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1 Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A) a product for which there are no close substitutes. B) a single firm. C) barriers to entry. D) all of the above 2) Natural monopolies occur when there are 2) A) external economies. B) diseconomies of scale. C) economies of scale. D) natural resources involved. 3) A single-price monopolist's demand curve is 3) A) more elastic than the market demand curve. B) its marginal revenue curve. C) the same as the market demand curve. D) perfectly elastic. 4) Which of the following is a characteristic of a single-price monopoly? 4) A) There are many close substitutes for the firm's product. B) Demand is perfectly elastic. C) Price exceeds marginal revenue. D) The firm is a price taker. 5) For a single-price monopolist, marginal revenue is less than price because 5) A) total revenue always decreases as output increases. B) the price does not have to be lowered on all previous units sold. C) the revenue gain from the last unit sold is offset by further gains in price on units not sold at all. D) the revenue gain from the last unit sold is offset by a revenue loss on the units that previously had been sold at a higher price. 6) Which of the following statements applies to a single-price monopolist? 6) A) In order to maximize profits, the monopolist should produce where its demand is unit elastic. B) In order to maximize profits, the monopolist should only produce an output in the inelastic range of its supply. C) In order to maximize profits, the monopolist should only produce an output that lies in the elastic range of its demand. D) In order to maximize profits, the monopolist should only produce an output that lies in the inelastic range of its demand. 7) Which of the following is a characteristic of monopoly in the long run? 7) A) Economic profits can exist. B) Economic profits are driven to zero so that the firm earns only a normal profit. C) Price equals marginal revenue. D) Price equals marginal cost. 8) A single-price monopolist maximizes profits by producing the output at which 8) A) marginal cost equals average cost. B) marginal revenue equals marginal cost. C) price equals marginal cost. D) price equals marginal revenue. 9) Which of the following is ALWAYS true for a single-price monopolist in equilibrium? 9) A) P > MC B) MR = MC C) P > MR D) All of the above are always true.

2 10) A profit maximizing single-price monopolist charges a price equal to 10) A) the price consumers are willing and able to pay for the profit maximizing quantity. B) marginal revenue. C) average total cost. D) the price necessary for the firm to earn a normal return on its investment. 11) The figure above shows the demand and cost curves for a single-price monopolist. What level of output maximizes the firm's economic profit? 11) A) 50 units B) 0 units C) 30 units D) 20 units 12) The figure above shows the demand and cost curves for a single-price monopolist. What price will the firm charge? 12) A) $20 per unit B) $50 per unit C) $10 per unit D) $30 per unit 13) The figure above shows the demand and cost curves for a single-price monopolist. What economic profit does this firm earn? 13) A) $200 B) $600 C) $400 D) zero Price (dollars per unit) Quantity (units per day) Total cost (dollars) ) The table above shows the demand and costs for a single-price monopolist. The firm maximizes its profits by selling 14) A) 0 units. B) 20 units C) 60 units D) 40 units. 15) The table above shows the demand and costs for a single-price monopolist. The firm can maximize its profits by setting its price at 15) A) $35 per unit. B) $45 per unit. C) $30 per unit. D) $40 per unit. 16) The table above shows the demand and costs for a single-price monopolist. The maximum economic profit this firm can earn equals 16) A) $1,390. B) $2,400. C) $1,580. D) $1,550.

3 17) Why can a monopoly earn an economic profit in the long run? 17) A) Because there are close substitutes for the firm's product. B) Because there is only a single firm in the market. C) Because the firm is protected by barriers to entry. D) ALL of the above are reasons why a monopoly can earn an economic profit in the long run. Use the figure below to answer the following question(s). Figure ) Refer to Figure What is the profit-maximizing output level for this monopolist? 18) A) 1 1/2 units per day. B) 3 units per day. C) 4 units per day. D) 5 1/2 units per day. E) 5 units per day. 19) Refer to Figure What price will the monopolist charge in order to maximize profit? 19) A) $6. B) $5. C) $4. D) $3. E) $7. 20) Refer to Figure At the profit-maximizing price and output, the total revenue is 20) A) $21. B) $16. C) $7. D) $18. E) $10. 21) Refer to Figure At the profit-maximizing price and output, the total cost is 21) A) $8. B) $6. C) $14. D) $18. E) $22. 22) Refer to Figure The total profit for this monopolist is 22) A) $9. B) $1. C) $3. D) $0. E) impossible to compute without more information concerning the fixed costs. 23) Refer to Figure The monopolist would not shut down the firm since, at the profitmaximizing output, the price is greater than the 23) A) average fixed cost. B) marginal revenue. C) average variable cost. D) average total cost. E) marginal cost.

