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Foundations of Microeconomics, 5e (Bade/Parkin)
Chapter 15 Monopoly
15.1 Monopoly and How it Arises
1) A major characteristic of monopoly is
A) a single seller of a product.
B) multiple sellers of a product.
C) two sellers of a product.
D) a few sellers of differentiated products.
E) a few sellers of an identical product.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: JC
AACSB: Reflective thinking
2) A monopoly is a market with
A) many suppliers each producing an identical product.
B) no barriers to entry.
C) many substitutes.
D) one supplier.
E) many suppliers each producing a slightly different product.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: SB
AACSB: Reflective thinking
3) The good produced by a monopoly
A) has perfect substitutes.
B) has no substitutes at all.
C) has no close substitutes.
D) can be easily duplicated.
E) must be unable to be resold.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
1
Copyright © 2011 Pearson Education, Inc.
4) One of the requirements for a monopoly is that
A) products are high priced.
B) there are several close substitutes for the product.
C) there is a unique product with no close substitutes.
D) the product cannot be produced by small firms.
E) there is no barrier to entry.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
5) We define a monopoly as a market with
A) one supplier and no barriers to entry.
B) one supplier with barriers to entry.
C) many suppliers with no barriers to entry.
D) many suppliers with barriers to entry.
E) a few suppliers and barriers to entry.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: WM
AACSB: Reflective thinking
6) Which of the following is a characteristic of monopoly?
A) The firm faces competition from many other firms.
B) The firm produces a product that has many close substitutes.
C) There are barriers to enter the market.
D) The firm's demand curve is perfectly elastic.
E) The firm produces a product identical to that produced by its many competitors.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: MR
AACSB: Reflective thinking
2
Copyright © 2011 Pearson Education, Inc.
7) A monopoly produces a product ________ and there ________ barriers to entry into the
market.
A) identical to its many competitors; are
B) with no close substitutes; are
C) identical to its many competitors; are no
D) with no close substitutes; are no
E) slightly different from those of its many competitors; are
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: PH
AACSB: Reflective thinking
8) A monopoly
A) is not protected by barriers to entry.
B) produces a good with no close substitutes.
C) faces a downward-sloping demand curve.
D) Both answers A and B are correct.
E) Both answers B and C are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
9) A monopoly
A) must determine the price it will charge.
B) faces extensive competition from firms making close substitutes.
C) cannot price discriminate because such a pricing strategy is illegal in the United States.
D) has no control over the price it must charge.
E) Both answers B and C are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
3
Copyright © 2011 Pearson Education, Inc.
10) A major characteristic of monopoly is that
A) no barriers to entry exist.
B) the product is identical to that produced by other companies.
C) a barrier to entry keeps out competitors.
D) competition is intense.
E) a few firms compete with each other.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: JC
AACSB: Reflective thinking
11) Which of the following firms is most likely to be a monopoly?
A) local restaurant
B) local distributor natural gas
C) local book store
D) clothing store
E) local bank
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: MR
AACSB: Reflective thinking
12) An example of a monopoly would be
A) one of many U.S. wheat farmers.
B) one of the few U.S. auto makers.
C) AT&T cell phone service.
D) the local water company.
E) Taco Bell
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: MR
AACSB: Reflective thinking
4
Copyright © 2011 Pearson Education, Inc.
13) Which of the following describes a barrier to entry?
A) something that establishes a barrier to expanding output
B) anything that protects a firm from the arrival of new competitors
C) a government regulation that bars a monopoly from earning an economic profit
D) firms already in the market incurring economic losses so that no new firm wants to enter the
market
E) Firms are legally prohibited from exiting the market in order to enter another market.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
14) A barrier to entry is
A) the economic term for diseconomies of scale.
B) illegal in most markets.
C) anything that protects a firm from the arrival of new competitors.
D) a factor that increases competition because firms must continue to operate in the market in
which they were founded.
E) the same as rent seeking.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: SB
AACSB: Reflective thinking
15) A natural barrier to entry is defined as a barrier that arises because of
A) technology that allows economies of scale over the entire relevant range of output.
B) patents or licenses that exclude others from producing a good or service.
C) many firms producing the good and thereby allowing choice for all consumers.
D) anticompetitive practices by a firm that keep other firms from producing.
E) one firm owning a key natural resource.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: WM
AACSB: Reflective thinking
5
Copyright © 2011 Pearson Education, Inc.
16) Natural barriers to entry arise when, over the relevant range of output, there
A) are diseconomies of scale.
B) are constant returns to scale.
C) are several firms who produce at the lowest average cost.
D) are economies of scale.
E) is one firm that owns a key natural resource.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: WM
AACSB: Reflective thinking
17) A natural monopoly exists when
A) diseconomies of scale exist in an industry.
B) one firm can supply an entire market at a lower average total cost than can two or more firms.
C) a firm can engage in price discrimination.
D) the producers in an industry have formed a cartel.
E) a monopoly firm faces a horizontal demand curve.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: PH
AACSB: Reflective thinking
18) If a single firm can meet the entire market demand at a lower average total cost than a larger
number of smaller firms, the single firm is
A) price discriminating.
B) a natural monopoly.
C) a legal monopoly.
D) efficient when profit maximizing.
E) an ownership-of-the-market monopoly.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: MR
AACSB: Reflective thinking
6
Copyright © 2011 Pearson Education, Inc.
19) A natural monopoly is one that arises from
A) patent law.
B) economies of scale.
C) copyright law.
D) any government-imposed barrier to entry.
E) mergers.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: JC
AACSB: Reflective thinking
20) A natural monopoly
A) arises as a result of legal barriers to entry.
B) occurs when one firm controls a natural resource.
C) arises when one firm can meet the entire market demand at a lower average total cost than
two or more firms.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
21) Which of the following would create a natural monopoly?
A) ownership of all the available units of a necessary input
B) an exclusive right granted to supply a good or service
C) requirement of a government license before the firm can sell the good or service
D) technology enabling a single firm to produce at a lower average cost than two or more firms
E) a patent granted the producer of the good or service
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
7
Copyright © 2011 Pearson Education, Inc.
22) If the technology for producing a good enables one firm to meet the entire market demand at
a lower average total cost than two or more firms could, then that firm has
A) patented the market.
B) a natural monopoly.
C) increasing average total costs.
D) a legal barrier to entry.
E) a discriminatory monopoly.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: SB
AACSB: Reflective thinking
23) For a natural monopoly, economies of scale
A) exist along the long-run average cost curve at least until it crosses the market demand curve.
B) and diseconomies of scale exist along the long-run average cost curve at least until it crosses
the market demand curve.
C) lead to a legal barrier to entry.
D) as well as constant returns to scale and diseconomies of scale exist along the long-run average
cost curve at least until it crosses the market demand curve..
E) are totally absent.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
24) A natural monopoly arises when
A) one firm controls the supply of a unique resource.
B) a firm has many small firms that it can control.
C) there are firms which act together as a monopoly.
D) the long-run average cost curve slopes downward as it crosses the demand curve.
E) one firm naturally convinces the government to limit competition in the market.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: WM
AACSB: Reflective thinking
8
Copyright © 2011 Pearson Education, Inc.
25) A natural monopoly's average cost curve
i. intersects the demand curve while the average cost curve slopes downward.
ii. reaches its minimum before it intersects the demand curve.
iii. intersects the demand curve below the intersection of the marginal cost curve and the demand
curve.
A) i only.
B) ii only.
C) iii only.
D) i and iii.
E) i, ii, and iii.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
26) The long-run average cost curve of a natural monopoly
A) is positively sloped until it crosses the demand curve.
B) intersects the demand curve while it is negative sloped.
C) intersects the demand curve while it is positively sloped.
D) is the natural monopoly's supply curve.
E) is the same as the natural monopoly's demand curve.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
27) Which of the following is an example of a natural monopoly?
A) the Pittsburgh Penguins hockey team, a National Hockey League team
B) Ford Motors, the large automobile producing company
C) Florida Power and Light, an electric utility in Florida
D) Sony, the Japanese producer of the Playstation III
E) JCPenney, the large department store chain
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: JC
AACSB: Reflective thinking
9
Copyright © 2011 Pearson Education, Inc.
28) Which of the following is an example of a natural monopoly?
A) the trademark protecting Gatorade
B) the talents of Tom Hanks
C) the local water company
D) the patent on an Intel processor
E) Debeers' ownership of a large fraction of the world's diamonds
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: JC
AACSB: Reflective thinking
29) Which of the following goods is the best example of a natural monopoly?
A) distribution of electricity
B) diamonds
C) first-class mail
D) a patented good
E) blouses
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: SB
AACSB: Reflective thinking
30) Which of the following is the best example of a natural monopoly?
A) ownership of the only ferry across Puget Sound for twenty miles
B) the United States Postal Service
C) the cable television company in your hometown
D) owning the only licensed taxicab in town
E) producing a patented drug
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
10
Copyright © 2011 Pearson Education, Inc.
31) Ownership of a necessary input creates what type of barrier to entry?
A) legal barrier to entry
B) natural barrier to entry
C) a public franchise
D) a government license
E) ownership barrier to entry
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
32) Which of the following is a legal barrier to entry?
i) public franchise
ii) government license
iii) patent
A) iii only
B) i and iii
C) ii and iii
D) i, ii, and iii
E) i and ii
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: CD
AACSB: Reflective thinking
33) A monopoly will arise if
A) two out of three of a town's pizzerias go out of business and only one new pizzeria opens.
B) the town council passes a law granting Nick's Pizza the exclusive right to operate in that town.
C) Papa Joe's Pizza becomes the largest pizza producer in town and Nick's Pizza stays small in
size.
D) several big pizza chains force several small pizzerias out of business.
E) people decide they like pizza more than before so some pizzeria's gain new customers.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
11
Copyright © 2011 Pearson Education, Inc.
34) Which of the following can be a barrier to entry?
i. ownership of a necessary input
ii. requiring a government license
iii. large diseconomies of scale
A) i only
B) ii only
C) i and iii
D) i and ii
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
35) Which barrier to entry is an exclusive right granted to the author or composer of a literary,
musical, dramatic or artistic work?
A) patent
B) copyright
C) public franchise
D) government license
E) natural barrier
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: SB
AACSB: Reflective thinking
36) The U.S. Postal Service has a monopoly over first-class mail service because
A) the government has granted this agency a public franchise.
B) stamps are copyrighted.
C) stamps are trademarked.
D) stamps are patented.
E) it owns a vital resource, namely all mailboxes.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: JC
AACSB: Reflective thinking
12
Copyright © 2011 Pearson Education, Inc.
37) The U.S. Postal Service's monopoly on first-class mail service is the result of
A) a natural monopoly.
B) a patent.
C) a public franchise.
D) a government license.
E) an ownership barrier to entry.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: CD
AACSB: Reflective thinking
38) The makers of the movie Beowulf have some monopoly power over this film because the
A) movie is patented.
B) name Beowulf is trademarked.
C) movie is protected by copyright law.
D) government has issued the maker of this movie a public franchise.
E) owner never price discriminated in marketing the movie.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: JC
AACSB: Reflective thinking
39) Patents
i. encourage the invention of new products and production methods.
ii. generally discourage innovation
iii. are exclusive rights granted to the inventor of a product or service.
A) i only
B) ii only
C) ii and iii
D) i and iii
E) i, ii, and iii
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: SB
AACSB: Reflective thinking
13
Copyright © 2011 Pearson Education, Inc.
40) Patents
A) are granted only to competitive firms and not monopolies.
B) require that monopolies increase the amount they produce.
C) increase the incentive to capture economies of scale.
D) increase the incentive to innovate.
E) grant the holder a monopoly that lasts forever.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: MR
AACSB: Reflective thinking
41) Patents
A) are a legal barrier to entry.
B) remove legal barriers to entry.
C) create economies of scale.
D) decrease the incentive to innovate.
E) are prohibited in the United States.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: MR
AACSB: Reflective thinking
42) To encourage invention and innovation, the government provides
A) patents.
B) public franchises.
C) government licenses.
D) natural monopolies.
E) easily obtained ownership barriers to entry.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: PH
AACSB: Reflective thinking
14
Copyright © 2011 Pearson Education, Inc.
43) Which of the following is NOT correct about patents?
A) Patents encourage invention of new products.
B) Patents stimulate innovation.
C) A patent is a barrier to entry.
D) Patents enable a firm to be a permanent monopoly.
E) Patents are granted to the inventor of a product or service.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
44) Which of the following is an example of a person or firm that is most likely to have been
granted a public franchise?
A) medical doctor
B) taxi cab driver
C) the local pizza parlor
D) the local telephone company
E) the local Honda dealership
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
45) Which of the following statements is correct?
A) Monopolies are guaranteed to earn an economic profit.
B) The market demand and the firm's demand are the same for a monopoly.
C) Monopolies have perfectly inelastic demand for the product sold.
D) Because a monopoly is the only firm in the market, its supply curve is the same as the market
demand curve.
E) Because a monopoly is the only firm in the market, its marginal revenue curve must be the
same as the market demand curve.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
15
Copyright © 2011 Pearson Education, Inc.
46) A monopoly is
A) a price taker.
B) able to ignore the demand for its product when setting its price.
C) able to set the price for its product.
D) able to earn only a normal profit in the long run.
E) a firm with no marginal revenue curve.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
47) If a monopoly wants to sell a larger quantity, it must
A) set a higher price.
B) maintain the current price.
C) set a lower price.
D) implement new technology.
E) increase the barrier to entry that protects it.
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: SB
AACSB: Reflective thinking
48) A gas station in the mountains of Oregon has a monopoly over the retail gas market within a
50-mile radius. The station decides not to price discriminate. As a result, all consumers will pay
A) the highest price each consumer is willing to pay.
B) the lowest price possible.
C) a single price.
D) multiple prices.
E) a price that depends on their willingness to pay.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: JC
AACSB: Reflective thinking
16
Copyright © 2011 Pearson Education, Inc.
49) A single-price monopoly
A) sets a single, different price for each consumer.
B) sets a single price for all consumers.
C) asks each consumer what single price they would be willing to pay.
D) sets a single, different price for each of two different groups.
E) sells each unit of its output for the single, highest price that the buyer of that unit is willing to
pay.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: WM
AACSB: Reflective thinking
50) A single-price monopoly
A) charges all of its customers a different price for the good or service.
B) sells all of its output at different prices.
C) sells each unit of output for the same price to all of its customers.
D) sells its output to wholesale customers at a different price than it sells to retail customers.
E) does not need to lower its price to sell more output.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: PH
AACSB: Reflective thinking
51) A price-discriminating monopoly is a monopoly that
A) sells its output at a single price to all of its customers.
