Chapter 15 Monopoly

Test B
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In which of the following industries do firms set prices? a. competitive markets, but not monopoly markets b. monopoly markets, but not competitive markets c. competitive and monopoly markets d. neither competitive nor monopoly markets ANS !"# b. monopoly markets, but not competitive markets $%&!# ' (!%1#) S!*$I+N#1 +,-!*$I.!# 1 "AN)+'#%
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hen a firm has a natural monopoly, other firms do not enter the market because by definition natural monopolies are protected by the government. the owners of natural monopolies have e0clusive rights to key resources. new firms cannot achieve the same low costs as the current monopolist. None of the above is correct. ANS !"# c. new firms cannot achieve the same low costs as the current monopolist. $%&!# ' (!%1#) S!*$I+N#1 +,-!*$I.!# 1 "AN)+'#% a. b. c. d.
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)e ,eers )iamonds is a a. natural monopoly. b. monopoly by virtue of a government decree. c. monopoly because of ownership of key resources. d. All of the above e0plain why )e ,eers )iamonds has a monopoly. ANS !"# c. monopoly because of ownership of key resources. $%&!# ' (!%1#) S!*$I+N#1 +,-!*$I.!# 1 "AN)+'#% NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
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hich of the following is a barrier to entry? a downward3sloping demand curve a single producer is more efficient than a large number of producers no close substitute for a product a homogeneous product ANS !"# b. a single producer is more efficient than a large number of producers $%&!# ' (!%1#) S!*$I+N#1 +,-!*$I.!# 1 "AN)+'#% a. b. c. d.
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Suppose a hospital in a small isolated town has a natural monopoly. ith the idea of increasing competition, the city opens a second hospital. a. ,oth hospitals will have higher average total cost than the first hospital did when it operated alone. b. ,oth hospitals will have lower average total cost than the first hospital did when it operated alone. c. ,oth hospitals will have the same average total cost as the first hospital when it operated alone. d. $he new hospital will have higher average total cost than the first hospital did when it operated alone, but the average total cost for the second hospital will be less. ANS !"# a. ,oth hospitals will have higher average total cost than the first hospital did when it operated alone. $%&!# ' (!%1#) S!*$I+N#1 +,-!*$I.!# 1 "AN)+'#%

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178

19: *hapter 14;'onopoly

7

$he demand curve for an individual firm<s output is a. downward sloping for both a competitive firm and a monopoly. b. hori=ontal for both a competitive firm and a monopoly. c. downward sloping for a competitive firm and hori=ontal for a monopoly. d. hori=ontal for a competitive firm and downward sloping for a monopoly. ANS !"# d. hori=ontal for a competitive firm and downward sloping for a monopoly. $%&!# ' (!%1# ) S!*$I+N# / +,-!*$I.!# / "AN)+'#%
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$he marginal revenue of a monopoly is a. greater than price. b. greater than price for low levels of output, but less than price at higher levels of output. c. e>ual to price. d. less than price. ANS !"# d. less than price. $%&!# ' (!%1#) S!*$I+N#/ +,-!*$I.!# / "AN)+'#%
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$he average revenue of a monopoly is a. greater than price. b. greater than price for low levels of output, but less than price at higher levels of output. c. e>ual to price. d. less than price. ANS !"# c. e>ual to price. $%&!# ' (!%1#) S!*$I+N# / +,-!*$I.!# / "AN)+'#%
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$o ma0imi=e profits, a monopolist produces the >uantity where a. average revenue e>uals average cost and then sets price e>ual to marginal revenue. b. average revenue e>uals average cost and then sets price so that all output is demanded. c. marginal revenue e>uals marginal cost and then sets price to marginal revenue. d. marginal revenue e>uals marginal cost and then sets price so that all output is demanded. ANS !"# d. marginal revenue e>uals marginal cost and then sets price so that all output is demanded. $%&!# ' (!%1#) S!*$I+N# / +,-!*$I.!# / "AN)+'#%
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hich of the following is not true for a profit3ma0imi=ing monopoly? price is greater than average revenue. profits e>ual total revenue minus total cost. marginal revenue e>uals marginal cost. price is greater than marginal revenue. ANS !"# a. price is greater than average revenue. $%&!# ' (!%1#) S!*$I+N#/ +,-!*$I.!# / "AN)+'#% a. b. c. d.

