ExamName___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which one of the following about a monopoly is false? A) A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly. B) A monopoly status could be temporary. C) A monopoly could make profits in the long run. D) A monopoly could break even in the long run. 1) 2) Governments grant patents to A) encourage firms to reveal secret production techniques. B) encourage low prices. C) compensate firms for research and development costs. D) encourage competition. 2) 3) The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds? A) because the availability of previously owned diamonds would increase the market demand for diamonds and dilute De Beers' monopoly B) because De Beers will not be able to guarantee the quality of previously owned diamonds and fears that its reputation might be harmed C) because previously owned diamonds would be a close substitute to newly mined diamonds and therefore reduce De Beers' market power D) because the availability of previously owned diamonds would make the market demand curve for diamonds more inelastic and force De Beers to lower its price 3) 4) Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit maximizing outputs? A) Marginal revenue equals marginal cost. B) Marginal revenue is less than price. C) Price equals marginal cost. D) Average revenue equals average cost. 4) 1 Figure 10-7 In 2011. C) Enforcement of antitrust laws is necessary to promote competition among firms. Food and Drug Administration. ending the virtual monopoly that Time Warner Cable had in most local communities in the region. 6) 7) The Aluminum Company of America (Alcoa) had a monopoly until the 1940s because A) it had a patent on the manufacture of aluminum. C) it had control of almost all the available supply of bauxite.S. B) the company had a secret technique for making aluminum from bauxite. 8) What is the increase in consumer surplus as a result of this change? A) the area B + C B) the area A + B + C C) the area D + F D) the area B + C + D 2 . 7) 8) Which of the following statements is consistent with the views of Joseph Schumpeter? A) A lack of competition discourages firms from developing new technologies. B) Major League Baseball. Figure 10-7 shows the cable television market in Upstate New York. 5) 6) An example of a monopoly based on control of a key resource is A) the U. B) Research and development by competitive firms is responsible for most technological changes. D) Microsoft's Windows operating system. 5) Refer to Figure 10-7. C) the Paul Ecke Ranch monopoly on poinsettias. D) An economy benefits from firms having market power because these firms are more likely to be able to commit funds for research and development. D) it was a public enterprise. Following the entry of Verizon. the subscription price falls from PM to PC. Verizon was granted permission to enter the market for cable TV in Upstate New York. D) a gain in producer surplus equal to the loss in consumer surplus. B) greater economic efficiency.000 in ticket revenue if it adds a sixth performance. C) to maximize profit the firm should continue to produce the output it is producing. 15) 3 . Microsoft filed a complaint with the European Commission accusing Google of taking steps to monopolize the Internet search engine business. 13) 14) If a firm's average total cost is less than price where MR=MC. 11) 12) A merger between two competitors may be approved by the Department of Justice and the FTC if the two companies can substantiate ________ as a result of the merger.000. D) the firm should continue to produce the output it is producing. 10) 11) If a theatre company expects $250. A) an increase in the HHI to over 1. C) the European Union contracts exclusively with Google for its Internet search engine use. 14) 15) Relative to a perfectly competitive market.9) For which of the following firms is patent protection of vital importance? A) software firms B) auto makers C) furniture producers D) pharmaceutical firms 9) 10) In 2011. then A) to maximize profit the firm should decrease output.800 B) increases in economic efficiency C) decreases in marginal revenue for the merged company D) increases in revenue for the merged company 12) 13) If a monopolist's price is $50 per unit and its marginal cost is $25. D) cost of staging the sixth performance is probably higher than the cost of staging the previous five. B) to maximize profit the firm should increase output. B) the firm should shut down. C) the firm should cut back on its output to lower its cost. Microsoft's primary complaint was that A) Google has prevented competitors from gaining access to needed content and data to provide search results to consumers. B) marginal revenue of the sixth performance is $38.000. C) a gain in producer surplus less than the loss in consumer surplus. A) the firm should raise its price. the A) marginal revenue of the sixth performance is $48. B) Google is the only Internet search engine available to Windows operating system users. C) company will be making a loss on the sixth performance because its ticket sales will be less than the average received from the previous five.000 in ticket revenue from five performances and $288. D) Google owns the Internet advertising companies that pay for ads on search engine sites. and has prohibited