
b. refuses to sell to consumers of certain races, sexes, or creeds
c. charges the same price for every unit sold
d. charges a different price for every unit sold
e. charges buyers who want a little of the good a low price and charges buyers who want a lot of the good a high price

d. charges a different price for every unit sold

121

Which of the following is a major criticism of a monopoly as a cause of allocative inefficiency?
a. A monopolist fails to expand output to the level where the consumers' evaluation of an additional unit is just equal to its opportunity cost
b. A monopolist has no incentive to produce efficiently, because even if it pays no attention to the costs of production, it will be guaranteed an economic profit
c. A monopolist will always make profits therefore providing an incentive to keep prices at the level that maximizes consumer surplus
d. A monopolist has an advantage because it can purchase the resources in a competitive market
e. Consumer surplus would no longer be equal to producer surplus

a. A monopolist fails to expand output to the level where the consumers' evaluation of an additional unit is just equal to its opportunity cost

122

A perfectly discriminating monopolist converts every dollar of producer surplus into economic profit.
a. True
b. False

b. false

123

With perfect price discrimination, each consumer is charged the marginal value of each unit consumed.
a. True
b. False

a. True

124

With perfect price discrimination, the firm faces a constant marginal revenue.

a. True
b. False

b. false

125

Suppose that a price-discriminating monopolist divides its market into two segments. The firm will charge the lower price in the market segment where consumers
a.
have relatively less elastic demand
b.
have relatively more elastic demand
c.
attach a higher marginal value to each unit of the good
d.
have perfectly inelastic demand
e.
attach higher average value to units of the good

b. have relatively more elastic demand

126

Suppose that a price-discriminating monopolist divides its market into two segments. In each market segment, price is determined by finding the level of output where that market's
a.
average revenue equals average total cost
b.
average revenue equals average variable cost
c.
marginal revenue equals average total cost
d.
marginal revenue equals marginal cost
e.
marginal cost equals average total cost

d.
marginal revenue equals marginal cost

127

Suppose that a price-discriminating monopolist divides its market into two segments. If the firm sells its product for a price of $42 in the market segment where demand is relatively less elastic, the price in the market segment whose customers' demand is more elastic will be
a.
$42
b.
greater than $42
c.
less than $42
d.
less than marginal revenue in that market segment
e.
equal to marginal revenue in that market segment

c. less than $42

128

Price-discriminating, profit-maximizing monopolists charge higher prices to buyers who have more elastic demand curves.
a. True
b. False

b. false

129

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
e.
the firm must have some market power

b. the firm must exhibit strong economies of scale

130

Price discrimination occurs when a monopolist charges
a.
both c and d
b.
different prices to different buyers for different products
c.
different prices to different groups of buyers, based on differences in the cost of providing the commodity to the buyer
d.
different prices to different groups of buyers for reasons unrelated to the cost of providing the commodity to the buyer
e.
all buyers the same price for the same product

d. different prices to different groups of buyers for reasons unrelated to the cost of providing the commodity to the buyer

131

Which of the following would not be considered price discrimination?
a.
charging higher rates on long distance calls during normal business hours
b.
giving lower air fares to those who buy tickets a month before departure
c.
charging lower prices for senior citizens at museums
d.
getting separate prices for residential and commercial users of natural gas
e.
charging more for BMWs than for Chevrolets

e. charging more for BMWs than for Chevrolets

132

Which of the following would not be considered price discrimination?
a.
setting separate rates for residential and commercial uses of electricity
b.
giving a senior citizen discount at restaurants
c.
renting recently released videos at a higher price than the old classic videos
d.
giving children a discount at the movies
e.
giving students a discount on ski lift tickets

c. renting recently released videos at a higher price than the old classic videos

