Type III: Multiple Choice
Seminar 7: Question: Monopoly By Le Thanh Ha
Type I: True/False question (give a brief explanation)
Downloaded by Nguy?t Phan Minh ([email protected])
1. Even with market power, monopolists cannot achieve any level of profit they desire because they will sell lower quantities at higher prices.
2. Copyrights and patents are examples of barriers to entry that afford firms monopoly pricing powers.
3. Like competitive firms, monopolies choose to produce a quantity in which marginal revenue equals marginal cost.
4. A monopolist does not have a supply curve because the firm’s decision about how much to supply is impossible to separate from the demand curve it faces.
5. A monopoly creates a deadweight loss to society because it earns both short-run and long-run positive economic profits.
6. A monopoly creates a deadweight loss to society because it produces less output than the socially efficient level.
7. The government may choose to do nothing to reduce monopoly inefficiency because the
“fix” may be worse than the problem.
Type II: Discussion questions
Downloaded by Nguy?t Phan Minh ([email protected])
1. In the market for "home heating" consumers typically have several options (e.g., electricity, heating fuel, natural gas, propane, etc.), yet we often think of firms in this industry as behaving like monopolists. Discuss the context in which your electricity provider is a monopolist. Is this characterization universally applicable? Explain your answer.
2. Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods.
3. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from taxation?
4. What is the deadweight loss due to profit-maximizing monopoly pricing under the following conditions: The price charged for goods produced is $10. The intersection of the marginal revenue and marginal cost curves occurs where output is 100 units and marginal revenue is $5. The socially efficient level of production is 110 units. The demand curve is linear and downward sloping, and the marginal cost curve is constant.
5. What are the four ways that government policymakers can respond to the problem of monopoly?.
Ans: First, the government can try to make monopolized industries more
competitive by using the power of antitrust laws. Second, the government can regulating the behavior of monopolies, which usually occurs with natural monopolies. Third, the government can own and run a monopoly. Four, the government can do nothing.
6. In many countries, the government chooses to "internalize" the monopoly by owning monopoly providers of goods and services. (In some cases these firms are "nationalized,"
and the government actually buys or confiscates firms that operate in monopoly markets).
What would be the advantages and disadvantages of such an approach to ensure that the
"best interest of society" is promoted in these markets? Explain your answer.
Ans: As long as the government "owner" pursues a production and pricing policy that approaches a competitive outcome, social well-being can be enhanced. In this case the government ownership would benefit society. However, in most cases, government owners operate much like private sector monopolists. The political economy of
government institutions does not ensure that government owners will pursue socially optimal policy. Also, governments have no incentive to reduce costs or innovate.
7. A monopolist has a total cost function and the demand curve P=70-Q
Downloaded by Nguy?t Phan Minh ([email protected])
a. What is the fixed cost?
b. What is the marginal revenue function?
c. What are the quantity and price that the monopolist maximize its profit? Compute this profit.
d. Compute CS, PS, NSB, and the deadweight loss in this case. Draw the figure to represent it.
e. What are the quantity and price that the monopolist maximize its revenue?
Type III: Multiple Choice
Downloaded by Nguy?t Phan Minh ([email protected])
1. Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly is often
a. not in the best interest of society.
b. one that fails to maximize total economic well-being.
c. inefficient.
d. All of the above are correct.
Downloaded by Nguy?t Phan Minh ([email protected])
2. Which of the following would be most likely to have monopoly power?
a. a long-distance telephone service provider b. a local cable TV provider
c. a large department store d. a gas station
Downloaded by Nguy?t Phan Minh ([email protected])
3. Which of the following statements is true of a monopoly firm?
a. A monopoly firm is a price taker and has no supply curve.
b. A monopoly firm is a price maker and has no supply curve
c. A monopoly firm is a price maker and has a downward-sloping supply curve.
d. A monopoly firm is a price maker and has an upward-sloping supply curve.
Downloaded by Nguy?t Phan Minh ([email protected])
4. Which of the following statements is correct for a monopolist?
i) The firm maximizes profits by equating marginal revenue with marginal cost.
ii) The firm maximizes profits by equating price with marginal cost.
iii) Demand equals marginal revenue.
iv) Average revenue equals price.
