Monopoly 3881
23. One problem with government operation of monopolies is that
a. a benevolent government is likely to be interested in generating profits for political gain.
b. monopolies typically have rising average costs.
c. the government typically has little incentive to reduce costs.
d. a government-regulated outcome will increase the profitability of the monopoly.
24. One problem with regulating a monopolist on the basis of cost is that
a. by focusing on costs, the regulators ignore profits.
b. it does not provide an incentive for the monopolist to reduce its cost.
c. a monopolist’s costs, by definition, are higher than costs of perfectly competitive firms.
d. a monopolist is still able to generate excessive economic profits.
25. The task of economic regulation is to
a. protect monopoly profits.
b. approximate the results of the competitive market.
c. replace competition with government ownership.
d. increase competition within the market.
3882 Monopoly
26. If government regulation sets the maximum price for a natural monopoly equal to its marginal cost,
then the natural monopolist will
a. earn economic losses.
b. earn economic profits.
c. earn zero economic profits.
d. produce a lower quantity of output than is socially optimal.
27. If the government regulates the price that a natural monopolist can charge to be equal to the
firm’s marginal cost, the firm will
a. earn zero profits.
b. earn positive profits, causing other firms to enter the industry.
c. earn negative profits, causing the firm to exit the industry.
d. minimize costs in order to lower the price that it charges.
Monopoly 3883
28. If the government regulates the price that a natural monopolist can charge to be equal to the
firm’s average total cost, the firm will
a. earn zero profits.
b. earn positive profits, causing other firms to enter the industry.
c. earn negative profits, causing the firm to exit the industry.
d. minimize costs in order to lower the price that it charges.
29. When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated
monopoly
a. will experience a loss.
b. will experience a price below average total cost.
c. may rely on a government subsidy to remain in business.
d. All of the above are correct.
3884 Monopoly
30. Because natural monopolies have a declining average cost curve, regulating natural monopolies by
setting price equal to marginal cost would
a. cause the monopolist to operate at a loss.
b. result in a less than optimal total surplus.
c. maximize producer surplus.
d. result in higher profits for the monopoly.
31. Policymakers are discussing various proposals regarding how to deal with natural monopolies.
Senator Huff wants to regulate natural monopolies by equating price with average total cost. Huff
contends that such a policy will ensure that monopolies make every effort to reduce costs.
Senator Puff wants the government to own natural monopolies. Puff argues that government-
owned monopolies usually do a better job of holding down costs than privately owned monopolies.
Which senator’s argument is correct?
a. Senator Huff
b. Senator Puff
c. both senators
d. neither senator
Monopoly 3885
32. For a typical natural monopoly, average total cost is
a. falling, and marginal cost is above average total cost.
b. falling, and marginal cost is below average total cost.
c. rising, and marginal cost is below average total cost.
d. rising, and marginal cost is above average total cost.
33. For a typical natural monopoly, average total cost is
a. rising, often because marginal costs are very large.
b. rising, often because fixed costs are very large.
c. declining, often because marginal costs are very large.
d. declining, often because fixed costs are very large.
3886 Monopoly
34. In the majority of cases where there is a natural monopoly in the United States, the government
usually deals with the problem
a. by splitting the natural monopoly into smaller companies.
b. through regulation.
c. by turning the natural monopoly into a public enterprise.
d. by doing nothing.
35. In a natural monopoly,
a. society would be better off if antitrust laws were used to create many different firms in the
market.
b. the marginal cost curve is positively sloped.
c. if the government requires marginal cost pricing, it will likely have to subsidize the firm.
d. the marginal revenue curve is horizontal.
Monopoly 3887
36. For a long while, electricity producers were thought to be a classic example of a natural
monopoly. People held this view because
a. the average cost of producing units of electricity by one producer in a specific region was lower
than if the same quantity were produced by two or more producers in the same region.
b. the average cost of producing units of electricity by one producer in a specific region was
higher than if the same quantity were produced by two or more produced in the same region.
c. the marginal cost of producing units of electricity by one producer in a specific region was
higher than if the same quantity were produced by two or more producers in the same region.
d. electricity is a special non-excludable good that could never be sold in a competitive market.
37. The reason to regulate utilities instead of using antitrust laws to promote competition is that a
utility is usually a
a. profit-maximizing monopoly.
b. producer of externalities.
c. revenue-maximizing monopoly.
d. natural monopoly.
3888 Monopoly
Figure 15-21
38. Refer to Figure 15-21. What is the price and quantity for this natural monopolist under fair
return pricing?
a. A and J
b. E and J
c. F and K
d. H and L
39. Refer to Figure 15-21. What is the price and quantity for this natural monopolist under socially
optimal pricing?
a. A and J
b. E and J
c. F and K
d. H and L
Monopoly 3889
40. Refer to Figure 15-21. Which of the following areas describes the profit of this natural
monopolist under socially optimal pricing?
a. ABCE
b. 0HIL
c. 0FGK
d. None of the above is correct.
