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52. Drug companies are allowed to be monopolists in the drugs they discover in order to
a.
allow drug companies to charge a price that is equal to their marginal cost.
b.
discourage new firms from entering the drug market.
c.
allow the government to earn patent revenue.
d.
None of the above is correct.
53. Authors are allowed to be monopolists in the sale of their books in order to
a.
encourage authors to write more and better books.
b.
correct for the negative externalities that the Internet and television impose.
c.
satisfy literary advocacy groups that exercise their lobbying power.
d.
promote a society in which people think for themselves and learn from whichever books they please.
54. Authors are allowed to be monopolists in the sale of their books in order to
a.
promote a society in which people think for themselves and learn from whichever books they please.
b.
correct for the negative externalities that the Internet and television impose.
c.
satisfy literary advocacy groups that exercise their lobbying power.
d.
None of the above is correct.
Figure 15-1
55. Refer to Figure 15-1. The shape of the average total cost curve reveals information about the nature of the barrier to
entry that might exist in a monopoly market. Which of the following monopoly types best coincides with the figure?
a.
ownership of a key resource by a single firm
b.
natural monopoly
c.
government-created monopoly
d.
a patent or copyright monopoly
56. Refer to Figure 15-1. The shape of the average total cost curve in the figure suggests an opportunity for a profit-
maximizing monopolist to take advantage of
a.
economies of scale.
b.
diseconomies of scale.
c.
diminishing marginal product.
d.
increasing marginal cost.
57. Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the marginal cost
curve for this firm
a.
must lie entirely above the average total cost curve.
b.
must lie entirely below the average total cost curve.
c.
must be upward sloping.
d.
does not exist.
58. Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the marginal cost
curve for this firm must
a.
lie entirely above the average total cost curve.
b.
lie entirely below the average total cost curve.
c.
be U-shaped.
d.
be horizontal.
Scenario 15-1
Consider a transportation corporation named Reading’s that has just completed the development of a new light rail system
in Minneapolis. Currently, there are plenty of seats on the train, and it is never crowded. Its capacity far exceeds the needs
of the city. After just a few years of operation, the shareholders of Reading’s experienced incredibly high rates of return
on their investment due to the profitability of the corporation.
59. Refer to Scenario 15-1. Which of the following statements is most likely to be true?
(i)
New entrants to the market know they will have a smaller market share than Reading’s
currently has.
(ii)
Reading’s is a natural monopoly.
(iii)
Reading’s is most likely experiencing increasing average total cost.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
60. Refer to Scenario 15-1. Which of the following statements is most likely to be true?
(i)
New entrants to the market know they will have a smaller market share than Reading’s
currently has.
(ii)
Reading’s is most likely experiencing decreasing average total cost.
(iii)
Reading’s is a natural monopoly.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
Scenario 15-2
Consider a local, privately-owned electrical cooperative named Poweshiek Power Company (PPCo). PPCo has just
completed a clean-coal-burning electrical power plant in Iowa. Currently, PPCo can meet the electricity needs of all
residents in the county. In fact, its capacity far exceeds the needs of the county. After just a few years of operation, the
shareholders of PPCo experienced incredibly high rates of return on their investment due to the profitability of the
corporation.
61. Refer to Scenario 15-2. Which of the following statements is most likely to be true?
(i)
New entrants to the market know they will have a smaller market share than PPCo
currently has.
(ii)
PPCo is most likely experiencing rising marginal cost.
(iii)
PPCo is a natural monopoly.
(iv)
PPCo is most likely experiencing declining average total cost.
a.
(i) and (ii) only
b.
(i), (ii), and (iii) only
c.
(i), (iii) and (iv) only
d.
(i), (ii), (iii), and (iv)
62. Refer to Scenario 15-2. Which of the following statements is most likely to be true?
(i)
New entrants to the market know they will have a smaller market share than PPCo
currently has.
