2010
Fall 1
ECON 2010
Review questions Chapter10
1. A significant difference between monopoly and perfect competition is that:
A. free entry and exit is possible in a monopolized industry but impossible in a competitive industry.
B. competitive firms control market supply, but monopolies do not.
C. the monopolist's demand curve is the industry demand curve, while the competitive firm's demand curve is
perfectly elastic.
D. profits are driven to zero in a monopolized industry, but may be positive in a competitive industry.
2. Drug maker Wyeth produces the hormone-therapy drug Premarin, which is derived from the urine of pregnant
mares. Not even Wyeth knows exactly what chemicals are in it, and the method of making the drug is a trade
secret. For almost 15 years, Barr Laboratories has been trying to make a pill that is close enough to Premarin to be
approved by the Food and Drug Administration as an "equivalent" drug. This story illustrates the importance of:
A. declining long-run cost curves as a way of preserving monopoly.
B. declining demand curves as an essential ingredient in keeping monopoly.
C. barriers to entry in keeping a monopoly position.
D. economies of scope in cementing a monopoly position.
3. One major barrier to entry under pure monopoly arises from:
A. The availability of close substitutes for a product
B. Ownership of essential resources
C. The price taking ability of the firm
D. Diseconomies of scale
4. Marginal revenue is not equal to price for a monopolist because:
A. the monopolist's demand curve is below its marginal revenue curve.
B. total revenue increases as output increases.
C. the monopolist sets price equal to marginal cost.
D. the monopolist must lower the price of all units in order to sell more.
5. At which combination of price and marginal revenue (P, MR) is the price elasticity of demand greater than 1?
A. P = 15, MR = 8
B. P = 12, MR = 0
C. P = 8, MR = -2
D. P = 4, MR = -4
6. Given a downsloping linear demand curve, when total revenue is decreasing, marginal revenue is:
A. Positive and demand is elastic
B. Negative and demand is elastic
C. Positive and demand is inelastic
D. Negative and demand is inelastic
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7. A monopolist can sell 20 toys per day for $8.00 each. To sell 21 toys per day, the price must be cut to $7.00. The
marginal revenue of the 21st toy is:
A. -$10
B. -$13
C. -$18
D. -$21
8. A pure monopoly firm will never charge a price in the inelastic range of its demand curve because lowering
price to get into this region will:
A. Increase total revenue, increase total cost, and decrease profit
B. Decrease total revenue, increase total cost, and decrease profit
C. Increase total revenue, decrease total cost, and decrease profit
D. Decrease total revenue, total cost, and profit
9. Under pure monopoly, a profit-maximizing firm will produce:
A. In the inelastic range of its demand curve
B. In the elastic range of its demand curve
C. Only where total costs are zero
D. Only where marginal revenue is zero
10. Refer to the table above that shows the demand schedule for a product sold by a monopolist. Marginal revenue
is positive:
A. when price is $10.
B. when price is above $10.
C. when price is below $10.
D. for every price.
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11. Refer to the above graph. For the demand curve it shows:
A. The price elasticity of demand is unitary at a price of P1
B. The price elasticity of demand is unitary at a price of P2
C. The price elasticity of demand is constant across the demand curve
D. A price cut from P2 to P3 would lead to an increase in consumer spending on the product
12. Refer to the graph above. If the firm seeks to maximize profit, it should set a price equal to:
A. $10.
B. $ 8.
C. $ 6.
D. $ 4.
13. Refer to the graph above. If the firm maximizes profit, its daily output will be:
A. 10 units.
B. 20 units.
C. 30 units.
D. 45 units.
Answer the question(s) below on the basis of the following demand and cost data for a pure monopolist.
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14. Refer to the above table. The monopolist will realize a:
A. Profit of $10.00
B. Profit of $6.50
C. Profit of $4.50
D. Loss of $7.23
15. A profit-maximizing monopolist facing the situation shown in the graph above should:
A. Shut down immediately
B. Continue producing to minimize losses
C. Continue producing to make economic profits
D. Continue producing as long as price is greater than marginal cost
16. The supply curve for a pure monopolist:
A. Is the portion of the marginal cost curve that lies above the average variable cost curve
B. Is perfectly price-elastic at the market price
C. Is upsloping across all relevant ranges of output
D. Does not exist because there is no unique relationship between price and quantity supplied
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17. Refer to the graph above. If a competitive industry producing hamburger dinners is taken over by a pure
monopoly firm that maximizes profit:
A. output will remain at 100 but price will rise to $6.
B. price will remain at $6 but output will fall by 100.
C. price will remain at $4 but output will fall by 100.
D. price will rise to $6 and output will fall by 100.
18. The deadweight loss from monopoly exists because:
A. there are no net gains to society at the output level produced by a monopolist.
B. resource owners hired by the monopolist gain at the expense of consumers.
C. the monopolist produces at an output level at which no one can be made better off without making someone
worse off.
D. the marginal benefit of the monopolist's product to society exceeds the monopolist's marginal cost.
19. Refer to the graph above. The loss of surplus to consumers resulting from monopoly is:
A. 11.25.
B. 20.
C. 31.25
D. 42.5.
20. Refer to the graph above. Producer surplus that is lost to society as a result of monopoly is:
A. $2.5.
B. $5.
C. $15.625.
D. $16.875.
21. Recent legislation allows cell phone customers to keep the same phone number even when they switch to a
different provider. This change:
A. increases the monopoly power of cell phone providers.
B. reduces the monopoly power of cell phone providers.
C. shows that lobbyists employed in the telecom industry are only interested in engaging in rent-seeking
activities.