B) sells different units of a good or service at different prices.
C) has control over the resources used to produce the product.
D) has a license to sell the product.
E) illegally charges different customers different prices for the good it produces.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: PH
AACSB: Reflective thinking
17
Copyright © 2011 Pearson Education, Inc.
52) Price discrimination occurs when a firm
A) charges customers different prices for different goods.
B) is able to sell different units of a good at different prices.
C) charges customers the same price for different goods.
D) can determine which of the many market equilibrium prices it will charge.
E) has a marginal cost curve that is horizontal.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: SB
AACSB: Reflective thinking
53) Price discrimination is
A) always illegal in the United States.
B) defined as charging the same price to all consumers.
C) defined as charging different prices for different units.
D) setting the price to minimize the quantity sold.
E) Both answers A and C are correct.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: WM
AACSB: Reflective thinking
54) A ________ monopoly sells different units of its good or service for ________.
A) price-discriminating; different prices
B) price-discriminating; the same price
C) single-price; the same price
D) single-price; different prices
E) Both Answers A and C are correct.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: CD
AACSB: Reflective thinking
18
Copyright © 2011 Pearson Education, Inc.
55) To be able to price discriminate, a firm must
A) have a public franchise.
B) be a natural monopoly.
C) be able to prevent resales of its good.
D) have a patent.
E) have an ownership barrier to entry.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: CD
AACSB: Reflective thinking
56) Which of the following statements is correct?
A) Any firm can price discriminate.
B) Only firms that sell high-priced products can price discriminate.
C) In order to price discriminate, a firm must sell a good or service that cannot be resold.
D) In order to price discriminate, the firms must sell a low-priced product.
E) Price discrimination is always illegal.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
57) Price discrimination is prevented in situations where
A) customers can resell the good.
B) firms have monopolies.
C) there are legal barriers to entry.
D) there are no close substitutes for the good or service.
E) customers have different willingnesses to pay for the good.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SB
AACSB: Reflective thinking
19
Copyright © 2011 Pearson Education, Inc.
58) In order for a hotel to successfully price discriminate so that senior citizens are given a
discount, the hotel must be able to
A) offset the economic loss from charging senior citizens a lower price by lowering the marginal
cost of renting rooms to senior citizens.
B) lower its prices to younger customers too.
C) prevent senior citizens from reselling their rooms to younger customers.
D) shift its demand curve rightward.
E) determine if a senior citizen can pay a higher price.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: JC
AACSB: Reflective thinking
59) Which of the following is an example of price discrimination?
A) UPS charges more if a package is sent from New York to Hawaii and less if it is sent from
New York to New Jersey.
B) Frank's Furniture shop charges no delivery fee for furniture delivered within Dutchess County
but charges $40 delivery fee outside of the county.
C) Albert pays 25 percent less on prescription drugs because he is a senior citizen.
D) Only answers A and B are correct.
E) Answer A, answer B, and answer C are all correct.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
60) Firms that can effectively price discriminate
A) can be either perfectly competitive firms or monopolies.
B) can prevent the resale of their products.
C) have only one class of buyers, buyers willing to pay a high price.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
20
Copyright © 2011 Pearson Education, Inc.
61) A monopoly market has
A) a few firms.
B) a single firm.
C) two dominating firms in the market.
D) only two firms in it.
E) some unspecified number of firms in it.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: STUDY GUIDE
AACSB: Reflective thinking
62) Two types of barriers to entry are called ________ barriers to entry and ________ barriers to
entry.
A) legal; illegal
B) natural; legal
C) natural; illegal
D) natural; rent seeking
E) ownership; rent seeking
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: STUDY GUIDE
AACSB: Reflective thinking
63) A natural monopoly is one that arises from
A) patent law.
B) copyright law.
C) a firm buying all of a natural resource.
D) economies of scale.
E) ownership of a natural resource.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: STUDY GUIDE
AACSB: Reflective thinking
21
Copyright © 2011 Pearson Education, Inc.
64) A legal barrier is created when a firm
A) has economies of scale, which allow it to produce at a lower cost than two or more firms.
B) is granted a public franchise, government license, patent, or copyright.
C) produces a unique product or service.
D) produces a standardized product or service.
E) has an ownership barrier to entry.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: STUDY GUIDE
AACSB: Reflective thinking
65) Pizza producers charge one price for a single pizza and almost give away a second one. This
is an example of
A) monopoly.
B) a barrier to entry.
C) behavior that is not profit-maximizing.
D) price discrimination.
E) rent seeking.
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: STUDY GUIDE
AACSB: Reflective thinking
15.2 Single-Price Monopoly
1) The demand curve for a monopoly is
A) horizontal because the demand is perfectly elastic.
B) downward sloping.
C) vertical because the demand is perfectly inelastic.
D) upward sloping.
E) undefined because it is the only supplier in the market.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: SA
AACSB: Reflective thinking
22
Copyright © 2011 Pearson Education, Inc.
2) If a monopoly wants to sell a greater quantity of output, it must
A) lower its price.
B) raise its price.
C) tell consumers to buy more because it's a monopolist.
D) raise its marginal cost.
E) change its fixed costs.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: WM
AACSB: Reflective thinking
3) A single-price monopoly
A) must practice price discrimination.
B) can lower its price for only a few select consumers if it wants to increase its sales.
C) will set its price equal to a consumer's willingness to pay.
D) must lower the price for all customers if it wants to increase its sales.
E) is able to raise its price as high as it wants and consumers must still buy from it because it is a
monopoly.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: SA
AACSB: Reflective thinking
4) Total revenue is equal to
A) the change in price resulting from a one-unit increase in quantity sold.
B) the amount people will buy at a given price.
C) the change in the quantity sold when you change the price by one unit.
D) price multiplied by the quantity sold.
E) the price at which the good or service is sold.
Skill: Level 1: Definition
Section: Checkpoint 15.2
Author: WM
AACSB: Reflective thinking
23
Copyright © 2011 Pearson Education, Inc.
5) For a monopoly, marginal revenue is equal to
A) the amount people buy at a given price.
B) the amount people buy between two prices.
C) the change in total revenue brought about by a one-unit increase in quantity sold.
D) the price multiplied by the quantity sold.
E) the price of the product.
Skill: Level 1: Definition
Section: Checkpoint 15.2
Author: WM
AACSB: Reflective thinking
6) For a single-price monopoly, price is
A) equal to marginal revenue.
B) greater than marginal revenue.
C) less than marginal revenue because the firm must lower its price in order to sell another unit
of output.
D) less than marginal revenue because the firm cannot increase its total revenue when the
demand curve is downward sloping.
E) equal to zero because the firm is not a price taker.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: PH
AACSB: Reflective thinking
7) Which of the following is always true for a single-price monopolist?
A) P > MR
B) P < MR
C) P = MR
D) P = elasticity of demand
E) None of the above answers is correct because none of them is always true.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: MR
AACSB: Reflective thinking
24
Copyright © 2011 Pearson Education, Inc.
8) For a single-price monopolist, why is marginal revenue less than price?
A) Because the firm is a price taker
B) To sell another unit, the price must be lowered.
C) Demand is elastic when another unit is sold.
D) Demand is inelastic when another unit is sold.
E) The question is false because marginal revenue is always equal to price.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: TS
AACSB: Reflective thinking
9) The marginal revenue for a single-price monopoly with a downward-sloping demand curve
A) is less than the price.
B) is greater than the price.
C) is equal to the price.
D) might be more than, less than, or equal to the price, depending on whether the slope of the
demand curve exceeds 1.0 in magnitude.
E) might be more than, less than, or equal to the price, depending on whether the price elasticity
of demand exceeds 1.0 in magnitude.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: SA
AACSB: Reflective thinking
10) A single-price monopoly faces a linear demand curve. If the marginal revenue for the second
unit is $20, then the marginal revenue for the
A) first unit is less than $20.
B) third unit is less than $20.
C) third unit is more than $20.
D) third unit is also $20.
E) more information is needed to determine if the marginal revenue for the third unit is more
than, less than, or equal to $20.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SA
AACSB: Analytical reasoning
25
Copyright © 2011 Pearson Education, Inc.
11) A single-price monopoly can sell 2 units for $8.50 per unit. In order to sell 3 units, the price
must be $8.00 per unit. The marginal revenue from selling the third unit is
A) $24.00.
B) $8.50.
C) $7.00.
D) $6.50.
E) $17.00.
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: PH
AACSB: Analytical reasoning
12) A single-price monopoly can sell 10 units of its product at a price of $45 each but to sell 11
units, the monopoly must cut the price to $44. What is the marginal revenue of the extra unit
sold?
A) $484
B) $450
C) $44
D) $34
E) -$1
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: TS
AACSB: Analytical reasoning
13) Suppose a monopoly can sell 10 units of output for $21. In order to sell 11 units of output,
the price must fall to $20. What is the marginal revenue of the 11th unit?
A) $41
B) $20
C) $10
D) $1
E) $220
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: SB
AACSB: Analytical reasoning
26
Copyright © 2011 Pearson Education, Inc.
14) Suppose a single-price monopoly sells 3 units of a good at $20 per unit. If the monopoly sells
4 units, the total revenue increases to $72. What is the marginal revenue of the fourth unit?
A) $52
B) $18
C) $60
D) $12
E) $20
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: SA
AACSB: Analytical reasoning
15) Suppose a single-price monopoly sells 3 units of a good at $20 per unit. If the monopoly sells
4 units, the total revenue increases to $72. What price is being charged for 4 units?
A) $52 each
B) $18 each
C) $60 each
D) $12 each
E) $20 each
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: SA
AACSB: Analytical reasoning
27
Copyright © 2011 Pearson Education, Inc.
Price
(dollars
per
haircut)
Quantity
demanded
(haircuts per
day)
5 50
10 40
15 30
20 20
25 10
30 0
16) Christy's Haircuts, the sole supplier of haircuts in a small town, faces the demand schedule
shown in the table above. What is Christy's marginal revenue from the 25th haircut?
A) zero
B) $5.00
C) $17.50
D) $50.00
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: MR
AACSB: Analytical reasoning
17) Christy's Haircuts, the sole supplier of haircuts in a small town, faces the demand schedule
shown in the table above. What is Christy's marginal revenue from the 35th haircut?
A) zero
B) -$5.00
C) $5.00
D) $12.50
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: MR
AACSB: Analytical reasoning
28
Copyright © 2011 Pearson Education, Inc.
Quantity
(units)
Price
(dollars
per unit)
1 8
2 7
3 6
4 5
5 4
6 3
18) The table above gives the demand for a monopolist's output. Between which two quantities is
marginal revenue equal to 0?
A) 4 and 5
B) 3 and 4
C) 2 and 3
D) 1 and 2
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: MR
AACSB: Analytical reasoning
19) The table above gives the demand for a monopolist's output. Between which two quantities is
demand elastic?
A) 6 and 5
B) 5 and 4
C) 4 and 3
D) 3 and 2
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: MR
AACSB: Analytical reasoning
29
Copyright © 2011 Pearson Education, Inc.
20) The table above gives the demand for a monopolist's output. What is the total revenue in
when 3 units of output are produced?
A) $21
B) $20
C) $18
D) $6
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: MR
AACSB: Analytical reasoning
21) The table above gives the demand for a monopolist's output. What is the marginal revenue
when output is increased from 5 to 6 units?
A) $18
B) $4
C) $3
D) -$2
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: MR
AACSB: Analytical reasoning
22) The table above gives the demand for a monopolist's output. What is the marginal revenue
when output is increased from 2 to 3 units?
A) $18
B) $4
C) $7
D) $6
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: MR
AACSB: Analytical reasoning
30
Copyright © 2011 Pearson Education, Inc.
23) The demand curve facing a single-price monopoly is
A) below the marginal revenue curve.
B) above the marginal revenue curve.
C) the same as only the marginal revenue curve.
D) the same as only the marginal cost curve.
E) the same as both the marginal revenue curve and the marginal cost curve.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: PH
AACSB: Reflective thinking
24) A single-price monopoly has a marginal revenue curve that is
A) horizontal and equal to price.
B) downward sloping and below the demand curve.
C) upward sloping and equal to the supply curve.
D) downward sloping and above the demand curve.
E) vertical at the profit-maximizing quantity.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: WM
AACSB: Reflective thinking
25) If Microsoft is a monopoly and currently charges prices where its demand is elastic, then
Microsoft's marginal revenue is
A) negative.
B) positive.
C) zero.
D) minimized.
E) undefined.
Skill: Level 1: Definition
Section: Checkpoint 15.2
Author: JC
AACSB: Reflective thinking
31
Copyright © 2011 Pearson Education, Inc.
26) When marginal revenue is positive, total revenue ________ when output increases and
demand is ________.
A) decreases; elastic
B) decreases; inelastic
C) increases; elastic
D) increases; inelastic
E) does not change; unit elastic
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SB
AACSB: Analytical reasoning
27) The relationship between marginal revenue and elasticity is
A) when demand is elastic, marginal revenue is positive and when demand is inelastic, marginal
revenue is negative.
B) whenever the elasticity is positive, marginal revenue is positive.
C) whenever the elasticity is negative, marginal revenue is positive.
D) when demand is elastic, marginal revenue is negative and when demand is inelastic, marginal
revenue is positive.
E) that total revenue equals zero at the quantity for which the demand is unit elastic.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: WM
AACSB: Reflective thinking
28) If total revenue falls when output increases, marginal revenue is
A) positive.
B) negative.
C) zero.
D) greater than total revenue.
E) elastic.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: SB
AACSB: Analytical reasoning
32
Copyright © 2011 Pearson Education, Inc.
29) If the Boston Red Sox baseball team is currently charging a ticket price where its demand is
inelastic, then the Red Sox's marginal revenue is
A) negative.
B) positive.
C) zero.
D) maximized.
E) undefined.
Skill: Level 1: Definition
Section: Checkpoint 15.2
Author: JC
AACSB: Reflective thinking
30) If the single restaurant in an Eastern Kentucky town is currently charging a price for its ham
and eggs where the demand is unit elastic, its marginal revenue for ham and eggs is
A) negative.
B) positive.
C) zero.
D) maximized.
E) undefined.
Skill: Level 1: Definition
Section: Checkpoint 15.2
Author: JC
AACSB: Reflective thinking
31) Suppose that along a linear demand curve, the elasticity of demand is equal to 1 when the
price is $4 and the quantity is 100 units. Then the
A) total revenue is at its maximum when 100 units are produced.
B) marginal revenue is positive at 100 units.
