Chapter 9

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Chapter 9

Anything that prevents new firms from competing on an equal basis with existing firms in an industry is called a barrier to entry.
a. True
b. False

A: True

A monopolist is
a. one of a large number of small firms that produce a homogeneous good
b. one of a small number of large firms that produce a differentiated good
c. a single seller of a product with many close substitutes
d. one of a small number of large firms that produce a homogeneous good
e. a single seller of a product with no close substitutes

E:a single seller of a product with no close substitutes

Which of the following is true of monopoly?
a. There are no barriers to entry.
b. The firm is a price taker.
c. There are no close substitutes for the product being produced.
d. There are many firms in the industry.
e. The firm faces a horizontal demand curve.

There are no close substitutes for the product being produced.

Innovation is the process of turning an invention into a marketable product.
a. True
b. False

a. True

Which of the following is true?
a. Patents reduce a firm's incentive to develop new products.
b. Patents are given for new works of art or literature.
c. Patents give a permanent exclusive right to produce a new good.
d. Patents give a temporary exclusive right to produce a new good.
e. Patents guarantee economic profits.

d. Patents give a temporary exclusive right to produce a new good.

Patent laws promote technical progress in all of the following ways except one. Which is the exception?
a. They allow other firms to copy successful products as soon as they are marketed.
b. They prevent duplication of inventions.
c. They provide a stimulus to innovation.
d. They provide the inventor with a temporary monopoly.
e. They increase a firm's incentive to incur the up-front costs of developing new products.

a. They allow other firms to copy successful products as soon as they are marketed.

A natural monopoly is based on economies of scale.

a. True

Which of the following describes the market structure of monopoly?
a. many firms with some control over price, and considerable product differentiation
b. many firms with no control over price, producing identical products with no differentiation
c. a few firms with some control over price, producing similar products which are close substitutes
d. a few firms with no control over price, producing highly differentiated products
e. a single firm producing all of the output for the industry

e. a single firm producing all of the output for the industry

Which of the following would probably not be considered a natural monopoly?
a. a municipal water company
b. the local telephone industry
c. the cable television industry
d. natural gas and electric companies
e. the automobile industry

e. the automobile industry

Maximizing total revenue is the same as maximizing profit.

b. False

The demand curve a monopolist uses in making an output decision is
a. the same as the demand curve facing a perfectly competitive firm
b. vertical because there are no close substitutes for its product
c. horizontal because there are no close substitutes for its product
d. the same as the market demand curve
e. perfectly inelastic

d. the same as the market demand curve

The demand curve a monopolist faces
a. is more elastic than a perfectly competitive firm's demand curve
b. is the market demand curve
c. is as elastic as a perfectly competitive firm's demand curve
d. is not affected by the prices of complements
e. will not shift in response to a change in consumer tastes

b. is the market demand curve

In order to sell an additional unit of its product, a monopolist must decrease price on all units.
a. True
b. False

a. True

Which of the following is true of marginal revenue for a monopolist that charges a single price?
a. P = MR because there are no close substitutes for the monopolist's product.
b. P > MR because the monopolist must decrease price on all units sold in order to sell an additional unit.
c. P < MR because the monopolist must decrease price on all units sold in order to sell an additional unit.
d. AR = MR because there are no close substitutes for the monopolist's product.
e. P = MR only at the profit-maximizing quantity.

b. P > MR because the monopolist must decrease price on all units sold in order to sell an additional unit.

For a monopolist, marginal revenue is
a. equal to price
b. greater than price
c. less than price
d. represented by a horizontal curve
e. equal to average revenue

c. less than price

In Exhibit 9-1, total revenue from selling 5 units is
a. $20
b. $140
c. $100
d. $10
e. $5

c. $100

In Exhibit 9-1, the marginal revenue of the third unit is
a. $20
b. $120
c. $100
d. $40
e. $0

a. $20

In Exhibit 9-1, the marginal revenue of the sixth unit is
a. $10
b. $60
c. $100
d. $40
e. -$40

e. -$40

For a monopolist,
a. P = MR = AR
b. P = MR > AR
c. P > MR = AR
d. P = MR < AR
e. P = AR > MR

