P12.1 Monopoly Concepts.

Indicate whether each of the following statements

is true or false, and explain why.
A. The Justice Department generally concerns itself with significant or
flagrant offenses under the Sherman Act, as well as with mergers for
monopoly covered by Section 7 of the Clayton Act.
B. When a single seller is confronted in a market by many small buyers,
monopsony power enables the buyers to obtain lower prices than
those that would prevail in a competitive market.
C. A natural monopoly results when the profit-maximizing output level
occurs at a point where long-run average costs are declining.
D. Downward-sloping industry demand curves characterize both perfectly
competitive and monopoly markets.
E. A decrease in the price elasticity of demand would follow an increase in
monopoly power.
P12.1 SOLUTION
A. True. Generally speaking, the Justice Department concerns itself with
significant or flagrant offenses under the Sherman Act, as well as with
mergers for monopoly covered by Section 7 of the Clayton Act.
B. False. When a single buyer is confronted in a market by many smaller
sellers, monopsony power enables the buyer to obtain lower prices
than those that would prevail in a competitive market.
C. False. A natural monopoly occurs in a market when the market clearing
price, or price where demand (Price) = Supply (Marginal Cost), occurs
at an output level where long-run average costs are declining.
D. True. Downward sloping demand curves follow from the law of
diminishing marginal utility and characterize both perfectly competitive
and monopoly market structures.
E. True. A decrease in the price elasticity of demand would result
following an increase in monopoly power.

P10.1 Competitive Markets Concepts. Indicate whether each of the

following statements is true or false, and explain why.
A. In long-run equilibrium, every firm in a perfectly competitive industry
earns zero profit.
B. Perfect competition exists in a market when all firms are price takers as
opposed to price makers.
C. In competitive markets, P > MC at the profit-maximizing output level.
D. Downward-sloping industry demand curves characterize perfectly
competitive markets.

E. A firm might show accounting profits in a competitive market but be

suffering economic losses.

P10.1 SOLUTION
A. False. In long-run equilibrium, every firm in a perfectly competitive
industry earns zero economic profit. For long-term viability, firms in
competitive markets must earn a normal rate of return on investment.
B. True. Perfect competition exists in a market when individual customers
and individual firms have no influence over price. In such markets,
both customers and firms take prices as given.
C. False. Profit maximization requires that a firm operate at the output
level at which marginal revenue and marginal cost are equal. With
price constant, average revenue equals marginal revenue. Therefore,
maximum profits result when market price is set equal to marginal cost
for firms in a perfectly competitive industry.
D. True. Downward sloping demand curves follow from the law of
diminishing marginal utility and characterize both competitive markets.
E. True. Normal profit is defined as the rate of return necessary to retain
and attract needed capital investment. Economic profit represents an
above-normal rate of return. The firm incurs economic losses whenever
it fails to earn a normal profit. A firm might show a small accounting
profit but be suffering economic losses because these profits are
insufficient to provide an adequate return to the firm's stockholders. In
such instances, firms are unable to replace plant and equipment and
will exit the industry in the long run.