133

Which of the following is not necessary for price discrimination to occur?
a.
a downward-sloping demand curve facing the firm
b.
control over price by the firm
c.
the firm can easily distinguish groups with different price elasticities
d.
the firm can easily prevent resale of the good by lower-price customers
e.
economies of scale exist

e. economies of scale exist

134

For which of the following products would price discrimination be most difficult?
a. photograph developing
b. tooth extractions
c. airline tickets
d. beer
e. college education

d. beer

135

For which of the following products would price discrimination be easiest?
a. orange juice
b. diamonds
c. compact disks
d. haircuts
e. gasoline

d. haircuts

136

A major fruit juice manufacturer failed in its attempt to engage in price discrimination between students and all other consumers. What is a possible explanation for this failure?
a.
There was nothing to prevent the students from reselling the fruit juice to other consumers.
b.
The fruit juice manufacturer produced in a perfectly competitive market.
c.
The two groups of consumers probably have the same demand elasticity for fruit juice.
d.
The cost of producing the product is relatively high.
e.
Demand for fruit juice is probably inelastic.

a. There was nothing to prevent the students from reselling the fruit juice to other consumers.

137

Why would we be likely to observe dentists engaging in price discrimination?
a. Dental care is expensive.
b. All dentists are basically alike.
c. It is very important to exercise care in choosing a dentist.
d. It is nearly impossible to resell the services of a dentist.
e. The demand for dentists is very inelastic.

d. It is nearly impossible to resell the services of a dentist.

138

Which of the following is not necessary in order for a firm to engage in price discrimination?
a. The producer must face an inelastic demand curve.
b. The producer must face a downward-sloping demand curve.
c. There must be at least two identifiable classes of consumers with different price elasticities of demand.
d. The producer must be able, at little cost, to distinguish between the different classes of buyers.
e. It must be impossible for one buyer to resell to another.

a. The producer must face an inelastic demand curve.

139

Price discrimination will occur whenever a firm faces a downward-sloping demand curve.
a. True
b. False

b. False

140

Which of the following would not be considered price discrimination?
a. Long distance telephone rates are cheaper late at night.
b. Airline fares are cheaper if you reserve several weeks in advance.
c. The price of lettuce is 59 cents a head and two for a dollar.
d. The price of a brand-name prescription drug is higher than the price of a generic brand.
e. Senior citizens pay less for a movie.

d. The price of a brand-name prescription drug is higher than the price of a generic brand.

141

A monopolist price discriminates by
a. charging different buyers different prices for different products
b. charging different buyers different prices for the same product
c. selling at a price below average total cost
d. selling at a price below marginal cost
e. selling at a price above marginal revenue

b. charging different buyers different prices for the same product

142

The practice of charging different prices to different consumers of the same product is called
a.
monopolistic pricing
b.
unit pricing
c.
price discrimination
d.
elasticity pricing
e.
marginal cost pricing

c. price discrimination

143

Firms price discriminate because, by doing so, they obtain a higher profit than by charging a single price.
a. True
b. False

a. true

144

Rent-seeking activities are socially wasteful because they use scarce resources but do not add to society's output.
a.
True
b.
False

a. true

145

Total deadweight loss in society is reduced through rent seeking by monopolists.
a.
True
b.
False

b. false

146

The welfare loss of monopoly is also called
a. converted consumer surplus
b. deadweight loss
c. economic profit under monopoly
d. producer surplus
e. contestable profit

b. deadweight loss

147

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
e.
increases from zero to a high value

a. can be expected to decrease

148

Compared to a perfectly competitive market, a monopoly tends 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 the same price
e. less output and charge a lower price

c. less output and charge a higher price

149

A profit-maximizing monopolist produces an output level that is allocatively inefficient because
a.
price is greater than marginal cost
b.
price is less than marginal cost
c.
marginal revenue is greater than marginal cost
d.
marginal revenue is less than marginal cost
e.
consumers wish to purchase all that is produced

a. price is greater than marginal cost

150

Compared to the productive efficiency of a perfectly competitive firm, a monopolist tends to be
a.
very efficient because it charges a higher price
b.
more efficient because it produces greater output
c.
inefficient
d.
equally efficient, as it also produces where MR = MC
e.
very efficient because it conserves resources by producing less output

