Chapter 15/Monopoly ❖ 93
39. 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.
40. 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.
41. 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
42. 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”
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
94 ❖ Chapter 15/Monopoly
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.
TRUE/FALSE
1. Monopolists can achieve any level of profit they desire because they have unlimited market power.
2. Even with market power, monopolists cannot achieve any level of profit they desire because they will sell
lower quantities at higher prices.
3. The three main sources of barriers to entry are monopoly resources, government regulation, and the firm’s
production process.
4. One characteristic of a monopoly market is that the product is virtually identical to products produced by
competing firms.
5. The fundamental cause of monopolies is barriers to entry.
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.
7. The De Beers Diamond company is not worried about differentiating its product from all other gemstones.
8. The amount of power that a monopoly has depends on whether there are close substitutes for its product.
Chapter 15/Monopoly ❖ 95
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.
10. Copyrights and patents are examples of barriers to entry that give firms monopoly pricing powers.
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.
12. A patent gives a single person or firm the exclusive right to sell some good or service forever.
13. A patent gives a single person or firm the exclusive right to sell some good or service for a specific period of
time.
14. A natural monopoly has economies of scale for most if not all of its range of output.
15. If a product can be produced by a natural monopoly, society will benefit in the form of lower prices if the mo-
nopolist is broken up into several smaller firms.
16. Declining average total cost with increased production is one of the defining characteristics of a natural mo-
nopoly.
17. Average revenue for a monopoly is the total revenue divided by the quantity produced.
18. For a monopoly, marginal revenue is often greater than the price it charges for its good.
19. When a monopolist increases the quantity that it sells, all else equal, total revenue increases, which is called
the output effect.
96 ❖ Chapter 15/Monopoly
20. When a monopolist increases the quantity that it sells, price decreases, which, all else equal, decreases total
revenue; this is called the price effect.
21. A monopolist maximizes profit by producing an output level where marginal cost equals price.
22. A monopolist produces an output level where marginal revenue equals marginal cost and charges a price
where marginal cost equals average total cost.
23. Like competitive firms, monopolies choose to produce a quantity in which marginal revenue equals marginal
cost.
24. Like competitive firms, monopolies charge a price equal to marginal cost.
25. A monopolist produces where P > MC = MR.
26. A monopolist produces where P = MC = MR.
27. During the life of a drug patent, the monopoly pharmaceutical firm maximizes profit by producing the quantity
at which marginal revenue equals marginal cost.
28. At the profit-maximizing quantity of output for a monopolist, average revenue, marginal revenue, and price
are all equal.
29. A monopolist’s profit is equal to (Price – Marginal Cost) Quantity.
Chapter 15/Monopoly ❖ 97
30. A monopolist does not have a supply curve because the firm’s decision about how much to supply is impossi-
ble to separate from the demand curve it faces.
31. A monopolist’s supply curve is vertical.
32. A monopolist’s supply curve is horizontal.
33. The socially efficient quantity is found where the demand curve intersects the marginal cost curve.
34. The profit that a monopolist earns represents a loss to society that is measured through deadweight loss.
35. Deadweight loss measures the loss in society’s welfare that occurs because a monopolist does not produce the
socially efficient level of output.
36. Deadweight loss measures the loss in society’s welfare that occurs because a monopolist can earn profits
without the concern of new firms entering its industry.
37. The deadweight loss for a monopolist equals one-half of its profits for any given level of output.
38. In a monopoly market, the socially efficient quantity of output is typically higher than the profit–maximizing
quantity of output for the monopolist.
39. A monopoly creates a deadweight loss to society because it earns both short-run and long-run positive eco-
nomic profits.
98 ❖ Chapter 15/Monopoly
40. A monopoly creates a deadweight loss to society because it produces less output than the socially efficient
level.
41. Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces an output level of
100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the de-
mand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly
deadweight loss equals $4,000.
42. Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces an output level of
100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the de-
mand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly
deadweight loss equals $2,000.
43. Suppose a profit-maximizing monopolist faces a constant marginal cost of $20, produces an output level of
100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the de-
mand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly
deadweight loss equals $1,500.
44. Goods that do not have close substitutes have downward-sloping demand curves.
45. Price discrimination can increase both the monopolist’s profits and society’s welfare.
46. In order for a firm to maximize profits through price discrimination, the firm must have some market power
and be able to prevent arbitrage.