41. Which type of public policy toward monopolies is much more common in Europe than in the
United States?
a. antitrust laws
b. regulation
c. public ownership
d. “do nothing”
3890 Monopoly
42. Which of the following is an example of public ownership of a monopoly?
a. DeBeers
b. Microsoft
c. U.S. Postal Service
d. AT&T
43. Private ownership of a monopoly may benefit society because the monopoly will have an
incentive to
a. charge a price that is consistent with that of a benevolent social planner.
b. charge a price that prevents some people from buying.
c. price its good according to the intersection of marginal cost and average revenue.
d. lower its costs to earn a higher profit.
Monopoly 3891
44. The key issue in determining the efficiency of public versus private ownership of a monopoly is
a. the tendency for efficient management of publicly owned enterprises.
b. the inability of private monopolies to get rid of managers that are doing a bad job.
c. the propensity of private monopolies to generate excessive profits.
d. how ownership of the firm affects the cost of production.
45. The assessment by George Stigler concerning the tradeoffs between “market failure” and “political
failure” in the American economy provides support for which of the following solutions to the
problems of monopolies?
a. public ownership of monopolies
b. government regulation of monopolies
c. government incentives to promote competition in monopolized industries
d. doing nothing at all
3892 Monopoly
46. The George Stigler quote, “...the degree of ‘market failure’ for the American economy is much
smaller than the ‘political failure’ arising from the imperfections of economic policies …”
illustrates the advantage of which type of public policy toward monopolies?
a. antitrust laws
b. regulation
c. public ownership
d. “do nothing”
Multiple Choice – Section 06: Conclusion
1. Which of the following strategies is not an effective strategy to reduce monopoly inefficiency?
a. antitrust laws
b. price discrimination
c. doing nothing
d. breaking up a natural monopoly into more than one firm
Monopoly 3893
2. Most firms have
a. no monopoly pricing power.
b. some monopoly pricing power.
c. absolute monopoly pricing power.
d. the ability to earn monopoly profits.
3. Which of the following statements is correct?
a. Firms with some degree of monopoly power are common, but firms with substantial monopoly
power are rare.
b. Firms with some degree of monopoly power are rare, as are firms with substantial monopoly
power.
c. Firms with some degree of monopoly power are common, as are firms with substantial
monopoly power.
d. Firms with some degree of monopoly power are rare, but firms with substantial monopoly power
are common.
3894 Monopoly
True/False and Short Answer
1. Monopolists can achieve any level of profit they desire because they have unlimited market
power.
a. True
b. False
2. Even with market power, monopolists cannot achieve any level of profit they desire because they
will sell lower quantities at higher prices.
a. True
b. False
3. The three main sources of barriers to entry are monopoly resources, government regulation, and the
firm’s production process.
a. True
b. False
Monopoly 3895
4. One characteristic of a monopoly market is that the product is virtually identical to products
produced by competing firms.
a. True
b. False
5. The fundamental cause of monopolies is barriers to entry.
a. True
b. False
6. The De Beers Diamond company advertises heavily to promote the sale of all diamonds, not just its
own. This is evidence that it has a monopoly position to some degree.
a. True
b. False
3896 Monopoly
7. The De Beers Diamond company is not worried about differentiating its product from all other
gemstones.
a. True
b. False
8. The amount of power that a monopoly has depends on whether there are close substitutes for its
product.
a. True
b. False
9. If the ABC company owns the exclusive rights to mine land in Afghanistan for Lapis Lazuli, a rare
stone used in jewelry which is found only in Afghanistan, the company benefits from a barrier to
entry.
a. True
b. False
Monopoly 3897
10. Copyrights and patents are examples of barriers to entry that give firms monopoly pricing
powers.
a. True
b. False
11. If the government deems a newly–invented drug to be truly original, the pharmaceutical company
is given the exclusive right to manufacture and sell the drug for 50 years.
a. True
b. False
12. A patent gives a single person or firm the exclusive right to sell some good or service forever.
a. True
b. False
13.
3898 Monopoly
14. A patent gives a single person or firm the exclusive right to sell some good or service for a
specific period of time.
a. True
b. False
15. A natural monopoly has economies of scale for most if not all of its range of output.
a. True
b. False
16. If a product can be produced by a natural monopoly, society will benefit in the form of lower
prices if the monopolist is broken up into several smaller firms.
a. True
b. False
Monopoly 3899
17. Declining average total cost with increased production is one of the defining characteristics of a
natural monopoly.
a. True
b. False
18. Average revenue for a monopoly is the total revenue divided by the quantity produced.
a. True
b. False
19. For a monopoly, marginal revenue is often greater than the price it charges for its good.
a. True
b. False
3900 Monopoly
20. When a monopolist increases the quantity that it sells, all else equal, total revenue increases,
which is called the output effect.
a. True
b. False
21. When a monopolist increases the quantity that it sells, price decreases, which, all else equal,
decreases total revenue; this is called the price effect.
a. True
b. False
22. A monopolist maximizes profit by producing an output level where marginal cost equals price.
a. True
b. False