Test Bank For Survey of Economics 6th Edition Osullivan

Test Bank for Survey of Economics, 6th Edition : OSullivan
Test Bank for Survey of Economics, 6th Edition :

OSullivan
To download the complete and accurate content document, go to:

https://testbankbell.com/download/test-bank-for-survey-of-economics-6th-edition-osull
ivan/
Visit TestBankBell.com to get complete for all chapters

Survey of Economics, 6e (O'Sullivan/Sheffrin/Perez)
Chapter 7 Monopoly and Price Discrimination
7.1 The Monopolist's Output Decision
1) A market served by only one firm is called a(n)

A) perfectly competitive market.
B) monopoly.
C) oligopoly.
D) Any of the above could be correct.
Answer: B
Diff: 1
Topic: Monopoly and Price Discrimination
Skill: Definition
AACSB: Reflective Thinking
Learning Outcome: Micro-14
2) A firm that has market power has the ability

A) to affect the price of its own product.
B) to conduct illegal activities without fear of prosecution.
C) to command consumer to buy any quantity from them.
D) to drive its competition out of the market.
Answer: A
Diff: 1
Skill: Conceptual
3) Which of the following firms have market power?

A) private universities
B) fast food chains such as McDonald's
C) theme parks
D) All of the above have market power.
Answer: D
Diff: 1
Skill: Conceptual
1
Copyright © 2014 Pearson Education, Inc.
4) Which of the following firms have no market power?
A) clothing companies
B) fast food chains such as McDonald's
C) theme parks
D) gold panners during the gold rush
Answer: D
Diff: 1
Skill: Conceptual
5) Which of the following is NOT a characteristic of a monopoly?

A) There is only one seller.
B) A monopolist is a price-taker.
C) There exist barriers to entry.
D) A monopolist's sales revenue is constrained by the market demand.
Answer: B
Diff: 1
Skill: Conceptual
6) Which of the following is NOT a barrier to entry for monopoly?

A) a patent
B) government licensing
C) large economies of scale
D) a large number of existing firms in a market
Answer: D
Diff: 1
Skill: Conceptual
7) When economists say a market has "barriers to entry" they refer to

A) monopolists being prohibited from selling their products to certain customers.
B) a policy that some countries establish to reduce imports from other countries.
C) factors that prevent other firms from challenging a firm with market power.
D) economic profits that are positive, but too high to encourage entry.
Answer: C
Diff: 1
Skill: Definition
2
8) Which of the following is an example of a barrier to entry?
A) A firm is open for business only at certain hours of the day, and has its doors locked at other
times.
B) The government grants licenses to taxicab drivers, without which it is illegal to operate a
taxicab.
C) A newspaper sells advertising space to businesses.
D) lack of a Web site
Answer: B
Diff: 2
Skill: Conceptual
9) Which of the following is NOT an artificial barrier to entry?

A) a patent
B) government franchise
C) large economies of scale
D) government licensing
Answer: C
Diff: 3
Skill: Conceptual
10) When a firm is awarded a patent, it is given monopoly rights to the production of that
product for ________ years.
A) 10
B) 20
C) 30
D) 50
Answer: B
Diff: 3
Skill: Fact
3
11) Which of the following firms rely on patents the most as the barrier to keep other firms from
entering the industry?
A) pharmaceutical firms
B) textbook publishers
C) law firms
D) wine makers
Answer: A
Diff: 3
Skill: Conceptual
12) A monopoly may arise due to

A) a patent.
B) network externalities.
C) large economies of scale.
D) all of the above
Answer: D
Diff: 2
Skill: Definition
13) ________ is a monopoly that exists in an industry where the large economies of scale acts as
its barrier to entry.
A) A natural monopoly
B) A monopolistic competitor
C) A regulated monopoly
D) A price discriminator
Answer: A
Diff: 2
Skill: Definition
4
14) A network externality occurs when
A) a firm has a patent.
B) the value of a product to a consumer increase with the number of other consumers who use it.
C) a firm has large economies of scale.
D) the value of a product to a consumer requires another product.
Answer: B
Diff: 2
Skill: Definition
15) Facebook is a social networking Web site that is used by a growing number of individuals.
Because of its popularity, it is now more difficult for new networking Web sites to enter and
compete with Facebook. Facebook enjoys ________ as a barrier for others to enter the market.
A) a network externality
B) price discrimination
C) a negative externality
D) economies of scale
Answer: A
Diff: 2
Skill: Conceptual
16) The demand curve that a monopolist faces is

A) the market demand curve.
B) the same as the demand curve that faces a perfectly competitive firm.
C) not affected by changes in the prices of other goods.
D) generally flatter than the demand curve that faces a perfectly competitive firm.
Answer: A
Diff: 2
Topic: Total Revenue and Marginal Revenue
Skill: Conceptual
5
Table 7.1
17) Refer to Table 7.1, which shows the relationship between the price that Gladys charges for a
product and the quantity of that product that Gladys sells. The total revenue that Gladys receives
from selling four units of output is
A) $4.
B) $6.
C) $10.
D) $24.
Answer: D
Diff: 2
Skill: Analytical
AACSB: Analytic Skills
product and the quantity of that product that Gladys sells. The marginal revenue that Gladys
receives from selling the fourth unit of output is
A) $3.
B) $6.
C) $10.
D) $24.
Answer: A
Diff: 2
Skill: Analytical
6
product and the quantity of that product that Gladys sells. The marginal revenue that Gladys
receives from selling the fifth unit of output is
A) $5, because that is the price per unit of output that Gladys receives.
B) $5, because that is the quantity that Gladys sells.
C) $25, because Gladys sells five unit of output at a price of $5.
D) $1, because Gladys earns $1 more in revenues by increasing her output to five units from four
units.
Answer: D
Diff: 2
Skill: Analytical
product and the quantity of that product that Gladys sells. Gladys' marginal revenue becomes
negative starting with the production of which unit?
A) 2
B) 4
C) 6
D) None of the above; marginal revenue is always positive or zero.
Answer: C
Diff: 2
Skill: Analytical
21) Which of the following is NOT a characteristic of a monopoly?

