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74. Refer to Figure 15–2. Which of the following reasons describes the fundamental barrier to entry
for the monopoly in the figure?
a. monopoly resources
b. government regulation
c. the production process
d. Both a and b are correct.
75. If the distribution of water is a natural monopoly, then
(i) imultiple firms would likely each have to pay large fixed costs to develop their own
network of pipes.
(ii) allowing for competition among different firms in the water-distribution industry is efficient.
(iii) a single firm can serve the market at the lowest possible average total cost.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (iii) only
3682 Monopoly
76. A firm that is a natural monopoly
a. is not likely to be concerned about new entrants eroding its monopoly power.
b. is taking advantage of economies of scale.
c. would experience a higher average total cost if more firms entered the market.
d. All of the above are correct.
77. A firm that is a natural monopoly
a. is not likely to be concerned about new entrants eroding its monopoly power.
b. is taking advantage of diseconomies of scale.
c. would experience a lower average total cost if more firms entered the market.
d. All of the above are correct.
78. Additional firms often do not try to compete with a natural monopoly because
a. they fear retaliation in the form of pricing wars from the natural monopolist.
b. they are unsure of the size of the market in general.
c. they know they cannot achieve the same low costs that the natural monopolist enjoys.
d. the natural monopoly does not make a large profit.
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79. When a single firm can supply a product to an entire market at a lower cost than could two or
more firms, the industry is called a
a. resource industry.
b. exclusive industry.
c. government monopoly.
d. natural monopoly.
80. A natural monopoly arises when
a. there are constant returns to scale over the relevant range of output.
b. there are economies of scale over the relevant range of output.
c. one firm owns a key natural resource.
d. the government gives a single firm the exclusive right to produce a particular good or service.
3684 Monopoly
81. When a firm has a natural monopoly, the firm’s
a. marginal cost always exceeds its average total cost.
b. total cost curve is horizontal.
c. average total cost curve is downward sloping.
d. marginal cost curve must lie above the firm’s average total cost curve.
82. If government officials break up a natural monopoly into four smaller firms, then
a. each firm will be unable to maximize profits due to increased competition.
b. competition will force firms to produce surplus output, which drives up price.
c. the average cost of production will increase.
d. consumers will benefit from lower average total costs.
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83. When there are economies of scale over the relevant range of output for a monopoly, the
monopoly
a. is a natural monopoly.
b. is a government–granted monopoly.
c. has monopoly power due to the ownership of a patent or copyright.
d. has monopoly power due to the ownership of a key production resource.
84. When a firm experiences continually declining average total costs, the firm is a
a. government-created monopoly.
b. price taker.
c. natural monopoly.
d. revenue maximizer.
3686 Monopoly
85. When a firm experiences continually declining average total costs,
a. the firm is a price taker.
b. society is better served by having one firm supply the product.
c. the firm will earn higher profits than if average total costs are increasing.
d. All of the above are correct.
Multiple Choice – Section 02: How Monopolies Make Production and Pricing Decisions
1. Which of the following statements is (are) true of a monopoly?
(i) A monopoly has the ability to set the price of its product at whatever level it desires.
(ii) A monopoly’s total revenue will always increase when it increases the price of its product.
(iii) The more a monopoly increases output, the higher the profits.
a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (ii) and (iii) only
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2. Amanda inherited the only local cable TV/Internet company in town after her father passed away.
The company has a local monopoly on the delivery of high-speed Internet service. The company is
completely unregulated by the government and is therefore free to operate as it wishes. Assume
that Amanda understands the true power of her new monopoly. Which of the following statements
is (are) correct?
(i) She will be able to set the price of high-speed Internet service at whatever level she
wishes.
(ii) The customers will be forced to purchase high-speed Internet service at whatever price
she wants to set.
(iii) She will be able to achieve any profit level that she desires.
a. (i) only
b. (ii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)
3. The market demand curve for a monopolist is typically
a. unit price elastic.
b. downward sloping.
c. horizontal.
d. vertical.
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4. A monopolist faces a
a. horizontal demand curve.
b. vertical demand curve.
c. downward–sloping demand curve.
d. U-shaped demand curve.
5. When a firm operates under conditions of monopoly, its price is
a. not constrained.
b. constrained by marginal cost.
c. constrained by demand.
d. constrained only by its social agenda.
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6. In order to sell more of its product, a monopolist must
a. sell to the government.
b. sell in international markets.
c. lower its price.
d. use its market power to force up the price of complementary products.
7. In order to sell more of its product, a monopolist must
a. lobby the government for a subsidy.
b. lower its price.
c. advertise.
d. enact barriers to entry in related markets.
8. Economists assume that monopolists behave as
a. cost minimizers.
b. profit maximizers.
c. price maximizers.
d. maximizers of social welfare.
3690 Monopoly
9. Because a monopolist is the sole producer in its market, it can necessarily alter the price of its
good
(i) without affecting the quantity sold.
(ii) without affecting its average total cost.
(iii) by adjusting the quantity it supplies to the market.
a. (ii) only
b. (iii) only
c. (i) and (ii) only
d. (ii) and (iii) only
10. When a monopolist decreases the price of its good, consumers
a. continue to buy the same amount.
b. buy more.
c. buy less.
d. may buy more or less, depending on the price elasticity of demand.
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11. When a monopolist increases the amount of output that it produces and sells, the price of its
output
a. stays the same.
b. increases.
c. decreases.
d. may increase or decrease depending on the price elasticity of demand.
12. A monopoly firm is a price
a. taker and has no supply curve.
b. maker and has no supply curve
c. taker and has an upward-sloping supply curve.
d. maker and has an upward-sloping supply curve.