c. inefficient

151

Empirical estimates indicate that the annual welfare cost of monopoly in the United States
a.
ranges from less than 1 percent to 5 percent of national income
b.
ranges from 10 percent to 20 percent of national income
c.
is approximately 10 percent of national income
d.
is approximately $1 billion
e.
is approximately $1 trillion

a. ranges from less than 1 percent to 5 percent of national income

152

For a nondiscriminating monopolist, which of the following is false?
a.
The monopolist produces where MR = MC.
b.
The monopolist's marginal revenue curve is the same as its demand curve.
c.
The monopolist will never produce in the inelastic range of its demand curve.
d.
A monopolist is more allocatively inefficient than a perfectly competitive firm.
e.
The monopolist produces where P > MC.

b. The monopolist's marginal revenue curve is the same as its demand curve.

153

Perfectly competitive firms and monopolist firms both maximize profit where
a.
price equals marginal cost
b.
total revenue is maximized
c.
average total cost is minimized
d.
marginal cost equals marginal revenue
e.
price is as high as possible

d. marginal cost equals marginal revenue

154

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
d.
the quantities of various resources which are used
e.
improvements in technology

a. the price they charge for the product

155

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.
the demand curve facing the firm is perfectly elastic for both
d.
price equals marginal revenue for both
e.
price equals average revenue for both

e. price equals average revenue for both

156

Relative to a perfectly competitive market, as long as the monopolist does not benefit from substantial economies of scale,
a.
price and quantity are higher under monopoly
b.
price and quantity are lower under monopoly
c.
quantity is higher and price is lower under monopoly
d.
quantity is lower and price is higher under monopoly
e.
there are no differences in price and quantity

d. quantity is lower and price is higher under monopoly

157

If the government breaks up a constant-cost, nondiscriminating monopoly into a perfectly competitive industry, what would we expect with regard to output and price?
a.
Output and price will decrease.
b.
Output will increase and price will decrease.
c.
Output and price will increase.
d.
Output will decrease and price will increase.
e.
No change.

b. Output will increase and price will decrease.

158

Which of the following conditions would distinguish a competitive firm from a monopolist?
a.
The existence of a demand curve for the firm.
b.
The slope of the demand curve facing the firm.
c.
The rule of profit maximization, i.e., produce where MR = MC.
d.
The relationship between marginal revenue and total revenue.
e.
The existence of diseconomies of scale.

b. The slope of the demand curve facing the firm.

159

When compared to firms in perfect competition, monopolists tend to charge __________ prices and offer __________ quantities of output.
a.
lower; lower
b.
higher; lower
c.
lower; higher
d.
higher; higher
e.
higher; the same

b. higher; lower

160

An important difference between a perfectly competitive firm and a monopolist is that
a.
the perfectly competitive firm tends to be larger
b.
only the monopolist attempts to maximize profit
c.
only the perfectly competitive firm maximizes profit
d.
the perfectly competitive firm faces a horizontal demand curve and the monopolist faces a downward-sloping demand curve
e.
only the monopolist maximizes profit at the quantity where marginal cost equals marginal revenue

d. the perfectly competitive firm faces a horizontal demand curve and the monopolist faces a downward-sloping demand curve

161

One of the ways that a perfectly competitive firm and a nondiscriminating monopolist are different is that
a.
the marginal cost curve is U-shaped for a perfectly competitive firm but not for a monopolist
b.
P = AR for a perfectly competitive firm but not for a monopolist
c.
P = MR for a perfectly competitive firm but not for a monopolist
d.
the average revenue curve and demand curve are the same for a perfectly competitive firm but not for a monopolist
e.
only the monopolist seeks to maximize profits

c. P = MR for a perfectly competitive firm but not for a monopolist

162

What is true at the profit-maximizing quantity for a nondiscriminating monopolist but not true of a perfectly competitive firm?
a.
Price equals marginal cost.
b.
Price is greater than marginal cost.
c.
Marginal revenue equals marginal cost.
d.
Marginal revenue is less than marginal cost.
e.
Marginal revenue is greater than average revenue.

b. Price is greater than marginal cost.