C) marginal revenue is negative at 100 units.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SA
AACSB: Analytical reasoning
33
Copyright © 2011 Pearson Education, Inc.
32) Suppose that along a linear demand curve, the elasticity of demand is equal to 1 when the
price is $4 and the quantity is 100 units. Then the
A) marginal revenue is negative when output exceeds 100 units.
B) elasticity of demand is less than 1 when output exceeds 100 units.
C) marginal revenue is 0 when output equals 100 units.
D) Only answers A and B are correct.
E) Answers A, B, and C are correct.
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: SA
AACSB: Analytical reasoning
33) The above table gives the demand schedule for a monopoly. The demand is elastic at all
prices between
A) $6 and $1.
B) $5 and $1.
C) $3 and $1.
D) $6 and $4.
E) $4 and $3.
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: PH
AACSB: Analytical reasoning
34
Copyright © 2011 Pearson Education, Inc.
34) The above table gives the demand schedule for a monopoly. The demand is inelastic over the
entire price range between
A) $6 and $1.
B) $5 and $1.
C) $3 and $1.
D) $6 and $4.
E) $4 and $3.
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: PH
AACSB: Analytical reasoning
35) To maximize its profit, a single-price monopoly the amount of output so that its marginal
revenue
A) equals zero.
B) equals its marginal cost.
C) exceeds its marginal cost but not necessarily by as much as possible.
D) is less than its marginal cost.
E) exceeds its marginal cost by as much as possible.
Skill: Level 1: Definition
Section: Checkpoint 15.2
Author: JC
AACSB: Reflective thinking
36) The maximum profit for a single-price monopoly is found when the firm produces the level
of output so that
A) marginal revenue equals marginal cost.
B) price equals marginal cost.
C) it can charge the highest possible price.
D) marginal revenue exceeds marginal cost by as much as possible.
E) total revenue equals total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: TS
AACSB: Reflective thinking
35
Copyright © 2011 Pearson Education, Inc.
37) To maximize its profit, a perfectly competitive firm produces so that ________ and a single-
price monopoly produces so that ________.
A) MR = MC; MR > MC
B) MR > MC; MR = MC
C) MR = MC; MR = MC
D) MR > MC; MR > MC
E) P = ATC; P = ATC
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: SA
AACSB: Reflective thinking
38) In order to maximize its profit, a single-price monopoly produces the amount of output so
that
A) P = MC.
B) MR = MC.
C) P = MC - MR.
D) P = MR.
E) P = ATC.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: PH
AACSB: Reflective thinking
39) Which of the following is ALWAYS true when a single-price monopolist maximizes its
profit?
A) P = MC
B) P = MR
C) MR = MC
D) MC = ATC
E) P > ATC
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: MR
AACSB: Reflective thinking
36
Copyright © 2011 Pearson Education, Inc.
40) Which of the following is NOT correct about a single-price monopoly?
A) Maximum profit is found where demand is the most inelastic.
B) Marginal revenue is negative when demand is inelastic.
C) Marginal revenue is positive when demand is elastic.
D) To sell more output, the firm must lower its price.
E) To maximize its profit, the firm produces so that marginal revenue equals marginal cost.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: TS
AACSB: Reflective thinking
41) Which of the following is correct for a single-price monopoly?
i. The firm can determine the quantity it produces and the price it charges.
ii. It would never profitably produce output in the inelastic range of its demand.
iii. Its marginal revenue is less than price.
A) i only
B) i and iii
C) ii only
D) ii and iii
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: TS
AACSB: Reflective thinking
42) Suppose that a monopoly is currently producing the quantity at which marginal revenue is
less than marginal cost. The monopoly can increase its profit by ________.
A) shutting down
B) lowering its price and increasing its output
C) raising its price and decreasing its output
D) lowering its price and decreasing its output
E) not changing its price and increasing its output
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: MR
AACSB: Analytical reasoning
37
Copyright © 2011 Pearson Education, Inc.
43) A single-price monopoly is producing at an output level where marginal revenue is $15,
marginal cost is $13, and price is $20. This monopoly is
A) not maximizing its profit and should decrease output to increase its profit.
B) not maximizing its profit and should increase output to increase its profit.
C) maximizing its profit but should shut down.
D) maximizing its profit and should not shut down.
E) maximizing its profit but still should decrease output to earn even more profit.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SB
AACSB: Analytical reasoning
44) The above table gives the demand schedule for a single-price monopoly. The marginal
revenue first becomes negative when going from
A) 1 unit to 2 units.
B) 2 units to 3 units.
C) 3 units to 4 units.
D) 4 units to 5 units.
E) None of the above; the total revenue is always positive so the marginal revenue must always
be positive.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SA
AACSB: Analytical reasoning
38
Copyright © 2011 Pearson Education, Inc.
45) The above table gives the demand schedule for a single-price monopoly. If the marginal cost
is $3, the profit maximizing output for the monopoly will be between
A) 1 to 2 units.
B) 2 to 3 units.
C) 3 to 4 units.
D) 4 to 5 units.
E) Exactly 5 units.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SA
AACSB: Analytical reasoning
46) Suppose the Busy Bee Café is the monopoly producer of hamburgers in Hugo, Oklahoma.
The above figure represents the demand, marginal revenue, and marginal cost curves for this
establishment. What quantity will the Busy Bee produce to maximize its profit?
A) 20 hamburgers per hour
B) 30 hamburgers per hour
C) 50 hamburgers per hour
D) 0 hamburgers per hour.
E) 10 hamburgers per hour
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: JC
AACSB: Analytical reasoning
39
Copyright © 2011 Pearson Education, Inc.
47) Suppose the Busy Bee Café is the monopoly producer of hamburgers in Hugo, Oklahoma.
The above figure represents the demand, marginal revenue, and marginal cost curves for this
establishment. What price will the Busy Bee charge to maximize its profit?
A) $5.00 for a hamburger
B) $3.00 for a hamburger
C) $2.00 for a hamburger
D) $1.00 for a hamburger
E) $4.00 for a hamburger
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: JC
AACSB: Analytical reasoning
48) Suppose the Busy Bee Café is the monopoly producer of hamburgers in Hugo, Oklahoma.
The above figure represents the demand, marginal revenue, and marginal cost curves for this
establishment. In order to maximize profit, the Busy Bee produces ________ hamburgers per
hour and sets a price of ________ per hamburger.
A) 20; $3.00
B) 20; $1.00
C) 30; $2.00
D) 30; $4.00
E) 50; $5.00
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: JC
AACSB: Analytical reasoning
49) Suppose the Busy Bee Café is the monopoly producer of hamburgers in Hugo, Oklahoma.
The above figure represents the demand, marginal revenue, and marginal cost curves for this
establishment. If the Busy Bee produces 40 hamburgers per hour, then
A) marginal revenue will exceed marginal cost.
B) profit will be maximized.
C) marginal revenue will be negative.
D) marginal revenue will be maximized.
E) both the marginal revenue and the price will be negative.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: JC
AACSB: Analytical reasoning
40
Copyright © 2011 Pearson Education, Inc.
50) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's
Parrot Pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When
Paul maximizes his profit, he produces ________ pillows per hour.
A) 1,000
B) 3,000
C) 4,000
D) 0
E) 2,000
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: CD
AACSB: Analytical reasoning
41
Copyright © 2011 Pearson Education, Inc.
51) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's
Parrot Pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When
Paul maximizes his profit, the price per pillow is
A) $70.
B) $60.
C) $40.
D) $100.
E) $30.
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: MR
AACSB: Analytical reasoning
52) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's
Parrot pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When
Paul maximizes his profit, the difference between marginal cost and price
A) $0.
B) $40.
C) $60.
D) $30.
E) $20.
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: CD
AACSB: Analytical reasoning
53) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's
Parrot pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When
Paul maximizes his profit, the price is ________ per pillow and the marginal cost is ________
per pillow.
A) $60; $60
B) $60; $40
C) $70; $60
D) $70; $40
E) $100; $40
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: MR
AACSB: Analytical reasoning
42
Copyright © 2011 Pearson Education, Inc.
54) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's
Parrot pillows, a single-price monopoly producer of pillows stuffed with parrot feathers. When
Paul maximizes his profit, his total economic profit is
A) $60.
B) $405.
C) $0.
D) $210,000.
E) unknown because more information is needed to determine Paul's profit.
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: CD
AACSB: Analytical reasoning
55) In the above figure, the profit-maximizing output for this single-price monopoly is ________
units and the price is ________.
A) 200; $10
B) 300; $20
C) 500; $50
D) 200; $30
E) 300; $30
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SA
AACSB: Analytical reasoning
56) A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of
output where the price on the demand curve is $38. At what price will this firm sell the output?
43
Copyright © 2011 Pearson Education, Inc.
A) $19
B) $38
C) $285
D) $570
E) There is not enough information given to answer the question.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: TS
AACSB: Analytical reasoning
57) A single-price monopoly has marginal cost of $23 and marginal revenue of $28. Which of
the following is definitely correct?
A) It is maximizing profit.
B) To increase profit, it should produce less.
C) To increase profit, it should produce more.
D) It should shut down.
E) It is earning an economic profit.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: TS
AACSB: Reflective thinking
58) A profit-maximizing output for a single-price monopoly is determined by the intersection of
the ________ curves and the profit-maximizing price is found on the ________ curve.
A) marginal cost and marginal revenue; marginal revenue
B) marginal cost and marginal revenue; demand
C) total revenue and total cost, total revenue
D) marginal cost and average total cost; demand
E) demand and supply; supply
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: TS
AACSB: Reflective thinking
44
Copyright © 2011 Pearson Education, Inc.
59) For a single-price monopoly,
A) if marginal cost exceeds marginal revenue, profits will increase if output decreases.
B) if marginal revenue exceeds marginal cost, profits will increase if output decreases.
C) there are several different price and output combinations that maximize profit.
D) marginal revenue will be greater than price if demand is elastic.
E) marginal revenue will be greater than price if demand is inelastic.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: TS
AACSB: Analytical reasoning
60) A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of
output where the price on the demand curve is $38. At this output, average total cost is $15.
What is the total profit earned?
A) $225
B) $285
C) $345
D) $570
E) $19
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: TS
AACSB: Analytical reasoning
61) A single-price monopoly has marginal revenue and marginal cost equal to $19 at 15 units of
output where the price on the demand curve is $38. What is the firm's total revenue?
A) $38
B) $285
C) $570
D) $19
E) There is not enough information given to answer the question.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: TS
AACSB: Analytical reasoning
45
Copyright © 2011 Pearson Education, Inc.
62) If a single-price monopoly is earning a large economic profit, what keeps other firms from
competing away the profit?
A) There are barriers to entry.
B) The monopoly must be keeping the amount earned secret.
C) The market must be too small.
D) The existing firm's ATC must be too large to allow competitors to enter and earn an economic
profit.
E) Nothing, other firms will enter and will compete away the profit.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: TS
AACSB: Reflective thinking
63) In contrast to competitive firms, single-price monopolies
A) do not have to worry about market demand.
B) sell only if demand is inelastic.
C) can never incur a loss.
D) can earn economic profit indefinitely.
E) must take the price that is determined by the market demand and market supply.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: TS
AACSB: Reflective thinking
64) A monopolist can make an economic profit in the long run because of
A) the relatively elastic demand for its product.
B) the relatively inelastic demand for its product.
C) the firm's price setting behavior.
D) barriers to entry.
E) the fact that the firm produces where MR = MC.
Skill: Level 1: Definition
Section: Checkpoint 15.2
Author: MR
AACSB: Reflective thinking
46
Copyright © 2011 Pearson Education, Inc.
65) Why can a monopoly make an economic profit in the long run?
A) because there are close substitutes for the firm's product
B) because the firm is protected by barriers to entry
C) because the firm produces where MR=MC
D) because P > MR
E) ALL of the above are reasons why a monopoly can make an economic profit in the long run.
Skill: Level 1: Definition
Section: Checkpoint 15.2
Author: MR
AACSB: Reflective thinking
66) For a single-price monopoly, price is
A) greater than marginal revenue.
B) one half of marginal revenue.
C) equal to marginal revenue.
D) unrelated to marginal revenue.
E) always less than average total cost when the firm maximizes its profit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: STUDY GUIDE
AACSB: Reflective thinking
67) A single-price monopoly can sell 1 unit for $9.00. To sell 2 units, the price must be $8.50 per
unit. The marginal revenue from selling the second unit is
A) $17.50.
B) $17.00.
C) $8.50.
D) $8.00.
E) $9.00
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: STUDY GUIDE
AACSB: Analytical reasoning
47
Copyright © 2011 Pearson Education, Inc.
68) When demand is elastic, marginal revenue is
A) positive.
B) negative.
C) zero.
D) increasing as output increases.
E) undefined.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: STUDY GUIDE
AACSB: Reflective thinking
69) To maximize its profit, a single-price monopoly produces the quantity at which
A) the difference between marginal revenue and marginal cost is as large as possible.
B) marginal revenue equals marginal cost.
C) average total cost is at its minimum.
D) the marginal cost curve intersects the demand curve.
E) the marginal revenue curve intersects the horizontal axis.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: STUDY GUIDE
AACSB: Reflective thinking
70) Once a monopoly has determined how much it produces, it will charge a price that
A) is determined by the intersection of the marginal cost and average total cost curves.
B) minimizes marginal cost.
C) is determined by its demand curve.
D) is independent of the amount produced.
E) is equal to its average total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: STUDY GUIDE
AACSB: Analytical reasoning
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15.3 Monopoly and Competition Compared
1) Assume someone organizes all farms in the nation into a monopoly. What is the monopoly's
marginal cost curve?
A) It is a horizontal line at the competitive industry's price.
B) It is a vertical line at the formerly competitive industry's quantity.
C) It is a vertical line at the monopoly's chosen output level.
D) It is the formerly competitive industry's supply curve.
E) It is the same as the formally competitive industry's average total cost curve.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: TS
AACSB: Reflective thinking
2) Assume someone organizes all farms in the nation into a single-price monopoly. What is the
monopoly's marginal revenue curve?
A) It is a horizontal line at the competitive industry's price.
B) It is a line that lies below the new monopoly's demand curve.
C) It is a vertical line at the monopoly's chosen output level.
D) It is identical to the demand curve for the monopolist's output.
E) It is a line that lies above the new monopoly's demand curve.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: TS
AACSB: Reflective thinking
3) Compared to a perfectly competitive industry, a single-price monopoly produces
A) more output.
B) less output.
C) the same output.
D) some amount that might be more, less, or the same depending on whether the monopoly's
marginal revenue curve lies above, below, or on its demand curve.