ads from being sold to competitors. a monopoly results in A) a gain in producer surplus equal to the gain in consumer surplus. D) Not enough information is given to say what the firm should do to maximize profit. the Ecke family cannot prevent government-funded academic institutions from researching into plant breeding.16) If a monopolist's marginal revenue is $25 a unit and its marginal cost is $25. B) to maximize profit the firm should continue to produce the output it is producing. Would the Ecke's have been better off if they had patented their process of growing poinsettias? A) Yes. then the Ecke family is not any better off. seeking patent protection necessitates divulging enough information that would enable others to information to discover ways of grafting poinsettias that were similar to the Ecke method but that did not violate the patent. B) No. even with a patent protection. D) less than the price that would prevail if the industry was perfectly competitive. C) That depends on how long they had a monopoly before university researchers made the discovery. C) not consistently related to price that would prevail if the market was perfectly competitive. then A) to maximize profit the firm should increase output. 16) 17) A profit maximizing monopoly's price is A) greater than the price that would prevail if the industry was perfectly competitive. The Ecke family did not patent their grafting process. 18) 4 . D) Not enough information is given to say what the firm should do to maximize profit. If the discovery was made after the period of time when patents expire. 17) 18) The Ecke's family virtual monopoly on commercial poinsettia production by grafting together two varieties of the plant ended around 1996 when university researchers were able to independently make the same discovery. C) to maximize profit the firm should decrease output. D) No. B) the same as the price that would prevail if the industry was perfectly competitive. it would have allowed them to earn economic profits indefinitely. What is the area that represents consumer surplus under a monopoly? A) the rectangle P1 P3HF B) the trapezium P1 P2 EF C) the triangle P0 P2 E D) the triangle P0 P1 F 5 19) .Figure 10-6 19) Refer to Figure 10-6. 20) Refer to Figure 10-5.Figure 10-5 Figure 10-5 shows the demand and cost curves for a monopolist. What is the economically efficient output level? A) 600 units B) 800 units C) 940 units 6 D) 1160 units 20) . Figure 10-2 Figure 10-2 above shows the demand and cost curves facing a monopolist. has been granted a patent for its Arnica toothache balm. What is the amount of Shakti's profit? A) $68 B) $72 C) $124 7 D) $192 22) . Suppose the monopolist represented in the diagram above produces positive output. What is the profit/loss per unit? A) loss of $21 per unit B) profit of $14 per unit C) loss of $7 per unit D) profit of $30 per unit 21) Table 10-2 Price per Dose $80 72 64 56 48 40 32 24 16 Quantity Demanded (dose) 0 1 2 3 4 5 6 7 8 Total Cost of Production (dollars) $80 82 88 100 124 164 208 268 340 Shakti Inc. Table 10-2 shows the demand and the total cost schedule for the firm. 22) Refer to Table 10-2. 21) Refer to Figure 10-2. Patents enable firms to recover costs incurred during this process. What is the profit-maximizing/loss-minimizing output level? A) 630 units B) 800 units C) 850 units D) 880 units 8 26) . C) 25%. B) that taxes on profits from drugs are very high. 26) Refer to Figure 10-2. Profits from patents are needed to pay these labor costs. B) undefined. Suppose the monopolist represented in the diagram above produces positive output. D) It cannot be determined from the information given.23) One reason patent protection is vitally important to pharmaceutical firms is A) successful new drugs are not profitable. D) the high salaries pharmaceutical firms pay to scientists and doctors make their labor costs higher than for any other business. all with equal market share. 23) 24) The demand curve for the monopoly's product is A) more elastic than the market demand for the product. The four-firm concentration ratio of this industry is A) 16%. profits from patent protection enable firms to pay these taxes. 25) Figure 10-2 Figure 10-2 above shows the demand and cost curves facing a monopolist. C) the market demand for the product. If firms are not granted patents many would go out of business and health care would be severely diminished. 24) 25) Suppose an industry is made up of 25 firms. C) the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly. B) 20%. D) more inelastic than the market demand for the product. What is the amount of the firm's profit? A) $335 B) $350 C) $880 9 D) $910 28) . What is the difference between the monopoly output and the perfectly competitive output? A) 140 units B) 240 units C) 340 units D) 560 units 27) Table 10-1 Price per Unit $85 80 75 70 65 60 55 Quantity Demanded (units) 10 11 12 13 14 15 16 Total Cost of Production (dollars) $530 540 550 560 575 595 625 A monopoly producer of foreign language translation software faces a demand and cost structure as given in Table 10-1.Figure 10-5 Figure 10-5 shows the demand and cost curves for a monopolist. 28) Refer to Table 10-1. 27) Refer to Figure 10-5. D) Safeway is a monopoly all day because it produces a service that has no close substitutes. 