Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Figure 9–3
Figure 9–3 shows the demand and cost curves for a monopolist.
1)
Refer to Figure 9–3. What is likely to happen to this monopoly in the long run?
1)
A)
As long as there are entry barriers this firm will continue to enjoy economic profits.
B)
New firms will enter the market to eliminate its profits.
C)
It will be regulated by the government because of its excess profits.
D)
It will expand its output to take advantage of economies of scale so as to further increase its
profit.
2)
Which of the following statements is consistent with the views of Joseph Schumpeter?
2)
A)
Enforcement of antitrust laws is necessary to promote competition among firms.
B)
A lack of competition discourages firms from developing new technologies.
C)
Research and development by competitive firms is responsible for most technological
changes.
D)
An economy benefits from firms having market power because these firms are more likely to
be able to commit funds for research and development.
3)
Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?
3)
A)
Each maximizes profits by producing a quantity for which marginal revenue equals marginal
cost.
B)
Each sets a price for its product that will maximize its revenue.
C)
Each maximizes profits by producing a quantity for which price equals marginal cost.
D)
Each must lower its price to sell more output.
4)
Which one of the following about a monopoly is false?
4)
A)
A monopoly can make profits in the long run.
B)
A monopoly can break even in the long run.
C)
Monopoly status can be temporary.
D)
A monopoly must have some kind of government privilege or government–imposed barrier
to entry maintain its monopoly.
Figure 9–7
Figure 9–7 shows the cost and demand curves for the Erickson Power Company.
5)
Refer to Figure 9–7. What is the economically efficient output level and what is the price at that
level?
5)
A)
Q2, P3
B)
Q3, P2
C)
Q2, P2
D)
Q4, P1
6)
Which of the following statements applies to a monopolist but not to a perfectly competitive firm at
its profit–maximizing output?
6)
A)
Marginal revenue equals marginal cost.
B)
Marginal revenue is less than price.
C)
Average revenue equals average cost.
D)
Price equals marginal cost.
7)
If a firm’s average total cost is less than price where MR=MC
7)
A)
the firm should raise its price.
B)
the firm should cut back on its output to lower its cost.
C)
the firm should produce if its price exceeds average variable cost.
D)
the firm should shut down.
8)
Economic efficiency in a free market occurs when
8)
A)
producer surplus is maximized.
B)
price is as low as possible.
C)
the sum of consumer surplus and producer surplus is maximized.
D)
consumer surplus is maximized.
9)
Why does a monopoly cause a deadweight loss?
9)
A)
because it does not produce some output for which marginal benefit exceeds marginal cost
B)
because it increases producer surplus at the expense of consumer surplus
C)
because it appropriates a portion of consumer surplus for itself
D)
because it does not produce some output for which demand exceeds supply
10)
The National Football League owns the NFL network, a 24–hour cable channel devoted entirely to
pro football. The network is available on basic tiers through satellite providers but several major
cable companies, including Time Warner and Comcast place this network on a special digital sports
tier, available only to customers who want to pay extra each month to watch it. If Taylor chooses to
pay the additional fee and Harriet does not, then
10)
A)
Taylor has lost some consumer surplus by paying the additional fee.
B)
Taylor’s demand for sports entertainment is more price elastic than Harriet’s demand.
C)
Harriet has gained some consumer surplus by not having to pay the additional fee.
D)
Harriet’s demand for sports entertainment is more price elastic than Taylor’s demand.
Figure 9–4
Figure 9–4 shows the demand and cost curves for a monopolist.
11)
Refer to Figure 9–4. What is the difference between the monopoly’s price and perfectly competitive
industry’s price?
11)
A)
The monopoly’s price is higher by $9.50.
B)
The monopoly’s price is higher by $3.50.
C)
The monopoly’s price is higher by $13.
D)
The monopoly’s price is higher by $21.
12)
When a proposed merger between two companies is reviewed by the government, the relevant
market is defined by
12)
A)
counting the number of firms that produce the same product.
B)
how elastic the demand is for each firm’s product.
C)
whether or not there are close substitutes for the products of the two firms.
D)
how much advertising is done in the industry.
Figure 9–7
Figure 9–7 shows the cost and demand curves for the Erickson Power Company.
13)
Refer to Figure 9–7. Why won’t regulators require that Erickson Power produce the economically
efficient output level?
13)
A)
because Erickson Power would sustain persistent losses and would not continue in business
in the long run
B)
because at the economically efficient output level the marginal cost of producing the last unit
sold exceeds the consumers’ marginal value for that last unit
C)
because there is insufficient demand at that output level
D)
because Erickson Power would break even
14)
Refer to Figure 9–5. What area represents producer surplus under a monopoly?
14)
A)
0P2E
B)
P1P3HF
C)
0P1FH
D)
0P3H
15)
If a monopolist’s marginal revenue is $25 a unit and its marginal cost is $25 then
15)
A)
to maximize profit the firm should decrease output.
B)
to maximize profit the firm should increase output.