Downloaded by Nguy?t Phan Minh ([email protected])
a. i), iii), and iv) only b. i) and iv) only c. i), ii), and iv) only d. i), ii), iii), and iv)
5. Which of the following statements is correct for both a monopolist and a perfectly competitive firm?
i) The firm maximizes profits by equating marginal revenue with marginal cost.
ii) The firm maximizes profits by equating price with marginal cost.
iii) Demand equals marginal revenue.
iv) Average revenue equals price.
Downloaded by Nguy?t Phan Minh ([email protected])
a. i), iii), and iv) only b. i) and iv) only c. i), ii), and iv) only d. i), ii), iii), and iv)
6. For a monopoly, 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.
7. A reduction in a monopolist's fixed costs would
a. decrease the profit-maximizing price and increase the profit-maximizing quantity produced.
b. increase the profit-maximizing price and decrease the profit-maximizing quantity produced.
c. not effect the profit-maximizing price or quantity.
d. possibly increase, decrease or not effect profit-maximizing price and quantity, depending on the elasticity of demand.
MC
D MR
ATC
J K L A
B C GF H
O P
Quantity Price
Figure 7-1
Downloaded by Nguy?t Phan Minh ([email protected])
8. Refer to Figure 7-1, What price will the monopolist charge?
a. A b. B c. C d. F
9. Refer to Figure 7-1. What area measures the monopolist’s profit?
a. (B-F)*K b. (A-H)*J c. (B-G)*K
d. 0.5[(B-F)*(L-K)]
10. The deadweight loss associated with a monopoly occurs because the monopolist a. maximizes profits.
b. produces an output level less than the socially optimal level.
c. produces an output level greater than the socially optimal level.
d. equates marginal revenue with marginal cost.
MIDTERM TEST - MICROECONOMICS PART I: MULTIPLE CHOICE QUESTIONS:
Choose the best answer and write X on the answer sheet (40 questions, each question values 2 points)
1 2 3 4 5 6 7 8 9 1
0
11 1 2
1 3
1 4
1 5
1 6
1 7
1 8
1 9
2 0 a
b c d
2 1
2 2
2 3
2 4
2 5
2 6
2 7
2 8
2 9
3 0
3 1
3 2
3 3
3 4
3 5
3 6
3 7
3 8
3 9
4 0 a
b c d
1. Economics deals primarily with the concept of a. scarcity.
Downloaded by Nguy?t Phan Minh ([email protected])
b. money.
c. poverty.
d. banking.
2. Economists, like mathematicians, physicists, and biologists, a. make use of the scientific method.
b. try to address their subject with a scientist’s objectivity.
c. devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories.
d. All of the above are correct.
3.Economic models are built with
a. recommendations concerning public policies.
b. facts about the legal system.
c. assumptions.
d. statistical forecasts.
4. When each person specializes in producing the good in which he or she has a comparative advantage, total production in the economy
a. falls.
b. stays the same.
c. rises.
d. may fall, rise, or stay the same.
5. Trade between countries
a. allows each country to consume at a point outside its production possibilities frontier.
b. limits a country’s ability to produce goods and services on its own.
c. must benefit both countries equally; otherwise, trade is not mutually beneficial.
d. can best be understood by examining the countries’ absolute advantages.
6. In a competitive market, the quantity of a product produced and the price of the product are determined by
a. buyers.
b. sellers.
c. both buyers and sellers.
d. None of the above is correct.
7. The law of demand states that, other things equal,
a. an increase in price causes quantity demanded to increase.
b. an increase in price causes quantity demanded to decrease.
c. an increase in quantity demanded causes price to increase.
d. an increase in quantity demanded causes price to decrease.
Table 1
Downloaded by Nguy?t Phan Minh ([email protected])
Price Aaron’s Quantity Demanded
Angela’s Quantity Demanded
Austin’s Quantity Demanded
Alyssa’s Quantity Demanded
$0.00 20 16 4 8
$0.50 18 12 6 6
$1.00 14 10 2 5
$1.50 12 8 0 4
$2.00 6 6 0 2
$2.50 0 4 0 0
8.Refer to Table 1. Whose demand does not obey the law of demand?
a. Aaron’s b. Angela’s c. Austin’s d. Alyssa’s
9.Refer to Table 1. If these are the only four buyers in the market, then the market quantity demanded at a price of $1 is
a. 4 units.
b. 7.75 units.
c. 14 units.
d. 31 units.
