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Week 7 Practice 101
Week 7 Practice 101
Name___________________________________
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)
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)
Figure 10-7
In 2011, Verizon was granted permission to enter the market for cable TV in Upstate New York, ending the virtual monopoly
that Time Warner Cable had in most local communities in the region. Figure 10-7 shows the cable television market in
Upstate New York.
5) Refer to Figure 10-7. Following the entry of Verizon, the subscription price falls from PM to PC.
5)
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.
B) the company had a secret technique for making aluminum from bauxite.
C) it had control of almost all the available supply of bauxite.
D) it was a public enterprise.
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) Research and development by competitive firms is responsible for most technological
changes.
C) Enforcement of antitrust laws is necessary to promote competition among firms.
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.
8)
9)
10) In 2011, Microsoft filed a complaint with the European Commission accusing Google of taking
steps to monopolize the Internet search engine business. 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) Google is the only Internet search engine available to Windows operating system users.
C) the European Union contracts exclusively with Google for its Internet search engine use.
D) Google owns the Internet advertising companies that pay for ads on search engine sites, and
has prohibited ads from being sold to competitors.
10)
11) If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in
ticket revenue if it adds a sixth performance, the
A) marginal revenue of the sixth performance is $48,000.
B) marginal revenue of the sixth performance is $38,000.
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.
D) cost of staging the sixth performance is probably higher than the cost of staging the previous
five.
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.
A) an increase in the HHI to over 1,800
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, then
A) to maximize profit the firm should decrease output.
B) to maximize profit the firm should increase output.
C) to maximize profit the firm should continue to produce the output it is producing.
D) Not enough information is given to say what the firm should do to maximize profit.
13)
14) If a firm's average total cost is less than price where MR=MC,
A) the firm should raise its price.
B) the firm should shut down.
C) the firm should cut back on its output to lower its cost.
D) the firm should continue to produce the output it is producing.
14)
15)
16) If a monopolist's marginal revenue is $25 a unit and its marginal cost is $25, then
A) to maximize profit the firm should increase output.
B) to maximize profit the firm should continue to produce the output it is producing.
C) to maximize profit the firm should decrease output.
D) Not enough information is given to say what the firm should do to maximize profit.
16)
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. The Ecke family did not patent their grafting process. Would the Ecke's
have been better off if they had patented their process of growing poinsettias?
A) Yes, it would have allowed them to earn economic profits indefinitely.
B) No, 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.
C) That depends on how long they had a monopoly before university researchers made the
discovery. If the discovery was made after the period of time when patents expire, then the
Ecke family is not any better off.
D) No, even with a patent protection, the Ecke family cannot prevent government-funded
academic institutions from researching into plant breeding.
18)
Figure 10-6
19) Refer to Figure 10-6. 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
19)
Figure 10-5
Figure 10-5 shows the demand and cost curves for a monopolist.
20) Refer to Figure 10-5. What is the economically efficient output level?
A) 600 units
B) 800 units
C) 940 units
D) 1160 units
20)
Figure 10-2
Figure 10-2 above shows the demand and cost curves facing a monopolist.
21) Refer to Figure 10-2. 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. has been granted a patent for its Arnica toothache balm. Table 10-2 shows the demand and the total cost schedule
for the firm.
D) $192
22)
23)
24)
25) Suppose an industry is made up of 25 firms, all with equal market share. The four-firm
concentration ratio of this industry is
A) 16%.
B) 20%.
C) 25%.
D) It cannot be determined from the information given.
25)
Figure 10-2
Figure 10-2 above shows the demand and cost curves facing a monopolist.
26) Refer to Figure 10-2. Suppose the monopolist represented in the diagram above produces positive
output. What is the profit-maximizing/loss-minimizing output level?
A) 630 units
B) 800 units
C) 850 units
D) 880 units
26)
Figure 10-5
Figure 10-5 shows the demand and cost curves for a monopolist.
27) Refer to Figure 10-5. 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.
28) Refer to Table 10-1. What is the amount of the firm's profit?
A) $335
B) $350
C) $880
D) $910
28)
Figure 10-2
Figure 10-2 above shows the demand and cost curves facing a monopolist.