C)
to maximize profit the firm should continue to produce the output it is producing.
D)
not enough information is given to say what the firm should do to maximize profit.
16)
If we use a narrow definition of monopoly, then a monopoly is defined as a firm
16)
A)
that has the largest market share in an industry.
B)
that can ignore the actions of all other firms because it produces a superior product compared
to its rivals’ products.
C)
that can ignore the actions of all other firms because it produces a product for which there are
no close substitutes.
D)
that has been granted special production rights by the government.
Figure 9–4
Figure 9–4 shows the demand and cost curves for a monopolist.
17)
Refer to Figure 9–4. What is the difference between the monopoly output and the perfectly
competitive output?
17)
A)
140 units
B)
240 units
C)
340 units
D)
560 units
18)
Consider an industry that is made up of nine firms, each with a market share (percent of sales) as
follows:
a. Firm A: 30%
b. Firm B: 20%
c. Firms C, D and E: 10% each
d. Firms F, G, H and J: 5% each
What is the value of the Herfindahl–Hirschman Index and how is the industry categorized?
18)
A)
1700; moderately concentrated
B)
1600; moderately concentrated
C)
2600; highly concentrated
D)
1425; moderately concentrated
Figure 9–1
Figure 9–1 above shows the demand and cost curves facing a monopolist.
19)
Refer to Figure 9–1. To maximize profit the firm will produce
19)
A)
Q1.
B)
Q2.
C)
Q3.
D)
Q4.
Figure 9–3
Figure 9–3 shows the demand and cost curves for a monopolist.
20)
Refer to Figure 9–3. What is the monopoly’s total cost of production?
20)
A)
$9,340
B)
$7,800
C)
$17,700
D)
$21,600
Figure 9–4
Figure 9–4 shows the demand and cost curves for a monopolist.
21)
Refer to Figure 9–4. At the profit–maximizing quantity, what is the difference between the
monopoly’s price and the marginal cost of production?
21)
A)
$8
B)
$21
C)
$11.50
D)
There is no difference.
22)
To maintain a monopoly a firm must have
22)
A)
a barrier to entry high enough to keep competing firms out.
B)
marginal revenue equal to demand.
C)
few competitors.
D)
a perfectly inelastic demand.
23)
In regulating a natural monopoly the price strategy that ensures the highest possible output and
zero profit is one that sets price
23)
A)
equal to marginal cost (MC) where the MC curve intersects the demand curve.
B)
equal to marginal revenue.
C)
equal to average variable cost (AVC) where the AVC curve intersects the demand curve.
D)
equal to average total cost (ATC) where the ATC curve intersects the demand curve.
24)
The Federal Trade Commission (FTC) Act
24)
A)
gave the FTC full power to regulate mergers.
B)
prohibited charging buyers different prices if the result would reduce competition.
C)
divided authority to police mergers between the FTC and the Department of Justice.
D)
closed the loopholes in the Sherman and Clayton Acts.
C
D
Figure 9–5
25)
Refer to Figure 9–5. The deadweight loss due to a monopoly is represented by the area
25)
A)
FQ1Q2E.
B)
GEH.
C)
FGE.
D)
FHE.
26)
A patent or copyright is a barrier to entry based on
26)
A)
ownership of a key necessary raw material.
B)
large economies of scale as output increases.
C)
widespread network externalities.
D)
government action.
27)
Compared to perfect competition the consumer surplus in a monopoly
27)
A)
is unchanged because price and output are the same.
B)
is eliminated.
C)
is lower because price is higher and output is lower.
D)
is higher because price is higher and output is the same.
28)
In Walnut Creek, California, there are three very popular supermarkets: Safeway, Whole Foods and
Lunardi’s. While Safeway remains open twenty–four hours a day, Whole Foods and Lunardi’s close
at 9 pm. Which of the following statements is true?
28)
A)
Safeway has a monopoly at midnight but not during the day.
B)
Safeway probably has a higher markup to compensate for its higher cost of production.
C)
Safeway can ignore the pricing decisions of the other two supermarkets.
D)
Safeway is a monopoly all day because it produces a service that has no close substitutes.
29)
In the early 1980s there were 14,500 banks in the United States; today there are fewer than 7,500.
Which of the following is a possible explanation for this?
29)
A)
The supply of banking services decreased with technological advancements that made
Internet transactions relatively easy and inexpensive to use.
B)
Many small community–based banks failed because they were experiencing diseconomies of
scale in their provision of banking services.
C)
The demand for banking services has decreased over time as other types of financial
institutions mushroomed in the economy.
D)
There are economies of scale that could not be exploited in the early 1980s because of federal
regulations that kept banks small.
Figure 9–3
Figure 9–3 shows the demand and cost curves for a monopolist.
30)
Refer to Figure 9–3. What is the profit maximizing/loss–minimizing output level?
