Chapter 15/Monopoly ❖ 81
Figure 15-17
Demand
MC
MR
10 20 30 40 50 60 70 80 Quantity
10
20
30
40
50
60
70
80
90
100
Price
62. Refer to Figure 15-17. The consumer surplus at the monopolist’s profit-maximizing price is
a.
$450.
b.
$900.
c.
$1,350.
d.
$2,025.
63. Refer to Figure 15-17. The deadweight loss caused by a profit-maximizing monopoly amounts to
a.
$225.
b.
$450.
c.
$900.
d.
$1,350.
64. Which of the following can defeat the profit-maximizing strategy of price discrimination?
a.
consumer surplus
b.
deadweight loss
c.
market power
d.
arbitrage
65. Price discrimination is a rational strategy for a profit-maximizing monopolist when
a.
the monopolist finds itself able to produce only limited quantities of output.
b.
consumers are unable to be segmented into identifiable markets.
c.
the monopolist wishes to increase the deadweight loss that results from profit-maximizing behavior.
d.
there is no opportunity for arbitrage across market segments.
82 ❖ Chapter 15/Monopoly
66. A market force that can prevent firms from price discriminating is
a.
fluctuating resource prices.
b.
arbitrage.
c.
high fixed costs.
d.
marginal-cost pricing.
67. The process of buying a good in one market at a low price and selling the good in another market for a higher
price in order to profit from the price difference is known as
a.
sabotage.
b.
conspiracy.
c.
arbitrage.
d.
collusion.
68. If a monopolist can practice perfect price discrimination, the monopolist will
a.
eliminate consumer surplus.
b.
eliminate deadweight loss.
c.
maximize profits.
d.
All of the above are correct.
69. Perfect price discrimination
a.
eliminates deadweight loss.
b.
reduces profits to the monopolist.
c.
decreases the total quantity sold by the monopolist.
d.
requires arbitrage in order for the monopolist to maximize profits.
70. Perfect price discrimination
a.
increases profits to the firm.
b.
increases total surplus.
c.
decreases consumer surplus.
d.
All of the above are correct.
71. A perfectly price-discriminating monopolist is able to
a.
maximize profit and produce a socially-optimal level of output.
b.
maximize profit, but not produce a socially-optimal level of output.
c.
produce a socially-optimal level of output, but not maximize profit.
d.
exercise illegal preferences regarding the race and/or gender of its employees.
Chapter 15/Monopoly ❖ 83
72. If a monopolist is able to perfectly price discriminate,
a.
consumer surplus is always increased.
b.
total surplus is always decreased.
c.
consumer surplus and deadweight losses are transformed into monopoly profits.
d.
the price effect dominates the output effect on monopoly revenue.
73. In theory, perfect price discrimination
a.
decreases the monopolist’s profits.
b.
decreases consumer surplus.
c.
increases deadweight loss.
d.
reduces the number of consumers who purchase the monopoly’s product.
74. Perfect price discrimination describes a situation in which the monopolist
a.
knows the exact willingness to pay of each of its customers.
b.
charges exactly two different prices to exactly two different groups of customers.
c.
maximizes consumer surplus.
d.
experiences a zero economic profit.
75. In reality, perfect price discrimination is
a.
used by about 75 percent of all monopolies.
b.
used by about 50 percent of all monopolies.
c.
seldom used by monopolies because it leads to lower profits.
d.
rarely possible.
76. How does a competitive market compare to a monopoly that engages in perfect price discrimination?
a.
In both cases, total social welfare is the same.
b.
Total social welfare is higher in the competitive market than with the perfectly price discriminating
monopoly.
c.
In both cases, some potentially mutually beneficial trades do not occur.
d.
Consumer surplus is the same in both cases.
77. A monopolist that practices perfect price discrimination
a.
creates no deadweight loss.
b.
charges one group of buyers a higher price than another group, such as offering a student discount.
c.
charges a higher price but produces the same monopoly level of output as when a single price is
charged.
d.
charges some customers a price below marginal cost because costs are covered by the high-priced
buyers.
84 ❖ Chapter 15/Monopoly
78. A monopolist faces the following demand curve:
Price
Quantity
$8
300
$7
400
$6
500
$5
600
$4
700
$3
800
$2
900
$1
1,000
The monopolist has fixed costs of $1,000 and has a constant marginal cost of $2 per unit. If the monopolist
were able to perfectly price discriminate, how many units would it sell?
a.
400
b.
500
c.
900
d.