163

What is true at the profit-maximizing quantity for a perfectly competitive firm but not for a nondiscriminating monopoly?
a.
Price equals marginal cost.
b.
Price is greater than marginal cost.
c.
Marginal revenue equals marginal cost.
d.
Marginal revenue is less than marginal cost.
e.
Marginal revenue is greater than average revenue.

a. Price equals marginal cost.

164

In the long run, which of the following is not a problem for a monopolist earning economic profit?
a.
other firms have an incentive to create substitutes for the monopolist's product
b.
technological change tends to break down barriers to entry
c.
patents expire, licenses must be renewed, and new sources of essential resources may be discovered
d.
government often decides to regulate monopolies
e.
all profit will gradually be converted to consumer surplus

e. all profit will gradually be converted to consumer surplus

165

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
e.
price is less than average variable cost at all rates of output

c. there are significant barriers to entry

166

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
e.
face a perfectly elastic demand curve

c. earn long-run economic profits

167

Which of the following statements is true of a monopolist?
a.
The firm charges the highest possible price.
b.
The firm always earns a profit.
c.
The firm might earn a profit in the long run.
d.
The firm generates a larger consumer surplus than a perfectly competitive firm.
e.
The firm is more production efficient than a perfectly competitive firm.

c. The firm might earn a profit in the long run.

168

Sam Edison obtains a patent on his new invention: trinoculars. In the long run,
a.
he can earn only a normal profit
b.
he may suffer an economic loss and stop producing
c.
his monopoly power guarantees him a positive economic profit
d.
he will achieve productive efficiency
e.
he will achieve allocative efficiency

b. he may suffer an economic loss and stop producing

169

Which of the following is true in both perfect competition and monopoly?
a.
Firms produce a differentiated product.
b.
Firms cannot earn economic profit in the long run.
c.
Individual firms have no ability to control the price of their output but must accept the market price.
d.
Firms go out of business in the long run if total revenue cannot cover total cost.
e.
Firms can earn economic profit in the long run.

d. Firms go out of business in the long run if total revenue cannot cover total cost.

170

The main reason a monopolist can earn long-run economic profit, whereas a perfectly competitive firm cannot, is that
a.
monopolists operate under economies of scale
b.
perfectly competitive firms have opportunity costs
c.
demand for the monopolist's output is inelastic
d.
demand for the monopolist's output is elastic
e.
there are no barriers to entry in perfect competition

e. there are no barriers to entry in perfect competition

171

Which of the following would not bar entry into a market?
a.
control by a single firm of an essential resource
b.
the necessity of taking risks when starting a firm
c.
patents
d.
economies of scale
e.
government regulations limiting the number of firms in an industry

b. the necessity of taking risks when starting a firm

172

Barriers to entry
a.
prevent monopolies from earning profit in the long run
b.
prevent monopolies from earning profit in the short run
c.
may allow monopolies to earn profit in the long run
d.
prevent government from regulating a monopoly
e.
prevent a natural monopoly from raising its price

c. may allow monopolies to earn profit in the long run

173

Monopolists can earn positive economic profits in the long run because they are more productively efficient than perfectly competitive firms.
a.
True
b.
False

b. false

174

Which of the following falsely describes a nondiscriminating monopolist at profit maximization?
a.
Price is greater than marginal cost.
b.
Economic profit is always positive.
c.
Marginal revenue is equal to marginal cost.
d.
Marginal revenue will typically be less than price.
e.
Average total cost will not be at a minimum.

b. Economic profit is always positive.