30)
A)
800 units
B)
600 units
C)
1,160 units
D)
940 units
Table 9–1
Price per unit
Quantity
demanded
(Units)
Total cost of
production
$200 1$200
180 2300
160 3350
140 4360
120 5375
100 6395
80 7425
A monopoly producer of a foreign language translation software package faces the demand and cost structure given in Table
9–1.
31)
Refer to Table 9–1. What is the marginal revenue from the sale of the third unit?
31)
A)
–$5
B)
$80
C)
$120
D)
$160
32)
For a natural monopoly to exist
32)
A)
a firm must have a government–imposed barrier to entry.
B)
a firm must continually buy up its rivals.
C)
a firm’s long–run average cost curve must exhibit diseconomies of scale beyond the
economically efficient output level.
D)
a firm’s long–run average cost curve must exhibit economies of scale throughout the relevant
range of market demand.
33)
A merger between the Ford Motor Company and General Motors would be an example of a
33)
A)
horizontal merger.
B)
vertical merger.
C)
conglomerate merger.
D)
trust.
34)
Which of following is the best example of a monopoly if we use a broad definition of monopoly?
34)
A)
Zippie Rentals, a sports car rental service in downtown Boston
B)
Santos Tacos, the only taqueria in the small town of Santosville
C)
Cheap Gas, one of two gasoline stations in a large rural community
D)
Spuds Mckenzie, a wealthy potato farmer in Idaho
Figure 9–7
Figure 9–7 shows the cost and demand curves for the Erickson Power Company.
35)
Refer to Figure 9–7. If the government regulates Erickson Power Company so that the firm can earn
a normal profit, price would be set at ________ and output would be set at ________.
35)
A)
P2, Q2
B)
P1, Q4
C)
P2, Q3
D)
P3, Q2
36)
A profit–maximizing monopoly’s price is
36)
A)
greater than the price that would prevail if the industry were perfectly competitive.
B)
less than the price that would prevail if the industry were perfectly competitive.
C)
not consistently related to price that would prevail if the market were perfectly competitive.
D)
the same as the price that would prevail if the industry were perfectly competitive.
37)
If a monopolist’s price is $50 at 63 units of output and marginal revenue equals marginal cost and
average total cost equals $43 then the firm’s total profit is
37)
A)
$3,150.
B)
$441.
C)
$2,709.
D)
$7.
38)
A monopoly is the only seller of a good or service
38)
A)
with many substitutes.
B)
without a well–defined demand curve.
C)
with a perfectly inelastic demand.
D)
without a close substitute.
39)
The Sherman Act prohibited
39)
A)
setting price above marginal cost.
B)
marginal cost pricing.
C)
collusive price agreements among rival sellers.
D)
selling below average total cost.
40)
To enter a local cable television market a firm needs a license from the city government. This is an
example of
40)
A)
a government–imposed barrier to entry.
B)
a natural monopoly.
C)
occupational licensing.
D)
the government maintaining consistent standards in the broadcast industry.
41)
A monopolist’s profit–maximizing price and output correspond to the point on a graph
41)
A)
where average total cost is minimized.
B)
where marginal revenue equals marginal cost and charging the price on the market demand
curve for that output.
C)
where price is as high as possible.
D)
where total cost is minimized.
42)
Patents are important to the success of which of the following firms?
42)
A)
furniture producers
B)
auto makers
C)
organic apple farmers
D)
pharmaceutical firms
43)
Microsoft hires marketing and sales specialists to decide what prices it should set for its products,
whereas a corn farmer in Iowa who sells his output in the world commodity market, does not. Why
is this so?
43)
A)
Microsoft can afford to hire the best people in their fields.
B)
The demand for Microsoft’s products changes; the demand for corn does not.
C)
Unlike Microsoft the corn farmer is probably a monopolist.
D)
The farmer is a price taker and he sells an identical product; Microsoft is a price maker and
sells differentiated products.
Table 9–2
Price per dose Quantity
Demanded
(Dose)
Total Cost of
Production
(Dollars)
$80 0$80
72 182
64 288
56 3100
48 4124
40 5164
32 6208
24 7268
16 8340
Shakti Inc. has been granted a patent for its toothache balm. Table 9–2 shows the demand and the total cost schedule for the
firm.
44)
Refer to Table 9–2. What is the amount of Shakti’s profit?
44)
A)
$124
B)
$192
C)
$68
D)
$72
45)
The Aluminum Company of America (Alcoa) had a monopoly until the 1940s because
45)
A)
it had a patent on the manufacture of aluminum.
B)
it was a public enterprise.
C)
the company had a secret technique for making aluminum from bauxite.
D)
it had control of almost all of the available supply of bauxite.
D
46)
A Herfindahl–Hirschman Index is calculated by
46)
A)
summing the advertising expenditures of the firms that want to merge by total industry
advertising expenditures.
B)
summing the amount of sales by the four largest firms and dividing by total industry sales.
C)
dividing the number of firms wanting to merge by the total number in the industry.
D)
summing the squares of the market shares of each firm in the industry.
D
C