10.Refer to Table 1. If these are the only four buyers in the market, then the market quantity demanded at a price of $2 is
a. 0 units.
b. 3.5 units.
c. 6 units.
d. 14 units.
Figure 1
Downloaded by Nguy?t Phan Minh ([email protected])
Demand A
B
C Quantity
Price
11. Refer to Figure 1. Suppose the point labeled B is the “halfway point” on the demand curve and it corresponds to a price of $5.00. Then, between prices of $4.99 and $5.01, the price elasticity of demand is
a. less than 1 but greater than zero.
b. equal to 1.
c. greater than 1.
d. equal to zero.
12.Refer to Figure 1. Assume the section of the demand curve from A to B corresponds to prices between $8 and $16. Then, when the price changes between $9 and $10,
a. quantity demanded changes proportionately less than the price.
b. quantity demanded changes proportionately more than the price.
c. quantity demanded changes the same amount proportionately as price.
d. the price elasticity of demand equals 1.
13.Refer to Figure 1. Assume, for the good in question, two specific points on the demand curve are (Q = 1,000, P = $40) and (Q = 1,500, P = $30). Then which of the following scenarios is possible?
a. Both of these points lie on the section of the demand curve from B to C.
b. The vertical intercept of the demand curve is the point (Q = 0, P = $60).
c. The horizontal intercept of the demand curve is the point (Q = 1,800, P = $0).
d. Any of these scenarios is possible.
14. A price ceiling is
a. often imposed on markets in which “cutthroat competition” would prevail without a price ceiling.
Downloaded by Nguy?t Phan Minh ([email protected])
b. a legal maximum on the price at which a good can be sold.
c. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price ceiling.
d. All of the above are correct.
15. The opportunity cost of going to college is
a. The total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.
b. The value of the best opportunity a student gives up to attend college.
c. Zero for students who are fortunate enough to have all of their college expenses paid by someone else.
d. Zero, since a college education will allow a student to earn a larger income after graduation.
Table 2
Price Quantity
Demanded
Quantity Supplied
$0 12 0
$1 10 2
$2 8 4
$3 6 6
$4 4 8
$5 2 10
$6 0 12
16.Refer to Table 2. Which of the following price ceilings would be binding in this market?
a. $2
b. $3
c. $4
d. $5
17. Refer to Table 2. Which of the following price floors would be binding in this market?
a. $1
b. $2
c. $3
d. $4
18.Refer to Table 2. Suppose the government imposes a price ceiling of $1 on this market.
What will be the size of the shortage in this market?
a. 0 units b. 2 units c. 8 units d. 10 units
19.Refer to Table 2. Suppose the government imposes a price floor of $1 on this market.
What will be the size of the surplus in this market?
a. 0 units b. 2 units
Downloaded by Nguy?t Phan Minh ([email protected])
c. 8 units d. 10 units
20. A $2.00 tax levied on the sellers of mailboxes will shift the supply curve a. upward by exactly $2.00.
b. upward by less than $2.00.
c. downward by exactly $2.00.
d. downward by less than $2.00.
Figure 2
P2
P1
Q2 Q1
Demand A
B C
D F
Quantity Price
21. Refer to Figure 2. When the price is P1, consumer surplus is a. A.
b. A+B.
c. A+B+C.
d. A+B+D.
22. Refer to Figure 2. When the price is P2, consumer surplus is a. A.
b. B.
c. A+B.
d. A+B+C.
23. Refer to Figure 2. Area C represents the
a. decrease in consumer surplus that results from a downward-sloping demand curve.
b. consumer surplus to new consumers who enter the market when the price falls from P2 to P1.
c. increase in producer surplus when quantity sold increases from Q2 to Q1.
d. decrease in consumer surplus to each consumer in the market when the price increases from P1 to P2.