A) A monopolist faces a downward-sloping demand curve.
B) There are no close substitutes for a monopolist's product.
C) After the first unit, the monopolist's marginal revenue is always less than its price.
D) A monopolist is a price-taker.
Answer: D
Diff: 1
Skill: Conceptual
7
22) Which of the following best characterizes the tradeoff faced by a monopolist when deciding
what quantity to produce?
A) The firm can increase its output, but needs to lower its price for only the marginal unit of
output.
B) The firm can increase its output, but to do so it must charge a higher price to all customers.
C) The firm gets more revenue from new customers by increasing output, but gets less revenue
from existing customers given that it lowered its price.
D) The firm gets less revenue from new customers by increasing output, but gets more revenue
from existing customers given that it lowered its price.
Answer: C
Diff: 2
Skill: Conceptual
Figure 7.1
23) Figure 7.1 shows a monopolist's demand curve. If the monopolist increases output from two
to three units, what is its marginal revenue?
A) $3
B) $5
C) $12
D) $15
Answer: A
Diff: 2
Topic: Total Revenue and Marginal Revenue, graphing
Skill: Analytical
8
24) Figure 7.1 shows a monopolist's demand curve. If the monopolist increases output from four
to five units, what is its marginal revenue?
A) $16
B) $15
C) $3
D) -$1
Answer: D
Diff: 2
Skill: Analytical
25) Figure 7.1 shows a monopolist's demand curve. If the monopolist were to maximize its total
revenue, it would produce ________ units of output and charge a price of ________.
A) 3; $5
B) 4; $4
C) 5; $3
D) 6; $2
Answer: B
Diff: 2
Skill: Analytical
26) When a monopolist sells two units of output its total revenues are $100. When the
monopolist sells three units of output its total revenues are $120. When the monopolist sells three
units of output, the price per unit is
A) $6.67.
B) $20.
C) $33.33.
D) $40.
Answer: D
Diff: 2
Skill: Analytical
9
27) When a monopolist sells two units of output its total revenues are $100. When the
monopolist sells three units of output, its price per unit is $35. The monopolist's marginal
revenue from selling the third unit of output is
A) $5.
B) $33.33.
C) $35.
D) $105.
Answer: A
Diff: 2
Skill: Analytical
28) For a monopolist, marginal revenue ________ for all units of output except the first unit.
A) is greater than the price of output
B) is less than the price of output
C) is equal to the price of output
D) may be either greater than or less than the price of output
Answer: B
Diff: 2
Skill: Conceptual
29) If a monopolist charges the same price for all of the units of the good that it sells, then
beyond the first unit sold
A) P = MR because the firm maximizes profit.
B) P = MR because the monopolist holds price constant.
C) P < MR because the monopolist must decrease price on all units in order to sell another unit.
D) P > MR because the monopolist must decrease price on all units in order to sell another unit.
Answer: D
Diff: 2
Skill: Conceptual
10
30) A monopolist will never produce at a quantity where the
A) MR < 0.
B) MR > 0.
C) P > MR.
D) MR= MC.
Answer: A
Diff: 2
Skill: Conceptual
Figure 7.2
31) Figure 7.2 shows a monopolist's demand curve. The marginal revenue from selling the third
unit is
A) $6.
B) $8.
C) $10.
D) $44.
Answer: A
Diff: 2
Skill: Analytical
11
32) Figure 7.2 shows a monopolist's demand curve. The marginal revenue from selling the fourth
unit is
A) $8.
B) $6.
C) $4.
D) $2.
Answer: D
Diff: 2
Skill: Analytical
33) Figure 7.2 shows a monopolist's demand curve. Suppose that the marginal cost is $6 for all
units and the current output level is 4 units. Then what would you recommend to the firm?
A) Lower the price to sell more units.
B) Raise the price and sell fewer units.
C) Maintain the current price and output level.
D) There is not sufficient information.
Answer: B
Diff: 3
Skill: Analytical
34) Figure 7.2 shows a monopolist's demand curve. Suppose that the marginal cost is $6 for all
units and the current output level is 4 units. Then which of the following is true?
A) The marginal revenue is less than the marginal cost.
B) The price is greater than the average total cost.
C) The firm is producing the profit maximizing level of output.
D) All of the above.
Answer: A
Diff: 2
Skill: Analytical
12
35) How do monopoly prices and quantities produced differ from perfectly competitive
outcomes, all other things equal?
A) Monopoly prices and quantities are both lower than competitive outcomes.
B) Monopoly prices and quantities are both higher than competitive outcomes.
C) Monopoly prices are lower than competitive prices but monopoly quantities are higher than
competitive quantities.
D) Monopoly prices are higher than competitive prices but monopoly quantities are lower than
competitive quantities.
Answer: D
Diff: 2
Skill: Conceptual
36) A monopolist maximizes profits by setting the quantity where

A) marginal revenue equal to marginal cost.
B) marginal revenue greater than marginal cost.
C) marginal revenue less than marginal cost.
D) total revenue as high as possible.
Answer: A
Diff: 2
Topic: Using the Marginal Principle
Skill: Conceptual
37) If a monopolist is maximizing its profits, we know that it has

A) maximized total revenue.
B) maximized marginal revenue.
C) minimized total cost.
D) equated marginal cost and marginal revenue.
Answer: D
Diff: 2
Skill: Conceptual
13
38) At a price of $10, the marginal revenue of a monopolist is $6. If the marginal cost of
production is $8, what should the monopolist do in order to maximize profits?
A) Increase its price.
B) Decrease its price.
C) Keep its price at the same level.
D) not enough information to solve
Answer: A
Diff: 2
Skill: Conceptual
39) At a price of $20, the marginal revenue of a monopolist is $12. If the marginal cost of
production is $10, what should the monopolist do in order to maximize profits?
A) Increase its price.
B) Decrease its price.
C) Keep its price at the same level.
D) not enough information to solve
Answer: B
Diff: 2
Skill: Conceptual
14
Figure 7.3
40) The firm in Figure 7.3 will produce

A) Q1.
B) Q2.
C) Q3.
D) Q4.
Answer: B
Diff: 2
Topic: Using the Marginal Principle, graphing
Skill: Analytical
41) The firm in Figure 7.3 will charge

A) P1.
B) P2.
C) P3.
D) P4.
Answer: C
Diff: 2
Skill: Analytical
15
42) Where it wants to produce the firm in Figure 7.3 will
A) make a zero economic profit.
B) suffer a loss.
C) make a positive economic profit.
D) break even.
Answer: C
Diff: 2
Skill: Conceptual
Recall the Application about setting the price of tickets for Major League Baseball games
to answer the following question(s).
43) Recall the application. The marginal revenue from ticket sales for a typical Major League
Baseball team is
A) positive.
B) zero.
C) negative.
D) infinity.
Answer: C
Diff: 1
Topic: Application 1, Marginal Revenue from a Baseball Fan
Skill: Fact
44) Recall the application. Due to the marginal revenue from ticket sales for a typical Major
League Baseball team, the team could increase total revenue from ticket sales by ________ the
price of tickets and ________ the quantity of tickets sold.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
Answer: B
Diff: 1
Topic: Application 1, Marginal Revenue from a Baseball Fan
Skill: Conceptual
16
45) A network externality acts as a barrier to entry.
Answer: TRUE
Diff: 1
Skill: Conceptual
46) A monopolist's marginal cost is less than the price it charges.

Answer: TRUE
Diff: 1
Skill: Conceptual
47) After the first unit, a monopolist's marginal revenue is less than the price it charges because
to sell an additional unit it needs to lower its price.
Answer: TRUE
Diff: 2
Skill: Conceptual
48) A monopolist will never produce a level of output where MR < 0.

