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
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.
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.
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
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.
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.
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
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.
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
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
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
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
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
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
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
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
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
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.
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.
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.
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.
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
A) ABG.
B) BEFG.
C) BCFG.
D) BCE.
E) None of the above because there is no deadweight loss created.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
8) The assumption that regulation relentlessly seeks out deadweight loss and seeks to eliminate it
is called the
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.
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
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
D) predatory pricing and price caps
E) marginal cost pricing and price cap regulation
15.8 Essay: Monopoly and How it Arises
1) What are the conditions that define a monopoly?
2) Describe the three general types of barriers.
3) Are some monopolies created by government legislation that gives a firm the unique right to
produce a good or service?
4) What is a legal barrier to entry?
5) Competition keeps prices lower for consumers. So why do we have patent laws?
6) What is price discrimination?
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?
2) What is the relationship between the marginal revenue curve and the demand curve for a
single-price monopoly?
3) How does marginal revenue compare to price for a single-price monopoly?
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?
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?
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.
7) Why will a profit-maximizing, single-price monopoly NEVER produce the amount of output
that maximizes its total revenue?
8) Can a monopoly earn an economic profit in the long run? Explain your answer.
9) What kind of profit can a monopoly earn in the short run? In the long run? Explain your
answers.