D. does not affect the degree of competition in the industry.
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22. iTunes UK charges customers 20% more than customers in France and Germany. Apple defended the price
differential, saying that the 'underlying economic' model in each country has an impact on how we price our track
downloads. An economist would say that Apple is engaged in:
A. collusion.
B. monopolistic competition.
C. price discrimination.
D. reverse engineering.
23. If the demand for a newly-released novel is less price-elastic than the demand for an older novel, then which
of the following pricing strategies would a price-discriminating publishing firm follow?
A. Sell newly-released novels and older novels for the same price.
B. Set price according to the marginal cost of printing the novels.
C. Charge a higher price for newly-released novels.
D. Charge a higher price for older novels.
24. Suppose quantity demanded is 2,000 when price is $10 and 3,000 when price is $5. If a monopolist who was
initially charging a price of $10 discovers a way to price discriminate, it will be able to increase revenue from
$20,000 to:
A. $25,000 by charging consumers with less elastic demands only $5 and keeping the price for consumers with
more elastic demands at $10.
B. $35,000 by charging consumers with less elastic demands only $5 and keeping the price for consumers with
more elastic demands at $10.
C. $25,000 by charging consumers with more elastic demands only $5 and keeping the price for consumers with
less elastic demands at $10.
D. $35,000 by charging consumers with more elastic demands only $5 and keeping the price for consumers with
less elastic demands at $10.
25. U.S. pharmaceutical companies often sell drugs at a lower price in foreign markets, where demand is more
price-elastic, than in U.S. markets. The main reason for this price discrimination is that companies must charge
high prices to some consumers in order to recover development costs. U.S. consumers end up paying:
A. more because they have less price-elastic demand.
B. more because they have more price-elastic demand.
C. less because they have less price-elastic demand.
D. less because they have more price-elastic demand.
26. What is the term that refers to increases in the value of a product to each user, including existing users, as the
total number of users increases?
A. Income transfer
B. Price discrimination
C. Simultaneous consumption
D. Network effects
27. Some firms in the technology sector have achieved economies of scale because costs have been reduced by:
A. Price discrimination
B. Socially optimal pricing
C. Fair return pricing
D. Simultaneous consumption
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28. If the ATC curve in the above graph represents the minimum of the average total cost curve, then examples of
X-inefficiency would best be represented by point:
A. A at output level Q1 and point D at output level Q1
B. A at output level Q1 and point B at output level Q2
C. E at output level Q2 and point F at output level Q3
D. D at output level Q1 and point C at output level Q3
29. Assume the owners of the only gambling casino in Wisconsin spend large sums of money lobbying state
government officials to protect their gambling monopoly. Economists refer to these expenditures as:
A. Rent seeking
B. Socially optimal pricing
C. Perfect price discrimination
D. Diseconomies of scale in production
30. Refer to the graph above. If the price of the product is $1 and the firm is a natural monopoly:
A. there will be a surplus of the product.
B. the firm will earn economic profit by satisfying the market quantity demanded at that price.
C. the firm can earn profit by producing more than Qc.
D. the firm will incur losses by producing the quantity demanded at that price.
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31. Refer to the graph above. At the price of $1.60, given market demand for the product:
A. the firm will incur losses.
B. the firm will just cover its opportunity costs.
C. there will be a shortage of the product.
D. the firm will go out of business.
32. An argument for making regulated monopolies adopt marginal cost pricing is that this would:
A. Increase productive efficiency by making price equal average cost
B. Benefit higher income groups by making monopoly products more affordable
C. Increase managerial incentives to reduce employment and production
D. Make the marginal cost equal to society's valuation of the marginal benefit
33. With a natural monopoly, the fair return price:
A. Is allocatively efficient; the socially optimal price is allocatively inefficient
B. Is allocatively inefficient; the socially optimal price is allocatively efficient
C. And the socially optimal price are both allocatively inefficient
D. And the socially optimal price are both allocatively efficient
34. What is the meaning of the phrase "dilemma of regulation"?
A. Natural monopolies achieve economies of scale, but charge high prices when there is no government
regulation; government regulation reduces prices, but results in diseconomies of scale
B. Natural monopolies are profitable, but only if the government permits price discrimination; government
regulation to restrict price discrimination reduces monopoly prices, but the regulation also reduces monopoly
output
C. The fair return price achieves allocative efficiency, but may produce economic losses; the socially optimal
price yields a normal profit but may not be allocatively efficient
D. The socially optimal price achieves allocative efficiency, but may produce economic losses; the fair return
price yields a normal profit but may not be allocatively efficient
35. The DeBeers' diamond monopoly has weakened in recent years primarily due to:
A. Emergence of high quality artificial diamonds that consumers find to be a perfect substitute for real diamonds
B. Successful antitrust prosecution against DeBeers by various governments around the world
C. New discoveries of diamonds by firms currently not in partnership with DeBeers
D. The effectiveness of its "diamonds are forever" advertising campaign
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Review questions Chapter 10 Key
1. C
2. C
3. B
4. D
5. A
6. D
7. B
8. B
9. B
10. B
11. B
12. B
13. C
14. B
15. A
16. D
17. D
18. D
19. B
20. A
21. B
22. C
23. C
24. C
25. A
26. D
27. D
28. C
29. A
30. D
31. B
32. D
33. B
34. D
35. C