Monopoly
Multiple Choice – Section 00: Introduction
1. A competitive firm
a. and a monopolist are price takers.
b. and a monopolist are price makers.
c. is a price taker, whereas a monopolist is a price maker.
d. is a price maker, whereas a monopolist is a price taker.
2. A perfectly competitive firm produces where
a. marginal cost equals price, while a monopolist produces where price exceeds marginal cost.
b. marginal cost equals price, while a monopolist produces where marginal cost exceeds price.
c. price exceeds marginal cost, while a monopolist produces where marginal cost equals price.
d. marginal cost exceeds price, while a monopolist produces where marginal cost equals price.
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3. A monopoly
a. can set the price it charges for its output and earn unlimited profits.
b. takes the market price as given and earns small but positive profits.
c. can set the price it charges for its output but faces a downward-sloping demand curve so it
cannot earn unlimited profits.
d. can set the price it charges for its output but faces a horizontal demand curve so it can earn
unlimited profits.
4. A monopoly can earn positive profits because it
a. can sell unlimited quantities at any price it chooses.
b. takes the market price as given and can sell unlimited quantities.
c. can set the price it charges for its output but faces a horizontal demand curve.
d. can maintain a price such that total revenues will exceed total costs.
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5. A perfectly competitive market
a. may not be in the best interests of society, whereas a monopoly market promotes general
economic well-being
b. promotes general economic well-being, whereas a monopoly market may not be in the best
interests of society.
c. and a monopoly market are equally likely to promote general economic well-being.
d. is less likely to promote general economic well-being than a monopoly market.
6. Because monopoly firms do not have to compete with other firms, the outcome in a market with a
monopoly is often
a. not in the best interest of society.
b. one that fails to maximize total economic well-being.
c. inefficient.
d. All of the above are correct.
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7. Because monopoly firms do not have to compete with other firms, the outcome in a market with a
monopoly
a. is often not in the best interest of society.
b. maximizes total economic well-being.
c. is efficient.
d. benefits consumers more so than the producer.
8. Because a monopolist does not face competition from other firms, the outcome in a market with a
monopoly
a. does not illustrate profit maximization.
b. is often not in the best interest of society.
c. is characterized by unlimited profits.
d. would be improved if the government produced the product rather than a private firm.
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9. Microsoft faces very little competition from other firms for its Windows software. Why isn’t the
price of the software $1,000 per copy?
a. because the government would not allow such a high price
b. because stockholders would not allow such a high price
c. because the company would sell so few copies that they would earn higher profits by selling at a
lower price
d. All of the above are correct.
10. The DeBeers Company faces very little competition from other firms in the wholesale diamond
market. Why isn’t the price of the wholesale diamonds $10,000 per carat?
a. because the government would not allow such a high price
b. because stockholders would not allow such a high price
c. because the company would sell so few copies that they would earn higher profits by selling at
a lower price
d. All of the above are correct.
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Multiple Choice – Section 01: Why Monopolies Arise
1. Which of the following is not a characteristic of a monopoly?
a. barriers to entry
b. one seller
c. one buyer
d. a product without close substitutes
2. Which of the following is not a characteristic of a monopoly?
a. the seller has market power
b. one seller
c. free entry and exit
d. a product without close substitutes
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3. Which of the following is a characteristic of a monopoly?
a. low fixed costs as a portion of total costs
b. free entry and exit
c. barriers to entry
d. declining marginal cost
4. Which of the following is a characteristic of a monopoly?
a. rising average total costs
b. one buyer
c. rising fixed costs
d. a product without close substitutes
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5. The fundamental source of monopoly power is
a. barriers to entry.
b. profit.
c. decreasing average total cost.
d. a product without close substitutes.
6. The fundamental source of monopoly power is
a. many buyers and sellers.
b. low fixed costs.
c. rising average total costs.
d. barriers to entry.
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7. A monopoly market is characterized by
a. many buyers and sellers.
b. “natural” products.
c. barriers to entry.
d. a Nash equilibrium.
8. A benefit of a monopoly is
a. lower prices.
b. a wide variety of similar products.
c. decreasing long-run average total costs.
d. greater creativity by authors who can copyright their novels.
9. A benefit of a monopoly is
a. efficient production.
b. decreasing long–run marginal costs.
c. profit that can be invested in research and development.
d. All of the above are correct.
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10. Which of the following are necessary characteristics of a monopoly?
(i) The firm is the sole seller of its product.
(ii) The firm’s product does not have close substitutes.
(iii) The firm generates a large economic profit.
(iv) The firm is located in a small geographic market.
a. (i) and (ii) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv)
11. The simplest way for a monopoly to arise is for a single firm to
a. decrease its price below its competitors’ prices.
b. decrease production to increase demand for its product.
c. make pricing decisions jointly with other firms.
d. own a key resource.
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12. Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds.
Then DeBeers, a large diamond company, has
a. less incentive to advertise than it would otherwise have.
b. less market power than it would otherwise have.
c. more control over the price of diamonds than it would otherwise have.
d. higher profits than it would otherwise have.
13. Suppose ABC Aluminum Inc. owns 80% of the world’s bauxite, a mineral used in the production
of aluminum. Which of the following reasons describes the fundamental barrier to entry for the
aluminum industry?
a. monopoly resources
b. government regulation
c. the production process
d. Both a and b are correct.
