Chapter 15 Monopoly

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. _ __ 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. _ __

1. Monopolies use their market power to ( c )

a. charge prices that equal minimum average total cost. b. attain normal profits in the long run. c. restrict output and increase price.

d. dump excess supplies of their product on the market.

2. If government officials break a natural monopoly up into several smaller firms, then ( c )

a. competition will force firms to attain economic profits rather than accounting

profits.

b. competition will force firms to produce surplus output, which drives up price. c. the average costs of production will increase. d. the average costs of production will decrease.

3. Sizable economic profits can persist over time under monopoly if the monopolist ( b )

a. produces that output where average total cost is at a maximum. b. is protected by barriers to entry.

c. operates as a price taker rather than a price maker. d. realizes revenues that exceed variable costs.

4. Most markets are not monopolies in the real world because ( d )

a. firms usually face downward-sloping demand curves. b. supply curves slope upward.

c. price is usually set equal to marginal cost by firms. d. there are reasonable substitutes for most goods.

Chapter 15 (4-1)

Consider the following demand and cost information for a monopoly. QUANTITY PRICE TOTAL COST 0 $40 $10 1 $30 $15 2 $20 $25 3 $10 $40 4 $0 $60

5. The marginal revenue of the second unit is ( a )

a. $10 b. $20 c. $30 d. $40

6. The marginal cost of the fourth unit is ( c )

a. $60 b. $40 c. $20 d. $10

7. The maximum profit this monopolist can earn is ( d )

a. $40 b. $30 c. $20 d. $15

8. To maximize profit, the monopolist sets price at ( b )

a. $40 b. $20 c. $0 d. $10

9. If a monopolist has zero marginal costs ( a )

a. it will produce the output at which total revenue is maximized.

b. it will produce in the range in which marginal revenue is still increasing. c. it will produce at the point at which marginal revenue is at a maximum. d. it will produce in the range in which marginal revenue is negative.

10. The supply curve for the monopolist ( d )

a. is horizontal. c. is a 45-degree line. b. is vertical. d. does not exist.

11. Many economists criticize monopolists because they produce at output levels that are not efficient. That is to say, monopolists ( a d )

a. charge too high a price. b. don’t innovate.

c. produce a large quantity of waste.

d. have no incentive to produce at their minimum ATC.

Chapter 15 (4-2)

12. Suppose potatoes were produced in Canada by many, many firms in perfect competition. In Belgium, only one firm produces potatoes for the Belgium market. Suppose further that for the competitive firms and the monopoly minimum ATC is the same. We would expect that in Belgium the price of potatoes is ______ and ______ potatoes are produced and sold than in Canada. ( c )

a. higher; more c. higher; fewer b. lower; more d. lower; fewer

13. “Monopolists do not worry about efficient production and cost saving since they can just pass along any increase in costs to their consumers.” The statement is ( a )

a. false; price increases will mean fewer sales, and lower costs will mean higher

profits (or smaller losses).

b. true; this is the primary reason why economists believe that monopolies result

in economic inefficiency.

c. false; the monopolist is a price taker.

d. true; consumers in a monopoly market have no substitutes to turn to when the

monopolist raises prices.

14. Concerning public utilities, the stated reason for resorting to regulation of a monopoly, rather than promoting competition through antitrust, is that the industry in question is believed to be a ( d )

a. profit-maximizing monopoly. b. producer of externalities.

c. revenue-maximizing monopoly. d. natural monopoly.

15. Splitting up a monopoly is often justified on the grounds that ( c )

a. consumers prefer dealing with small firms.

b. small firms have lower costs.

c. competition is inherently efficient.

d. nationalization is a less preferred option.

16. The first major piece of antitrust legislation in the United States was the ( c )

a. Clayton Act. c. Sherman Act.

b. Celler-Kefauver Act. d. Robinson-Patman Act.

Chapter 15 (4-3)