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Market power is
A characteristic of all market structures.
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The ability to alter the market price of a product.
Most common for competitive firms.
Enjoyed by all firms at high levels of output.
If a firm can change market prices by altering its output, then it has market power.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 24-01 How a
monopolist sets price and output.
award:
10.00
points
Monopolists are price
Takers, as are competitive firms.
Takers, but competitive firms are price makers.
→
Makers, but competitive firms are price takers.
Makers, as are competitive firms.
Competitive firms must charge the market price because of the perfectly elastic demand curve that they face. On the
other hand, monopolists are price makers in that the firm chooses the profit-maximizing output and then charges the
price that consumers are willing and able to pay.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
award:
10.00
points
A monopolist has market power because it
→
Faces a downward-sloping demand curve for its own output.
Can raise price as much as it wishes and not lose any customers.
Is a price taker.
Is regulated by the government.
A firm that faces a downward-sloping demand curve can change market prices by altering its output and therefore
has market power.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
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The marginal revenue curve is below the demand curve
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If a firm must lower its price to sell additional output.
For a competitive firm.
When a market is characterized by economies of scale.
For all firms.
If a firm must lower its price to sell additional output (demand is downward-sloping), marginal revenue is less than
price and therefore the MR curve will fall below the demand curve.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
award:
10.00
points
Which of the following is true about the output level where marginal revenue equals marginal cost?
Economic profits are equal to zero.
The firm should increase its output.
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The firm is maximizing profit.
The firm should reduce its output.
A firm maximizes total profit at the output rate where MR is equal to MC. If MC is less than MR, the firm can increase
profits by producing more. If MC exceeds MR, the firm should reduce output.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
award:
10.00
points
Which of the following statements is not correct?
→
A monopolist's ability to act as a price setter guarantees economic profits in the short run.
The monopolist's marginal revenue is less than the price for any output greater than one.
A monopolist's demand curve is the same as the market demand curve for the product.
In the long run, a monopolist will experience only positive or zero economic profits.
No firm, regardless of whether it is a monopoly or a perfectly competitive firm, is guaranteed profits.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
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Which of the following is the same for monopoly and competition under the same cost and demand conditions?
The amount of output that is produced.
Economic profits.
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The goal of maximizing profits.
Efficiency of production at the profit-maximizing output.
The basic incentive for any firm to produce goods and services is the expectation of profit.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
award:
10.00
points
In Table 24.1, according to the profit maximization rule, at the profit-maximizing level of output marginal, cost is
$200.
$250.
→
$300.
$350.
Profit is maximized at the output level where the difference between revenue and cost is greatest (where MR is equal
to MC). This occurs at three units of output and MC is equal to $300.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
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The shaded area in Figure 24.1 represents
Total revenue.
Total cost.
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Total profit.
Total loss.
Total profit is equal to the difference between price and average total costs times quantity, which will be the shaded
area.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
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In Figure 24.1 total cost is represented by the area
ABFE.
→
CDFE.
ABGHE.
ABDC.
Total cost will be the ATC times quantity, which is area CDFE.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
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In Figure 24.2, total revenue at the profit-maximizing rate of output is
→
$22.00.
$6.40.
$4.00.
$16.00.
Total revenue is equal to price times quantity, which will be $22.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
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In Figure 24.2, total profit at the profit-maximizing rate of output is
$16.00.
$5.50.
→
$6.00.
$22.00.
Total profit is equal to the difference between price and average total cost times quantity, which will be ($5.50 - $4) ×
4 or $6.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
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Reductions in minimum average costs that come about through increases in the size of plants and equipment are called
Barriers to entry.
Economies to monopoly power.
→
Economies of scale.
Diseconomies of entry.
Economies of scale occur when a firm increases efficiency by investing in a larger plant or more equipment.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-02 How
monopoly and competitive
outcomes differ.
award:
10.00
points
Like a competitive industry, a monopoly must
Practice marginal cost pricing.
→
Deal with the law of demand.
Confront a demand curve equal to its marginal revenue curve.
Earn only zero economic profit in the long run.
The monopoly faces the industry demand curve, which is downward-sloping. Because of this, the monopoly firm will
have to lower prices in order to sell additional goods.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 24-02 How
monopoly and competitive
outcomes differ.
award:
10.00
points
Assume a monopoly confronts the same costs and demand as a competitive industry. In this case, the monopolist
produces
The same output and charges the same price as the competitive industry.