E) some amount that might be more, less, or the same depending on whether the monopoly's
marginal cost curve lies above, below, or on its marginal revenue curve.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: JC
AACSB: Reflective thinking
49
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4) Assume someone organizes all farms in the nation into a single-price monopoly. As a result,
the amount of food produced
A) remains constant.
B) decreases.
C) increases.
D) might increase or decrease depending on whether the demand for food is elastic or inelastic.
E) might increase or decrease depending on whether the monopoly's marginal revenue curve lies
below or above its demand curve.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: TS
AACSB: Reflective thinking
5) Compared to a perfectly competitive market, a single-price monopoly sets
A) a lower price.
B) the same price.
C) a higher price.
D) a price that might be higher, lower, or the same depending on whether the monopoly's
marginal revenue curve lies above, below, or on its demand curve.
E) a price that might be higher, lower, or the same depending on whether the monopoly's
marginal cost curve lies above, below, or on its marginal revenue curve.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: JC
AACSB: Reflective thinking
6) Assume someone organizes all farms in the nation into a single-price monopoly. As a result,
the price consumers pay for food
A) does not change, that is, it remains constant.
B) falls.
C) rises.
D) might rise or fall depending on whether the demand for food is elastic or inelastic.
E) might rise or fall depending on whether the monopoly's marginal revenue curve lies above or
below its demand curve.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: TS
AACSB: Reflective thinking
50
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7) If we compare a perfectly competitive market to a single-price monopoly with the same costs,
the monopoly sells
A) the same quantity at a higher price.
B) a smaller quantity at a higher price.
C) a larger quantity at a lower price.
D) a larger quantity at a higher price.
E) a smaller quantity at the same price.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: WM
AACSB: Reflective thinking
8) When compared to a perfectly competitive market, a single-price monopoly with the same
costs produces ________ output and charges ________ price.
A) a larger; a lower
B) a smaller; a lower
C) the same; a higher
D) a smaller; a higher
E) a smaller; the same
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: PH
AACSB: Reflective thinking
9) A single-price monopoly transfers
A) consumer surplus to producers.
B) producer surplus to consumers.
C) economic profit to consumers.
D) economic profit to the government.
E) economic profit to deadweight loss.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: SA
AACSB: Reflective thinking
51
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10) Assume someone organizes all farms in the nation into a monopoly. As a result, consumer
surplus will
A) not change.
B) increase.
C) decrease.
D) either increase, decrease, or not change depending if the monopoly's marginal revenue curve
lies below, above, or is the same as its demand curve.
E) None of the above answers is correct because the effect on consumer surplus depends on
whether the monopoly is a single-price or a price-discriminating monopoly.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: TS
AACSB: Reflective thinking
11) Assume someone organizes all farms in the nation into a monopoly. Which of the following
occurs?
i. Consumer surplus decreases.
ii. Economic profit increases.
iii. A deadweight loss is created.
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: TS
AACSB: Reflective thinking
12) When a perfectly competitive industry is taken over by a monopoly, some consumer surplus
is transferred to the monopolist in the form of
A) marginal cost.
B) economic profit.
C) deadweight loss.
D) taxes.
E) average variable cost.
Skill: Level 4: Applying models
Section: Checkpoint 15.3
Author: SB
AACSB: Reflective thinking
13) Which of the following statements is FALSE?
A) A perfectly competitive market produces more output and charges a lower price than a
monopoly.
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B) A perfectly competitive firm produces where MR = MC but a monopoly produces where MR
> MC.
C) In a perfectly competitive market, the price is equal to the marginal cost, but in a market with
a single-price monopoly, price exceeds marginal cost.
D) The consumer surplus is smaller for a market with a monopoly than for a perfectly
competitive market.
E) In the long run, a monopoly can earn a larger economic profit than can a perfectly competitive
firm.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: SA
AACSB: Reflective thinking
53
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14) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store
buys all the others and becomes a single-price monopoly. The figure above shows the relevant
demand and cost curves. When the market is perfectly competitive, the price of a pound of steak
is
A) $4.
B) $8.
C) $12.
D) $20.
E) $2.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: JC
AACSB: Analytical reasoning
54
Copyright © 2011 Pearson Education, Inc.
15) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store
buys all the others and becomes a single-price monopoly. The figure above shows the relevant
demand and cost curves. When the market is a monopoly, the price of a pound of steak is
A) $4.
B) $8.
C) $12.
D) $20.
E) $2.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: JC
AACSB: Analytical reasoning
16) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store
buys all the others and becomes a single-price monopoly. The figure above shows the relevant
demand and cost curves. When the market is perfectly competitive, the price of a pound of steak
is ________ and when it is a monopoly, the price of a pound of steak is ________.
A) $4; $20
B) $8; $4
C) $8; $12
D) $4; $8
E) $4; $12
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: JC
AACSB: Analytical reasoning
17) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store
buys all the others and becomes a single-price monopoly. The figure above shows the relevant
demand and cost curves. When the market is perfectly competitive, the quantity of steak is
A) 2,000 pounds.
B) 3,000 pounds.
C) 4,000 pounds.
D) 5,000 pounds.
E) less than 2,000 pounds.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: JC
AACSB: Analytical reasoning
18) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store
buys all the others and becomes a single-price monopoly. The figure above shows the relevant
demand and cost curves. When the market is a monopoly, the quantity of steak is
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A) 2,000 pounds.
B) 3,000 pounds.
C) 4,000 pounds.
D) 5,000 pounds.
E) less than 2,000 pounds.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: JC
AACSB: Analytical reasoning
19) Suppose the grocery store market in Kansas City is perfectly competitive. Then one store
buys all the others and becomes a single-price monopoly. The figure above shows the relevant
demand and cost curves. When the market is perfectly competitive, the quantity of steak is
________ pounds and when the market is a monopoly the quantity of steak is ________ pounds.
A) 2,000; 4,000
B) 3,000; 2,000
C) 4,000; 4,000
D) 5,000; 3,000
E) 4,000; less than 2,000 pounds.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: JC
AACSB: Analytical reasoning
20) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's
Parrot pillows, a monopoly producer of pillows stuffed with parrot feathers. When Paul
maximizes his profit, Paul produces ________ pillows per hour and if the market was perfectly
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competitive, ________ pillows per hour would be produced.
A) 0; 4,000
B) 3,000; 4,000
C) 4,000; 4,000
D) 3,000; 3,000
E) 0; 3,000
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: CD
AACSB: Analytical reasoning
57
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21) The figure above shows the demand, marginal revenue, and marginal cost curves for Paul's
Parrot pillows, a monopoly producer of pillows stuffed with parrot feathers. When the pillow
market is a monopoly, the price of a pillow is ________ and if the pillow market is perfectly
competitive, the price of a pillow is ________.
A) $40; $20
B) $70; $60
C) $40; $60
D) $60; $40
E) $100; $40
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: CD
AACSB: Analytical reasoning
22) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve.
The amount of consumer surplus when the market has a monopoly producer is
A) ace.
B) abf.
C) bcd.
D) bcef.
E) acd.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: CD
AACSB: Analytical reasoning
23) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve.
The amount of consumer surplus when the market has a monopoly producer is ________ and the
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amount of consumer surplus when the market is perfectly competitive is ________.
A) abf; ace
B) abf; bcd
C) ace; bcd
D) ace; abf
E) bcd; ace
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: CD
AACSB: Analytical reasoning
24) The figure above shows the demand curve, marginal revenue curve, and marginal cost curve.
The deadweight loss when the market has a monopoly producer is
A) ace.
B) abf.
C) bcd.
D) bcef.
E) acd.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: CD
AACSB: Analytical reasoning
59
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25) In the above figure, a perfectly competitive market will have a price of ________ and a
single-price monopoly will have a price of ________.
A) P1 and quantity of Q1; P2 and quantity of Q2
B) P2 and quantity of Q2; P1 and quantity of Q1
C) P3 and quantity of Q3; P1 and quantity of Q1
D) P2 and quantity of Q2; P3 and quantity of Q1
E) P2 and quantity of Q1; P1 and quantity of Q1
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: SA
AACSB: Analytical reasoning
26) In the above figure, for a single-price monopoly the consumer surplus is equal to the area
A) abP1.
B) acP2.
C) bce.
D) bed.
E) cQ20P2.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: SA
AACSB: Analytical reasoning
27) In the above figure, for a single-price monopoly the deadweight loss is equal to the area
A) abP1.
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B) acP2.
C) bce.
D) bed.
E) P1beP3.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: SA
AACSB: Analytical reasoning
28) Comparing a perfectly competitive market to a single-price monopoly with the same costs,
we see that
A) both markets are equally efficient in their use of resources.
B) the monopoly market always is more efficient in the use of resources.
C) the perfectly competitive market achieves efficiency in resource use while the monopoly
market does not.
D) the monopoly market achieves efficiency in resource use while perfectly competitive market
does not.
E) None of the above answers is correct because comparing a perfectly competitive market to a
monopoly is impossible.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: WM
AACSB: Reflective thinking
29) A monopoly creates a deadweight loss because the monopoly
A) sets a price that is too low.
B) earns a normal profit.
C) does not maximize profit.
D) produces less than the efficient quantity.
E) produces more than the efficient quantity.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: SB
AACSB: Reflective thinking
61
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30) Monopolies are inefficient because, at the profit-maximizing output level,
A) MC = MR.
B) MC does not equal MR.
C) MB = MC.
D) MB does not equal MC.
E) P = ATC.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: SB
AACSB: Reflective thinking
31) Compared to a similar perfectly competitive industry, a single-price monopoly
A) creates a deadweight loss and decreases economic profit.
B) produces more output.
C) creates a deadweight loss and decreases consumer surplus.
D) is more efficient because there is no wasteful competition.
E) sets a lower price because there is less competition.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: MR
AACSB: Reflective thinking
32) In a monopoly, producers ________ and consumers ________.
A) gain; lose
B) lose; lose
C) lose; gain
D) gain; gain
E) gain; do not gain or lose
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: SB
AACSB: Reflective thinking
62
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33) If a perfectly competitive industry becomes a monopoly and the costs do not change, which
of the following allocation of costs and benefits applies?
A) The producer benefits, but consumers and society are harmed.
B) The producer and society are harmed, but consumers benefit.
C) The producer and society benefit, but consumers are harmed.
D) The producer is harmed, but consumers and society benefit.
E) The producer, consumers, and society all benefit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: MR
AACSB: Reflective thinking
34) The Seattle Mariners baseball team has a monopoly on major league baseball in the
Northwest. If the Mariners could be purchased by anyone with enough money, we could argue
that this purchase is fair according to the
A) fair rules test.
B) fair results test.
C) fair price test.
D) fair output test.
E) allocative fairness test.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: JC
AACSB: Reflective thinking
35) Rent seeking is the act of obtaining special treatment by ________ to create ________.
A) a monopoly; consumer surplus
B) the government; economic profit
C) consumers; a monopoly
D) the government; consumer surplus
E) competitive producers; a monopoly
Skill: Level 1: Definition
Section: Checkpoint 15.3
Author: JC
AACSB: Reflective thinking
63
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36) Rent seeking is defined as
A) charging higher prices for an apartment.
B) the act of obtaining special treatment by the government to create an economic profit.
C) charging a price below marginal cost.
D) selling a greater quantity than is profitable.
E) charging different prices for different units of the good or service.
Skill: Level 1: Definition
Section: Checkpoint 15.3
Author: WM
AACSB: Reflective thinking
37) Rent seeking
A) is the act of obtaining special treatment by the government to create economic profit.
B) is the attempt to get rent from tardy renters.
C) occurs when landlords advertise for apartments and other property for rent.
D) is an attempt to sell a property and capture economic profit.
E) occurs when a firm charges different prices for different units of its good or service.
Skill: Level 1: Definition
Section: Checkpoint 15.3
Author: SA
AACSB: Reflective thinking
38) If a producer wants a monopoly with a legal barrier to entry, how can this be done?
i. The producer can spend funds lobbying to attain passage of the legal barrier to entry.
ii. The producer can purchase an existing monopoly.
iii. The producer can make rent seeking expenditures.
A) i and ii
B) i and iii
C) ii and iii
D) i, ii, and iii
E) None of the above are ways to acquire a monopoly with a legal barrier to entry.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: TS
AACSB: Reflective thinking
64
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39) Competition among rent seekers results in
A) higher rents.
B) firms earning normal profits.
C) firms setting lower prices.
D) lower costs.
E) all competing firms earning an economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: SB
AACSB: Reflective thinking
40) When a rent-seeking equilibrium is reached, the
A) economic profit is maximized.
B) economic profit is eliminated by legislation.
C) economic profit is eliminated.
D) consumer surplus is greater than without rent seeking.
E) consumer surplus is eliminated.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: WM
AACSB: Reflective thinking
41) If a perfectly competitive industry is taken over by a single firm that operates as a single-
price monopoly, the price will ________ and the quantity will ________.
A) fall, decrease
B) fall, increase
C) rise, decrease
D) rise, increase
E) not change; decrease
Skill: Level 4: Applying models
Section: Checkpoint 15.3
Author: STUDY GUIDE
AACSB: Analytical reasoning
65
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42) Comparing single-price monopoly to perfect competition, monopoly
A) increases the amount of consumer surplus.
B) has the same amount of consumer surplus.
C) has no consumer surplus.
D) decreases the amount of consumer surplus.
E) decreases the amount of economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: STUDY GUIDE
AACSB: Reflective thinking
43) Is a single-price monopoly efficient?
A) Yes, because it creates a deadweight loss.
B) No, because it creates a deadweight loss.
C) Yes, because consumers gain and producers lose some of their surpluses.
D) Yes, because consumers lose and producers gain some of their surpluses.
E) Yes, because it produces the quantity at which MR=MC.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: STUDY GUIDE
AACSB: Reflective thinking
44) Monopolies ________ fair and ________ efficient.
A) are always; are not
B) might be; are always
C) might be; might be
D) are always; are always
E) are never; are always
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: STUDY GUIDE
AACSB: Reflective thinking
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45) In equilibrium, rent seeking eliminates the
A) deadweight loss.
B) economic profit.
C) consumer surplus.
D) demand for the product.
E) opportunity to price discriminate.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: STUDY GUIDE
AACSB: Reflective thinking
15.4 Price Discrimination
1) To be able to price discriminate, a firm must
A) lower prices for all customers.
B) raise prices for all customers.
C) be able to identify and separate different types of buyers.
D) sell a product that can be resold.
E) Both answers B and C are correct.
Skill: Level 1: Definition
Section: Checkpoint 15.4
Author: JC
AACSB: Reflective thinking
2) Which of the following must exist for a firm to engage in price discrimination?
