Essentials of Economics 10th Edition Schiller Test Bank 1

Essentials of Economics 10th Edition
Schiller
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Chapter 07_Test Bank KEY

1. Market power exists if a firm can alter:
A. Its costs of production.
B. The market price.
C. Its own supply curve.
D. The production function.
If a firm can alter the market price by changing production it has market power.
AACSB: Analytic
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Define what a monopoly is.
Topic: MONOPOLY STRUCTURE
2. If a seafood restaurant can raise the price of its fried shrimp without losing all of its customers,
then the restaurant definitely:
A. Has market power.
B. Is experiencing economies of scale.
C. Is using predatory pricing.
D. Has a monopoly.
The fewer customers that a seafood restaurant loses when it raises its price the more market
power it has.
7-1
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
3. Which of the following firms is likely to have the greatest market power?
A. A farmer who can sell as much lettuce as he can grow.
B. A single soft drink company serving a campus with no barriers to entry.
C. The sole producer of the latest computer microchip technology.
D. A regulated natural monopoly selling natural gas service.
Since the sole producer of the latest computer microchip technology would pose a significant
barrier to entry by a competing firm that producer would have a lot of market power.
AACSB: Reflective Thinking

Blooms: Analyze
4. The total quantities of a good that people are willing and able to buy at alternative prices
defines:
A. Market equilibrium.
B. Marginal revenue.
C. Market supply.
D. Market demand.
The demand schedule or the demand curve of all buyers of a good or service is called market
demand.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
5. Which of the following is true about market demand?

A. It is typically horizontal or flat.
B. It is downward sloping.
C. It is inconsistent with the law of demand.
D. It represents the quantity of a good people are willing, but not necessarily able, to buy.
Since market demand represents an inverse relationship between price and quantity demanded it
is downward sloping.
AACSB: Analytic
Blooms: Understand
7-2
6. The demand curve for an individual monopolist:
A. Does not exist.
B. Slopes upward to the right.
C. Is the same as the market demand curve.
D. Is the same as the marginal revenue curve.
Since the number of firms in a monopolistic industry is one the individual demand curve is the
market demand curve.
AACSB: Analytic
Blooms: Understand
7. A patent:
A. Is a government grant of exclusive ownership of an innovation.
B. Requires a firm to share its innovations with others.
C. Protects a perfectly competitive firm from competition.
D. Is an illegal method to protect an innovative idea.
The government grants patents in order to encourage innovation even though it gives the owner
an exclusive market.
AACSB: Analytic
Blooms: Remember
8. Which of the following might be used to protect a monopoly from competition?

A. A horizontal demand curve.
C. A patent.
D. A contestable market.
The government grants patents in order to encourage innovation even though it gives the owner
an exclusive market.
AACSB: Analytic
Blooms: Understand
9. If the entire output of a market is produced by a single seller, the firm:

A. Is a monopoly.
B. Is competitive.
C. Is an oligopolist.
D. Faces a perfectly vertical demand curve.
7-3
A monopoly is control of the production and distribution of a product or service by one firm.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10. An industry dominated by one firm is:

A. Monopolistic competition.
B. Perfect competition.
C. A monopoly.
D. An oligopoly.
A monopoly is control of the production and distribution of a product or service by one firm.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
11. Which of the following is likely to be a monopolist?

A. A small firm with a patent granting it the exclusive right to produce a drug.
B. A large firm, such as HP, that produces a substantial portion of the printer market.
C. Bell Helicopter which is one of the largest producers of helicopters in the world.
D. A major car manufacturer such as General Motors.
An exclusive right to use a process or produce or sell a particular product for a designated period
of time is a patent and a firm that has this right is a monopoly in the market for that particular
drug.

Blooms: Understand
12. Which of the following is likely to be a monopolist?

A. A potato chip company that sells lots of chips and competes with other chip producers.
B. A farmer who specializes in growing organic fruits and vegetables.
C. The sole producer of a new medical device for people with limited mobility.
D. The chemical company in a small town that employs most of the town's workforce.
The sole producer who is in control of the production and distribution of a product or service
characterizes a monopolist.

Blooms: Understand
7-4
13. Which of the following is not true for a monopoly?

A. The demand curve for the monopoly and the market are the same.
B. It has no direct competitors.
C. It can use its market power to charge higher prices than a competitive firm.
D. It is a price taker.
Since a monopolist has control of both the production and distribution of a product or service
they are a price maker.
AACSB: Analytic
Blooms: Understand
14. Monopolists are price:

A. Takers as are perfectly competitive firms.
B. Takers, but perfectly competitive firms are price makers.
C. Makers, but perfectly competitive firms are price takers.
D. Makers as are perfectly competitive firms.
Unlike a firm in a competitive industry whose output is small relative to the total market, a
monopolist is the market supply and therefore sets the price.
AACSB: Analytic
Blooms: Understand
15. Which of the following is not a characteristic of a monopoly?