More output and charges a higher price than the competitive industry.
Less output and charges a lower price than the competitive industry.
→
Less output and charges a higher price than the competitive industry.
When compared to a competitive market, monopolists tend to charge a higher price and produce a lower level of
output.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-02 How
monopoly and competitive
outcomes differ.
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A monopoly realizes larger profits than a comparable competitive market by
Setting a higher price at the competitive level of output, thereby increasing total revenue.
Producing a greater quantity at the competitive price, thereby increasing profits.
Producing at output levels with more favorable cost structures and charging the competitive market
price, thereby increasing profits per unit.
→
Reducing production and pushing prices up.
A monopoly receives larger profits than a comparable competitive industry by reducing the quantity supplied and
pushing prices up.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-02 How
monopoly and competitive
outcomes differ.
award:
10.00
points
Price-discriminating firms charge higher prices to those who
Have greater incomes.
→
Have lower price elasticities of demand.
Have many substitutes available to them.
Want the product less.
Consumers who have inelastic (or less elastic) demand will not respond significantly to increases in price. Therefore,
a price-discriminating monopoly will charge consumers with inelastic demand higher prices, while charging
consumers with elastic demand lower prices.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-02 How
monopoly and competitive
outcomes differ.
award:
10.00
points
Price-discriminating firms that sell in two markets will charge higher prices in the market, ceteris paribus,
With a higher positive cross-price elasticity of demand with respect to substitutes.
→
With the more price-inelastic demand.
With the more income-elastic demand.
With lower incomes.
Consumers who have inelastic (or less elastic) demand will not respond significantly to increases in price. Therefore,
a price-discriminating monopoly will charge consumers with inelastic demand higher prices, while charging
consumers with elastic demand lower prices.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-02 How
monopoly and competitive
outcomes differ.
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A patent gives a firm the exclusive right to produce a product for
6 months.
2 years.
→
20 years.
Forever.
A government-awarded patent gives a producer 20 years of exclusive rights to produce a particular product, thus
serving as a barrier to entry to potential competitors in the market.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 24-02 How
monopoly and competitive
outcomes differ.
award:
10.00
points
Which of the following contributes to a firm maintaining a monopoly?
→
Exclusive franchises.
The existence of substitute goods.
A large number of firms in the industry.
Homogeneous products in the market.
Barriers to entry help a monopoly maintain its market power. Examples of barriers include patents, control over key
inputs, and acquisition of competitors, franchise rights, and economies of scale.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-02 How
monopoly and competitive
outcomes differ.
award:
10.00
points
The argument that concentration of market power enhances research and development efforts may be weak because
Monopolies cannot afford basic research.
→
A monopoly may have no clear incentive to pursue new research and development.
No one has attempted to gather any empirical evidence.
No existing monopoly has a research and development program.
Although monopolists have a clear financial advantage in pursuing research and development activities, they have no
clear incentive to do so. Research and development aren't necessarily required for profitable survival.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-03 The pros
and cons of monopoly.
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According to the text, a convincing argument against concentration of market power is that
Market power increases incentives for innovation and invention.
Market power results in lower barriers to entry.
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The exercise of market power results in a higher price.
Large firms can produce more efficiently than small firms because of diminishing returns in production.
Economies of scale may help monopolies reduce costs, but because of their market power, they will retain the cost
savings rather than pass them along to the consumer in the form of lower prices.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-03 The pros
and cons of monopoly.
award:
10.00
points
Markets that exhibit economies of scale over the entire range of market output
→
Are natural monopolies.
Are perfectly competitive.
Have downward-sloping short-run average total cost curves.
Have upward-sloping long-run average total cost curves.
Industries that exhibit economies of scale over the entire range of market output are called natural monopolies.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 24-03 The pros
and cons of monopoly.
award:
10.00
points
In a contestable market,
→
Entry occurs when prices rise above average total costs.
Many firms compete, which drives prices down to minimum long-run average total cost.
A few firms use predatory prices to achieve market share.
A few firms collude to achieve monopoly profits.
A contestable market is an imperfectly competitive industry subject to potential entry if prices or profits increase.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-03 The pros
and cons of monopoly.
