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Chapter 15



Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

1. 

A government-created monopoly arises when
a.
government spending in a certain industry gives rise to monopoly power.
b.
the government exercises its market control by encouraging competition among sellers.
c.
the government gives a firm the exclusive right to sell some good or service.
d.
All of the above could qualify as government-created monopolies.
 

2. 

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.
encourage research.
d.
All of the above are correct.
 

3. 

In view of what we know about 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.
 

4. 

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 monopolist enjoys.
d.
the natural monopoly doesn't make a huge profit.
 

5. 

Which of the following items is a primary source of barriers to entry?
a.
The costs of production make a single firm more efficient than a large number of firms.
b.
A single firm hires all the people who have the management skills that are important in the industry.
c.
Contracts among firms prohibit them from competing with one another in the production and sale of certain products.
d.
All of the above are correct.
 

6. 

Economists assume that monopolists behave as
a.
cost minimizers.
b.
profit maximizers.
c.
price maximizers.
d.
All of the above are correct.
 

7. 

When a monopolist increases the amount of output that it produces and sells, its average revenue
a.
increases and its marginal revenue increases.
b.
increases and its marginal revenue decreases.
c.
decreases and its marginal revenue increases.
d.
decreases and its marginal revenue decreases.
 

8. 

Marginal revenue can become negative for
a.
both competitive and monopoly firms.
b.
competitive firms, but not for monopoly firms.
c.
monopoly firms, but not for competitive firms.
d.
neither competitive nor monopoly firms.
 
 
The figure below reflects the cost and revenue structure for a monopoly firm. Use it to answer the following questions.

Figure 15-2
chapter15_files/i0100000.jpg
 

9. 

Refer to Figure 15-2. If the monopoly firm is currently producing Q3 units of output, then a decrease in output will necessarily cause profit to
a.
remain unchanged.
b.
decrease.
c.
increase as long as the new level of output is at least Q2.
d.
increase as long as the new level of output is at least Q1.
 

10. 

As a monopolist increases the quantity of output it sells, the price consumers are willing to pay for the good
a.
is unaffected.
b.
decreases.
c.
increases.
d.
There is not enough information given in answer the question.
 

11. 

For a monopolist, when does marginal revenue exceed average revenue?
a.
never
b.
when output is less than the profit-maximizing level of output
c.
when output is greater than the profit-maximizing level of output
d.
when price is subject to the Law of Demand
 

12. 

For a monopoly firm, the level of output at which marginal revenue equals zero is also the level of output at which
a.
average revenue is zero.
b.
profit is maximized.
c.
total revenue is maximized.
d.
marginal cost is zero.
 

13. 

Competitive firms and monopolists differ in which of the following ways?
a.
A competitive firm cannot choose its level of output; a monopolist chooses its level of output.
b.
A competitive firm's short-run profit is always zero; a monopolist can have a positive short-run profit.
c.
A competitive firm's marginal revenue curve is horizontal; a monopolist's marginal revenue curve is downward sloping.
d.
All of the above are correct.
 
 
Refer to the information below to answer the following questions.

Scenario 15-3
A monopoly firm maximizes its profit by producing 500 units output (so Q = 500). At that level of output, its marginal revenue is $30, its average revenue is $40, and its average total cost is $34.
 

14. 

Refer to Scenario 15-3. The firm's profit-maximizing price is
a.
$30.
b.
between $30 and $34.
c.
between $34 and $40.
d.
$40.
 

15. 

Economic well-being is generally measured by
(i)
total surplus.
(ii)
the sum of consumer surplus and producer surplus.
(iii)
marginal revenue to the producer minus the average cost to the consumer.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(ii) only
 

16. 

Inefficiency arises from a monopoly because
a.
the monopoly firm earns an excessively large profit.
b.
some buyers will refrain from buying the good, due to the high price.
c.
consumers who buy the goods feel exploited.
d.
All of the above are correct.
 
 
Refer to the diagram below to answer the following questions.

Figure 15-6
chapter15_files/i0200000.jpg
 

17. 

Refer to Figure 15-6. The deadweight loss caused by a profit-maximizing monopoly amounts to
a.
$150.
b.
$200.
c.
$250.
d.
$300.
 

18. 

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.
 

19. 

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.
 

20. 

The legislation passed by Congress in 1890 to reduce the market power of large and powerful "trusts" is called the
a.
Morgan Act.
b.
Sherman Act.
c.
Clayton Act.
d.
14th Amendment.
 

21. 

Antitrust laws allow the government to
a.
prevent mergers.
b.
break up companies.
c.
promote competition.
d.
All of the above are correct.
 

22. 

Government-run monopolies may lead to undesirable outcomes in the form of
a.
special interest groups that attempt to block cost reductions.
b.
customers and taxpayer losses when the monopoly operates inefficiently.
c.
the political system as the only form of recourse for customers.
d.
All of the above are correct.
 

23. 

For a firm to price discriminate, it must
a.
be a natural monopoly.
b.
be regulated by the government.
c.
have some market power.
d.
None of the above are correct.
 

24. 

Many movie theaters allow discount tickets to be sold to senior citizens because
a.
senior-citizen laws mandate such discounts.
b.
efforts of goodwill show community respect and win loyal patrons.
c.
the theaters are profit maximizers.
d.
senior citizens usually comprise a solid portion of those who voice their opinions.
 

25. 

Price discrimination explains why Ivy League universities often set rules that determine prices of admission based on students'
a.
age.
b.
financial resources.
c.
high school GPA.
d.
sex.
 



 
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