24. Refer to Figure 2. When the price rises from P1 to P2, which of the following statements is not true?
a. The buyers who still buy the good are worse off because they now pay more.
b. Some buyers leave the market because they are not willing to buy the good at the higher price.
c. Buyers place a higher value on the good after the price increase.
Downloaded by Nguy?t Phan Minh ([email protected])
d. Consumer surplus in the market falls.
Figure 3
The vertical distance between points A and C represents a tax in the market.
Demand Supply
Q2 B
Q1
P1 C
P2 D
P3 A
P4
Quantity Price
25. Refer to Figure 3. The equilibrium price before the tax is imposed is a. P1.
b. P2.
c. P3.
d. P4.
26.Refer to Figure 3. The per-unit burden of the tax on sellers is a. P3 - P1.
b. P3 - P2.
c. P2 - P1.
d. P4 - P3.
27.Refer to Figure 3. The amount of tax revenue received by the government is equal to the area
a. P3ACP1.
b. ABC.
c. P2DAP3.
d. P1CDP2.
28.Refer to Figure 3. The amount of deadweight loss associated with the tax is equal to a. P3ACP1.
b. ABC.
c. P2ADP3.
d. P1DCP2.
29. The principle of comparative advantage asserts that
a. not all countries can benefit from trade with other countries.
b. the world price of a good will prevail in all countries, regardless of whether those countries allow international trade in that good.
c. countries can become better off by exporting goods, but they cannot become better off by importing goods.
d. countries can become better off by specializing in what they do best.
Downloaded by Nguy?t Phan Minh ([email protected])
30. A tariff is a
a. limit on how much of a good can be exported.
b. limit on how much of a good can be imported.
c. tax on an exported good.
d. tax on an imported good.
31. All externalities
a. cause markets to fail to allocate resources efficiently.
b. cause equilibrium prices to be too high.
c. benefit producers at the expense of consumers.
d. cause equilibrium prices to be too low.
32. A negative externality arises when a person engages in an activity that has
a. an adverse effect on a bystander who is not compensated by the person who causes the effect.
b. an adverse effect on a bystander who is compensated by the person who causes the effect.
c. a beneficial effect on a bystander who pays the person who causes the effect.
d. a beneficial effect on a bystander who does not pay the person who causes the effect.
33. If Amanda sells 200 glasses of lemonade at $0.50 each, her total revenuesare
a. $100.
b. $199.50.
c. $200.
d. $400.
34. Profit-maximizing firms in a competitive market produce an output level where a. marginal cost equals marginal revenue.
b. marginal cost equals average total cost.
c. marginal revenue is increasing.
d. price is less than marginal revenue.
35. Which of the following are necessary characteristics of a monopoly?
(i) The firm is the sole seller of its product.
(ii) The firm's product does not have close substitutes.
(iii) The firm generates a large economic profit.
(iv) The firm is located in a small geographic market.
a. (i) and (ii) only b. (i) and (iii) only c. (i), (ii), and (iii) only d. (i), (ii), (iii), and (iv)
36. A natural monopoly occurs when
a. the product is sold in its natural state, such as water or diamonds.
b. there are economies of scale over the relevant range of output.
c. the firm is characterized by a rising marginal cost curve.
d. production requires the use of free natural resources, such as water or air.
37. Which of these situations produces the largest profits for oligopolists?
a. The firms reach a Nash equilibrium.
Downloaded by Nguy?t Phan Minh ([email protected])
b. The firms reach the monopoly outcome.
c. The firms reach the competitive outcome.
d. The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome.
38. A distinguishing feature of an oligopolistic industry is the tension between a. profit maximization and cost minimization.
b. cooperation and self interest.
c. producing a small amount of output and charging a price above marginal cost.
d. short-run decisions and long-run decisions.
39. An oligopoly is a market in which
a. there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market.
b. firms are price takers.
c. the actions of one seller in the market have no impact on the other sellers' profits.
d. there are many price-taking firms, each offering a product similar or identical to the products offered by other firms in the market.
40.Economists normally assume that the goal of a firm is to (i) sell as much of their product as possible.
(ii) set the price of the product as high as possible.
(iii) maximize profit.
a. (i) and (ii) are true.
b. (ii) and (iii) are true.
c. (iii) is true.
d. (i) and (iii) are true.