4,200
79. With perfect price discrimination the monopoly
a.
eliminates all price discrimination by charging each customer the same price.
b.
charges each customer an amount equal to the monopolist’s marginal cost of production.
c.
eliminates deadweight loss.
d.
eliminates profits and increases consumer surplus.
80. Which of the following is not one of the ways that antitrust laws promote competition?
a.
Antitrust laws allow the government to prevent mergers.
b.
Antitrust laws allow the government to break up companies into smaller ones.
c.
Antitrust laws prevent companies from coordinating their activities in ways that make markets less
competitive.
d.
Antitrust laws allow the government to shut down any firm the government believes has monopoly
power.
Chapter 15/Monopoly ❖ 85
Table 15–18
Tommy’s Tie Company, a monopolist, has the following cost and revenue information. Assume that Tommy’s
is able to engage in perfect price discrimination.
COSTS
REVENUES
Total Cost
Marginal
Cost
Quantity
Demanded
Price
Total
Revenue
Marginal
Revenue
$100
—
0
$170
—
$140
1
$160
$184
2
$150
$230
3
$140
$280
4
$130
$335
5
$120
$395
6
$110
$475
7
$100
$575
8
$95
81. Refer to Table 15–18. If the monopolist can engage in perfect price discrimination, what is the
marginal revenue from selling the 5th tie?
a.
$80
b.
$100
c.
$110
d.
$120
82. Refer to Table 15–18. If the monopolist can engage in perfect price discrimination, what is the marginal reve-
nue from selling the 8th tie?
a.
$45
b.
$60
c.
$80
d.
$95
83. Refer to Table 15–18. If the monopolist can engage in perfect price discrimination, what is the total revenue
when 3 ties are sold?
a.
$140
b.
$420
c.
$450
d.
$620
84. Refer to Table 15–18. If the monopolist can engage in perfect price discrimination, what is the total revenue
when 7 ties are sold?
a.
$650
b.
$700
c.
$910
d.
$1080
86 ❖ Chapter 15/Monopoly
85. Refer to Table 15–18. If the monopolist can engage in perfect price discrimination, what is the average reve-
nue when 7 ties are sold?
a.
$90
b.
$100
c.
$110
d.
$130
86. Refer to Table 15–18. If the monopolist can engage in perfect price discrimination, what is the quantity that
maximizes economic profit?
a.
5 ties
b.
6 ties
c.
7 ties
d.
8 ties
87. Refer to Table 15–18. If the monopolist can engage in perfect price discrimination, what is total profit at the
profit-maximizing quantity?
a.
$325
b.
$435
c.
$565
d.
$1000
88. Refer to Table 15–18. What are Tommy’s Ties Company’s fixed costs?
a.
$100
b.
$150
c.
$354
d.
$654
PUBLIC POLICY TOWARD MONOPOLIES
1. Which of the following is the preferred strategy for the government to follow to remedy the inefficient alloca-
tion of resources associated with monopolies?
a.
preventing mergers through antitrust laws
b.
regulating the prices that monopolies can charge
c.
doing nothing
d.
None of the above strategies is preferred. Each is a viable strategy.
2. Which of the following statements is not correct?
a.
The government may use antitrust laws to break up an existing company to improve competition.
b.
The government may break up a natural monopoly to lower the price charged to customers.
c.
Private ownership is typically preferred to public ownership.
d.
Sometimes the best strategy is for the government to do nothing about monopoly inefficiency
because the “fix” may be worse than the problem.
Chapter 15/Monopoly ❖ 87
3. Which of the following statements is not correct?
a.
The government may use antitrust laws to prevent a merger if the government believes the merger
will reduce competition and increase prices.
b.
By regulating a natural monopoly where price equals average total cost, the monopoly earns zero
profits.
c.
An advantage of private ownership over public ownership is that private business owners tend to
fire inefficient managers.
d.
The government should always intervene to improve monopoly inefficiency.
4. Which of the following may eliminate some or all of the inefficiency that results from monopoly pricing?
a.
The government can regulate the monopoly.
b.
The monopoly can be prohibited from price discriminating.
c.
The monopoly can be forced to operate at a point where its marginal revenue is equal to its
marginal cost.
d.
None of the above would eliminate any inefficiency associated with a monopoly.
5. Antitrust laws have economic benefits that outweigh the costs if they
a.
prevent mergers that would decrease competition and lower the costs of production.
b.
prevent mergers that would decrease competition and raise the costs of production.
c.
allow mergers that would decrease competition and raise the costs of production.
d.
None of the above is correct because antitrust laws never have economic benefits that outweigh the
costs.