(ii)
PPCo is a natural monopoly.
(iii)
PPCo would experience higher profits if it were government-run.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
63. Refer to Scenario 15-2. PPCo will continue to be a monopolist in the electricity industry only if
a.
population growth leads to an increased demand for electricity.
b.
there are no new entrants to the market.
c.
the price of natural gas decreases.
d.
All of the above are correct.
64. Which of the following is a characteristic of a natural monopoly?
a.
Fixed costs are typically a small portion of total costs.
b.
Average total cost declines over large regions of output.
c.
The product sold is a natural resource such as diamonds or water.
d.
All of the above are correct.
65. Which of the following is a characteristic of a natural monopoly?
a.
Average cost exceeds marginal cost over large regions of output.
b.
Increasing the number of firms increases each firm’s average total cost.
c.
One firm can supply output at a lower cost than two firms.
d.
All of the above are correct.
66. A natural monopoly occurs when
a.
the product is sold in its natural state, such as water or diamonds.
b.
there are economies of scale over the relevant range of output.
c.
the firm is characterized by a rising marginal cost curve.
d.
production requires the use of free natural resources, such as water or air.
67. An industry is a natural monopoly when
(i)
the government assists the firm in maintaining the monopoly.
(ii)
a single firm owns a key resource.
(iii)
a single firm can supply a good or service to an entire market at a smaller cost than could
two or more firms.
a.
(ii) only
b.
(iii) only
c.
(i) and (ii) only
d.
(ii) and (iii) only
68. When a natural monopoly exists, it is
a.
always cost effective for government-owned firms to produce the product.
b.
never cost effective for one firm to produce the product.
c.
always cost effective for two or more private firms to produce the product.
d.
never cost effective for two or more private firms to produce the product.
69. The defining characteristic of a natural monopoly is
a.
constant marginal cost over the relevant range of output.
b.
economies of scale over the relevant range of output.
c.
constant returns to scale over the relevant range of output.
d.
diseconomies of scale over the relevant range of output.
70. Natural monopolies differ from other forms of monopoly because they are
a.
not subject to barriers to entry.
b.
not regulated by government.
c.
unable to sustain long-run profits.
d.
are generally not worried about competition eroding their monopoly position in the market.
71. When a firm's average total cost curve continually declines, the firm is a
a.
government-created monopoly.
b.
natural monopoly.
c.
revenue monopoly.
d.
All of the above are correct.
72. A natural monopolist's ability to price its product is
a.
constrained by the market demand curve.
b.
constrained by market supply.
c.
not affected by market demand.
d.
enhanced by regulatory control of the government.
73. When an industry is a natural monopoly,
a.
it is characterized by constant returns to scale.
b.
it is characterized by diseconomies of scale.
c.
a larger number of firms may lead to a lower average cost.
d.
a larger number of firms will lead to a higher average cost.
Figure 15-2
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)
multiple 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
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.
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.
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.
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.
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.
86. Which of the following is a characteristic of a monopoly market?
a.
A large number of buyers and sellers.
b.
Mutual interdependence.
c.
Free entry and exit.
d.
A product with no close substitutes.
87. A patent gives the inventor monopoly control over the patented good. Patents also
a.
lead to lower prices for goods.
b.
create incentives to develop new products.
c.
lead to an increase in the number of producers of the patented good.
d.
lead to increased entry into the market for the patented good.
88. When the market for a good is a natural monopoly, this results in
a.
improved product choice for consumers.
b.
many producers charging low prices for the good.
c.
dominance by a single producer of the good.
d.
increased entry by new producers of the good.
89. Suppose that a market that is a natural monopoly has three producers providing the good to this market. This situation
will
a.
result in lower prices for consumers under all circumstances.
b.
result in higher average costs for each producer than if there were only a single producer.
c.
result in all firms taking full advantage of economies of scale in the production of the good.
d.
result in a more efficient outcome than the market with fewer producers.