e. P = AR > MR

Between which quantities in Exhibit 9-2 is demand unit elastic?
a. 1 and 2
b. 2 and 3
c. 3 and 4
d. 4 and 5
e. 5 and 6

c. 3 and 4

In Exhibit 9-2, the marginal revenue of the fourth unit is
a. $12
b. $3
c. $4
d. -$4
e. $0

e. $0

In Exhibit 9-2, the average revenue of the fourth unit is
a. $12
b. $3
c. $4
d. -$4
e. $0

b. $3

On a graph, to determine the price a profit-maximizing monopolist would charge, find the quantity at which MC and MR intersect and read up to the demand curve.
a. True
b. False

a. True

A monopolist maximizes total revenue at the quantity where marginal revenue equals zero.
a. True
b. False

a. True

The demand curve facing a monopolist
a. is kinked at the market price
b. is perfectly elastic
c. lies above its marginal revenue curve
d. lies below its marginal revenue curve
e. is the same as its marginal revenue curve

c. lies above its marginal revenue curve

What is the relationship between price elasticity of demand and the monopolist's revenue?
a. marginal revenue is maximized where demand is unit elastic.
b. average revenue is maximized where demand is unit elastic.
c. marginal revenue is negative where demand is inelastic.
d. average revenue is negative where demand is inelastic.
e. marginal revenue is lowest where demand is unit elastic.

c. marginal revenue is negative where demand is inelastic.

A monopolist's demand curve
a. is horizontal at the market price
b. lies above its marginal revenue curve
c. is the same as its marginal cost curve
d. indicates that the firm must raise price to sell additional units
e. lies above the marginal cost curve at all levels of output

b. lies above its marginal revenue curve

A profit-maximizing monopolist never produces along the ________ portion of the demand curve because marginal revenue is ________ there.
a. elastic; positive
b. elastic; negative
c. inelastic; negative
d. inelastic; positive
e. inelastic; zero

c. inelastic; negative

Which of the following is true at the profit-maximizing quantity for both a perfectly competitive firm and a monopoly?
a. Price equals marginal cost.
b. Price is greater than marginal cost.
c. Marginal revenue equals marginal cost.
d. Marginal revenue is less than marginal cost.
e. Marginal revenue is greater than average revenue.

c. Marginal revenue equals marginal cost.

The firm in Exhibit 9-3, which charges the same price to all customers, will produce where
a. MR = 0
b. MR = MC
c. MC < MR
d. MC = ATC
e. P = MC

b. MR = MC

The profit-maximizing output and price for the firm in Exhibit 9-3, which charges the same price to all customers, are
a. 117 and $14
b. 150 and $22
c. 150 and $14
d. 117 and $22
e. 117 and $24

e. 117 and $24

The total revenue for the firm in Exhibit 9-3, a monopolist that maximizes profit while charging all customers the same price, is
a. $2,574
b. $2,808
c. $2,100
d. $1,638
e. $3,300

b. $2,808

The total cost for the firm in Exhibit 9-3, a monopolist that maximizes profit while charging all customers the same price, is
a. $3,300
b. $3,400
c. $2,808
d. $2,340
e. $1,638

d. $2,340

The nondiscriminating monopolist in Exhibit 9-5 will produce where
a. MR = 0
b. MR = MC
c. MC < MR
d. MC = ATC
e. D = MC

b. MR = MC

Optimal output and price for the nondiscriminating monopolist in Exhibit 9-5 are
a. 90 and $18
b. 1,500 and $24
c. 1,700 and $22
d. 1,100 and $28
e. 1,500 and $22

d. 1,100 and $28

The total revenue for the nondiscriminating monopolist at its profit-maximizing quantity in Exhibit 9-5 is
a. $16,200
b. $36,000
c. $39,600
d. $30,800
e. $31,000

d. $30,800

The total cost for the nondiscriminating monopolist at its profit-maximizing quantity in Exhibit 9-5
a. is $16,500
b. is $24,200
c. is $16,200
d. is $19,800
e. cannot be determined, as no fixed costs are given

d. is $19,800

The nondiscriminating monopolist at its profit-maximizing quantity in Exhibit 9-5 is making a profit of
a. $6,200
b. $13,320
c. $11,000
d. $15,200
e. $0

c. $11,000

A monopolist earning short-run economic profit determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit?
a. Raise price and lower output.
b. Lower price and lower output.
c. Raise price and raise output.
d. Lower price and raise output.
e. Lower output but leave price unchanged.

a. Raise price and lower output.