A) The firm must be able to identify and separate its buyers into different classes, and the low-
price buyers cannot resell the product to the high-price buyers.
B) The firm must face an inelastic demand.
C) The firm must be able to realize economies of scale.
D) The firm must have no more than one class of buyer.
E) The firm must be a natural monopoly.
Skill: Level 1: Definition
Section: Checkpoint 15.4
Author: PH
AACSB: Reflective thinking
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3) A price-discriminating monopoly charges
A) the same price to every buyer for the same product.
B) a different price to different types of buyers for the same product, even though there are no
differences in costs.
C) a different price to different buyers, because the costs are different.
D) different prices to buyers for different products.
E) each customer a price that equals the marginal cost of serving that customer.
Skill: Level 1: Definition
Section: Checkpoint 15.4
Author: PH
AACSB: Reflective thinking
4) Price discrimination is possible, in part, because
A) costs of production vary as output increases.
B) monopolies are regulated.
C) monopolies don't profit maximize.
D) the willingness to pay can vary among groups of buyers.
E) monopolies face horizontal demand curves.
Skill: Level 1: Definition
Section: Checkpoint 15.4
Author: SB
AACSB: Reflective thinking
5) Arnie's Airlines is a monopoly airline that is able to price discriminate. If Arnie's decides to
price discriminate, then
A) Arnie's profit decreases.
B) consumer surplus decreases.
C) Arnie's revenues decrease.
D) Arnie's sells fewer tickets.
E) Arnie's will see all of his tickets at a single price.
Skill: Level 3: Using models
Section: Checkpoint 15.4
Author: CD
AACSB: Reflective thinking
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6) With price discrimination, a monopoly
A) converts consumer surplus into economic profit.
B) converts producer surplus into economic profit.
C) can charge a single price to all customers.
D) produces less output than if it does not price discriminate.
E) converts consumer surplus into deadweight loss.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: SA
AACSB: Reflective thinking
7) One way a monopoly can convert additional consumer surplus into economic profit is to
A) lower prices.
B) raise prices.
C) price discriminate.
D) become more competitive.
E) produce where price equals average total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: JC
AACSB: Reflective thinking
8) An airline company
A) cannot price discriminate because it is against the law.
B) price discriminates by charging higher prices to business travelers.
C) price discriminates by charging lower prices to business travelers.
D) price discriminates even though its profits are lower because competition forces it to do so.
E) has fewer customers because it price discriminates than it would have if it did not price
discriminate.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: WM
AACSB: Reflective thinking
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9) A price-discriminating monopoly
A) sells a larger quantity than it would if it were a single-price monopoly.
B) is illegal.
C) cannot offer discounts.
D) cannot control the price of its product.
E) makes a smaller economic profit than it would if it were a single-price monopoly.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: SA
AACSB: Reflective thinking
10) Compared to setting a single price, if a firm can price discriminate it
A) earns a higher economic profit.
B) earns a lower economic profit.
C) earns zero economic profit.
D) has no change in its economic profit from when it set a single price.
E) might increase, decrease, or not change its economic profit depending on whether as a single-
price monopoly its marginal revenue curve was above, below, or the same as its demand curve.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: SB
AACSB: Reflective thinking
11) The key idea behind price discrimination is to convert consumer surplus into
A) a barrier to entry.
B) economic profit.
C) deadweight loss.
D) monopoly power.
E) total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: SB
AACSB: Reflective thinking
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12) If a firm successfully price discriminates, it increases
i. consumer surplus.
ii. deadweight loss.
iii. economic profit.
A) i only
B) ii only
C) iii only
D) i and iii
E) i and ii
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: SB
AACSB: Reflective thinking
13) Arnie's Airlines is a monopoly airline that is able to price discriminate. If Arnie's decides to
price discriminate, then
A) Arnie's profit increases.
B) consumer surplus increases.
C) Arnie's revenues decrease.
D) Arnie's sells fewer tickets.
E) Arnie can no longer set a price that depends upon the buyer's willingness to pay.
Skill: Level 3: Using models
Section: Checkpoint 15.4
Author: CD
AACSB: Reflective thinking
14) Arnie's Airlines decides to offer different fares to different customers for the same trip.
Arnie's price discriminates because Arnie
A) wants to convert consumer surplus to deadweight loss.
B) wants to help some buyers with lower fares.
C) has different costs for the same flight.
D) wants to convert consumer surplus to economic profit.
E) wants to convert producer surplus to consumer surplus.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: SB
AACSB: Reflective thinking
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15) Which of the following is true regarding price discrimination?
i. It converts consumer surplus to economic profit.
ii. A price discriminator must be a monopoly.
iii. To be able to price discriminate, the firm must be able to identify different types of buyers.
A) i and ii
B) i and iii
C) ii and iii
D) ii only
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: CD
AACSB: Reflective thinking
16) Compared to the situation in which it sets a single price, a monopoly that price discriminates
________ its economic profit and ________ its output.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: PH
AACSB: Reflective thinking
17) A "buy one, get one for half price" promotion is an example of
A) price discriminating among units of a good.
B) price discriminating among groups of buyers.
C) a legal monopoly.
D) a natural monopoly.
E) marketing by a perfectly competitive firm designed to increase the firm's sales.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: SB
AACSB: Reflective thinking
72
Copyright © 2011 Pearson Education, Inc.
18) Why do publishers print the first edition of a book by a popular author in hard cover and not
in paperback?
A) Hard cover books are long lasting and paperbacks can rip easily.
B) Readers who want to read the book as soon as it comes out will be willing to pay a higher
price compared to those who can wait for the paperback edition.
C) A hardcover is the publisher's way of rewarding the avid readers.
D) Publishers are not sure of the demand.
E) Publishers cannot price discriminate.
Skill: Level 5: Critical thinking
Section: Checkpoint 15.4
Author: SA
AACSB: Reflective thinking
19) Which of the following statements about price discrimination is false?
A) Price discrimination is a method for a seller to capture some consumer surplus.
B) Compared to a single-price monopoly, the number of units sold increases when a monopoly
price discriminates.
C) Charging less for a second pizza that is identical to the first is an example of price
discrimination.
D) Price discrimination increases a monopoly's profit.
E) All forms of price discrimination are illegal.
Skill: Level 3: Using models
Section: Checkpoint 15.4
Author: TS
AACSB: Reflective thinking
20) If a firm is able to convert every dollar of consumer surplus to economic profit, the firm has
achieved
A) discrimination among units of a good.
B) discrimination between groups of buyers.
C) perfect price discrimination.
D) perfect cost minimization.
E) the normal amount of economic profit.
Skill: Level 1: Definition
Section: Checkpoint 15.4
Author: SB
AACSB: Reflective thinking
73
Copyright © 2011 Pearson Education, Inc.
21) With perfect price discrimination, a monopoly can extract the ________ price each customer
is willing to pay and thereby obtain the entire ________ surplus.
A) maximum; consumer
B) minimum; producer
C) maximum; producer
D) minimum; consumer
E) None of the above answers are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: PH
AACSB: Reflective thinking
22) When a firm is able to engage in perfect price discrimination, its marginal revenue curve
A) lies below its demand curve.
B) is the same as its demand curve.
C) lies above its demand curve.
D) is the same as its supply curve.
E) is undefined because it does not exist.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: PH
AACSB: Reflective thinking
23) If a monopoly can perfectly price discriminate, then its marginal revenue curve will be
A) the same as its demand curve.
B) the same as its supply curve.
C) the same as its marginal cost curve.
D) a vertical line at the profit-maximizing quantity of output.
E) undefined because it does not exist.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: JC
AACSB: Reflective thinking
74
Copyright © 2011 Pearson Education, Inc.
24) Under which of the following does a monopoly's demand curve become its marginal revenue
curve?
A) all types of monopoly
B) only single-price monopoly
C) only perfect price discrimination
D) only price discrimination on the basis of the number of units purchased
E) any monopoly that price discriminates
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: TS
AACSB: Reflective thinking
25) With perfect price discrimination ________, and production is expanded until marginal
revenue equals ________.
A) the firm's demand curve becomes its marginal revenue curve; marginal cost
B) the firm's demand curve becomes its marginal revenue curve; average total cost
C) the firm's marginal revenue curve bisects the angle with which demand intersects the price-
axis; marginal cost
D) the firm's marginal revenue curve bisects the angle with which demand intersects the price-
axis; average total cost
E) economic profit is maximized when the lowest price equals marginal cost; average total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: TM
AACSB: Reflective thinking
26) Compared to a single-price monopoly, when a monopoly can perfectly price discriminate,
the deadweight loss
A) increases.
B) decreases.
C) remains the same.
D) becomes infinite.
E) probably changes, but more information is needed to determine if it increases, decreases, or
remains constant.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: JC
AACSB: Reflective thinking
75
Copyright © 2011 Pearson Education, Inc.
27) With perfect price discrimination, the level of output
A) exceeds the efficient quantity.
B) is the same as the amount produced by any monopoly that price discriminates.
C) is the same as the amount produced in a perfectly competitive market.
D) equals the amount produced by a single-price monopoly.
E) is unknown.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: SB
AACSB: Reflective thinking
28) Under which of the following is consumer surplus zero?
A) all types of monopoly
B) only single-price monopoly
C) only perfectly price-discriminating monopoly
D) only price discrimination on the basis of the number of units purchased
E) perfect competition
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: TS
AACSB: Reflective thinking
29) The deadweight loss with perfect price discrimination is
A) equal to the deadweight loss of a single-price monopoly.
B) sometimes less than and sometimes more than the deadweight loss of a single-price
monopoly.
C) more than the deadweight loss of a single-price monopoly.
D) zero.
E) larger than the deadweight loss with perfect competition.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: SB
AACSB: Reflective thinking
76
Copyright © 2011 Pearson Education, Inc.
30) Which of the following industries is most likely closest to achieving perfect price
discrimination?
A) the airline industry
B) the wheat industry
C) the textbook industry
D) the toilet paper industry
E) the soft drink industry
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: JC
AACSB: Reflective thinking
31) Which of the following must a firm be able to do to successfully price discriminate?
i. divide buyers into different groups according to their willingness to pay
ii. prevent resale of the good or service
iii. identify into which group (high willingness to pay or low willingness to pay) a buyer falls
A) ii only
B) i and ii
C) i and iii
D) iii only
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: STUDY GUIDE
AACSB: Reflective thinking
32) Which of the following is (are) price discrimination?
i. charging different prices based on differences in production cost
ii. charging business flyers a higher airfare than tourists
iii. charging more for the first pizza than the second
A) i only
B) ii only
C) ii and iii
D) i and iii
E) i, ii, and iii
Skill: Level 1: Definition
Section: Checkpoint 15.4
Author: STUDY GUIDE
AACSB: Reflective thinking
77
Copyright © 2011 Pearson Education, Inc.
33) When a monopoly price discriminates, it
A) increases the amount of consumer surplus.
B) decreases its economic profit.
C) converts consumer surplus into economic profit.
D) converts economic profit into consumer surplus.
E) has no effect on the deadweight loss in the market.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: STUDY GUIDE
AACSB: Reflective thinking
34) If a monopoly is able to perfectly price discriminate, then consumer surplus is
A) equal to zero.
B) maximized.
C) unchanged from what it is with a single-price monopoly.
D) unchanged from what it is in a perfectly competitive industry.
E) not zero but is less than with a single-price monopoly.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: STUDY GUIDE
AACSB: Reflective thinking
35) With perfect price discrimination, the quantity of output produced by a monopoly is
________ the quantity produced by a perfectly competitive industry.
A) greater than but not equal to
B) less than
C) equal to but not greater than
D) not comparable to
E) either greater than or equal to
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: STUDY GUIDE
AACSB: Analytical reasoning
78
Copyright © 2011 Pearson Education, Inc.
15.5 Monopoly Regulation
1) ________ natural monopolies is a commonly used, potential solution to the problems
presented by natural monopolies.
A) Breaking up firms that are
B) Regulating
C) Outlawing price discrimination by
D) Refusing to grant patents to
E) Giving incentives to firms to become
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: MR
AACSB: Reflective thinking
2) The social interest theory of regulation is defined as the
A) use of regulations to maximize firms' profits.
B) use of regulations to assure an efficient use of resources.
C) removal of regulations on business activities.
D) implementation and removal of regulations on the cable TV industry.
E) use of rate of return regulation.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: WM
AACSB: Reflective thinking
3) The social interest theory of regulation is that
A) regulators help producers maximize economic profit.
B) regulation seeks to increase the government's revenue.
C) regulation causes producers to produce at a point where they are earning normal profits.
D) regulation seeks an efficient use of resources.
E) regulation focuses on the consumers' interests and ignores producers' interests.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: PH
AACSB: Reflective thinking
79
Copyright © 2011 Pearson Education, Inc.
4) The social interest theory of regulation assumes that
A) regulation is against the public interest.
B) the public is indifferent to regulation.
C) regulation seeks an efficient use of resources.
D) the public cares deeply about regulation.
E) regulators are captured by the firms being regulated.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
5) The social interest theory of regulation asserts that regulation
A) seeks an efficient use of resources.
B) is aimed at keeping prices as low as possible.
C) helps firms maximize economic profit.
D) of a natural monopoly must be done using rate of return regulation.
E) does not work for society as well as would allowing the firms freedom from regulation.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
6) Who receives benefits if regulation works according to social interest theory?
A) the entire economy
B) cohesive interest groups
C) everyone not in the cohesive interest group
D) the regulators
E) It is impossible to determine who benefits.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
80
Copyright © 2011 Pearson Education, Inc.
7) Under the social interest theory of regulation, the goal of regulating natural monopolies is
A) to provide a larger, though not maximum, profit for the firms.
B) to use average cost pricing.
C) to provide an outcome similar to the competitive outcome.
D) to provide a the maximum profit for the firms.
E) None of the above answers is correct.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
8) Capture theory is
A) an economic theory of regulation.
B) a model about perfect competition.
C) the same as the public interest theory.
D) the theory that regulators capture firms' attention by dictating a very low price.
E) a theory that explains behavior of competitive firms.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
9) The theory that regulation helps producers to maximize profit is the
A) social interest theory.
B) consumer surplus theory.
C) antitrust theory.
D) capture theory.
E) oligopoly theory of regulatory bodies.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: JC
AACSB: Reflective thinking
81
Copyright © 2011 Pearson Education, Inc.
10) The capture theory of regulation is that regulations
A) help producers to maximize economic profits.
B) mean producers suffer losses.
C) result in diseconomies of scale.