4 24) Refer to Figure At the profit-maximizing output level 24) A) the efficiency of the resource allocation is assured since profit is maximized. B) the resource allocation is inefficient in the economy since the price exceeds the marginal cost. C) the resource allocation is efficient in the economy since the marginal revenue equals the marginal cost. D) the resource allocation is efficient in the economy since the price is less than the highest price some buyers would be willing to pay. E) the efficiency of the resource allocation is assured since cost is minimized. 25) Four monopolists were overheard talking at an expensive restaurant. Which one of their statements below contains a correct strategy for maximizing profits? 25) A) "I think cost minimization is the key to maximizing profits." B) "I don't really keep close tabs on total profits, but I don't approve any business deal unless it increases my revenue more than it increases my costs." C) "In my company, we don't increase output unless we know that the larger output will raise total revenue." D) "We try to make the most of our equipment by producing at maximum capacity." E) None of the above. 26) Relative to a perfectly competitive industry with the same cost and demand curves, a single-price monopolist produces 26) A) less output and has a lower price. B) less output and has a higher price. C) more output and has a lower price. D) more output and has a higher price. 27) The deadweight loss from monopoly represents 27) A) a loss to society of consumer and producer surplus. B) the consumer surplus captured by the monopolist. C) the lost profits of output not produced. D) the benefit to society of output not produced. 28) The creation of a monopoly results in gains to 28) A) consumers at the expense of producers. B) producers at no expense to consumers. C) consumers at no expense to producers. D) producers at the expense of consumers. 29) Rent seeking is best defined as 29) A) attempts by landlords to get tenants. B) attempts by owners of a monopoly to sell the firm. C) attempts to achieve monopoly power and the resulting economic profit. D) attempts by individuals to avoid paying taxes. 30) Which of the following is necessary for a monopolist to price discriminate between groups? 30) A) A customer from one group cannot resell to a customer in another group. B) The groups have different average willingness to pay. C) The groups are easily identifiable. D) ALL of the above conditions are necessary for the monopolist to price discriminate. 31) Price discrimination is the practice of charging different prices to 31) A) different countries because of tariffs and transportation costs. B) different customers even though cost of selling to each is the same. C) the same customers because of changes in cost. D) different customers because the costs of selling are different. 32) Compared to a single-price monopolist, a price-discriminating monopolist 32) A) produces more output. B) generates a larger deadweight loss. C) produces the same amount of output but charges a higher price. D) produces less output but charges a lower price.

5 33) If a monopolist can perfectly price discriminate, it will 33) A) produce until price elasticity of demand equals one. B) charge a different price for every unit sold. C) not be concerned with the market demand. D) charge the same price for each unit sold. 34) Which of the following is true about a perfect price discriminating monopolist? 34) A) There is no consumer surplus. B) There is zero economic profit. C) There is inefficiency. D) All consumers pay marginal cost. Use the figure below to answer the following question(s). Figure ) Consider Figure Suppose we have a market with perfect competition. If the slanted-barred area shows the consumer surplus, and the vertical-barred area shows the producer surplus, which graph(s) correctly represents this market? 35) E) (b) and (d). 36) Consider Figure Suppose we have a market with a single-price monopolist. If the slantedbarred area shows the consumer surplus, and the vertical-barred area shows the producer surplus, which graph(s) correctly represents this market? 36) E) (b) and (c). 37) Consider Figure Suppose we have a market with a two-price monopolist. If the slantedbarred area shows the consumer surplus and the vertical-barred area shows the producer surplus, which graph(s) correctly represents this market? 37) E) (b) and (d).

6 38) Consider Figure Suppose we have a market with a perfect price-discriminating monopolist. If the slanted-barred area shows the consumer surplus and the vertical-barred area shows the producer surplus, which graph(s) correctly represents this market? 38) E) None of the graphs. Use the figure below to answer the following question(s). Figure ) Refer to Figure This figure represents a natural monopoly since 39) A) positive profits will be made. B) the sellers of electricity can price discriminate between residential users of electricity and business users of electricity. C) the average and marginal costs decline throughout the relevant range of demand. D) marginal revenue is declining over the relevant range. E) the demand faced by the firm is downward sloping. 40) Refer to Figure The profit-maximizing output of electricity is 40) A) 300 kwh. B) 100 kwh. C) 500 kwh. D) 200 kwh. E) 400 kwh. 41) Refer to Figure The profit-maximizing price charged per kwh would be 41) A) $0.50. B) $0.90. C) $0.40. D) $0.70. E) $ ) Refer to Figure The output of electricity that would be allocatively efficient is 42) A) 400 kwh. B) 200 kwh. C) 500 kwh. D) 100 kwh. E) 300 kwh.

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