What is the profit-maximizing price for the monopolist in Exhibit 9-6?
a. $14
b. $11
c. $10
d. $9
e. $8

d. $9

What is the maximum profit the monopolist in Exhibit 9-6 can earn?
a. -$5
b. $40.80
c. $43.60
d. $44.20
e. $42.60

d. $44.20

Which of following is true of monopoly and not of perfect competition?
a. Profit is maximized where marginal cost equals marginal revenue
b. The industry demand curve is also the firm's demand curve
c. Normal profits are made only if average total cost equals average revenue
d. Profit is maximized in the elastic portion of the demand curve
e. the firm has no control over the market price

b. The industry demand curve is also the firm's demand curve

Maximum profit for the profit-maximizing monopolist in Exhibit 9-10, which does not price discriminate, is
a. $14
b. -$8
c. $0
d. $46.62
e. $54

a. $14

What output would maximize the profit of the nondiscriminating monopolist in Exhibit 9-10?
a. 0
b. 7
c. 10
d. more than 10
e. less than 7

b. 7

Eli Whitney III receives a patent for the rayon gin, a product for which there are no close substitutes. Eli will maximize his profit when
a. MR is maximized
b. MR = MC
c. MR > MC
d. MR < MC
e. P = MR > MC

b. MR = MC

In the short run, how will a profit-maximizing monopolist react if its marginal cost suddenly increases? It will
a. lower price to expand revenue possibilities
b. restrict output to extract a higher price from customers
c. maintain the current price if profit is still positive
d. increase plant size to lower marginal cost
e. decrease plant size to lower marginal cost

b. restrict output to extract a higher price from customers

Suppose Arf n' Barf restaurant has a monopoly on restaurant food in a certain small town. Their rent, which is one of several fixed costs they pay whether they sell food or not, has gone up. In the short run, the Arf n' Barf should
a. pay the higher rent and increase menu prices
b. pay the higher rent and leave menu prices unchanged
c. pay the higher rent and lower prices
d. go out of business
e. shut down

b. pay the higher rent and leave menu prices unchanged

In the short run, a monopolist will always shut down when
a. total cost is greater than total revenue at all output levels
b. total variable cost is greater than fixed cost
c. total revenue is greater than total variable cost at all output levels
d. fixed cost is greater than total revenue at all output levels
e. total variable cost is greater than total revenue at all output levels

e. total variable cost is greater than total revenue at all output levels

In the short run, a monopolist will shut down when
a. average total cost is greater than price at all output levels
b. average variable cost is greater than average fixed cost at all output levels
c. price is greater than average variable cost at all output levels
d. average fixed cost is greater than price at all output levels
e. average variable cost is greater than price at all output levels

e. average variable cost is greater than price at all output levels

In the short run, the monopolist depicted in Exhibit 9-13 should
a. shut down because P < AVC at some output levels
b. shut down because P < ATC at all output levels
c. continue producing because P > AVC at some output levels
d. continue producing because P > ATC at all output levels
e. continue producing because monopolists never shut down

c. continue producing because P > AVC at some output levels

Barriers to entry
a. prevent monopolies from earning profit in the long run
b. prevent monopolies from earning profit in the short run
c. may allow monopolies to earn profit in the long run
d. prevent government from regulating a monopoly
e. prevent a natural monopoly from raising its price

c. may allow monopolies to earn profit in the long run

Which of the following would not bar entry into a market?
a. control by a single firm of an essential resource
b. the necessity of taking risks when starting a firm
c. patents
d. economies of scale
e. government regulations limiting the number of firms in an industry

b. the necessity of taking risks when starting a firm

The main reason a monopolist can earn long-run economic profit, whereas a perfectly competitive firm cannot, is that
a. monopolists operate under economies of scale
b. perfectly competitive firms have opportunity costs
c. demand for the monopolist's output is inelastic
d. demand for the monopolist's output is elastic
e. there are no barriers to entry in perfect competition

e. there are no barriers to entry in perfect competition

An important difference between a perfectly competitive firm and a monopolist is that
a. the perfectly competitive firm tends to be larger
b. only the monopolist attempts to maximize profit
c. only the perfectly competitive firm maximizes profit
d. the perfectly competitive firm faces a horizontal demand curve and the monopolist faces a downward-sloping demand curve
e. only the monopolist maximizes profit at the quantity where marginal cost equals marginal revenue

d. the perfectly competitive firm faces a horizontal demand curve and the monopolist faces a downward-sloping demand curve