A. High barriers to entry
B. Differentiated product
C. Ownership of essential resources
D. Large economics of scale
In general a monopolistic firm’s product is unique since it is the only producer.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
16. For a monopolist, the demand curve facing the firm is:
A. The same as for the perfectly competitive firm.
B. The same as the market demand curve.
C. Always below marginal revenue.
D. Perfectly elastic.
7-5
Since a monopolist represents 100% of the market, the firm’s individual demand curve is the
AACSB: Analytic
Blooms: Understand
17. The demand curve for a monopolist:

A. Is steeper than the marginal revenue curve.
B. Lies below the marginal revenue curve at every point but the first.
C. Is the same as the marginal revenue curve.
D. Lies above the marginal revenue curve at every point but the first.
Since the law of diminishing marginal utility means that marginal revenue must be falling with
each additional unit, average revenue (market demand) must also be falling and will be greater
than marginal revenue at any point on the curve.

Blooms: Analyze
Difficulty: 3 Hard
18. Since a monopoly has market power:

A. Its demand curve is upward sloping.
B. Its marginal revenue curve is below its demand curve.
C. It must hold price constant in order to sell an additional unit of output.
D. Its costs of production are minimal.
Unlike a competitive producer whose marginal revenue, average revenue and price are the same
and flat, the monopolist sees the downward sloping market demand curve (average revenue) and
since it is falling the marginal (additional) revenue must be below the average revenue.

Blooms: Analyze
Difficulty: 3 Hard
19. The change in total revenue that results from a one-unit increase in quantity sold is:
A. Marginal cost.
C. Marginal profit.
D. Total revenue.
The change in total revenue that results from the sale of one additional unit of the firm’s product.
AACSB: Analytic
7-6
Blooms: Remember
Learning Objective: 07-02 Explain why price exceeds marginal revenue in monopoly.
20. For a monopolist, marginal revenue is:

A. Equal to price, just as it is for a perfectly competitive firm.
B. Constant up to the rate of output that maximizes total revenues.
C. Always less than price, after the first unit.
D. The same as the demand curve.
If every unit could be sold at the same price marginal revenue would equal average revenue
(price) but since the demand curve is downward sloping the marginal revenue must lie below the
average revenue curve.

Blooms: Understand
21. In order to sell one additional unit of output, a profit-maximizing monopolist must:
A. Increase the size of its factory.
B. Reduce marginal cost.
C. Increase marginal revenue.
D. Reduce the price of all units sold.
Since the monopolist faces a downward sloping demand curve only by reducing the price will
the quantity demanded increase.

Blooms: Understand
22. For a monopolist, after the first unit of output, marginal revenue is always:
A. Constant.
B. Increasing.
C. Less than price.
D. Greater than marginal cost.
Since a monopolist faces a downward sloping demand curve it must reduce the price in order to
sell more quantity which means that the additional revenue of each additional unit will be less
the previous unit.

Blooms: Understand
7-7
23. The marginal revenue of a monopolist is:
A. Less than price because a monopolist is a price taker.
B. Less than price because to sell more output the firm must reduce the price on all units sold.
C. Above price because the firm is a price setter.
D. Always equal to price.
Since a monopolist must reduce the price of all units sold in order to sell one more unit, the
additional (marginal) revenue must fall.

Blooms: Analyze
Difficulty: 3 Hard
24. Suppose a monopoly firm produces software and can sell 10 items per month at a price of
$50 each. In order to increase sales by one item per month, the monopolist must lower the price
of its software by $1 to $49. The marginal revenue of the 11th item is:
A. $1.
B. $39.
C. $49.
D. $50.
Marginal revenue is defined as the change in total revenue ($539 - $500) divided by the one
additional unit.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
25. Suppose a monopoly firm produces a medical device and can sell 15 items per month at a
price of $2,000 each. In order to increase sales by one item per month, the monopolist must
lower the price of its medical device by $100 to $1,900. The marginal revenue of the 16th item
is:
A. $100.
B. $400.
C. $1,900.
D. $2,000.
Marginal revenue is defined as the change in total revenue ($30,400 - $30,000) divided by the
one additional unit.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
7-8
26. Suppose a monopoly pharmaceutical company produces a drug and sells 100 prescriptions
for $25 each. In order to sell 101 prescriptions, the monopolist must lower the price to $24 per
prescription. The marginal revenue of the 101st prescription is:
A. -$76.
B. $24.
C. $25.
D. $2424.
Marginal revenue is defined as the change in total revenue ($2,424 - $2,500) divided by the one
additional unit.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
27. Which of the following is true for a monopolist?

A. It is a price taker.
B. Profit is maximized where marginal cost equals marginal revenue.
C. The firm faces a horizontal or flat demand curve.
D. It will earn zero economic profit in the long run.
As with all firms in all market structures profit is maximized where marginal revenue equals
marginal costs.