Answer: TRUE
Diff: 1
Skill: Conceptual
49) At a price of $15, a firm sells 80 CDs per day. If the slope of the demand curve is 0.10,
marginal revenue is $5.
Answer: FALSE
Diff: 3
Skill: Analytical
17
50) Monopolist marginal revenue rises with output.
Answer: FALSE
Diff: 2
Skill: Conceptual
51) A monopolist picks the quantity of output at which price equals marginal cost.
Answer: FALSE
Diff: 1
Skill: Conceptual
52) A monopolist maximizes profit by producing the output at which marginal revenue equals
marginal cost.
Answer: TRUE
Diff: 1
Skill: Conceptual
53) At a price of $18, the marginal revenue of a movie seller is $12. If the marginal cost of a
movie is $9, the firm should increase its price.
Answer: FALSE
Diff: 2
Skill: Analytical
54) Why do barriers to entry create market power?

Answer: Barriers to entry create market power because it is difficult for firms to enter even if the
incumbents are enjoying excessive profits (firms in the market would have the ability to
determine price due to lack of competition). In a competitive market with no entry barriers,
economic profits would be bid down to zero by entry.
Diff: 2
Skill: Conceptual
18
55) Why do some markets have more firms than others?
Answer: It depends on a number of factors. One involves the costs of the industry—in some
industries, given consumer demand for the product, it makes sense for there to be more firms in
some markets than in others. Other factors include barriers to entry—some markets are easier to
enter than are others.
Diff: 2
Skill: Conceptual
56) What is a network externality?

Answer: It is when the value of a good to a consumer depends on the number of other
consumers using the good.
Diff: 2
Skill: Conceptual
57) How does a monopolist's marginal revenue change as output increases? Why?
Answer: As output increases, a firm must lower its price to sell additional units of the good. So
the firm's marginal revenue from selling an additional unit of output decreases with output.
Diff: 2
Skill: Conceptual
58) Why is a monopolist's marginal revenue less than the price?

Answer: In order for the monopolist to sell more of a good, it must lower its price on all units
sold.
Diff: 2
Skill: Conceptual
59) Will a profit maximizing monopolist who is not subject to government regulation produce a
quantity where the MR < 0?
Answer: Never. If the MR < 0, the firm would always be better off decreasing its production to
raise prices. Doing so increases revenues and decreases costs, resulting in a higher level of profit.
Diff: 2
Skill: Conceptual
19
60) Should a monopolist charge the highest price for its good that anyone in the market will pay?
Answer: No. The monopolist would not sell very many units of its good that way. It should
lower price from the highest possible price and thus increase revenue. The monopolist should
produce where marginal revenue equals marginal cost.
Diff: 2
Skill: Conceptual
7.2 The Social Cost of Monopoly
1) Which of the following is most accurate?

A) In all cases, competitive markets yield more consumer surplus than would be enjoyed in a
monopoly market with the same cost structure.
B) In all cases, competitive markets yield less consumer surplus than would be enjoyed in a
C) In some cases, competitive markets can yield less consumer surplus than would be enjoyed in
a monopoly market with the same cost structure.
D) In all cases, competitive markets yield the same consumer surplus that would be enjoyed in a
Answer: A
Diff: 1
Topic: Deadweight Loss from Monopoly
Skill: Conceptual
2) In the long run, the main reason that a monopolist can earn positive economic profits while a
perfectly competitive firm cannot is
A) monopolists enjoy greater economies of scale.
B) there are no barriers to entry in a perfectly competitive market.
C) the monopolist faces an inelastic demand for its product.
D) perfectly competitive firms face greater opportunity costs.
Answer: B
Diff: 2
Skill: Conceptual
20
3) Which of the following is true in the long run for both monopoly and perfectly competitive
industries?
A) There are low barriers to entry.
B) Firms can earn positive economic profits in the long run.
C) Firms produce at levels that are economically efficient.
D) Firms will go out of business if they cannot charge a price that is at least equal to average
total cost.
Answer: D
Diff: 2
Skill: Conceptual
4) Relative to a competitive market equilibrium, the profit maximizing quantity chosen by a

monopolist will result in a deadweight loss because
A) the monopolist will produce at a quantity lower than the competitive equilibrium.
B) the monopolist will produce at a quantity higher than the competitive equilibrium.
C) the monopolist will charge a price lower than the competitive equilibrium.
D) the monopolist will keep producing at a quantity even though the MR < MC.
Answer: A
Diff: 2
Skill: Conceptual
21
Figure 7.4
5) Suppose that Figure 7.4 shows a monopolist's demand curve, marginal revenue, and its costs.
The monopolist would maximize its profit by producing a quantity of
A) 30 units.
B) 50 units.
C) 60 units.
Answer: A
Diff: 2
Topic: Deadweight Loss from Monopoly, graphing
Skill: Analytical
The monopolist would maximize its profit by charging a price of
A) $35.
B) $25.
C) $20.
D) $16.
Answer: A
Diff: 2
Skill: Analytical
22
At the profit maximizing output level, the monopolist's profit would be
A) $730.
B) $570.
C) $320.
D) $150.
Answer: B
Diff: 2
Skill: Analytical
8) Suppose that Figure 7.4 shows an industry's market demand, its marginal revenue, and the
production costs of a representative firm. If the industry was perfectly competitive, it would
produce a quantity of
A) 30 units.
B) 50 units.
C) 60 units.
Answer: B
Diff: 2
Skill: Analytical
production costs of a representative firm. If the industry was perfectly competitive, a
representative firm would charge a price of
A) $35.
B) $25.
C) $20.
D) $16.
Answer: B
Diff: 2
Skill: Analytical
23
production costs of a representative firm. If the industry was perfectly competitive, a
representative firm's profit would be
A) $1,250.
B) $450.
C) $250.
Answer: D
Diff: 2
Skill: Analytical
11) Refer to Figure 7.4. If the market was perfectly competitive, the consumer surplus would be
A) $850.
B) $625.
C) $300.
D) $100.
Answer: B
Diff: 2
Skill: Analytical
12) Refer to Figure 7.4. If the market was a monopoly, the consumer surplus would be
A) $625.
B) $450.
C) $300
D) $225.
Answer: D
Diff: 3
Skill: Analytical
24
13) Refer to Figure 7.4. The deadweight loss associated with the monopoly would be represented
by the area
A) △abe.
B) △ace.
C) △ade.
D) △efg.
Answer: C
Diff: 2
Skill: Analytical
Figure 7.5
14) Suppose that Figure 7.5 shows a monopolist's demand curve, marginal revenue, and its cost.
The monopolist would maximize its profit by producing a quantity of ________ and by charging
a price of ________.
A) 35; $65
B) 50; $50
C) 70; $30
Answer: A
Diff: 2
Skill: Analytical
25
15) Suppose that Figure 7.5 shows a monopolist's demand curve, marginal revenue, and its cost.
At the profit maximizing output level and price, the consumer surplus would be
A) $2,450.
B) $1,225.
C) $612.5.
D) $262.5.
Answer: C
Diff: 2
Skill: Analytical
production costs of a representative firm. If the industry was perfectly competitive, it will
produce a quantity of ________ and charge a price of ________.
A) 35; $65
B) 50; $50
C) 70; $30
Answer: C
Diff: 2
Skill: Analytical
production costs of a representative firm. If the industry was perfectly competitive, the consumer
surplus would be
A) $2,450.
B) $1,225.
C) $612.5.
D) $262.5.
Answer: A
Diff: 2
Skill: Analytical
26
18) Refer to Figure 7.5. The deadweight loss associated with the monopoly would be
A) $787.5.
B) $612.5.
C) $262.5.
Answer: B
Diff: 3
Skill: Analytical
19) The term "rent seeking" best describes a situation in which