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*hapter 14;'onopoly 191

11

According to the graph, what price does the profit3ma0imi=ing monopolist charge? a. &A b. &, c. &* d. &) ANS !"# b. &, $%&!# ' (!%1#) S!*$I+N# / +,-!*$I.!# / "AN)+'#%
MC ATC

18 17 15 D MR 50 60
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According to the graph, what are the revenues of a profit3ma0imi=ing monopolist? a. 1:/: b. 8:: c. 94: d. None of the above is correct ANS !"# b. 8::. $%&!# ' (!%1#) S!*$I+N# / +,-!*$I.!# / "AN)+'#% NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER" &rice A1:: A8: A?: A9: A7: A4: A2: @uantity )emanded : 1 / 1 2 4 7 'arginal *ost A1: A2: A4: A7: A9: A?:

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19/ *hapter 14;'onopoly

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$he price and output of this profit3ma0imi=ing monopoly will be# a. A1:: and 7, respectively. b. A 9: and 1, respectively. c. A 4: and 2, respectively. d. A 2: and 4, respectively. ANS !"# b. A9: and 1, respectively. $%&!# ' (!%1#) S!*$I+N# / +,-!*$I.!# / "AN)+'#%
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If a benevolent social planner ran a monopoly, price a. and output would be higher. b. and output would be lower. c. would be lower and output would be higher. d. None of the above is correct. ANS !"# c. would be lower and output would be higher. $%&!# ' (!%1#) S!*$I+N# 1 +,-!*$I.!# 1 "AN)+'#%
14

At the point where the monopolist produces, the value of the good to the marginal buyer is a. greater than price. b. less than price. c. greater than the marginal cost to the monopolist. d. less than the marginal cost to the monopolist. ANS !"# c. greater than the marginal cost to the monopolist. $%&!# ' (!%1#) S!*$I+N# 1 +,-!*$I.!# 1 "AN)+'#%
MC

11 10 8 D MR 25 30
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In the diagram the deadweight loss is a. A/.4:. b. A4.::. c. A9.4:. d. All of the above are correct. ANS !"# c. A9.4:. $%&!# ' (!%1#) )IBBI*CD$%# 1 S!*$I+N# 1 +,-!*$I.!# 1 "AN)+'#%
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hich of the following concerning the social cost of monopoly is correct? $he profit a monopolist makes contributes to the deadweight loss created by monopoly. !0penditures of a monopolist to maintain the monopoly are part of the social cost. $he source of the social cost is that a monopolist sets a price below marginal cost. All of the above are correct. ANS !"# b. !0penditures of a monopolist to maintain the monopoly are part of the social cost. $%&!# ' (!%1#) )IBBI*CD$%# 1 S!*$I+N# 1 +,-!*$I.!# 1 "AN)+'#% a. b. c. d.

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*hapter 14;'onopoly 191

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hich of the following do antitrust laws allow for? private lawsuits against firms employing certain anti3competitive tactics the government to split up firms to promote competition the option for government to prevent mergers All of the above are correct. ANS !"# d. All of the above are correct. $%&!# ' (!%1#) S!*$I+N# 2 +,-!*$I.!# 2 "AN)+'#% a. b. c. d.
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If the government sets a natural monopoly<s price e>ual to marginal cost a. social welfare is ma0imi=ed. b. price falls and >uantity produced rises, but social welfare is not ma0imi=ed. c. the monopolist makes an even larger profit than before. d. the monopolist will e0it the industry unless it receives a subsidy. ANS !"# d. the monopolist will e0it the industry unless it receives a subsidy. $%&!# ' (!%1#) S!*$I+N# 2 +,-!*$I.!# 2 "AN)+'#%
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$he incentive to reduce costs is eliminated or reduced if the government a. operates a monopoly. b. re>uires a monopoly to set average total cost e>ual to price. c. ,oth a and b are correct. d. Neither a nor b is correct. ANS !"# c. ,oth a and b are correct. $%&!# ' (!%1#) S!*$I+N# 2 +,-!*$I.!# 2 "AN)+'#%
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'ergers a. may be advantageous if they allow for synergies. b. may be advantageous because competitive firms have little incentive to reduce costs as their economic profits are =ero. c. ,oth of the above are correct. d. None of the above is correct. ANS !"# a. 'ay be advantageous if they allow for synergies. $%&!# ' (!%1#) S!*$I+N# 2 +,-!*$I.!# 2 "AN)+'#% NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
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&rice discrimination is the practice of# a. charging lower prices in the short run than in the long run. b. charging lower prices in the long run than in the short run. c. selling the same good at different prices to different customers. d. selling more output in one market than in another market. ANS !"# c. selling the same good at different prices to different customers. $%&!# ' (!%1#) S!*$I+N# 4 +,-!*$I.!# 4 "AN)+'#%
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hich of the following is correct? 'onopolists have lower profits when price discrimination occurs. &rice discrimination re>uires being able to separate customers according to their willingness to pay. &rice discrimination always lowers economic welfare. None of the above is correct. ANS !"# b. &rice discrimination re>uires being able to separate customers according to their willingness to pay. $%&!# ' (!%1#) S!*$I+N# 4 +,-!*$I.!# 4 "AN)+'#% a. b. c. d.