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14. Exclusive ownership of a key resource
a. is the most common cause of a monopoly.
b. is a potential but rare cause of a monopoly.
c. explains the monopoly ownership of the US Postal Service.
d. explains why a single firm distributes water to a community.
15. Which of the following is not a reason for the existence of a monopoly?
a. sole ownership of a key resource
b. patents
c. copyrights
d. diseconomies of scale
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16. Which of the following is not a reason for the existence of a monopoly?
a. patents
b. marginal-cost pricing
c. economies of scale
d. trademarks
17. Which of the following would be most likely to have monopoly power?
a. a long-distance telephone service provider
b. a local cable TV provider
c. a large department store
d. a gas station
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18. Which of the following would be most likely to have monopoly power?
a. a national florist
b. an online bookstore
c. a local restaurant
d. a local electrical cooperative
19. Which of the following would be most likely to have monopoly power?
a. an online bookstore
b. a municipal water company
c. a local restaurant
d. a grocery store
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20. A firm that is the sole seller of a product without close substitutes is
a. perfectly competitive.
b. monopolistically competitive.
c. an oligopolist.
d. a monopolist.
21. A market structure with barriers to entry is
a. a monopoly.
b. oligopolistically competitive.
c. monopolistically competitive.
d. perfectly competitive.
22. Most markets are not monopolies in the real world because
a. firms usually face downward-sloping demand curves.
b. supply curves slope upward.
c. firms usually equate price with marginal cost.
d. there are reasonable substitutes for most goods.
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23. Which of the following statements is not correct?
a. Consumers will likely benefit in the form of lower prices from buying a product made by a
natural monopoly than if the market were served by several firms.
b. Monopolists typically charge higher prices than competitive firms.
c. Monopolists typically produce larger quantities of output than competitive firms.
d. Consumers may benefit from monopolies if the firms invest their higher profits into something
that benefits society such as medical research.
24. Which of the following is not an example of a barrier to entry?
a. Mighty Mitch’s Mining Company owns a unique plot of land in Tanzania, under which lies the
only large deposit of Tanzanite in the world.
b. A pharmaceutical company obtains a patent for a specific high blood pressure medication.
c. A musician obtains a copyright for her original song.
d. An entrepreneur opens a popular new restaurant.
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25. Which of the following is not an example of a barrier to entry?
a. Mighty Mitch’s Mining Company owns a unique plot of land in Tanzania, under which lies the
only large deposit of Tanzanite in the world.
b. A college student starts a part–time tutoring business.
c. A novelist obtains a copyright for her new book.
d. A taxi cab driver in New York City obtains a license to legally provide transportation in New
York City.
26. Which of the following is not an example of a barrier to entry?
a. Mighty Mitch’s Mining Company owns a unique plot of land in Tanzania, under which lies the
only large deposit of Tanzanite in the world.
b. A chemist receives a patent for a new skin cream.
c. An entrepreneur opens a cupcake bakery.
d. A taxi cab driver in New York City obtains a license to legally provide transportation in New
York City.
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27. Which of the following is not an example of a barrier to entry?
a. A soybean farmer is the first in her county to use a new brand of fertilizer.
b. Microsoft obtains a copyright for its Windows operating system.
c. A pharmaceutical company obtains a patent for a new medication to treat migraine headaches.
d. A taxi cab driver in New York City obtains a license to legally provide transportation in New
York City.
28. Which of the following is not an example of a barrier to entry?
a. John owns the only parcel of lakeside property with a beach that is safe for swimming. He
charges admission to neighbors who want to use the beach.
b. Jackie owns the copyright to a popular song. She receives royalties every time a radio station
plays her song.
c. John Jr. owns the best seafood restaurant in a popular resort area. He charges high prices
because the quality of the food is so good.
d. Caroline owns the patent for a new running shoe. She receives payments from the company
who manufactures the shoes.
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29. Which of the following is an example of a barrier to entry?
a. Tom charges a higher price than his competitors for his golf lessons.
b. Dick charges a lower price than his competitors for his lawn-mowing services.
c. Harry offers free concerts on Sunday afternoons as a form of advertising.
d. Larry obtains a copyright for the new computer game that he invented.
30. Which of the following is an example of a barrier to entry?
a. Crystal charges a higher price than her competitors for her hair-styling services.
b. Dan charges a lower price than his competitors for his dry-walling services.
c. Jackie offers free samples of her loose-meat sandwiches to attract new customers.
d. Roseanne obtains a copyright for a short story that she wrote and published.
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31. Which of the following is an example of a barrier to entry?
a. Matthew offers free samples of his latest flavored coffee drink to entice customers to buy a
cup.
b. Mark charges a lower price to students than to faculty for his tattoo services.
c. Luke charges a higher hourly price to business students than to liberal arts students for his
economics tutoring.
d. John obtained a copyright for the song he wrote and recorded.
32. Which of the following is an example of a barrier to entry?
(i) A key resource is owned by a single firm.
(ii) The costs of production make a single producer more efficient than a large number of
producers.
(iii) The government has given the existing monopolist the exclusive right to produce the good.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) only
d. (i), (ii), and (iii)