A) individuals expend effort searching for a good price on an apartment.
B) consumers compete for a limited quantity of the good.
C) firms use resources to secure or preserve a monopoly in providing a good or service.
D) None of the above are good descriptions of rent-seeking behavior.
Answer: C
Diff: 2
Topic: Rent Seeking: Using Resources to Get Monopoly Power
Skill: Definition
20) When a pharmaceutical firm spends millions of dollars to lobby and convince Congress to
extend the number of years a firm is awarded patent protection, then the pharmaceutical firm is
engaging in
A) rent seeking.
B) fraud.
C) price discrimination.
D) marginal cost pricing.
Answer: A
Diff: 2
Skill: Conceptual
27
21) When a local casino spends millions in TV ads convincing town residents to reject another
casino's bid to operate in the area, the casino is
A) rent seeking.
B) seeking rent controls.
C) acting fraudulently.
D) allocating resources efficiently.
Answer: A
Diff: 2
Skill: Conceptual
22) When a local casino spends millions in TV ads convincing town residents to reject another
casino's bid to operate in the area, the most that the casino would be willing to spend is
A) the producer surplus gained by being a monopoly.
B) the consumer surplus gained by being a monopoly.
C) deadweight loss.
D) total economic surplus.
Answer: A
Diff: 2
Skill: Conceptual
23) In the case of rent-seeking behavior in a monopoly market

A) the net loss to society is greater than it would have been in the absence of rent-seeking
behavior.
B) the net loss to society is less than it would have been in the absence of rent-seeking behavior.
C) the net loss to society is the same as it would have been in the absence of rent-seeking
behavior.
D) monopoly profit is higher than if the monopolist did not engage in rent-seeking behavior, but
the net loss to society is lower.
Answer: A
Diff: 1
Skill: Conceptual
28
Recall the Application about the developer who is interested in building a casino in
Creswell, Oregon to answer the following question(s).
24) Recall the Application. By offering the citizens of Creswell, Oregon a yearly cash payment if
they voted to approve his casino, the developer was engaged in
A) price discrimination.
B) rent seeking.
C) applying for a patent.
D) network externalities.
Answer: B
Diff: 2
Topic: Application 2, A Casino Monopoly in Creswell, Oregon?
Skill: Conceptual
25) Recall the Application. The developer who was interested in building a casino in Creswell,
Oregon was willing to offering the citizens of Creswell a yearly cash payment if they voted to
approve his casino because in Creswell, the casino market would most likely be
A) perfectly competitive.
B) monopolistically competitive.
C) an oligopoly.
D) a monopoly.
Answer: D
Diff: 1
Topic: Application 2, A Casino Monopoly in Creswell, Oregon?
Skill: Conceptual
26) Part of the efficiency cost resulting from a switch from perfect competition to monopoly is
the loss of consumer surplus caused by the decrease in quantity produced.
Answer: TRUE
Diff: 2
Skill: Conceptual
27) Monopolists earn excessive profits by increasing their quantity produced above the
competitive market outcome.
Answer: FALSE
Diff: 1
Skill: Conceptual
29
28) If a market switches from being a perfectly competitive market to being a monopoly market,
the decrease in consumer surplus is more than offset by an increase in producer profits.
Answer: FALSE
Diff: 2
Skill: Conceptual
29) Monopolists reduce producer surplus.

Answer: FALSE
Diff: 1
Skill: Conceptual
30) Monopoly reduces market efficiency compared to perfect competition.

Answer: TRUE
Diff: 1
Skill: Conceptual
31) Firms that expend resources for lobbying that could have been used for productive services
are engaging in rent-seeking behavior.
Answer: TRUE
Diff: 1
Skill: Conceptual
30
32) Explain why a monopolist must lower its quantity relative to a competitive market to
maximize its profits.
Answer: Unlike competitive firms, which are price takers with no control over the market,
monopolists have a downward-sloping demand curve exclusively for their product. Therefore, if
a monopolist wants to increase its quantity produced, it must lower its price for all units sold.
The reverse is also true: the monopolist can charge a higher price to everyone by decreasing its
production. Therefore, the monopolist's marginal revenue is not the market price (as is the case
in a competitive firm) but is rather a decreasing function of the quantity produced that is
necessarily less than the price of the output. The monopolist, when lowering output from the
competitive level, faces a tradeoff. By lowering its output, it loses the revenue on the output that
it is no longer producing. But it gains revenue as it can sell its other output at a higher price. At
least at first, when the marginal revenue is less than marginal cost, the monopolist can increase
its profits by reducing output from the competitive level.
Diff: 2
Skill: Conceptual
33) What does the deadweight loss of monopoly measure?

Answer: It measures the inefficiency associated with monopoly because the level of production
is lowered. Since fewer units are produced there is a loss of both consumer and producer surplus
for those units; this is known as a loss in market surplus.
Diff: 2
Skill: Conceptual
34) Why does monopoly necessarily reduce consumer surplus compared to perfect competition?
Answer: In a monopoly market consumers consume less of the product and pay a higher price
for the product. Since getting to consume less reduces consumer surplus and a higher price
reduces consumer surplus, the combination of them necessarily reduces consumer surplus.
Diff: 2
Skill: Conceptual
35) What is rent seeking?

Answer: the process of using public policy to gain economic profit
Diff: 2
Skill: Conceptual
31
7.3 Patents and Monopoly Power
1) When governments grant patents

A) producers earn profits that are substantially higher than would occur in a competitive market.
B) consumers pay a higher price than they would in a competitive market.
C) consumers are likely to pay lower prices than they would in a competitive market.
D) Both A and B are correct.
Answer: D
Diff: 1
Topic: Incentives for Innovation
Skill: Conceptual
2) Why do pharmaceutical firms benefit most from patent protection?