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192 *hapter 14;'onopoly

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&erfect price discrimination implies deadweight loss a. and consumer surplus are both =ero. b. is =ero and consumer surplus is higher than in the absence of price discrimination. c. is greater than =ero, but consumer surplus is less than in the absence of price discrimination. d. is greater than =ero, and consumer surplus is higher than in the absence of price discrimination. ANS !"# a. and consumer surplus are both =ero. $%&!# ' (!%1#) S!*$I+N# 4 +,-!*$I.!# 4 "AN)+'#%
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hich of the following is inconsistent with price discrimination? *olleges and universities provide financial aid to needy students. &rice per3unit increases with the >uantity a person purchases. *harging customers willing to clip coupons a lower price. 'ovie tickets are priced lower for children than for adults. ANS !"# b. &rice per3unit increases with the >uantity a person purchases. $%&!# ' (!%1#) S!*$I+N# 4 +,-!*$I.!# 4 "AN)+'#% a. b. c. d.

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ANS !"# b. monopoly markets, but not competitive markets $%&!# ' (!%1#) S!*$I+N#1 +,-!*$I.!# 1 "AN)+'#%

ANS !"# c. new firms cannot achieve the same low costs as the current monopolist. $%&!# ' (!%1#) S!*$I+N#1 +,-!*$I.!# 1 "AN)+'#%
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ANS !"# c. monopoly because of ownership of key resources. $%&!# ' (!%1#) S!*$I+N#1 +,-!*$I.!# 1 "AN)+'#%
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ANS !"# b. a single producer is more efficient than a large number of producers $%&!# ' (!%1#) S!*$I+N#1 +,-!*$I.!# 1 "AN)+'#%
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ANS !"# a. ,oth hospitals will have higher average total cost than the first hospital did when it operated alone. $%&!# ' (!%1#) S!*$I+N#1 +,-!*$I.!# 1 "AN)+'#%
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ANS !"# d. hori=ontal for a competitive firm and downward sloping for a monopoly. $%&!# ' (!%1# ) S!*$I+N# / +,-!*$I.!# / "AN)+'#%
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ANS !"# d. less than price. $%&!# ' (!%1#) S!*$I+N#/ +,-!*$I.!# / "AN)+'#%
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ANS !"# c. e>ual to price. $%&!# ' (!%1#) S!*$I+N# / +,-!*$I.!# / "AN)+'#%
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ANS !"# d. marginal revenue e>uals marginal cost and then sets price so that all output is demanded. $%&!# ' (!%1#) S!*$I+N# / +,-!*$I.!# / "AN)+'#%
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ANS !"# a. price is greater than average revenue. $%&!# ' (!%1#) S!*$I+N#/ +,-!*$I.!# / "AN)+'#%
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ANS !"# b. &, $%&!# ' (!%1#) S!*$I+N# / +,-!*$I.!# / "AN)+'#%

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ANS !"# b. 8::. $%&!# ' (!%1#) S!*$I+N# / +,-!*$I.!# / "AN)+'#%

11

ANS !"# b. A9: and 1, respectively. $%&!# ' (!%1#) S!*$I+N# / +,-!*$I.!# / "AN)+'#%
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ANS !"# c. would be lower and output would be higher. $%&!# ' (!%1#) S!*$I+N# 1 +,-!*$I.!# 1 "AN)+'#%

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ANS !"# c. greater than the marginal cost to the monopolist. $%&!# ' (!%1#) S!*$I+N# 1 +,-!*$I.!# 1 "AN)+'#%
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ANS !"# c. A9.4:. $%&!# ' (!%1#) )IBBI*CD$%# 1 S!*$I+N# 1 +,-!*$I.!# 1 "AN)+'#%
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ANS !"# b. !0penditures of a monopolist to maintain the monopoly are part of the social cost. $%&!# ' (!%1#) )IBBI*CD$%# 1 S!*$I+N# 1 +,-!*$I.!# 1 "AN)+'#%
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ANS !"# d. All of the above are correct. $%&!# ' (!%1#) S!*$I+N# 2 +,-!*$I.!# 2 "AN)+'#%
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ANS !"# d. the monopolist will e0it the industry unless it receives a subsidy. $%&!# ' (!%1#) S!*$I+N# 2 +,-!*$I.!# 2 "AN)+'#%
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ANS !"# c. ,oth a and b are correct. $%&!# ' (!%1#) S!*$I+N# 2 +,-!*$I.!# 2 "AN)+'#%
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ANS !"# a. 'ay be advantageous if they allow for synergies. $%&!# ' (!%1#) S!*$I+N# 2 +,-!*$I.!# 2 "AN)+'#%
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ANS !"# c. selling the same good at different prices to different customers. $%&!# ' (!%1#) S!*$I+N# 4 +,-!*$I.!# 4 "AN)+'#%
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ANS !"# b. &rice discrimination re>uires being able to separate customers according to their willingness to pay. $%&!# ' (!%1#) S!*$I+N# 4 +,-!*$I.!# 4 "AN)+'#%
/2

ANS !"# a. and consumer surplus are both =ero. $%&!# ' (!%1#) S!*$I+N# 4 +,-!*$I.!# 4 "AN)+'#%
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ANS !"# b. &rice per3unit increases with the >uantity a person purchases. $%&!# ' (!%1#) S!*$I+N# 4 +,-!*$I.!# 4 "AN)+'#%