47. Price discrimination is prohibited by antitrust laws.
48. A monopolist earns higher profits by charging one price than by practicing price discrimination.
Chapter 15/Monopoly ❖ 99
49. By selling hardcover books to die-hard fans and paperback books to less enthusiastic readers, the publisher is
able to price discriminate and raise its profits.
50. Movie theatres charge different prices to different groups of people based on the differing marginal costs that
exist from group to group.
51. Airlines often separate their customers into business travelers and personal travelers by giving a discount to
those travelers who stay over a Saturday night.
52. University financial aid can be viewed as a type of price discrimination.
53. By offering lower prices to customers who buy a large quantity, a monopoly is price discriminating.
54. A monopolist that can practice perfect price discrimination will not impose a deadweight loss on society.
55. Antitrust laws give the Justice Department the authority to challenge potential mergers between companies in
an effort to safeguard society from monopoly power.
56. Some companies merge in order to lower costs through efficient joint production.
57. If the government regulates the price a natural monopolist can charge to be equal to the firm’s average total
cost, the firm has no incentive to reduce costs.
58. If the government regulates the price a natural monopolist can charge to be equal to the firm’s marginal cost,
the government will likely need to subsidize the firm.
59. The proper level of government intervention is unclear when dealing with a monopoly.
100 ❖ Chapter 15/Monopoly
60. A common solution to monopoly in European countries is public ownership.
61. The best solution to the problem of welfare loss from monopoly is public ownership.
62. The government may choose to do nothing to reduce monopoly inefficiency because the “fix” may be worse
than the problem.
63. Government intervention always reduces monopoly deadweight loss.
64. Government intervention is always preferable to doing nothing when reducing the social inefficiencies of mo-
nopoly.
65. Firms with substantial monopoly power are quite common because many goods are unique.
SHORT ANSWER
1. Describe how government is involved in creating a monopoly. Why might the government create one? Give an
example.
2. What is the defining characteristic of a natural monopoly? Give an example of a natural monopoly.
3. In the market for “home heating” consumers typically have several options (e.g., electricity, heating fuel, natu-
ral gas, propane, etc.), yet we often think of firms in this industry as behaving like monopolists. Discuss the
context in which your electricity provider is a monopolist. Is this characterization universally applicable? Ex-
plain your answer.
Chapter 15/Monopoly ❖ 101
4. There has been much discussion of deregulating electricity and natural gas delivery companies in the United
States. Discuss the likely effect of deregulation on prices in these two industries.
5. Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods.
6. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from
taxation?
102 ❖ Chapter 15/Monopoly
7. What is the deadweight loss due to profit-maximizing monopoly pricing under the following conditions: The
price charged for goods produced is $10. The intersection of the marginal revenue and marginal cost curves
occurs where output is 100 units and marginal revenue is $5. The socially efficient level of production is 110
units. The demand curve is linear and downward sloping, and the marginal cost curve is constant.
8. Assume that a monopolist decides to maximize revenue rather than profit. How does this operating objective
change the size of the deadweight loss? If you are a “benevolent” manager of a monopoly firm and are inter-
ested in reducing the deadweight loss of monopoly, should you maximize profits or maximize revenue? Ex-
plain your answer.
9. One example of price discrimination occurs in the publishing industry when a publisher initially releases an
expensive hardcover edition of a popular novel and later releases a cheaper paperback edition. Use this exam-
ple to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy.
10. What are the four ways that government policymakers can respond to the problem of monopoly?
11. Give some examples of the benefits and costs of antitrust laws.
12. In many countries, the government chooses to “internalize” the monopoly by owning monopoly providers of
goods and services. (In some cases these firms are “nationalized,” and the government actually buys or confis-
cates firms that operate in monopoly markets). What would be the advantages and disadvantages of such an
approach to ensure that the “best interest of society” is promoted in these markets? Explain your answer.
Chapter 15/Monopoly ❖ 103
13. Why might economists prefer private ownership of monopolies over public ownership of monopolies?
14. One solution to the problems of marginal-cost pricing of a regulated natural monopolist is average cost pric-
ing. In this model, the monopolist is allowed to price its production at average total cost. How does average–
cost pricing differ from marginal-cost pricing? Does this solution maximize social well-being?