A) because research and development of drugs require large expenditures that need to be
recouped while the patent is still valid
B) because pharmaceutical drugs need to be controlled by the government
C) because pharmaceutical companies pay large taxes to the government
D) because only physicians can legally prescribe pharmaceutical drugs
Answer: A
Diff: 1
Skill: Conceptual
3) In which of the following situations can a firm or individual apply for a patent?
A) A firm develops a new tool that makes cutting grass much easier.
B) An author publishes a new novel.
C) Nicki Minaj, a recording artist, releases a new CD in the market.
D) All of the above are activities that can be patented.
Answer: A
Diff: 2
Skill: Conceptual
32
4) Suppose that it would cost a firm $10 million to develop a new drug. In the absence of a
patent, other firms will be able to copy and bring to market a generic equivalent of the drug in
three years. In each of these three years, the firm would earn monopoly profits of $3 million. A
patent will generate monopoly status for the firm for twenty years. If the government knew this
information ahead of time, which of the following is most correct?
A) The government should not grant a patent to the firm, because the firm would earn monopoly
profits for three years even without the patent.
B) The government should not grant a patent to the firm, because monopoly leads to efficiency
losses relative to the competitive market.
C) The government should grant a patent to the firm, because even with a patent the firm will not
earn a monopoly profits.
D) The government should grant a patent to the firm, because the firm would not produce the
drug at all without a patent.
Answer: D
Diff: 2
Topic: Tradeoffs from Patents
Skill: Conceptual
5) Suppose that it would cost a firm $9 million to develop a new drug. In the absence of a patent,
other firms will be able to copy and bring to market a generic equivalent of the drug in three
years. In each of these three years, the firm would earn monopoly profits of $4 million. A patent
will generate monopoly status for the firm for twenty years. If the government knew this
information ahead of time, which of the following is most correct?
A) The government should grant a patent to the firm, because the firm would not produce the
drug at all without a patent.
B) The government should grant a patent to the firm, because it does not have the resources to
determine on a case-by-case basis exactly which inventions merit award of the patent.
C) The government should grant a patent to the firm, because even with a patent the firm will not
earn a monopoly profits.
D) The government should not grant a patent to the firm, because the firm would earn sufficient
profits to develop the drug without the patent.
Answer: D
Diff: 2
Skill: Conceptual
33
6) The merits of a patent system is
A) the patent system gives firms strong incentives to take the risk of substantial research and
development costs.
B) the patent system may precipitate the development of new products.
C) granting monopoly power through a patent may be beneficial from society's perspective.
D) all of the above
Answer: D
Diff: 2
Skill: Conceptual
Recall the Application about allegations that the makers of branded drugs made deals with
generic drug makers once the patents expired on branded drugs to answer the following
question(s).
7) Recall the Application. When a patent ends and generic drugs are introduced, there is
A) downward pressure on the price of the patent version of the drug.
B) upward pressure on the price of the patent version of the drug.
C) no pressure on the price of the patent version of the drug.
D) no demand for the patent version of the drug.
Answer: A
Diff: 2
Topic: Application 3, Bribing the Makers of Generic Drugs
Skill: Conceptual
8) Recall the Application. Because when a patent ends and generic drugs are introduced there is
downward pressure on price, the makers of the brand name drug will
A) raise their price.
B) abandon the product.
C) claim the generic is not as good as the patent version of the drug.
D) price discriminate.
Answer: C
Diff: 2
Topic: Application 3, Bribing the Makers of Generic Drugs
Skill: Conceptual
34
9) A patent is a government granted exclusive right to sell a product for a period of time.
Answer: TRUE
Diff: 1
Skill: Definition
10) Patents encourage firms to engage in innovation.

Answer: TRUE
Diff: 1
Skill: Conceptual
11) Since patents lead to lower quantities and higher prices for new products, society is
necessarily worse off when patents are awarded.
Answer: FALSE
Diff: 1
Skill: Conceptual
12) All patent protected products would not have been developed without patent protection.
Answer: FALSE
Diff: 1
Skill: Conceptual
13) Society gains from a patent if the product would not otherwise be developed.
Answer: TRUE
Diff: 1
Skill: Conceptual
35
14) What is a patent?
Answer: A right to sell a particular good for a certain period of time.
Diff: 1
Skill: Definition
15) What would happen if the government chooses to increase the number of years that a firm
can enjoy patent protection from 20 years to 25 years?
Answer: Because the time that a firm can enjoy monopoly rights increase, the firm will receive a
larger profits with longer patent protection. This will entice more firms to invest in research and
development, in the hopes of creating more patents and more profits. However, while this policy
increases the creation of higher cost new products or technology, it will reduce the market
efficiency for those products that would have been produced under the old 20 year rule. Those
markets will display lower production and higher prices for a longer time.
Diff: 2
Skill: Conceptual
16) Why does the government grant patents to companies that research new drugs?
Answer: Researching new drugs is a very risky and expensive business. If the government did
not grant the firm a patent then all other firms would be able copy its innovation as soon as the
FDA approved the drug. This competition would make the price of the drug so low that the
research firm would not be able to recoup its investment. The result would be that no new drugs
would be developed. By allowing firms with new drugs to hold patents the government
encourages private research and development.
Diff: 2
Skill: Conceptual
17) Why does the government grant patents universally rather than just to those products that
would not be developed without a patent?
Answer: The government has no way to know which products would be developed without a
patent.
Diff: 1
Skill: Conceptual
36
7.4 Price Discrimination
1) Price discrimination is when a firm charges

A) the same price to all consumers.
B) different prices for different goods to different consumers.
C) different prices for the same goods to different consumers.
D) None of the above is correct.
Answer: C
Diff: 1
Topic: Price Discrimination
Skill: Definition
2) The government allows firms to engage in price discrimination unless the practice
A) allows the firm to earn positive economic profits.
B) reduces consumer surplus.
C) drives rival firms out of business.
D) increases prices to consumers.
Answer: C
Diff: 1
Skill: Conceptual
3) Which of the following situations would be examples of price discrimination?

A) United Airlines charges customers who book 14 days ahead a lower price than those who
don't.
B) Chevron gas stations charges customers 20 cents more per gallon if they choose the premium
grade over the regular unleaded.
C) The local carwash charges drivers of minivans and large SUVs a $2.00 "large vehicle"
surcharge.
D) GEICO, an insurance company, charges higher rates to those who received more than one
speeding ticket in the last 6 months.
Answer: A
Diff: 2
Skill: Conceptual
37
4) Which conditions must hold if a firm is to engage in price discrimination?
A) It must be extremely difficult, if not impossible, for one consumer to resell a product to
another.
B) Firms must have a sufficiently low amount of market power.
C) Consumers must have very similar preferences for the product.
D) all of the above
Answer: A
Diff: 2
Skill: Conceptual
5) In order to practice price discrimination a firm must

A) avoid detection by the government.
B) be able to divide consumers into groups with different demands for their product.
C) have a homogeneous product.
D) advertise their product.
Answer: B
Diff: 1
Skill: Conceptual
6) In order to practice price discrimination a firm must

A) avoid detection by the government.
B) have some degree of market power.
C) have a homogeneous product.
D) advertise their product.
Answer: B
Diff: 1
Skill: Conceptual
38
7) The reason that the local telephone company is able to engage in price discrimination between
business and residential customers in providing local phone service is that
A) it is the only provider of local (landline) telephone service.
B) it must be extremely difficult, if not impossible, for one consumer to resell phone service to
another.
C) business and residential customers differ in their willingness to pay for phone service.
D) All of the above are correct.
Answer: D
Diff: 2
Skill: Conceptual
8) A school bookstore tried to engage in price discrimination by selling novels to students and
faculty for different prices. Its strategy was to increase prices to faculty and decrease prices to
students. What is the most likely reason that this strategy failed?
A) Novels are sold in a competitive market.
B) There was nothing to prevent students from purchasing novels and reselling them to faculty.
C) Everyone had inelastic demand for novels.
D) There was no easy way to distinguish the students from the faculty.
Answer: B
Diff: 2
Skill: Analytical
9) If we observe a firm engaging in price discrimination, it must be true that

A) the firm is enjoying higher total profits than it would have earned if it charged a single price
for the product.
B) the firm can identify the preferences of every customer it serves.
C) the firm earns higher profits per unit than it would have earned if it charged a single price for
the product.
Answer: A
Diff: 2
Skill: Conceptual
39
10) Price discrimination always benefits
A) the firm and may benefit or harm the consumer.
B) the consumer and may benefit or harm the firm.
C) consumers and firms.
D) consumers only.
Answer: A
Diff: 2
Skill: Conceptual
11) Which of the following would NOT be considered price discrimination?