175

For a monopolist, there is no supply curve because
a.
the supply curve is the same as the marginal cost curve
b.
the monopolist does not maximize profit
c.
the quantity supplied is independent of marginal cost
d.
the quantity supplied is independent of demand
e.
there is no unique relationship between price and quantity supplied

e. there is no unique relationship between price and quantity supplied

176

The supply curve for a monopolist
a.
is its marginal cost curve
b.
is vertical because there are no close substitutes for its product
c.
is horizontal because there are no close substitutes for its product
d.
slopes upward
e.
does not exist

e. does not exist

177

Eli Whitney III receives a patent for the rayon gin, a product for which there are no close substitutes. Eli will maximize his profit when
a.
MR is maximized
b.
MR = MC
c.
MR > MC
d.
MR < MC
e.
P = MR > MC

b. MR = MC

178

Suppose a monopolist cannot price discriminate. To maximize profit, it will
a.
always produce in the inelastic range of its demand curve
b.
never produce in the elastic range of its demand curve
c.
never produce in the inelastic range of its demand curve
d.
never produce in the elastic range of its marginal cost curve
e.
produce in the elastic range of the marginal revenue curve

c. never produce in the inelastic range of its demand curve

179

Which of the following is not true of a pure monopoly?
a.
Demand is negatively sloped
b.
Marginal revenue is less than price therefore the firm should consider raising its price until marginal revenue equals demand
c.
Marginal revenue is less than average revenue therefore the firm should consider adjusting its quantity until marginal revenue equals average revenue
d.
It is a price taker
e.
Its position is protected by significant barriers to entry

d. It is a price taker

180

A profit-maximizing monopolist that produces in the short run will
a.
produce the level of output where marginal revenue exceeds marginal cost by the largest amount
b.
increase output as long as the marginal revenue exceeds the marginal cost of producing that unit
c.
produce the level of output where average total cost is at a minimum
d.
increase price as long as the average revenue exceeds the average total cost
e.
produce the level of output where average revenue exceeds average total cost by the largest amount

b. increase output as long as the marginal revenue exceeds the marginal cost of producing that unit

181

In the short run, how will a profit-maximizing monopolist react if its marginal cost suddenly increases? It will
a.
lower price to expand revenue possibilities
b.
restrict output to extract a higher price from customers
c.
maintain the current price if profit is still positive
d.
increase plant size to lower marginal cost
e.
decrease plant size to lower marginal cost

b. restrict output to extract a higher price from customers

182

Suppose Arf n' Barf restaurant has a monopoly on restaurant food in a certain small town. Their rent, which is one of several fixed costs they pay whether they sell food or not, has gone up. In the short run, the Arf n' Barf should
a.
pay the higher rent and increase menu prices
b.
pay the higher rent and leave menu prices unchanged
c.
pay the higher rent and lower prices
d.
go out of business
e.
shut down

b. pay the higher rent and leave menu prices unchanged

183

Gilligan runs the only dry-cleaning business on a desert isle. If the cost of cleaning fluid falls, he can increase profit by
a.
raising price
b.
charging the highest price he can
c.
using less cleaning fluid
d.
lowering price
e.
charging a price equal to marginal cost

d. lowering price

184

You are hired as a production analyst at Monopoly-R-Us and you estimate that, at current output, demand is inelastic and marginal cost is positive. You advise your superiors that they can increase profit by
a.
raising price until demand becomes unit elastic
b.
raising price into the elastic range
c.
lowering price until demand becomes unit elastic
d.
lowering price into the elastic range
e.
reduce output without changing price

b. raising price into the elastic range

185

For a monopolist that produces in the short run and does not price discriminate, price always has to be
a.
equal to marginal cost at the profit-maximizing quantity
b.
equal to marginal revenue at the profit-maximizing quantity
c.
greater than marginal cost at the profit-maximizing quantity
d.
less than marginal cost at the profit-maximizing quantity
e.
less than marginal revenue at the profit-maximizing quantity

c. greater than marginal cost at the profit-maximizing quantity

186

Suppose the only professional hockey team within 500 miles is the Salt Lake City Slappers team. If the State of Utah imposes a profits tax on sports teams, the Slappers will
a.
raise ticket prices
b.
lower ticket prices to boost sales
c.
maintain ticket prices and suffer a loss in profits
d.
expand the number of home hockey games
e.
reduce the number of home hockey games