D) benefit society, not producers.
E) benefit the regulators, not the producers or the consumers.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: PH
AACSB: Reflective thinking
11) The capture theory of regulation assumes that regulation benefits
A) producers.
B) consumers.
C) government.
D) the general public.
E) the regulators.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
12) The capture theory of regulation predicts that
A) regulation helps producers to maximize profits.
B) regulators capture the firm's economic profit and transfer it to consumers as consumer
surplus.
C) regulators eliminate the deadweight loss a monopoly can create.
D) resources are used efficiently.
E) regulators capture the firm's economic profit and transfer it to themselves.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: SA
AACSB: Reflective thinking
82
Copyright © 2011 Pearson Education, Inc.
13) The capture theory of regulation is defined as
A) the use of regulations to assure the efficient use of resources.
B) the constant reapplication of regulation on the cable TV industry.
C) the use of regulation to assist producers to maximize profits.
D) the removal of regulations on business activities.
E) regulation that focuses on consumers' interests and ignores producers' interests.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: WM
AACSB: Reflective thinking
14) Suppose that a regulatory agency helps producers maximize economic profit. This type of
regulation coincides with
A) a natural monopoly.
B) a marginal cost pricing rule.
C) an average cost pricing rule.
D) the capture theory of regulation.
E) the social interest theory of regulation.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: CD
AACSB: Reflective thinking
15) The capture theory of regulation predicts that regulations bring ________ to producers and
impose ________ on any individual consumer.
A) small benefits; small costs
B) small benefits; large costs
C) large benefits; small costs
D) large benefits; large costs
E) large benefits; no costs
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
83
Copyright © 2011 Pearson Education, Inc.
16) When economies of scale exist so that one firm can meet the entire market demand at a lower
average total cost than two or more firms,
A) a natural monopoly develops.
B) the monopoly encounters competition.
C) economic profit is reduced to zero.
D) the monopoly converts all of the consumer surplus into economic profit.
E) there is always the opportunity to price discriminate.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: WM
AACSB: Reflective thinking
17) A firm that is a natural monopoly
A) can supply the entire market at a lower cost than two or more firms.
B) has very small fixed costs and very large marginal costs.
C) is infrequently regulated because having one firm serve the market is economically sound.
D) cannot make an economic profit if it is not regulated because it must serve a very large
customer base.
E) produces the efficient quantity of output when it is not regulated.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SA
AACSB: Reflective thinking
18) A natural monopoly
A) sells to a single buyer.
B) sets price equal to marginal revenue.
C) is a firm than can supply the market at lower cost than two or more firms.
D) produces a natural resource.
E) faces a horizontal demand curve.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: MR
AACSB: Reflective thinking
84
Copyright © 2011 Pearson Education, Inc.
19) Today, you might be buying from a regulated natural monopoly when you purchase
A) a car, a truck, or a bicycle.
B) a computer, a phone, or a camera.
C) natural gas or electricity.
D) a house, a condominium, or a plot of land.
E) food in a grocery store or in a restaurant
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: MR
AACSB: Reflective thinking
20) Fixed costs are ________ in a natural monopoly, so average total cost ________ as output
increases.
A) large; increases
B) large; decreases
C) small; increases
D) small; decreases
E) nonexistent; decreases
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
21) A marginal cost pricing rule sets marginal cost equal to
A) minimum average variable cost.
B) price.
C) average cost.
D) marginal revenue.
E) the smaller of price or marginal revenue.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: PH
AACSB: Reflective thinking
85
Copyright © 2011 Pearson Education, Inc.
22) For a regulated natural monopoly, the marginal cost pricing rule is a rule that sets price
________ marginal cost and achieves an ________ amount of output.
A) equal to; efficient
B) above; inefficient
C) below; efficient
D) equal to; inefficient
E) above; efficient
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: JC
AACSB: Reflective thinking
23) How should a natural monopoly be regulated under the social interest theory of regulation?
A) by setting price equal to the average cost of production
B) by allowing a price that maximizes the profit of the natural monopoly
C) by using a marginal cost pricing rule
D) by subsidizing other producers to compete with the monopoly
E) by using rate of return regulation
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
24) The outcome of regulating a natural monopoly using the marginal cost pricing rule is
A) that the firm earns a normal profit.
B) that the firm maximizes its profit.
C) that consumer surplus is less than what it would be if the firm maximized its profit.
D) an efficient level of production.
E) that the firm earns an economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
86
Copyright © 2011 Pearson Education, Inc.
25) For a natural monopoly, the efficient quantity is produced when the firm is regulated so that
A) P = ATC.
B) P > ATC.
C) P = MC.
D) P > MC.
E) P < MC.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SA
AACSB: Reflective thinking
26) If a natural monopoly is regulated using
A) a marginal cost pricing rule, the firm maximizes its profit.
B) an average cost pricing rule, the firm incurs an economic loss.
C) a total cost pricing rule, the firm will exit the industry.
D) a marginal cost pricing rule, the firm incurs an economic loss.
E) an average cost pricing rule, the firm maximizes its profit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: WM
AACSB: Reflective thinking
27) Under a marginal cost pricing rule, a natural monopoly
A) earns a reasonable profit.
B) earns large economic profits.
C) earns accounting profits, but breaks even in economic terms.
D) incurs an economic loss.
E) earns a normal profit but it cannot be determined whether or not it earns an accounting profit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: JC
AACSB: Reflective thinking
87
Copyright © 2011 Pearson Education, Inc.
28) A natural monopoly that is regulated to set price equal to marginal cost
A) earns an economic profit.
B) breaks even by earning a normal profit.
C) incurs an economic loss.
D) could make an economic loss, an economic profit, a normal profit.
E) earns zero normal profit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
29) Which of the following explains why the marginal cost pricing rule results in an economic
loss for a natural monopoly?
A) The ATC curve is downward sloping throughout the relevant range, therefore the MC is lower
than the ATC.
B) The demand curve is downward sloping, therefore price falls as quantity increases.
C) The MC is constant and equal to price.
D) Because output is determined by setting MC equal to the price, consumer surplus is
maximized.
E) The firm's MR is always less than its price.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
30) Regulated natural monopolies can obey a marginal cost pricing rule and still earn a normal
profit by engaging in
A) least cost pricing and average cost pricing.
B) price discrimination and two-part tariff pricing.
C) zero profit pricing.
D) profit-maximizing pricing.
E) None of the above answers is correct because a natural monopoly regulated using a marginal
cost pricing rule always incurs an economic loss.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: PH
AACSB: Reflective thinking
88
Copyright © 2011 Pearson Education, Inc.
31) Which of the following is an example of a two-part tariff?
A) price discrimination based on the buyers' willingness to pay
B) charging a hookup fee plus a monthly charge equal to marginal cost
C) higher sales tax on specific products
D) different prices based on the cost of production and quantity bought
E) a regulated firm uses marginal cost pricing for some customers and average cost pricing for
other customers
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
32) One way a company can cover its costs and, at the same time, obey a marginal cost pricing
rule is by
A) choosing output levels according to the profit-maximizing rule.
B) using price discrimination.
C) increasing production.
D) decreasing production.
E) decreasing its marginal cost but not changing its average total cost.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
33) If a regulatory agency sets the price equal to marginal cost for a natural monopoly, the
A) government might have to provide a subsidy to the firm to keep it in business.
B) price is the same as the unregulated monopoly price.
C) firm earns an economic profit, though not the maximum economic profit.
D) firm earns the maximum economic profit.
E) firm earns a normal profit.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: SA
AACSB: Reflective thinking
89
Copyright © 2011 Pearson Education, Inc.
34) What problem is caused by subsidizing a natural monopoly regulated using a marginal cost
pricing rule?
A) The regulated firm ends up earning an economic profit.
B) Consumers pay too much for the product of the monopoly.
C) This policy is a two-part tariff, which creates inefficiency.
D) The taxes required to gain the revenue used as the subsidy result in a deadweight loss that
subtracts from gains in efficiency which result from use of the marginal cost pricing rule.
E) The regulated firm goes out of business if it is subsidized.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
35) With a natural monopoly
A) no regulation is necessary because it is a natural monopoly.
B) regulation takes the form of forcing competition from new firms.
C) regulation takes the form of forcing the company out of business.
D) regulation can take the form of average cost pricing to allow coverage of costs.
E) regulation takes the form of breaking the company into several competing firms.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: WM
AACSB: Reflective thinking
36) When a firm is regulated so it uses an average cost pricing rule, the price
A) exceeds average total cost.
B) equals marginal cost.
C) is less than marginal cost.
D) equals average total cost.
E) equals marginal revenue.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: PH
AACSB: Reflective thinking
90
Copyright © 2011 Pearson Education, Inc.
37) For a natural monopoly to cover its total cost, its price must equal its
A) average total cost.
B) marginal cost.
C) demand.
D) total fixed cost.
E) marginal revenue.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
38) When used with a natural monopoly, an average cost pricing rule results in
A) the efficient level of output.
B) economic losses for the firm.
C) the need for government to subsidize the natural monopoly.
D) zero economic profit for the firm.
E) the firm earning an economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
39) With an average cost pricing rule, the quantity produced by the natural monopoly is
________ the quantity produced with a marginal cost pricing rule.
A) greater than
B) less than
C) equal to
D) greater than in the long run and less than in the short run than
E) not comparable to
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: JC
AACSB: Reflective thinking
91
Copyright © 2011 Pearson Education, Inc.
40) A natural monopoly's output is less if it is regulated with
A) a marginal cost pricing rule than if it is unregulated.
B) an average cost pricing rule than if it is unregulated.
C) an average cost pricing rule than if it is regulated with a marginal cost pricing rule.
D) a marginal cost pricing rule than if it is regulated with an average cost pricing rule.
E) More information about the firm's demand is needed to determine how its output depends on
what regulation it faces.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: WM
AACSB: Reflective thinking
41) If we compare regulating a natural monopoly using a marginal cost pricing rule to using an
average cost pricing rule, we see that output is
A) greater with marginal cost pricing but average cost pricing allows for costs to be covered.
B) the same under both cases but the profit is greater with average cost pricing.
C) greater under average cost pricing but profits are greater with marginal cost pricing.
D) the same but profits are greater with marginal cost pricing.
E) greater with marginal cost pricing and the firm's profit is larger with marginal cost pricing.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: WM
AACSB: Reflective thinking
42) Gene's Car Wash is a natural monopoly. To wash 100 cars a week, if Gene is unregulated, he
would charge a price of $10. Gene's average total cost for washing 100 cars is $8, his average
variable cost is $6, and his marginal cost is $4. If Gene is regulated using a marginal cost pricing
rule, the price he is allowed to charge to wash 100 cars is
A) $10.
B) $8.
C) $6.
D) $4.
E) $400.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
92
Copyright © 2011 Pearson Education, Inc.
43) Gene's Car Wash is a natural monopoly. To wash 100 cars a week, if Gene is unregulated, he
would charge a price of $10. Gene's average total cost for washing 100 cars is $8, his average
variable cost is $6, and his marginal cost is $4. If Gene is regulated using an average cost pricing
rule, the price he is allowed to charge to wash 100 cars is
A) $10.
B) $8.
C) $6.
D) $4.
E) $400.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
93
Copyright © 2011 Pearson Education, Inc.
44) The above figure represents the market for cable television in Oakland, Florida. Time
Warner Communications (TWC) is the sole provider of cable television to the residents of this
Central Florida community. If TWC is left unregulated, how many households in Oakland are
served?
A) 20,000
B) 30,000
C) 40,000
D) 50,000
E) 10,000
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
94
Copyright © 2011 Pearson Education, Inc.
45) The above figure represents the market for cable television in Oakland, Florida. Time
Warner Communications (TWC) is the sole provider of cable television to the residents of this
Central Florida community. If TWC is left unregulated, what is the price of cable television in
Oakland?
A) $40
B) $30
C) $20
D) $10
E) $50
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
46) The above figure represents the market for cable television in Oakland, Florida. Time
Warner Communications (TWC) is the sole provider of cable television to the residents of this
Central Florida community. If TWC operated under a marginal cost pricing rule, how many
households in Oakland are served?
A) 20,000
B) 30,000
C) 40,000
D) 50,000
E) 10,000
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: JC
AACSB: Analytical reasoning
47) The above figure represents the market for cable television in Oakland, Florida. Time
Warner Communications (TWC) is the sole provider of cable television to the residents of this
Central Florida community. If TWC operated under a marginal cost pricing rule, what is the
price of cable television in Oakland?
A) $40
B) $30
C) $20
D) $10
E) $0
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: JC
AACSB: Analytical reasoning
95
Copyright © 2011 Pearson Education, Inc.
48) The above figure represents the market for cable television in Oakland, Florida. Time
Warner Communications (TWC) is the sole provider of cable television to the residents of this
Central Florida community. If TWC operated under an average cost pricing rule, how many
households in Oakland are served?
A) 20,000
B) 30,000
C) 40,000
D) 50,000
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: JC
AACSB: Analytical reasoning
49) The above figure represents the market for cable television in Oakland, Florida. Time
Warner Communications (TWC) is the sole provider of cable television to the residents of this
Central Florida community. If TWC operated under an average cost pricing rule, what is the
price of cable television in Oakland?
A) $40
B) $30
C) $20
D) $10
E) $50
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: JC
AACSB: Analytical reasoning
96
Copyright © 2011 Pearson Education, Inc.
50) The above figure represents the market for cable television in Oakland, Florida. Time
Warner Communications (TWC) is the sole provider of cable television to the residents of this
Central Florida community. Compared to a marginal cost pricing rule, under an average cost
pricing rule, TWC ________ output by ________ households.
A) increases; 20,000
B) decreases; 10,000
C) increases; 30,000
D) decreases; 50,000
E) decreases; 40,000
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: JC
AACSB: Analytical reasoning
51) Rate of return regulation is designed to allow a natural monopoly to
A) earn an economic profit.
B) earn a normal profit.
C) underestimate its average cost.
D) compete with any firm entering the market.
E) earn zero normal profit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: MR
AACSB: Reflective thinking
52) When a regulatory agency uses rate of return regulation, the
A) agency is able to eliminate the deadweight loss.
B) firm's managers have an incentive to inflate the firm's costs.
C) regulated firm's profit must be maximized for the market to be efficient.
D) regulated firm must receive a government subsidy.
E) the agency is using a form of marginal cost pricing.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: MR
AACSB: Reflective thinking
97
Copyright © 2011 Pearson Education, Inc.
53) Managers of a natural monopoly regulated using rate of return regulation have an incentive
to
A) exaggerate the firm's costs.
B) underestimate the firm's costs.