A) charging business travelers more money than leisure travelers for plane tickets
B) charging houses in expensive neighborhoods more money for mowing the same size lawn
than in a less expensive neighborhood
C) charging a lower price for dry cleaning men's shirts than women's shirts
D) charging more money for a large luxury car than a small economy car
Answer: D
Diff: 2
Skill: Analytical
12) Which of the following would NOT be considered price discrimination?

A) charging more money for long distance calls during business hours than on weekends
B) giving students a discount on ski lift tickets
C) charging higher rates for oil delivery to people who live farther from your business
D) charging less money to wash a large luxury car than a small economy car
Answer: C
Diff: 2
Skill: Analytical
40
13) Many hotel chains offer senior citizen discounts to members of AARP. This suggests that the
hotels believe that senior citizens have a ________ demand for hotel rooms than non-seniors.
A) smaller
B) greater
C) more elastic
D) less elastic
Answer: C
Diff: 2
Topic: Senior Discounts in Restaurants
Skill: Conceptual
Figure 7.6
14) Figure 7.6 shows prices, demands, and cost data for the only restaurant in a small town. If the
restaurant charges the single price of $8 per meal, what is its profit from senior customers?
A) $1,200
B) $1,500
C) $2,280
D) $2,560
Answer: A
Diff: 2
Topic: Senior Discounts in Restaurants, graphing
Skill: Analytical
41
15) Figure 7.6 shows prices, demands, and cost data for the only restaurant in a small town. If the
restaurant charges the single price of $8 per meal, what is its profit from non-senior customers?
A) $1,200
B) $1,500
C) $2,280
D) $2,560
Answer: C
Diff: 2
Skill: Analytical
16) Figure 7.6 shows prices, demands, and cost data for the only restaurant in a small town.
Which group's demand for meals is more price-elastic?
A) the senior customers
B) the non-senior customers
C) the two groups are equally sensitive to a change in price
Answer: A
Diff: 2
Skill: Analytical
What is its profit from senior customers under the senior discount policy of a $7 senior price and
a $10 non-senior price?
A) $1,200
B) $1,500
C) $2,280
D) $2,560
Answer: B
Diff: 2
Skill: Analytical
42
What is its profit from non-senior customers under the senior discount policy of a $7 senior price
and a $10 non-senior price?
A) $1,200
B) $1,500
C) $2,280
D) $2,560
Answer: D
Diff: 2
Skill: Analytical
Compared to the profit under the single price policy, how much additional profit does the
restaurant earn under the senior discount policy of a $7 senior price and a $10 non-senior price?
A) $920
B) $580
C) $300
D) $280
Answer: B
Diff: 3
Skill: Analytical
20) In order to practice price discrimination a firm must be in a market such that the consumers
in its market
A) all have identical tastes.
B) all have identical price elasticities of demand.
C) have different price elasticities of demand.
D) have the same demand for its product.
Answer: C
Diff: 1
Topic: Price Discrimination and the Elasticity of Demand
Skill: Conceptual
43
21) Price discrimination is related to elasticity because
A) the firm can increase revenues by charging customers with elastic demands higher prices and
charging customers with inelastic demands lower prices.
B) the firm can increase revenues by charging customers with elastic demands lower prices and
charging customers with inelastic demands higher prices.
C) the firm can increase revenues by charging all customers higher prices.
D) None of the above; elasticity and price discrimination are unrelated.
Answer: B
Diff: 2
Skill: Conceptual
22) Price discrimination is based on differences in ________ among groups of consumers and
the differences in ________ that will result.
A) cross elasticities of demand; revenues
B) price elasticities of demand; profits
C) quantities supplied; marginal revenues
D) income elasticities of demand; marginal costs
Answer: B
Diff: 2
Skill: Conceptual
23) In order to engage in price discrimination, a monopolist has to be able to determine that there
are different groups of consumers that have different ________ for the product.
A) income elasticities of demand
B) price elasticities of demand
C) cross elasticities of demand
Answer: B
Diff: 2
Skill: Conceptual
44
24) Suppose that a price discriminating monopolist is able to divide its market into two groups. If
the firm sells its product for $50 to the group whose customers have the most elastic demand,
what price are they likely to charge to the group whose customers have the least elastic demand?
A) $50
B) more than $50
C) less than $50
D) The answer depends on the marginal revenue for that group.
Answer: B
Diff: 2
Skill: Conceptual
25) Suppose that a price discriminating monopolist is able to divide its market into two groups. If
the firm sells its product for $25 to the group whose customers have the least elastic demand,
what price are they likely to charge to the group whose customers have the most elastic demand?
A) $25
B) more than $25
C) less than $25
D) The answer depends on the marginal revenue for that group.
Answer: C
Diff: 2
Skill: Conceptual
26) Firms who are attempting to engage in price discrimination will offer customers with a
________ demand a higher price and customers with a(n) ________ demand a lower price.
A) lower; higher
B) normal; inferior
C) less elastic; more elastic
D) more elastic; less elastic
Answer: C
Diff: 2
Skill: Conceptual
45
27) A firm switching from a single price to a price discrimination scheme will ________ the
price for the group of consumers with relatively elastic demand and ________ the price for the
group of consumers with relatively inelastic demand.
A) decrease; increase
B) decrease; decrease
C) increase; increase
D) increase; decrease
Answer: A
Diff: 2
Skill: Conceptual
28) Because demand for air travel from people who are traveling on vacation is more ________,
the airlines offer leisure travelers lower prices than business travelers.
A) large
B) elastic
C) inelastic
D) small
Answer: B
Diff: 2
Skill: Conceptual
29) What is the MOST LIKELY reason that snack foods sold in vending machines is so much
more expensive than the snack foods sold in grocery stores?
A) Snack foods sold in vending machines come in smaller packages, so the per-package costs are
higher.
B) Grocery stores buy in bulk, while vending machine companies tend to buy in smaller
quantities.
C) People who purchase snack foods from vending machines tend to have less elastic demand for
snack foods.
D) Owners of vending machine companies are greedier than owners of grocery stores.
Answer: C
Diff: 2
Skill: Conceptual
46
30) What is the MOST LIKELY reason that milk sold in convenience stores is more expensive
than milk sold in grocery stores?
A) Convenience stores sell milk in smaller packages, so the per-gallon packaging costs are
higher.
B) Grocery stores buy in bulk, while convenience stores buy milk in smaller quantities.
C) People who buy milk at convenience stores tend to have less elastic demand for milk.
D) Convenience store owners are greedier than grocery store owners.
Answer: C
Diff: 2
Skill: Conceptual
31) You currently sell the same product to both students and faculty members, and are able to
prevent transfer from one group to the other. Your current prices, quantities sold, and the
absolute values of the slopes of the demand curves are as follows
If your marginal cost is $1 and you are interested in maximizing your revenues, how would you
adjust your prices?
A) Increase prices for both groups.
B) Decrease prices for both groups.
C) Increase student price and decrease faculty price.
D) Decrease student price and increase faculty price.
Answer: D
Diff: 3
Skill: Analytical
47
32) You currently sell the same product to both professional plumbers and homeowners, and are
able to prevent transfer from one group to the other. Your current prices, quantities sold, and the
absolute values of the slopes of the demand curves are as follows
If your marginal cost is $10 and you are interested in maximizing your revenues, how would you
adjust your prices?
A) Increase plumbers' price and decrease homeowners' price.
B) Decrease plumbers' price and increase homeowners' price.
C) Increase prices for both groups.
D) Decrease prices for both groups.
Answer: A
Diff: 3
Skill: Analytical
Table 7.2
33) Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run
movie theater in a small town. What is its revenue from students under the single price policy?
A) $150
B) $180
C) $450
D) $540
Answer: B
Diff: 2
Topic: Examples: Movie Admission versus Popcorn, and Hardback versus Paperback Books
Skill: Analytical
48
34) Table 7.2 contains price, demand and cost data for the Capri Theater, the only first-run
movie theater in a small town. What is its profit from students under the single price policy?
A) $150
B) $180
C) $450
D) $540
Answer: A
Diff: 2
Skill: Analytical
movie theater in a small town. What is its revenue from non-students under the single price
policy?
A) $300
B) $360
C) $450
D) $540
Answer: B
Diff: 2
Skill: Analytical
movie theater in a small town. What is its profit from non-students under the single price policy?
A) $300
B) $360
C) $450
D) $540
Answer: A
Diff: 2
Skill: Analytical
49
movie theater in a small town. What is its total profit under the single price policy?
A) $300
B) $360
C) $450
D) $540
Answer: C
Diff: 2
Skill: Analytical
movie theater in a small town. What is its profit from students under the student discount policy?
A) $200
B) $250
C) $325
D) $375
Answer: A
Diff: 2
Skill: Analytical
movie theater in a small town. What is its profit from non-students under the student discount
policy?
A) $200
B) $250
C) $350
D) $400
Answer: C
Diff: 2
Skill: Analytical
50
movie theater in a small town. What is its total profit under the student discount policy?
A) $450
B) $550
C) $600
D) $650
Answer: B
Diff: 2
Skill: Analytical
movie theater in a small town. Should the firm adopt the single price policy or the student
discount policy?