c.
maintain ticket prices and suffer a loss in profits

187

Suppose Bank-in-the-Box is a monopolist in its market area. If the market wage rate of bank tellers rises, the bank will
a.
maintain price and suffer losses
b.
raise price and earn greater profit
c.
raise price but earn less profit
d.
lower price to boost sales
e.
shut down if AVC is less than price

c. raise price but earn less profit

188

Suppose that at an output of 1,000 units, a monopolist has marginal cost of $40, marginal revenue of $30, average variable cost of $30, and average total cost of $50. In order to maximize profit or minimize loss in the short run, the firm should
a.
shut down
b.
continue to produce 1,000 units
c.
produce fewer than 1,000 units but still operate
d.
produce more than 1,000 units
e.
increase its plant size to gain economies of scale

c. produce fewer than 1,000 units but still operate

189

A profit-maximizing monopolist produces an output level at which
a.
marginal revenue is the greatest distance from marginal cost
b.
price is less than marginal cost
c.
the value to society of the last unit produced equals marginal cost
d.
marginal revenue equals marginal cost
e.
consumers wish to purchase less than what is produced because of high monopoly prices

d.
marginal revenue equals marginal cost

190

A nondiscriminating monopolist earning positive short-run economic 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
e.
shut down

d. reduce price and increase output

191

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 output
b.
raising price and decreasing output
c.
keeping price constant and increasing output
d.
reducing price and increasing output
e.
shutting down

b. raising price and decreasing output

192

Adam Matsumi is an attorney who can charge legal fees above the competitive level because entry of new competitors is made more difficult by the need to hold a(n)
a.
state license
b.
patent
c.
essential resource
d.
economy of scale
e.
copyright

a. state license

193

Which of the following is not an example of De Beers trying to increase consumer demand?
a.
sending the marketing message that a diamond last forever and so should love
b.
ads that illustrate that a diamond should remain in the family and not be sold
c.
informing potential customers about how diamonds lose monetary value over time
d.
introducing the idea of the diamond engagement ring
e.
the “spirit ring” as a sign of independence

c. informing potential customers about how diamonds lose monetary value over time

194

Consumer concern about “blood diamonds” or “conflict diamonds” may have caused a drop in De Beers sales.
a.
True
b.
False

a. True

195

Which of the following is an example of a local monopoly?
a.
a restaurant at a rural crossroads
b.
Alcoa during the 19th century
c.
De Beers Consolidated Mines
d.
AT&T
e.
U.S. Postal Service

a. a restaurant at a rural crossroads

196

Because some monopolies could still earn an economic profit even if the firm is inefficient, corporate executives might waste resources by indulging in
a.
long lunches
b.
corporate jets
c.
plush offices
d.
None of the answers is correct.
e.
All of the answers are correct.

e. All of the answers are correct.

197

Business-class airline tickets cost much more than coach-class tickets because, compared to householders, businesspeople’s demand for travel is
a.
equally elastic
b.
unitary elastic
c.
more elastic
d.
less elastic
e.
not a factor in the cost of airline tickets

d. less elastic

198

Which of the following is not an example of price discrimination?
a.
IBM charges business users of its laser printer more than home users
b.
Intel offered faster and slower versions of a computer chip
c.
An amusement park charges the same admission fee to local residents and out-of-towners
d.
Adobe stripped some features from Photoshop to offer a cheaper version
e.
Holders of Nevada driver’s licenses pay less to ride the Las Vegas monorail

c. An amusement park charges the same admission fee to local residents and out-of-towners

199

Cell phone companies offer pricing plan alternatives in order to convert some
a.
consumer surplus into profit
b.
producer surplus into profit
c.
economic profit into normal profit
d.
profit into consumer surplus
e.
consumer surplus into deadweight loss

a. consumer surplus into profit


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