29) Refer to Figure 10-2. Suppose the monopolist represented in the diagram above produces positive
output. 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, California, there are three very popular supermarkets: Safeway, Whole Foods and
Lunardi's. While Safeway remains open twenty-four hours a day, Whole Foods and Lunardi's close
at 9 pm. Which of the following statements is true?
A) Safeway can ignore the pricing decisions of the other two supermarkets.
B) Safeway probably has a higher markup to compensate for its higher cost of production.
C) Safeway has a monopoly at midnight but not during the day.
D) Safeway is a monopoly all day because it produces a service that has no close substitutes.
30)
10
Figure 10-9
Figure 10-9 shows the cost and demand curves for the Erickson Power Company.
31) Refer to Figure 10-9. 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.
D) because at the economically efficient output level, the marginal cost of producing the last unit
sold exceeds the consumers' marginal value for that last unit
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31)
Figure 10-3
Figure 10-3 shows the demand and cost curves for a monopolist.
32) Refer to Figure 10-3. 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. 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.
B) It will be regulated by the government because of its excess profits.
C) As long as there are entry barriers, this firm will continue to enjoy economic profits.
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. 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.
C) the quantity demanded of the drug has increased enough that the demand becomes inelastic
and revenue falls.
D) firms sell their patent rights to other firms so that they can concentrate on finding drugs to
treat new illnesses.
34)
35) Microsoft hires marketing and sales specialists to decide what prices it should set for its products,
whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity market, does
not. Why is this so?
A) because unlike Microsoft, 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)
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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.
B) economies of scale.
C) network externalities.
D) control of a key raw material.
37)
Figure 10-2
Figure 10-2 above shows the demand and cost curves facing a monopolist.
38) Refer to Figure 10-2. 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.
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) If the cost and demand curves remain the same, it will exit the market.
38)
39)
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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.
B) Each must lower its price to sell more output.
C) Each maximizes profits by producing a quantity for which marginal revenue equals marginal
cost.
D) Each sets a price for its product that will maximize its revenue.
41)
42)
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. has been granted a patent for its Arnica toothache balm. Table 10-2 shows the demand and the total cost schedule
for the firm.
14
D) 7 units
44)
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) where marginal revenue equals marginal cost and charging the price on the market demand
curve for that output.
C) where average total cost is minimized.
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.
D) P4 .
46)
47)
48)
49) A merger between U.S. Steel and General Motors would be an example of a
A) conspiracy in restraint of trade.
B) horizontal merger.
C) vertical merger.
D) conglomerate merger.
49)
50)
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SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
51) Suppose that a perfectly competitive industry becomes a monopoly. What effect will this
have on consumer surplus, producer surplus, and deadweight loss?
51)
52) How does a network externality serve as a barrier to entry? Is this barrier surmountable?
Explain.
52)
Figure 10-4
53) Refer to Figure 10-4. Use the figure above to answer the following questions.
a. What is the profit-maximizing quantity and what price will the monopolist charge?
b. What is the total revenue at the profit-maximizing output level?
c. What is the total cost at the profit-maximizing output level?
d. What is the profit?
e. What is the profit per unit (average profit) at the profit-maximizing output level?
f. If this industry was organized as a perfectly competitive industry, what would be the
profit-maximizing price and quantity?
53)
54)
55)
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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
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Answer Key
Testname: WEEK7PRACTICE101
51) If a perfectly competitive industry is monopolized, consumer surplus will decrease, producer surplus will increase,
and there will be a deadweight loss.
52) A network externality exists where the usefulness of the product increases with the number of people who use it. It can
serve as an entry barrier because the popularity of the product attracts more and more consumers, thereby increasing
the supplier's dominance in the market. However, this barrier is not insurmountable. If a rival enters the market with a
superior product, then it is possible that customers will switch to the superior product.
53) a. Quantity = 50; price = 32
b. Total revenue = 50 $32 = $1,600
c. Total cost = 50 $20 = $1,000
d. Profit = $1,600 - $1,000 = $600
e. Profit per unit = $32 - $20 = $12
f. If purely competitive, quantity = 80; price = $22
54) The government control monopolies by enforcing antitrust laws and through economic regulation of natural
monopolies.
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. The monopolist selects its profit maximizing output by equating marginal revenue to marginal
cost and takes the price dictated by the demand curve. Thus, there is no array of prices and quantities supplied.
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