A) the single price policy because the firm does not meet the three conditions necessary to
engage in price discrimination
B) the single price policy because price discrimination would not be legal for this firm
C) the single price policy because it is more profitable than price discrimination for this firm
D) the student discount policy because it is more profitable than the single price policy
Answer: D
Diff: 3
Skill: Analytical
42) Movie theaters often offer reduced rates for children under 10. This suggests that demand for
adult admission is ________ than demand for children's admission.
A) more elastic
B) less elastic
C) more variable
D) lower
Answer: B
Diff: 2
Skill: Conceptual
51
43) The cost of producing a hardback book is only about 20% higher than producing a paperback
book, yet the hardback price is typically three times the paperback price. This suggests that
demand for paperback books is ________ than demand for hardback books.
A) more elastic
B) less elastic
C) more variable
D) lower
Answer: A
Diff: 2
Skill: Conceptual
Recall the Application about the reason for the high price of movie popcorn to answer the
following question(s).
44) Recall the Application. Suppose a low demander is willing to pay $8 for a movie, while a
high demander is willing to pay $12 for a movie and popcorn. The theater could charge
________ for admission and ________ for popcorn for each consumer to receive a consumer
surplus of $2.
A) $8; $2
B) $10; $0
C) $6; $4
D) $9; $3
Answer: C
Diff: 2
Topic: Application 4, Why Does Movie Popcorn Cost So Much?
Skill: Analytical
high demander is willing to pay $12 for a movie and popcorn. If the theater charged $7 for
admission and $4 for popcorn, the low demander would receive a consumer surplus of
________, and the high demander would receive a consumer surplus of ________.
A) $1; $1
B) $5; $6
C) $3; $9
D) $15; $21
Answer: A
Diff: 2
Skill: Analytical
52
admission and $2 for popcorn, the low demander would receive a consumer surplus of
________, and the high demander would receive a consumer surplus of ________.
A) $2; $6
B) $-2; $4
C) $10; $22
D) $0; $2
Answer: D
Diff: 2
Skill: Analytical
admission and $10 for popcorn, ________ would be willing to go to the movie.
A) only the low demander
B) only the high demander
C) both the low demander and the high demander
D) neither the low demander nor the high demander
Answer: C
Diff: 2
Skill: Analytical
48) Price discrimination can be profitable if consumers can resell the product.
Answer: FALSE
Diff: 1
Skill: Conceptual
49) If a firm wants to engage in price discrimination it must have some market power.
Answer: TRUE
Diff: 1
Skill: Conceptual
53
50) If airlines give passengers under the age of 10 a 25% discount, then this is an example of
price discrimination.
Answer: TRUE
Diff: 1
Skill: Conceptual
51) When a hair stylist charges men less than women for a haircut because men's hair take less
time to cut, the hairstylist is price discriminating.
Answer: FALSE
Diff: 2
Skill: Conceptual
52) The reason that movie videotapes cost more money immediately after they are released than
they do six months later is due to price discrimination.
Answer: TRUE
Diff: 1
Skill: Conceptual
53) When a firm engages in price discrimination it sets marginal revenue equal to marginal cost
for each separate set of consumers.
Answer: TRUE
Diff: 1
Skill: Conceptual
54) Firms who engage in price discrimination usually make the same amount of money as they
would if they charged one price.
Answer: FALSE
Diff: 1
Skill: Conceptual
54
55) All consumers are worse off when firms engage in price discrimination.
Answer: FALSE
Diff: 1
Skill: Conceptual
56) If a fast food restaurant gives senior citizens a 10% discount on food every day, that is an
example of price discrimination. If they only give the discount on Tuesdays it is not price
discrimination.
Answer: FALSE
Diff: 2
Topic: Senior Discounts in Restaurants
Skill: Conceptual
57) Movie theaters would make more money if they offered students the same type of discounts
on popcorn that they do on admission.
Answer: FALSE
Diff: 1
Skill: Conceptual
58) The difference in price between hardback books and paperbacks is primarily explained by
differences in production costs.
Answer: FALSE
Diff: 1
Skill: Conceptual
59) Why is it important that a firm have market power if it wishes to engage in price
discrimination?
Answer: If a firm does not have market power then it will face price competition from other
firms in the industry if it tries to increase the price to one group of consumers. The competitors
will charge a lower price to this group of consumers and the first firm will end up serving only
the low price consumers. This will make it unprofitable to engage in price discrimination.
Diff: 2
Skill: Conceptual
55
60) Why is it important that a firm can prevent resale of its product if it wishes to engage in price
discrimination?
Answer: If the firm cannot prevent resale then consumers who are able to purchase the product
at the lower price can do so and resell the product to the consumers to whom the firm will charge
the higher price. This will prevent the firm from earning higher profits from price discrimination
than from a single pricing strategy since the single price will be higher than the lowest price
charged with a price discrimination strategy.
Diff: 2
Skill: Conceptual
61) When an electronics company advertises on the local newspaper a 10% discount coupon, is
this an example of price discrimination? Why or why not?
Answer: Yes, it is price discrimination. The price sensitive individual would search for these
coupons prior to making a purchase, and will end up paying the lower price. A price insensitive
individual will not search for these coupons and will not get the lower price.
Diff: 2
Skill: Conceptual
62) Why is it important that a firm have different groups of consumers with different demand
elasticities if it wishes to engage in price discrimination?
Answer: Price discrimination works because a firm charges higher prices to individuals with
relatively more inelastic demand and lower prices to those with relatively more elastic demand.
If all consumers have the same elasticity of demand then charging different prices to different
groups of consumers will not yield higher profit to the firm.
Diff: 2
Skill: Conceptual
56
63) If you purchased a new model of a digital camera right after it is released you will likely pay
more than if you purchase it six months after release. Why is this an example of price
discrimination on the part of the firm?
Answer: "Early adopters" who purchase the camera right away do so because they have
immediate need (thus inelastic demand) for the camera due to its new features. Other consumers
might be willing to purchase the camera but only at a lower price. If price starts out high the
consumers with immediate need will purchase the camera because they are unable to wait for
price to drop. Once they make their purchases, the firm can drop price so that other consumers
with relatively elastic demands will also purchase cameras.
Diff: 2
Skill: Conceptual
64) Bars often offer specials on appetizers during "happy hour." What does the concept of price
discrimination suggest about why this might be profit-maximizing behavior?
Answer: People might have more elastic demand for appetizers during times when they could
easily go home and eat dinner and less elastic demand for appetizers during the evening hours
after dinner.
Diff: 2
Skill: Conceptual
65) Suppose that you own a golf course that is part of a Florida resort. You primarily serve two
groups of people: local residents and tourists. Devise a price discrimination strategy that will
increase your revenues compared to a single-pricing strategy.
Answer: Local residents can be given a free membership in the golf course if they show proof
that they are from the area. Prices for these members (who probably have relatively elastic
demand since they can play golf all year) could be set lower than for tourists (who have inelastic
demand for golf since that is probably why they came to Florida in winter). This would
encourage the local residents to play golf all year round. Another possibility is that prices could
be set higher during the tourist season than during the off-season.
Diff: 2
Skill: Conceptual
57
Test Bank for Survey of Economics, 6th Edition : OSullivan
66) You own a local sub shop in a college town. You primarily serve two groups of people: local
residents (both students and other local residents) and visitors to your town. Devise a price
discrimination strategy that will increase your revenues compared to a single-pricing strategy.
Answer: People who live in town know all of the local restaurants well and have kitchens where
they could cook their own meals. This means that they will have relatively more elastic demand
for your subs than visitors do. You could engage in price discrimination in a number of ways: by
mailing coupons to local residents; by giving out cards so that they can get a meal free if they get
enough punches on the card; or by participating in programs through which members of local
banks and credit unions get discount cards that are honored in your restaurant. [Others may
propose student discounts because college students have a higher price elasticity due to
university food services and food being a higher percentage of student's budgets compared to
people working full time.]
Diff: 2
Skill: Conceptual
67) As manager of the only video rental store in town, you have noticed that on Thursday
through Sunday the demand for movie rentals is much less elastic than it is on Monday through
Wednesday. If you are currently charging $3 for a two-night rental, give an example of a pricing
policy that might increase your revenues compared to a single-pricing strategy.
Answer: Weekend movie rental prices could be increased to $4 per night and Monday through
Wednesday price could be cut to $2 per night.
Diff: 2
Skill: Conceptual
58
Visit TestBankBell.com to get complete for all chapters

