Micro Chapter 11 Study Guide Questions

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1 Micro Chapter 11 Study Guide Questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. A monopoly is best defined as a. a single seller of a product that has characteristics very similar to the products produced in other industries. b. a single seller of a well-defined product for which there are no good substitutes operating in a market with high barriers to entry. c. a market in which a small number of rival sellers produce the entire market output. d. any firm operating in a contestable market. 2. Which of the following firms best fits the definition of a monopoly? a. McDonald's, because it is the only firm who produces the Big Mac b. a local cable company that has been granted the only license to sell cable in a city by the town council c. Ford Motor Company, because there are significant economies of scale in the production of automobiles d. Harvard University, because it has a reputation as being one of the top universities in the country 3. Which of the following is not a barrier that limits the entry of potential competitors into a market? a. government licensing b. control over an essential resource c. an elastic demand for a product d. patent rights 4. When significant economies of scale are present in the production process, an industry will tend naturally toward monopoly because a. one firm will be able to produce the entire market output at a lower cost than several smaller firms. b. marginal revenue will be less than market price, giving firms the incentive to equate marginal cost with price instead of equating marginal cost and marginal revenue. c. economies of scale can only be present when firms produce identical products and there is no reason to have more than one firm producing the same exact product. d. consumers will be unwilling to compare the prices charged by several different firms. 5. How will the price and output of an unregulated monopolist compare with the ideal levels that might be reached if the market was competitive? a. The output of the monopolist will be larger and the price lower. b. The output of the monopolist will be larger and the price higher. c. The output of the monopolist will be smaller and the price lower. d. The output of the monopolist will be smaller and the price higher. 6. Which of the following is true? a. A monopolist is always guaranteed to earn positive economic profits regardless of their cost of production or the price they charge. b. A monopolist will charge the highest price possible for their product because no matter what price they charge, people will still have to buy it. c. A monopolist has no incentive to find more cost-efficient methods of production because they are protected from competition from other sellers. d. None of the above are correct.

2 7. To maximize profit, the monopolist, whose cost and demand conditions are shown below, should charge a price of Price Output Total Cost $7 1 $ a. $4. b. $5. c. $6. d. $7. 8. Which of the following statements accurately describes a difference between a firm that is a monopolist and one that is in a competitive price-searcher market? a. A competitive price searcher produces at the output level where marginal cost equals marginal revenue; a monopolist does not. b. A monopolist faces a downward-sloping demand curve; a competitive price searcher does not. c. A monopolist charges a price higher than marginal cost; a competitive price searcher does not. d. In the long run, a competitive price searcher will earn zero economic profit because of low entry barriers, while a monopolist may earn positive economic profits in the long run. 9. To maximize profits, the monopolist shown in the figure would produce output of a. Q 1 and charge a price of P 1. b. Q 1 and charge a price of P 2. c. Q 2 and charge a price of P 3. d. Q 1 and charge a price of P 4.

3 10. The profit-maximizing monopolist shown in the figure would a. charge a price equal to C and earn an economic profit of AFDC. b. charge a price equal to C and earn an economic profit of AFEB. c. charge a price equal to C and earn an economic profit of BEDC. d. charge a price equal to A and earn an economic profit of AFDC. 11. A market situation in which only a small number of mutually interdependent, rival sellers exists is known as a(n) a. oligopoly market. b. monopoly market. c. open price-taker market. d. competitive price-searcher market. 12. In general, an organization of sellers designed to coordinate supply decisions so that the joint profits of the members is maximized is called a(n). If they are successful, the total market output and price will most closely approximate the output and price in a(n) market. (Fill in the blanks.) a. cooperative; open price-taker b. cartel; monopoly c. cartel; open price-taker d. OPEC; competitive price-searcher 13. To increase joint profits, a cartel will attempt to a. restrict output in order to increase the market price of the good produced. b. restrict output in order to decrease the market price of the good produced. c. expand output in order to increase the market price of the good produced. d. expand output in order to decrease the market price of the good produced.

4 14. The oil industry is dominated by a cartel known as OPEC, and the cocaine industry is dominated by the Colombian cocaine cartel. If these cartels are being successful, a. the price of oil is higher than if the cartel did not exist, but the price of cocaine is lower. b. the price of cocaine is higher than if the cartel did not exist, but the price of oil is lower. c. both goods have higher prices than if the cartels did not exist, and both have lower levels of total output. d. both goods have higher prices than if the cartels did not exist, and both also have higher levels of total output. 15. Laws designed to prevent monopoly and promote competition are known as a. antitrust laws. b. statutory amendments. c. fair-pricing legislation. d. breakup bills. 16. Which of the following would increase the likelihood that firms in an industry could successfully collude? a. a large number of firms in the industry b. unstable demand conditions in the industry c. high barriers to entry in the industry d. product characteristics that make it difficult for firms to detect other firms that cheat on the agreement 17. (I) Oligopolistic firms have an incentive to collude to increase profits. (II) Oligopolistic firms have an incentive to cheat on collusive agreements to increase profits. a. I is true; II is false. b. I is false; II is true. c. Both I and II are false. d. Both I and II are true. 18. If a local government began licensing funeral homes in the area, effectively making them into a cartel, we would expect a. the price of funeral services to rise, and the number of funerals performed in the area to fall. b. the price of funeral services to rise, and the number of funerals performed in the area to increase as well. c. the price of funeral services to fall, and the number of funerals performed in the area to increase. d. the price of funeral services to fall, and the number of funerals performed in the area to fall as well. 19. Economic theory suggests that government-operated monopolies will a. be highly efficient and follow policies that are in the consumers' interest. b. be dominated by persons who, while seeking to serve the public interest, are not hardnosed enough to run a business efficiently. c. be inefficient because of poor incentives for operational efficiency. d. favor the consumer at the expense of special interest groups in and out of government. Critical Thinking and Application 20. Monopoly is a word derived from Greek origins that means, roughly, single seller. Why is the definition of monopoly as single seller inadequate in economic terms? 21. Suppose all automobile manufacturers have collusively agreed to sell their cars at a uniform price. If a firm wanted to break this agreement and not be detected, what would be one way to do this?

5 22. Why does the U.S. government maintain a monopoly in the delivery of first-class mail? Does the Postal Service nevertheless face other forms of competition?

6 Micro Chapter 11 Study Guide Questions 13e Answer Section MULTIPLE CHOICE 1. B 2. B 3. C 4. A 5. D 6. D 7. B 8. D 9. D 10. C 11. A 12. B 13. A 14. C 15. A 16. C 17. D 18. A 19. C

Chapter 7 Monopoly, Oligopoly and Strategy

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