C) minimize the monopoly's deadweight loss.
D) earn zero economic profit.
E) exaggerate the firm's profit.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SB
AACSB: Reflective thinking
54) A natural monopoly
A) faces more competition after regulation.
B) might exaggerate its costs if it is regulated using rate of return regulation.
C) might falsely minimize its costs if it is regulated using rate of return regulation.
D) might falsely minimize its costs if it is regulated using a marginal cost pricing rule.
E) is allowed to maximize its profit under a marginal cost pricing rule.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SA
AACSB: Reflective thinking
55) One of the tendencies that is common among firms regulated using rate of return regulation
is to
A) increase production to an inefficient level.
B) inflate the costs of production.
C) incur losses.
D) understate the costs of production.
E) overstate their total revenue.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: JC
AACSB: Reflective thinking
98
Copyright © 2011 Pearson Education, Inc.
56) When regulated using rate of return regulation, who benefits from the practice of some
natural monopolies to count sumptuous offices, free baseball tickets, golf excursions, and
limousines as costs of production?
A) stockholders
B) managers of the monopoly
C) customers of the monopoly
D) regulators of the industry
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
57) Price cap regulation is defined as regulation that
A) imposes a price ceiling on the regulated firm.
B) encourages firms to exaggerate costs to increase profits.
C) uses marginal cost pricing to ensure efficient output.
D) uses average cost pricing to ensure costs are covered.
E) is essentially the same as rate of return regulation.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: WM
AACSB: Reflective thinking
58) Price cap regulation is regulation that
A) is a marginal cost pricing rule.
B) is an average cost pricing rule.
C) imposes a price ceiling on the regulated firm.
D) has the same incentive effects as does rate of return regulation.
E) is the same as allowing the firm to operate as if it was totally unregulated.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
99
Copyright © 2011 Pearson Education, Inc.
59) Price cap regulation
A) does not provide incentives to firms to minimize their costs because firms cannot change
prices.
B) sets the maximum price these firms can charge.
C) gives firms the incentive to exaggerate their costs.
D) Both answers A and C are correct.
E) Both answers A and B are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SA
AACSB: Reflective thinking
60) Price cap regulation involves
A) setting the monopoly's price equal to its average total cost.
B) setting the monopoly's price equal to its profit-maximizing price.
C) setting a maximum price the monopoly may charge.
D) assuming a natural monopoly will not charge a higher than profit-maximizing price.
E) setting the monopoly's price equal to its marginal cost.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
61) The process of price cap regulation includes which of the following?
i. a price ceiling.
ii. marginal cost pricing.
iii. average cost pricing
A) i only
B) ii only
C) i and ii
D) ii and iii
E) i and iii
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: CD
AACSB: Reflective thinking
100
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62) Under earnings-sharing regulation, if a firm's profits ________ above a certain level, they
must be shared with the firm's ________.
A) rise; customers
B) fall; customers
C) rise; suppliers
D) fall; suppliers
E) rise; competitors
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: JC
AACSB: Reflective thinking
63) Earning-sharing regulation involves
A) setting the monopoly's price equal to its average total cost.
B) requiring that the monopoly share its profits with its customers if the profits rise above a
certain level.
C) setting a maximum price the monopoly may charge and maintaining it for many years.
D) assuming a natural monopoly will not charge a higher than profit-maximizing price.
E) setting the monopoly's price equal to its marginal cost.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: TS
AACSB: Reflective thinking
64) The theory that regulation seeks an efficient use of resources is the
A) social interest theory.
B) producer surplus theory.
C) consumer surplus theory.
D) capture theory.
E) deadweight loss theory.
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: STUDY GUIDE
AACSB: Reflective thinking
101
Copyright © 2011 Pearson Education, Inc.
65) Which of the following best describes the capture theory of regulation?
i. Regulation seeks an efficient use of resources.
ii. Regulation is aimed at keeping prices as low as possible.
iii. Regulation helps firms maximize economic profit.
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii, and iii
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: STUDY GUIDE
AACSB: Reflective thinking
66) At a level of output when regulators require a natural monopoly to set a price that is equal to
marginal cost, the firm
A) makes zero economic profit.
B) makes an economic profit.
C) incurs an economic loss.
D) earns a normal-economic profit.
E) makes either zero economic profit or an economic profit, depending on whether the firm's
average total cost equals or is less than its marginal cost.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: STUDY GUIDE
AACSB: Reflective thinking
67) If a natural monopoly is told to set price equal to average cost, then the firm
A) is not able to set marginal revenue equal to marginal cost.
B) automatically also sets price equal to marginal cost.
C) will earn a substantial economic profit.
D) will incur an economic loss.
E) sets a price that is lower than its marginal cost.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: STUDY GUIDE
AACSB: Reflective thinking
102
Copyright © 2011 Pearson Education, Inc.
15.6 Chapter Figures
The figure above shows a firm's demand and average total cost curves.
1) The situation in the figure above creates a barrier to entry for a second firm because
i. a second firm that produced as many kilowatt-hours as the first firm would see the market
price fall beneath its cost and would incur an economic loss.
ii. a second firm that produced fewer kilowatt-hours than the first firm would have to charge a
higher price and would not gain many customers.
iii. the first firm's average total cost curve indicates it has been given a patent for the product.
A) i only
B) ii only
C) iii only
D) i and ii
E) i and iii
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: TM
AACSB: Analytical reasoning
103
Copyright © 2011 Pearson Education, Inc.
The figure above shows a monopoly's total revenue and total cost curves.
2) Using the figure above, which of the following statements are correct?
i. MR = MC when 3 haircuts are produced.
ii. If the firm charges each customer the same price for a haircut, the price of a haircut is $42.
iii. The firm's MC equals $30.
A) i only
B) ii only
C) i and ii
D) i and iii
E) None of the above are correct.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: TM
AACSB: Analytical reasoning
104
Copyright © 2011 Pearson Education, Inc.
3) Using the figure above, which of the following statements are correct?
i. MR = MC = $42 when 3 haircuts are produced.
ii. If the firm charges each customer the same price for a haircut, the price of a haircut is $14.
iii. The firm's economic profit is $12.
A) i only
B) ii only
C) i and ii
D) i and iii
E) i, ii, and iii
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: MR
AACSB: Analytical reasoning
4) Using the figure above, which of the following statements are correct?
i. When 3 haircuts are produced, the firm's ATC is $10.
ii. If the firm charges each customer the same price for a haircut, the price of a haircut is $14.
iii. The firm's is NOT a perfect competitor.
A) i only
B) ii only
C) i and ii
D) i and iii
E) i, ii, and iii
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: MR
AACSB: Analytical reasoning
105
Copyright © 2011 Pearson Education, Inc.
The above figure shows a market.
5) If the market was a monopoly, the quantity would be ________ and the price would be
________; if the market tis perfectly competitive, the quantity would be ________ and the price
would be ________.
A) Q1; P1; Q2; P2
B) Q2; P1; Q1; P2
C) Q1; P1; Q2; P1
D) Q1; P2; Q2; P1
E) Q1; P2; Q1; P1
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: MR
AACSB: Analytical reasoning
106
Copyright © 2011 Pearson Education, Inc.
6) The figure above shows that monopoly is ________ because it produces a level of output at
which ________.
A) inefficient; marginal benefit equals marginal cost
B) efficient; marginal benefit equals marginal cost
C) efficient; marginal benefit exceeds marginal cost
D) inefficient; marginal benefit exceeds marginal cost
E) efficient; producer surplus is maximized
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: TM
AACSB: Analytical reasoning
7) If the market in the figure above is a profit-maximizing single-price monopoly, consumer
surplus is the area ________.
A) ABH
B) BFGH
C) ACG
D) BCD
E) ACE
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: MR
AACSB: Analytical reasoning
8) If the market in the figure above is perfectly competitive, consumer surplus is the area
________.
A) ABH
B) BFGH
C) ACG
D) BCD
E) ACE
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: MR
AACSB: Analytical reasoning
107
Copyright © 2011 Pearson Education, Inc.
9) If the market in the figure above is a profit-maximizing single-price monopoly, the
deadweight loss is the area ________.
A) ABH
B) BFGH
C) ACG
D) BCD
E) ACE
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: MR
AACSB: Analytical reasoning
10) If the market in the figure above is a profit-maximizing single-price monopoly, the producer
surplus is the area ________.
A) ABH
B) BFGH
C) ACG
D) BDEH
E) ACE
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: MR
AACSB: Analytical reasoning
11) If the market in the figure above changes from perfectly competitive to a profit-maximizing
single-price monopoly, the amount of the gain in producer surplus is the area ________.
A) ABH
B) BFGH
C) ACG
D) BDEH
E) ACE
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: MR
AACSB: Analytical reasoning
108
Copyright © 2011 Pearson Education, Inc.
The figure above shows a natural monopoly regulated using a marginal cost pricing rule.
12) In the figure above, an
A) efficient output results, but the firm incurs a loss per household which must be subsidized in
some way.
B) inefficient output results, though the firm covers its costs.
C) an efficient output results, though marginal costs exceed average total costs.
D) an inefficient output results, because the firm cannot cover its costs.
E) an efficient output results, because consumer surplus is maximized.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: TM
AACSB: Analytical reasoning
13) In the figure above, the length of the double sided arrow is the
A) consumer surplus.
B) deadweight loss.
C) producer surplus.
D) economic loss per unit.
E) economic profit.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
109
Copyright © 2011 Pearson Education, Inc.
14) In the figure above, the dark triangle is the
A) consumer surplus.
B) deadweight loss.
C) producer surplus.
D) total cost.
E) economic profit.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
The figure above shows a natural monopoly.
15) In the figure above, if the firm is regulated using an average cost pricing rule, the firm
A) avoids an economic loss, but produces less than the efficient quantity and creates a
deadweight loss.
B) incurs an economic loss, but produces the efficient quantity and creates a deadweight loss.
C) avoids an economic loss, is able to produce the efficient quantity, and therefore avoids
creating a deadweight loss.
D) avoids an economic loss, produces the efficient quantity, and creates a deadweight loss.
E) incurs an economic loss, produces the efficient quantity, and avoids creating a deadweight
loss.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: TM
AACSB: Analytical reasoning
16) In the figure above, if the firm is regulated using an average cost pricing rule, the deadweight
loss created is equal to the area of
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A) ABG.
B) BEFG.
C) BCFG.
D) BCE.
E) None of the above because there is no deadweight loss created.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
17) In the figure above, if the firm is regulated using a marginal cost pricing rule, the deadweight
loss created is equal to the area of
A) ABG.
B) BEFG.
C) BCFG.
D) BCE.
E) None of the above because there is no deadweight loss created.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
18) In the figure above, if the firm is regulated using an average cost pricing rule, the consumer
surplus created is equal to the area of
A) ABG.
B) BEFG.
C) BCFG.
D) BCE.
E) None of the above because there is no consumer surplus created.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
111
Copyright © 2011 Pearson Education, Inc.
19) In the figure above, if the firm is regulated using a marginal cost pricing rule, the consumer
surplus created is equal to the area of
A) ABG.
B) ACF.
C) BCFG.
D) BCE.
E) None of the above because there is no consumer surplus created.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
20) In the figure above, if the firm is regulated using an average cost pricing rule, the economic
loss created is equal to the area of
A) ABG.
B) BEFG.
C) BCFG.
D) BCE.
E) None of the above because there is no economic loss created.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: MR
AACSB: Analytical reasoning
15.7 Integrative Questions
1) A monopoly can arise when
A) there are diseconomies of scale.
B) there are barriers to entry and no close substitutes for the good being produced.
C) a firm cannot price discriminate.
D) firms engage in rent seeking.
E) a firm must set MR equal to MC in order to maximize its profit.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
112
Copyright © 2011 Pearson Education, Inc.
2) The total revenue test using the price elasticity of demand
A) explains why monopolies will only operate on the elastic portion of their demand curve.
B) explains why monopolies will only operate on the inelastic portion of their demand curves.
C) demonstrates why a monopoly can earn an economic profit in the long run.
D) determines whether a monopoly can perfectly price discriminate or not.
E) cannot be used for a price discriminating monopoly.
Skill: Level 4: Applying models
Section: Integrative
Author: CD
AACSB: Reflective thinking
3) A monopoly definitely incurs an economic loss if
A) it produces where its marginal revenue equals its marginal cost.
B) its average total cost is greater than price.
C) it cannot perfectly price discriminate.
D) it price discriminates.
E) The statement errs because a monopoly cannot incur an economic loss.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
4) A difference between a perfectly competitive industry and a monopoly is that
A) in the long run, firms in a perfectly competitive industry earn zero economic profit and a
monopoly can earn an economic profit.
B) a firm in a perfectly competitive industry can perfectly price discriminate but a monopoly
cannot.
C) only monopolies have an incentive to maximize profit.
D) perfectly competitive firms can have a public franchise.
E) a barrier to entry protects perfectly competitive firms in the short run and protects a monopoly
in the long run.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
113
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5) If a monopoly engages in rent seeking,
i. its average total cost curve is lower than otherwise.
ii. it might or might not earn an economic profit depending on how many other competitors also
are rent seeking.
iii. it necessarily incurs an economic loss.
A) i only
B) ii only
C) iii only
D) i and ii
E) i and iii
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
6) If a monopoly can perfectly price discriminate,
A) all the demanders pay one price.
B) it minimizes its profit.
C) it produces the same amount of output as would be produced if the market was a perfectly
competitive industry.
D) it produces less output than would be produced if the market was a perfectly competitive
industry.
E) it creates the same amount of consumer surplus as would be created if the market was a
perfectly competitive industry.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
7) Monopolies arise when there are
A) many substitutes but there are no barriers to entry.
B) no close substitutes and there are no barriers to entry.
C) no close substitutes and there are barriers to entry.
D) many substitutes and there barriers to entry.
E) None of the above answers are correct because the existence of a monopoly has nothing to do
with the presence or absence of barriers to entry.
Skill: Level 2: Using definitions
Section: Integrative
Author: WM
AACSB: Reflective thinking
8) The assumption that regulation relentlessly seeks out deadweight loss and seeks to eliminate it
is called the
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A) social interest theory of regulation.
B) capture theory of regulation.
C) Coase theory of regulation.
D) socially optimal theory of regulation.
E) predatory theory of regulation.
Skill: Level 1: Definition
Section: Integrative
Author: PH
AACSB: Reflective thinking
9) The figure above shows a natural monopoly that the government must regulate. If the
government uses ________, the firm produces ________ units per week.