3692 Monopoly
13. Monopolies use their market power to
a. charge prices that equal minimum average total cost.
b. increase the quantity sold as they increase price.
c. charge a price that is higher than marginal cost.
d. dump excess supplies of their product on the market.
14. Monopoly firms have
a. downward-sloping demand curves, so they can sell as much output as they desire at the market
price.
b. downward-sloping demand curves, so they can sell only the specific price-quantity combinations
that lie on the demand curve.
c. horizontal demand curves, so they can sell as much output as they desire at the market price.
d. horizontal demand curves, so they can sell only a limited quantity of output at each price.
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15. Which of the following is not correct?
a. The demand curve facing a competitive firm is perfectly elastic.
b. The demand curve facing a monopolist is the market demand curve.
c. A monopolist can charge any price and sell any quantity that it chooses.
d. A monopolist can alter the market price by adjusting the quantity that it produces.
16. Which of the following statements is correct?
a. The demand curve facing a competitive firm is horizontal, as is the demand curve facing a
monopolist.
b. The demand curve facing a competitive firm is downward sloping, whereas the demand curve
facing a monopolist is horizontal.
c. The demand curve facing a competitive firm is horizontal, whereas the demand curve facing a
monopolist is downward sloping.
d. The demand curve facing a competitive firm is downward sloping, as is the demand curve
facing a monopolist.
3694 Monopoly
17. The profit–maximization problem for a monopolist differs from that of a competitive firm in which
of the following ways?
a. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost;
a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost.
b. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a
monopolist maximizes profit at the point where average revenue exceeds marginal cost.
c. For a competitive firm, marginal revenue at the profit–maximizing level of output is equal to
marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profit–
maximizing level of output is smaller than it is for larger levels of output.
d. For a profit-maximizing competitive firm, thinking at the margin is much more important than it
is for a profit- maximizing monopolist.
18. Competitive firms differ from monopolies in which of the following ways?
(i) Competitive firms do not have to worry about the price effect lowering their total
revenue.
(ii) Marginal revenue for a competitive firm equals price, while marginal revenue for a
monopoly is less than the price it is able to charge.
(iii) Monopolies must lower their price in order to sell more of their product, while competitive
firms do not.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)
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19. Which of the following is not a difference between monopolies and perfectly competitive
markets?
a. Monopolies can earn profits in the long run while perfectly competitive firms break even.
b. Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a
price equal to marginal cost.
c. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost
while perfectly competitive firms do not.
d. Monopolies face downward sloping demand curves while perfectly competitive firms face
horizontal demand curves.
20. Competitive firms have
a. downward-sloping demand curves, and they can sell as much output as they desire at the
market price.
b. downward-sloping demand curves, and they can sell only a limited quantity of output at each
price.
c. horizontal demand curves, and they can sell as much output as they desire at the market price.
d. horizontal demand curves, and they can sell only a limited quantity of output at each price.
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21. Because many good substitutes exist for a competitive firm’s product, the demand curve that it
faces is
a. unit-elastic.
b. perfectly inelastic.
c. perfectly elastic.
d. inelastic only over a certain region.
22. In a market characterized by monopoly, the market demand curve is
a. upward sloping.
b. horizontal.
c. downward sloping.
d. vertical.
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23. As a monopolist increases the quantity of output it sells, the price consumers are willing to pay for
the good
a. is unaffected.
b. decreases.
c. increases.
d. There is not enough information given in answer the question.
24. When a monopolist reduces the quantity of output it produces and sells, the
a. price of its output increases.
b. price of its output remains constant.
c. price of its output decreases.
d. profits for the firm always decrease.
3698 Monopoly
25. Suppose a firm has a monopoly on the sale of widgets and faces a downward-sloping demand
curve. When selling the 100th widget, the firm will always receive
a. less marginal revenue on the 100th widget than it received on the 99th widget.
b. more average revenue on the 100th widget than it received on the 99th widget.
c. more total revenue on the 100 widgets than it received on the first 99 widgets.
d. a lower average cost per unit at 100 units of output than at 99 units of output.
26. Suppose a firm has a monopoly on the sale of a computer game and faces a downward-sloping
demand curve.
When selling the 50th game, the firm will always receive
a. less marginal revenue on the 50th game than it received on the 49th game.
b. more average revenue on the 50th game than it received on the 49th game.
c. more total revenue on the 50 games than it received on the first 49 games.
d. Both b and c are correct.
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27. For a monopoly firm, the shape and position of the demand curve play a role in determining the
(i) profit-maximizing price.
(ii) shape and position of the marginal-cost curve.
(iii) shape and position of the marginal-revenue curve.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)
28. For a monopoly, the level of output at which marginal revenue equals zero is also the level of
output at which
a. average revenue is zero.
b. profit is maximized.
c. total revenue is maximized.
d. marginal cost is zero.
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29. A monopolist’s average revenue is always
a. equal to marginal revenue.
b. greater than the price of its product.
c. equal to the price of its product.
d. less than the price of its product.
30. If a profit-maximizing monopolist faces a downward–sloping market demand curve, its
a. average revenue is less than the price of the product.
b. average revenue is less than marginal revenue.
c. marginal revenue is less than the price of the product.
d. marginal revenue is greater than the price of the product.
31. When a monopolist increases the amount of output that it produces and sells, average revenue
a. increases, and marginal revenue increases.
b. increases, and marginal revenue decreases.
c. decreases, and marginal revenue increases.
d. decreases, and marginal revenue decreases.