6. Which of the following statements is not correct?
a.
Two examples of early antitrust laws are the Sherman and Clayton Antitrust Acts.
b.
Antitrust laws automatically prevent mergers between companies that produce similar products.
c.
Antitrust laws give the government power to increase competition.
d.
Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through
more efficient joint production.
7. Which of the following statements is correct?
a.
Two examples of early antitrust laws are the Clinton and Stigler Antitrust Acts.
b.
Antitrust laws automatically prevent mergers between companies that produce similar products.
c.
Antitrust laws reduce the government’s power to regulate private companies.
d.
Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through
more efficient joint production.
8. The first major piece of antitrust legislation was the
a.
Clayton Act.
b.
Reagan-Bush Act.
c.
Sherman Act.
d.
Clinton-Gore Act.
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9. The legislation passed by Congress in 1890 to reduce the market power of large and powerful “trusts” was the
a.
Morgan Act.
b.
Sherman Act.
c.
Clayton Act.
d.
14th Amendment.
10. The legislation passed by Congress in 1914 to strengthen the government’s powers and authorize private law-
suits was the
a.
Morgan Act.
b.
Sherman Act.
c.
Clayton Act.
d.
14th Amendment.
11. The collection of statutes aimed at curbing monopoly power is called
a.
the 14th amendment.
b.
the Clayton Act.
c.
the Sherman Act.
d.
antitrust law.
12. In order for antitrust laws to raise social welfare, the government must
a.
disallow synergy benefits from accruing to monopolists.
b.
disallow any mergers from taking place.
c.
be able to determine which mergers are desirable and which are not.
d.
always attempt to keep markets in their most competitive form.
13. Reduced competition through merging of companies will raise social welfare
a.
if the social cost from the synergies exceeds the benefit of increased market power.
b.
if the benefit from the synergies exceeds the social cost of increased market power.
c.
always.
d.
never.
14. One method used to control the ability of firms to capture monopoly profit in the United States is through
a.
government purchase of products produced by monopolists.
b.
government distribution of a monopolist’s excess production.
c.
enforcement of antitrust laws.
d.
regulation of firms in highly competitive markets.
15. Antitrust laws may
a.
enhance the ability of firms to capture profits from a concentration of market power.
b.
enhance the ability of firms to reduce economic losses.
c.
restrict the ability of firms to operate at the socially efficient level of production.
d.
restrict the ability of firms to merge.
Chapter 15/Monopoly ❖ 89
16. Antitrust laws allow the government to
a.
prevent mergers.
b.
break up companies.
c.
promote competition.
d.
All of the above are correct.
17. Antitrust laws allow the government to
a.
collect revenues through the antitrust tax.
b.
break up companies.
c.
purchase privately-held companies through eminent domain.
d.
All of the above are correct.
18. Splitting up a monopoly is often justified on the grounds that
a.
consumers prefer dealing with small firms.
b.
small firms have lower costs.
c.
competition is inherently efficient.
d.
small firms produce higher quality products.
19. Antitrust laws
a.
prevent firms from maximizing profits.
b.
allow the government to prevent mergers, even ones that would benefit consumers.
c.
require the government to measure both the benefits and costs of a potential merger.
d.
All of the above are correct.
20. Which of the following statements is correct?
a.
Public ownership is preferred to regulation in order to minimize the deadweight losses associated
with natural monopolies.
b.
Antitrust laws are always the best way to limit monopoly power.
c.
It is possible that the best approach to monopolies is for the government to do nothing.
d.
Marginal-cost pricing requires a natural monopoly to earn zero economic profits.
21. Which of the following is not correct?
a.
Antitrust laws may prevent mergers that would actually raise social welfare.
b.
Public ownership is the most common public policy toward monopolies in the United States.
c.
Regulation is a common strategy for a natural monopoly.
d.
Sometimes the best public policy toward a monopoly may be to do nothing.
90 ❖ Chapter 15/Monopoly
22. Which of the following statements is not correct?
a.
Part of the deadweight loss associated with monopoly is measured by the monopolist’s economic
profit.
b.
Marginal cost is always less than average total cost in a natural monopoly.
c.
Discount coupons available free to the public are a type of price discrimination.
d.
Anti-trust laws make it harder for firms to create synergies.
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.
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.
Chapter 15/Monopoly ❖ 91
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.
30. Since 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 poli-
cy 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
32. 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”
92 ❖ Chapter 15/Monopoly
33. 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
34. 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.
35. 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.
36. 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.
37. 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.
38. 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.