A) the HHI; 50
B) an average cost pricing rule; 30
C) rate of return regulation; 40
D) social interest regulation; 30
E) a marginal cost pricing rule; 20
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
10) The figure above shows a natural monopoly that the government must regulate. Which of the
following pairs most likely results in similar outcomes?
A) marginal cost pricing and rate of return regulation
B) marginal cost pricing and a two-part tariff
C) average cost pricing and rate of return regulation
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D) predatory pricing and price caps
E) marginal cost pricing and price cap regulation
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
15.8 Essay: Monopoly and How it Arises
1) What are the conditions that define a monopoly?
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: TS
AACSB: Reflective thinking
2) Describe the three general types of barriers.
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: TS
AACSB: Communication
116
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3) Are some monopolies created by government legislation that gives a firm the unique right to
produce a good or service?
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: WM
AACSB: Reflective thinking
4) What is a legal barrier to entry?
Skill: Level 2: Using definitions
Section: Checkpoint 15.1
Author: SA
AACSB: Reflective thinking
5) Competition keeps prices lower for consumers. So why do we have patent laws?
Skill: Level 3: Using models
Section: Checkpoint 15.1
Author: JC
AACSB: Communication
6) What is price discrimination?
Skill: Level 1: Definition
Section: Checkpoint 15.1
Author: MR
AACSB: Communication
117
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15.9 Essay: Single-Price Monopoly
1) A monopoly, unlike a perfect competitor, has total control in its market because it is the single
producer. Why, then, must a single-price monopoly decrease its price if it wants to increase its
output?
Skill: Level 4: Applying models
Section: Checkpoint 15.2
Author: SA
AACSB: Communication
2) What is the relationship between the marginal revenue curve and the demand curve for a
single-price monopoly?
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: JC
AACSB: Communication
3) How does marginal revenue compare to price for a single-price monopoly?
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: TS
AACSB: Reflective thinking
4) What does the marginal revenue equal when a monopoly's total revenue is maximized? What
is the elasticity of demand when the total revenue is maximized?
Skill: Level 2: Using definitions
Section: Checkpoint 15.2
Author: WM
AACSB: Reflective thinking
118
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5) A monopoly can set any price it wants. So why does it still produce at a point where MR =
MC, just like a perfectly competitive firm?
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SA
AACSB: Communication
6) "A single-price monopoly will always charge a price that is on the elastic range of the demand
for the monopoly's output." Explain why the previous statement is correct or incorrect.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: JC
AACSB: Communication
7) Why will a profit-maximizing, single-price monopoly NEVER produce the amount of output
that maximizes its total revenue?
Skill: Level 5: Critical thinking
Section: Checkpoint 15.2
Author: JC
AACSB: Communication
119
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8) Can a monopoly earn an economic profit in the long run? Explain your answer.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SB
AACSB: Communication
9) What kind of profit can a monopoly earn in the short run? In the long run? Explain your
answers.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: CD
AACSB: Communication
120
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10) The table below gives a monopoly's demand schedule. Complete the table by calculating the
total revenue and the marginal revenue.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: WM
AACSB: Analytical reasoning
121
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11) The table below gives a monopoly's demand schedule. Complete the table by calculating the
total revenue and the marginal revenue.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: PH
AACSB: Analytical reasoning
122
Copyright © 2011 Pearson Education, Inc.
12) The demand schedule for a single-price monopoly is given in the table below. Calculate the
marginal revenue.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: TS
AACSB: Analytical reasoning
13) The above figure represents the demand and marginal revenue curves for Sue's Seafood, a
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seller of fresh fish.
a. Over what range of output is demand elastic?
b. Over what range of output is demand inelastic?
c. What price maximizes total revenue?
d. What is the price elasticity of demand at the revenue maximizing price?
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SB
AACSB: Analytical reasoning
124
Copyright © 2011 Pearson Education, Inc.
14) A single-price monopoly has the demand and marginal cost schedules given in the above
table. What is the profit-maximizing level of output and price?
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: TS
AACSB: Analytical reasoning
125
Copyright © 2011 Pearson Education, Inc.
15) In the figure below, draw and label the demand and cost curves of a monopoly. Identify the
quantity a single-price monopoly will produce by labeling it Qm and identify the price by
labeling it Pm.
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: WM
AACSB: Analytical reasoning
126
Copyright © 2011 Pearson Education, Inc.
16) Ron's Hamburger Joint is the only restaurant in town. The above figure represents Ron's cost,
the market demand, and marginal revenue curves. Ron operates as a single-price monopoly.
a. How many hamburgers does Ron produce?
b. What price does Ron charge for a hamburger?
c. What is Ron's total revenue?
d. What is his total cost?
e. What is Ron's economic profit?
Skill: Level 3: Using models
Section: Checkpoint 15.2
Author: SB
AACSB: Analytical reasoning
127
Copyright © 2011 Pearson Education, Inc.
15.10 Essay: Monopoly and Competition Compared
1) "A single-price monopoly charges a higher price and produces more output than a perfectly
competitive industry." Is the previous statement correct or incorrect? Explain your answer.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: JC
AACSB: Communication
2) Compare the outcome in a market with a single-price monopoly to that in a perfectly
competitive market.
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: CD
AACSB: Communication
3) Explain how a single-price monopoly determines its output and price. Compare this process to
how a perfectly competitive firm determines its output and price.
Skill: Level 4: Applying models
Section: Checkpoint 15.3
Author: SB
AACSB: Communication
4) Which creates a larger deadweight loss, perfect competition or a single-price monopoly?
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: MR
AACSB: Communication
5) How do the price, output, consumer surplus, economic profit, and total surplus for a single-
price monopoly compare to that of a competitive industry?
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Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: TS
AACSB: Communication
6) "Compared to a competitive market, a single-price monopoly decreases the consumer surplus
and increases the economic profit." Is the previous statement correct or incorrect? Explain your
answer.
Skill: Level 2: Using definitions
Section: Checkpoint 15.3
Author: TS
AACSB: Communication
7) Suppose the government breaks up a single-price monopoly and turns it into a perfectly
competitive industry. What will happen to price and the quantity produced? What will happen to
the monopoly's economic profit and the deadweight loss associated with the monopoly?
Skill: Level 4: Applying models
Section: Checkpoint 15.3
Author: SB
AACSB: Communication
8) What is rent seeking? How does rent seeking affect the deadweight loss from monopoly?
Skill: Level 1: Definition
Section: Checkpoint 15.3
Author: PH
AACSB: Communication
9) "Because of rent seeking, a monopoly may end up earning a normal profit." Is the previous
statement correct or incorrect? Why?
Skill: Level 1: Definition
Section: Checkpoint 15.3
Author: TS
AACSB: Communication
10) The above figure represents a perfectly competitive industry that is taken over by a single
firm and operated as a monopoly.
a. What was the competitive price and quantity?
b. What is the monopoly price and quantity?
c. What area represents consumer surplus under perfect competition?
d. What area represents consumer surplus under monopoly?
e. What area represents the deadweight loss of monopoly?
Skill: Level 3: Using models
Section: Checkpoint 15.3
Author: SB
AACSB: Analytical reasoning
15.11 Essay: Price Discrimination
1) Define price discrimination. What factors must be present in order for a firm to price
discriminate? Why do firms price discriminate?
Skill: Level 1: Definition
Section: Checkpoint 15.4
Author: WM
AACSB: Communication
2) Give an example of price discrimination.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: SA
AACSB: Reflective thinking
3) "Price discrimination allows a monopoly to increase its economic profit by capturing part of
the consumer surplus and turning it into economic profit." Is the previous statement correct or
incorrect? If the statement is correct, why is it important in understanding firms' behaviors? If it
is incorrect, why is it incorrect?
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: PH
AACSB: Communication
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4) Why do some firms price discriminate? Relate your answer to the common practice of public
colleges charging lower tuition to in-state students and higher tuition to out-of-state students.
Skill: Level 2: Using definitions
Section: Checkpoint 15.4
Author: JC
AACSB: Communication
5) Compare and contrast the effect of perfect competition to the effect of perfect price
discrimination on:
a. efficiency.
b. consumer surplus.
c. economic profit in the long run.
Skill: Level 4: Applying models
Section: Checkpoint 15.4
Author: PH
AACSB: Communication
6) Which produces more output: a perfectly price discriminating monopoly or a single-price
monopoly?
Skill: Level 3: Using models
Section: Checkpoint 15.4
Author: SA
AACSB: Reflective thinking
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7) A monopolist has the market demand and marginal cost schedules given in the above table. If
the monopoly can perfectly price discriminate, what is the profit-maximizing level of output and
price?
Skill: Level 3: Using models
Section: Checkpoint 15.4
Author: TS
AACSB: Analytical reasoning
133
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8) The above figure represents the cost, market demand, and marginal revenue curves for a
monopoly.
a. Indicate the price and quantity a single-price monopoly selects by labeling the price Pm and
the quantity Qm.
b. In the figure, lightly shade in the area that represents the single-price monopoly's economic
profit.
c. Indicate the quantity a perfectly price-discriminating monopoly selects by labeling it Qppd.
d. In the figure, more darkly shade in the area that represents the additional economic profit the
monopoly earns as a result of the perfect price discrimination.
Skill: Level 4: Applying models
Section: Checkpoint 15.4
Author: SB
AACSB: Analytical reasoning
15.12 Essay: Monopoly Regulation
1) "Under the social interest theory of regulation, regulators attempt to maximize profits for the
owners of the firms being regulated." Is the previous statement correct or incorrect?
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: WM
AACSB: Reflective thinking
2) What is the social interest theory of regulation? How does it differ from the capture theory of
regulation?
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: SA
AACSB: Reflective thinking
3) "The theory that regulation seeks an efficient use of resources is called the capture theory of
regulation." Is the previous statement correct or incorrect?
Skill: Level 1: Definition
Section: Checkpoint 15.5
Author: JC
AACSB: Reflective thinking
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4) Describe the difference between social interest theory of regulation and the capture theory of
regulation.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: CD
AACSB: Communication
5) Why are water companies considered a natural monopoly?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: JC
AACSB: Communication
6) "If a natural monopoly is regulated using a marginal cost pricing rule, the firm earns zero
economic profit." Is the previous statement correct or incorrect?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: WM
AACSB: Reflective thinking
7) "If Michigan's electric utilities were allowed to use marginal cost pricing, it would lead to
economic profits for these utilities." Is the previous statement correct or incorrect?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: JC
AACSB: Reflective thinking
8) When a natural monopoly is regulated using a marginal cost pricing rule, what can you say
about the firm's profit and the market's efficiency?
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Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: MR
AACSB: Reflective thinking
9) If a natural monopoly is regulated using the marginal cost pricing rule, how will that affect
prices, outputs, profits, and the distribution of surpluses? What are the pros and cons to this
method of regulation?
Skill: Level 4: Applying models
Section: Checkpoint 15.5
Author: SB
AACSB: Communication
10) What is an average cost pricing rule? Why do regulatory agencies use it for natural
monopolies?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SA
AACSB: Communication
137
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11) "When electric utilities are regulated using an average cost pricing rule, they will earn zero
economic profit." Is the previous statement correct or incorrect? Why?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: JC
AACSB: Reflective thinking
12) When a natural monopoly is regulated using an average cost pricing rule, what can you say
about the firm's profit and the market's efficiency?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: MR
AACSB: Reflective thinking
13) Electric utilities are often considered natural monopolies and are regulated. When would the
price be highest: when the utility is not regulated, when it is regulated using an average cost
pricing rule, or when it is regulated using a marginal cost pricing rule? When would its price be
lowest?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: MR
AACSB: Communication
14) Compare and contrast the marginal cost and average cost pricing rules for regulating natural
monopolies.
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SB
AACSB: Communication
15) What is a marginal cost pricing rule and an average cost pricing rule? What are the
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disadvantages and advantages of each?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: TS
AACSB: Communication
16) Why do some utilities have an incentive to exaggerate their costs of production?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: JC
AACSB: Communication
17) What potential problem is there with rate of return pricing?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: PH
AACSB: Communication
18) How can managers of natural monopolies exaggerate their costs?
Skill: Level 2: Using definitions
Section: Checkpoint 15.5
Author: SB
AACSB: Communication
19) Briefly describe and discuss the different ways a natural monopoly can be regulated:
Marginal cost pricing, average cost pricing, rate of return regulation, and price cap regulation.
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: CD
AACSB: Communication
140
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20) In the figure above, complete the graph of the electric utility company by adding the
marginal revenue and marginal cost curves. Assume the marginal cost is constant at 4¢ per
kilowatt-hour. Now discuss the marginal cost pricing rule and the average cost pricing rule
regulators might use to regulate the firm. Be sure to state the price and quantity that are selected
for each option. Also, what price and quantity does the firm select if it is not regulated?
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Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: WM
AACSB: Analytical reasoning
142
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21) The above figure shows the demand for cable and the cable company's cost of providing
cable.
a. What price and quantity will be produced if the company is unregulated and profit
maximizes?
b. What price and quantity will be produced if the company is regulated using the marginal cost
pricing rule?
c. What is the advantage of the marginal cost pricing rule?
d. What price and quantity will be produced if the company is regulated using the average cost
pricing rule?
e. What is the advantage of the average cost pricing rule?
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: SB
AACSB: Analytical reasoning
143
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22) The above figure illustrates the market for electric power that is served by the one utility in
Alberta, Canada.
a. If the government did not regulate this utility, what would be the price of a kilowatt hour in
this region and how much power would be generated?
b. If the government regulates the utility and chooses an average cost pricing rule, what would
be the price of a kilowatt hour and how much power would be generated?
c. If the government regulates the utility and chooses a marginal cost pricing rule, what would
be the price of a kilowatt hour and how much power would be generated?
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: JC
AACSB: Analytical reasoning
144
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23) The above figure represents the cost and demand curves for a natural monopoly that is
regulated using a marginal cost pricing rule.
a. What is the quantity?
b. What price is charged?
c. What area represents the consumer surplus when the firm is regulated using a marginal cost
pricing rule?
d. What distance represents the firm's loss per unit when the firm is regulated using a marginal
cost pricing rule?
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: SB
AACSB: Analytical reasoning
145
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24) The above figure shows the demand, marginal revenue, and cost curves for a natural
monopoly.
a. Which price and quantity is set if the capture theory is correct?
b. If production is at the price and quantity specified in part (a), what area represents the
economic profit?
c. If production is at the price and quantity specified in part (a), what area represents the
deadweight loss?
d. If production is at the price and quantity specified in part (a), what area represents the
consumer surplus?
Skill: Level 3: Using models
Section: Checkpoint 15.5
Author: SB
AACSB: Analytical reasoning
146
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