29) Refer to Figure 10-2.Figure 10-2 Figure 10-2 above shows the demand and cost curves facing a monopolist. Whole Foods and Lunardi's close at 9 pm. C) Safeway has a monopoly at midnight but not during the day. Whole Foods and Lunardi's. 30) 10 . Suppose the monopolist represented in the diagram above produces positive output. Which of the following statements is true? A) Safeway can ignore the pricing decisions of the other two supermarkets. California. What is the price charged at the profit-maximizing/loss-minimizing output level? A) $38 B) $54 C) $68 D) $75 29) 30) In Walnut Creek. While Safeway remains open twenty-four hours a day. B) Safeway probably has a higher markup to compensate for its higher cost of production. there are three very popular supermarkets: Safeway. the marginal cost of producing the last unit sold exceeds the consumers' marginal value for that last unit 11 31) . 31) Refer to Figure 10-9.Figure 10-9 Figure 10-9 shows the cost and demand curves for the Erickson Power Company. D) because at the economically efficient output level. Why won't regulators require that Erickson Power produce the economically efficient output level? A) because there is insufficient demand at that output level B) because Erickson Power will earn zero profit C) because Erickson Power will sustain persistent losses and will not continue in business in the long run. The main reason for the elimination of profits is A) after 20 years most people who have taken the drug have passed away or are cured of the illness the drug was intended to treat. B) after 20 years patent protection is ended and other firms can produce less expensive generic versions of the drug. What is the price charged for the profit-maximizing output level? A) $13 B) $21 C) $27 D) $34 32) 33) Refer to Figure 10-3. C) As long as there are entry barriers. this firm will continue to enjoy economic profits. C) the quantity demanded of the drug has increased enough that the demand becomes inelastic and revenue falls.Figure 10-3 Figure 10-3 shows the demand and cost curves for a monopolist. B) It will be regulated by the government because of its excess profits. 32) Refer to Figure 10-3. Why is this so? A) because unlike Microsoft. does not. D) firms sell their patent rights to other firms so that they can concentrate on finding drugs to treat new illnesses. who sells his output in the world commodity market. 34) 35) Microsoft hires marketing and sales specialists to decide what prices it should set for its products. D) New firms will enter the market to eliminate its profits. 33) 34) Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale. What is likely to happen to this monopoly in the long run? A) It will expand its output to take advantage of economies of scale so as to further increase its profit. whereas a wealthy corn farmer in Iowa. the wealthy corn farmer is probably a monopolist B) because Microsoft could potentially lose sales if it sets prices indiscriminately C) because the wealthy corn farmer is a price taker who chooses his optimal output independently of market price but Microsoft's optimal output depends on the price it selects D) because Microsoft is large enough to hire the best people in the field 35) 12 . 38) 39) Economic efficiency requires that a natural monopoly's price be A) equal to average variable cost where it intersects the demand curve. it will exit the market. 38) Refer to Figure 10-2. B) economies of scale. B) It will be forced out of business by more efficient producers. C) It will raise its price at least until it breaks even. D) control of a key raw material.36) Why does a monopoly cause a deadweight loss? A) because it does not produce some output for which demand exceeds supply B) because it does not produce some output for which marginal benefit exceeds marginal cost C) because it increases producer surplus at the expense of consumer surplus D) because it appropriates a portion of consumer surplus for itself 36) 37) A local electricity-generating company has a monopoly that is protected by an entry barrier that takes the form of A) perfectly inelastic demand curve. C) network externalities. C) equal to the lowest price the firm can charge and still make a normal profit. What happens to the monopolist represented in the diagram in the long run? A) The government will subsidize the monopoly to enable it to break even. D) equal to average total cost where it intersects the demand curve. 39) 13 . D) If the cost and demand curves remain the same. B) equal to marginal cost where it intersects the demand curve. 37) Figure 10-2 Figure 10-2 above shows the demand and cost curves facing a monopolist. 40) 41) Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly? A) Each maximizes profits by producing a quantity for which price equals marginal cost. D) if the majority of the population are entrepreneurs. 41) 42) A market economy benefits from market power A) if firms with market power do research and development with the profits earned. C) summing the amount of sales by the four largest firms and dividing by total industry sales. Table 10-2 shows the demand and the total cost schedule for the firm. C) Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost. What is Shakti's profit-maximizing output? A) 4 units B) 5 units C) 6 units 14 D) 7 units 44) . B) Each must lower its price to sell more output. 