Test Bank For Survey of Economics 6th Edition Osullivan

Uploaded by

Copyright:

Available Formats

You might also like

Test Bank For Survey of Economics 6th Edition Osullivan

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Test Bank For Survey of Economics 6th Edition Osullivan

Uploaded by

Copyright:

Available Formats

Test Bank for Survey of Economics, 6th Edition : OSullivan

Test Bank for Survey of Economics, 6th Edition :

To download the complete and accurate content document, go to:

Visit TestBankBell.com to get complete for all chapters

7.1 The Monopolist's Output Decision

1) A market served by only one firm is called a(n)

2) A firm that has market power has the ability

3) Which of the following firms have market power?

5) Which of the following is NOT a characteristic of a monopoly?

6) Which of the following is NOT a barrier to entry for monopoly?

7) When economists say a market has "barriers to entry" they refer to

9) Which of the following is NOT an artificial barrier to entry?

12) A monopoly may arise due to

16) The demand curve that a monopolist faces is

21) Which of the following is NOT a characteristic of a monopoly?

36) A monopolist maximizes profits by setting the quantity where

37) If a monopolist is maximizing its profits, we know that it has

40) The firm in Figure 7.3 will produce

41) The firm in Figure 7.3 will charge

46) A monopolist's marginal cost is less than the price it charges.

48) A monopolist will never produce a level of output where MR < 0.

54) Why do barriers to entry create market power?

56) What is a network externality?

58) Why is a monopolist's marginal revenue less than the price?

7.2 The Social Cost of Monopoly

1) Which of the following is most accurate?

4) Relative to a competitive market equilibrium, the profit maximizing quantity chosen by a

19) The term "rent seeking" best describes a situation in which

23) In the case of rent-seeking behavior in a monopoly market

29) Monopolists reduce producer surplus.

30) Monopoly reduces market efficiency compared to perfect competition.

33) What does the deadweight loss of monopoly measure?

35) What is rent seeking?

1) When governments grant patents

2) Why do pharmaceutical firms benefit most from patent protection?

10) Patents encourage firms to engage in innovation.

1) Price discrimination is when a firm charges

3) Which of the following situations would be examples of price discrimination?

5) In order to practice price discrimination a firm must

6) In order to practice price discrimination a firm must

9) If we observe a firm engaging in price discrimination, it must be true that

11) Which of the following would NOT be considered price discrimination?

12) Which of the following would NOT be considered price discrimination?

Visit TestBankBell.com to get complete for all chapters

You might also like