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According to the theory of contestable markets, monopoly may not be a problem if
The structure of a market is competitive.
Antitrust regulations are enforced.
Firms can exit from the market.
→
Potential competition exists.
A contestable market is an imperfectly competitive industry subject to potential entry if prices or profits increase.
Therefore firms will keep prices low, which will result in low profits.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-03 The pros
and cons of monopoly.
award:
10.00
points
Sky-High Skywriters charges competitive prices for its skywriting services even though it has no competition. This is
most likely because
There are no economies of scale in this industry.
→
It operates in a contestable market.
It is a natural monopoly.
It cares more about customers' well-being than its own well-being.
A contestable market is an imperfectly competitive industry subject to potential entry if prices or profits increase.
Therefore firms will keep prices low, which will result in low profits.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 24-03 The pros
and cons of monopoly.
award:
10.00
points
The Microsoft Corporation was sued by the government for all but which one of the following antitrust violations?
Discouraging computer manufacturers from installing any operating system other than Microsoft's.
Buying out potential competitors.
Bundling software.
→
Stealing competitors' secrets.
Microsoft was sued for thwarting its competitors in operating systems by erecting entry barriers such as exclusive
purchase agreements with computer manufacturers, using its monopoly position in operating systems to gain an
unfair advantage in the applications market, and thwarting competition by simply buying out promising rivals.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
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Which of the following prohibits price discrimination, certain types of mergers, and interlocking boards of directors
among competing companies?
The Sherman Act.
→
The Clayton Act.
The Federal Trade Commission Act.
The Full Employment and Balanced Growth Act.
The Sherman Act prohibits "conspiracies in restraint of trade," including mergers, contracts, or acquisitions that
threaten to monopolize an industry, while the principal aim of the Clayton Act is to prevent the development of
monopolies by prohibiting price discrimination, exclusive dealing agreements, certain types of mergers, and
interlocking boards of directors among competing firms.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
award:
10.00
points
Which of the following was the first to prohibit "conspiracies in restraint of trade"?
→
The Sherman Act.
The Federal Trade Commission Act.
The Clayton Act.
The Gramm-Rudman Act.
The Sherman Act prohibits "conspiracies in restraint of trade," including mergers, contracts, or acquisitions that
threaten to monopolize an industry, while the principal aim of the Clayton Act is to prevent the development of
monopolies by prohibiting price discrimination, exclusive dealing agreements, certain types of mergers, and
interlocking boards of directors among competing firms.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
award:
10.00
points
The World View article titled "Foxy Soviets Pelt the West: Sable Monopoly Traps Hard Currency, Coats Capitalists"
provides evidence that the Soviets experienced
→
Market power.
Economies of scale.
Barriers to entry.
Price discrimination.
The Soviet Union earned $100 million in 1984 fur sales. High profits give some evidence that the Soviets had market
power.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
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Based on the headline "Foxy Soviets Pelt the West: Sable Monopoly Traps Hard Currency, Coats Capitalists" you could
predict that
Output is more than it would be in a competitive market.
→
Long-run economic profit is positive.
The sable market is contestable.
Sable producers are franchise monopolists.
The headline mentions a monopoly trapping currency, which correctly suggests high long-run economic profits.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 24-01 How a
monopolist sets price and output.
award:
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points
The In the News article "XM-Sirius Merger Made Simple: One Is Always Less Than Two" discusses the proposed
merger of two satellite radio companies. Antitrust officials will examine the merger in order to
→
Prevent the abuse of market power.
Prevent economies of scale.
Protect the government from frivolous lawsuits.
Increase the profitability of monopolies.
The Sherman Act prohibits "conspiracies in restraint of trade," including mergers, contracts, or acquisitions that
threaten to monopolize an industry.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
award:
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points
The In the News article "XM-Sirius Merger Made Simple: One Is Always Less Than Two" discusses the proposed
merger of two satellite radio companies. In some industries, mergers can be economically justified if economies of scale
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Lower the average cost of production.
Result in more product variety.
Act as a barrier to entry.
Increase the total cost of production.
Monopolies may enjoy economies of scale. In the long run, however, consumers may benefit more from competitive
pressures to reduce costs, improve product quality, and lower prices.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 24-01 How a
monopolist sets price and output.
11/5/2013 4:33 PM