42) 43) A Herfindahl-Hirschman Index is calculated by A) summing the squares of the market shares of each firm in the industry. B) if market power gets so bad the government creates public enterprises. the lobbyist then raise money for those Congress members who granted the franchise. 43) Table 10-2 Price per Dose $80 72 64 56 48 40 32 24 16 Quantity Demanded (dose) 0 1 2 3 4 5 6 7 8 Total Cost of Production (dollars) $80 82 88 100 124 164 208 268 340 Shakti Inc. D) when a firm's sales volume reaches a level where the firm can take advantage of economies of scale. C) when lobbyists petition members of Congress to grant a public franchise. B) when a firm can attract enough buyers initially to increase a product's usefulness to attract even more buyers. 44) Refer to Table 10-2. has been granted a patent for its Arnica toothache balm. D) dividing the number of firms wanting to merge by the total number in the industry. B) summing the advertising expenditures of the firms that want to merge by total industry advertising expenditures. thereby reducing the price of the product to further boost its sales. D) Each sets a price for its product that will maximize its revenue. C) under no circumstances.40) A virtuous cycle occurs A) when monopoly profits are used to create new products for additional monopoly profits. 15 . C) P3 . D) the Department of Justice. C) a perfectly inelastic demand curve. C) the Department of Commerce. 50) B) a horizontal demand curve. 46) 47) Natural monopolies in the United States are generally regulated by A) the Federal Trade Commission. 46) Refer to Figure 10-1. D) all horizontal mergers. B) where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.S. C) where average total cost is minimized. B) local or state regulatory commissions. Steel and General Motors would be an example of a A) conspiracy in restraint of trade. B) all conglomerate mergers. 49) 50) A monopolist faces A) a downward-sloping demand curve. D) conglomerate merger. The firm's profit-maximizing price is A) P1 . 48) 49) A merger between U. 47) 48) The Clayton Act prohibited A) any merger if its effect was to substantially lessen competition or create a monopoly. B) horizontal merger. D) where total costs are the smallest relative to price. 45) Figure 10-1 Figure 10-1 above shows the demand and cost curves facing a monopolist. C) all vertical mergers. D) a perfectly elastic demand curve. C) vertical merger.45) A monopolist's profit maximizing price and output correspond to the point on a graph A) where price is as high as possible. B) P2 . D) P4 . What is the total revenue at the profit-maximizing output level? c. and deadweight loss? 51) 52) How does a network externality serve as a barrier to entry? Is this barrier surmountable? Explain.SHORT ANSWER. What is the profit? e. 52) Figure 10-4 53) Refer to Figure 10-4. What is the profit-maximizing quantity and what price will the monopolist charge? b. Write the word or phrase that best completes each statement or answers the question. what would be the profit-maximizing price and quantity? 53) 54) Identify two ways by which the government controls monopolies? 54) 55) Explain why the monopolist has no supply curve? 55) 16 . producer surplus. What is the total cost at the profit-maximizing output level? d. What is the profit per unit (average profit) at the profit-maximizing output level? f. Use the figure above to answer the following questions. If this industry was organized as a perfectly competitive industry. 51) Suppose that a perfectly competitive industry becomes a monopoly. What effect will this have on consumer surplus. a. Answer Key Testname: WEEK7PRACTICE101 1) A 2) C 3) C 4) B 5) D 6) B 7) C 8) D 9) D 10) A 11) B 12) B 13) D 14) D 15) C 16) B 17) A 18) C 19) D 20) C 21) C 22) A 23) C 24) C 25) A 26) A 27) C 28) B 29) C 30) C 31) C 32) D 33) C 34) B 35) B 36) B 37) B 38) D 39) B 40) B 41) C 42) A 43) A 44) A 45) B 46) C 47) B 48) A 49) C 50) A 17 . 000 = $600 e. Total cost = 50 × $20 = $1. 52) A network externality exists where the usefulness of the product increases with the number of people who use it. price = 32 b. there is no array of prices and quantities supplied. quantity = 80. then it is possible that customers will switch to the superior product. 55) A supply curve that shows the relationship between the price of a product and the quantity that suppliers are willing and able to supply. and there will be a deadweight loss.$20 = $12 f. price = $22 54) The government control monopolies by enforcing antitrust laws and through economic regulation of natural monopolies. If a rival enters the market with a superior product. 53) a. thereby increasing the supplier's dominance in the market. 18 . If purely competitive. Total revenue = 50 × $32 = $1.$1. Profit = $1. Thus. Quantity = 50.600 .Answer Key Testname: WEEK7PRACTICE101 51) If a perfectly competitive industry is monopolized. this barrier is not insurmountable. The monopolist selects its profit maximizing output by equating marginal revenue to marginal cost and takes the price dictated by the demand curve. It can serve as an entry barrier because the popularity of the product attracts more and more consumers. However.000 d. consumer surplus will decrease. Profit per unit = $32 . producer surplus will increase.600 c.