When compared to firms in perfect competition, monopolists tend to charge __________ prices and offer __________ quantities of output.
a. lower; lower
b. higher; lower
c. lower; higher
d. higher; higher
e. higher; the same

b. higher; lower

Perfectly competitive firms and monopolist firms both maximize profit where
a. price equals marginal cost
b. total revenue is maximized
c. average total cost is minimized
d. marginal cost equals marginal revenue
e. price is as high as possible

d. marginal cost equals marginal revenue

In Exhibit 9-15, deadweight loss to consumers from a monopolist that does not price discriminate is represented by area
a. ecf
b. eda
c. dacb
d. dafc
e. abf

e. abf

The welfare loss of monopoly is also called
a. converted consumer surplus
b. deadweight loss
c. economic profit under monopoly
d. producer surplus
e. contestable profit

b. deadweight loss

The U.S. Postal Service
a. has as much monopoly power now as it had 100 years ago
b. has lost much of its market power due to new competitors and new technologies
c. has increased its prices by less than the rate of inflation during the past 25 years
d. is more mechanized and more computerized than its potential competitors
e. is a perfectly competitive firm

b. has lost much of its market power due to new competitors and new technologies

Firms price discriminate because, by doing so, they obtain a higher profit than by charging a single price.
a. True
b. False

a. True

The practice of charging different prices to different consumers of the same product is called
a. monopolistic pricing
b. unit pricing
c. price discrimination
d. elasticity pricing
e. marginal cost pricing

c. price discrimination

Which of the following would not be considered price discrimination?
a. Long distance telephone rates are cheaper late at night.
b. Airline fares are cheaper if you reserve several weeks in advance.
c. The price of lettuce is 59 cents a head and two for a dollar.
d. The price of a brand-name prescription drug is higher than the price of a generic brand.
e. Senior citizens pay less for a movie.

d. The price of a brand-name prescription drug is higher than the price of a generic brand.

Which of the following would not be considered price discrimination?
a. Long distance telephone rates are cheaper late at night.
b. Airline fares are cheaper if you reserve several weeks in advance.
c. The price of lettuce is 59 cents a head and two for a dollar.
d. The price of a brand-name prescription drug is higher than the price of a generic brand.
e. Senior citizens pay less for a movie.

d. The price of a brand-name prescription drug is higher than the price of a generic brand.

Which of the following is not necessary for price discrimination to occur?
a. a downward-sloping demand curve facing the firm
b. control over price by the firm
c. the firm can easily distinguish groups with different price elasticities
d. the firm can easily prevent resale of the good by lower-price customers
e. economies of scale exist

e. economies of scale exist

Which of the following would not be considered price discrimination?
a. charging higher rates on long distance calls during normal business hours
b. giving lower air fares to those who buy tickets a month before departure
c. charging lower prices for senior citizens at museums
d. getting separate prices for residential and commercial users of natural gas
e. charging more for BMWs than for Chevrolets

e. charging more for BMWs than for Chevrolets

Which of the following is not a condition required for a monopolist to price discriminate?
a. the demand curve facing the firm must be downward-sloping
b. the firm must exhibit strong economies of scale
c. there must be different groups of buyers with different price elasticities of demand
d. the firm must be able to prevent reselling of the product
e. the firm must have some market power

b. the firm must exhibit strong economies of scale

Suppose that a price-discriminating monopolist divides its market into two segments. In each market segment, price is determined by finding the level of output where that market's
a. average revenue equals average total cost
b. average revenue equals average variable cost
c. marginal revenue equals average total cost
d. marginal revenue equals marginal cost
e. marginal cost equals average total cost

d. marginal revenue equals marginal cost

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