Blooms: Understand
Learning Objective: 07-03 Describe how a monopoly sets output and price.
Topic: MONOPOLY BEHAVIOR
28. Which of the following do a monopolist and a competitive firm have in common?
A. Predatory pricing.
B. Barriers to entry.
C. Marginal cost pricing.
D. Profit-maximization rule.
As with all firms in all market structures profit is maximized where marginal revenue equals
marginal costs.

Blooms: Understand
29. Why would a monopolist never set a price on a point in the inelastic portion of the demand
curve?
A. Marginal revenue would be negative and therefore well below the marginal cost curve.
7-9
B. The point where marginal revenue equals marginal cost would be below the shutdown point.
C. The demand curve would be below the average total cost curve.
D. The monopolist would be operating at a loss.
Since marginal cost is positive and a firm wants to operate where marginal revenue equals
marginal cost that intersection would have to be before the point where marginal revenue was
negative.

Blooms: Evaluate
Difficulty: 3 Hard
30. If the price is $10 and marginal revenue equals marginal cost at $7 at a quantity of 400 lbs. If
the firm’s profit at that point is $800, find the average total cost.
A. $7
B. $8
C. $9
D. $10
If MC = MR at 400lbs then total revenue would be $10 times 400lbs or $4,000. So if at that point
the firm’s profit was $800 then that total cost would be $3,200 and the average total cost $8.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
31. A monopolist sets price at a point on the _______ curve, corresponding to the rate of output
determined by the intersection of _______.
A. Demand; marginal revenue and marginal cost.
B. Marginal revenue; marginal revenue and marginal cost.
C. Average total cost; price and marginal cost.
D. Demand; average total cost and marginal cost.
Maximum profit is at the point where marginal revenue equals marginal cost and the profit per
unit would be the difference between the price and the average total cost.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
7-10
32. A monopolist sets its price:

A. Below the demand curve.
B. Without constraints since there is no competition.
C. At the rate of output where marginal revenue equals marginal cost.
D. At the minimum of the long-run average total cost curve.
AACSB: Analytic
Blooms: Understand
33. The price charged by a profit-maximizing monopolist occurs at:

A. The minimum of the average total cost curve.
B. The price where marginal cost equals marginal revenue.
C. A price on the demand curve above the intersection where marginal revenue equals marginal
cost.
D. A price on the average cost curve below the point where marginal revenue equals marginal
cost.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
34. In terms of pricing, which of the following is not true for a monopolist?
A. In the long-run economic profit is impossible.
B. Marginal revenue is always less then the price charged.
C. If marginal revenue is greater then marginal cost increasing output will increase profits
(decrease loss).
D. Maximum profit (minimum loss) occurs where marginal revenue equals marginal cost.
Since a monopolist is protected from outside competition economic profits are possible in the
long-run.

Blooms: Understand
35. Which of the following is true for a monopoly?

7-11
A. The intersection of total revenue and total cost establishes the profit-maximizing rate of
output.
B. The demand curve indicates the highest price consumers are willing to pay for the rate of
output.
C. Several different prices are compatible with the profit-maximizing rate of output.
D. The total revenue curve indicates the highest price consumers are willing to pay for the rate of
output.
Maximum profit is at the point where marginal revenue equals marginal cost and the price on the
demand curve would be the highest price at that level of output.
AACSB: Analytic
Blooms: Understand
36. Total profit can be calculated as:

A. Average total cost multiplied by price.
B. Total revenue divided by the quantity sold.
C. The difference between price and average total cost multiplied by the quantity sold.
D. Price and average total cost added together and then multiplied by the quantity sold.
Since the price is equal to the average revenue then the profit is the difference between the
average revenue minus the average cost times the units sold.
AACSB: Analytic
Blooms: Understand
37. For a monopoly in long-run equilibrium, economic profits are likely to be:
A. Greater than zero.
B. Zero.
C. Less than zero.
D. Predatory.
Since a monopoly will operate at a point where marginal revenue equals marginal cost and at this
point the average revenue will be greater than the average cost, the firm will experience
economic profit and without competition is likely to not change.
AACSB: Analytic
Blooms: Understand
38. A monopolist:
A. Maximizes profit at the output where price equals marginal cost.
7-12
B. Charges a higher price than a competitive firm, ceteris paribus.
C. Is a price taker since it has market power.
D. Cannot earn an economic profit in the long run
Barriers to entry allow a monopolist to charge a higher price and thereby earn an economic
profit.
AACSB: Analytic
Blooms: Understand
Learning Objective: 07-04 Illustrate how monopoly and competitive outcomes differ.
Topic: BARRIERS TO ENTRY
39. Which of the following statements is true, assuming the same cost and demand conditions?
A. A monopoly produces less output than a competitive firm.
B. A monopoly cannot earn an economic profit in the long run.
C. A monopoly charges a lower price than a competitive firm.
D. A monopoly maximizes profit where price equals marginal cost.
Since a monopolist demand curve is downward sloping whereas a firm in a competitive market is
flat, the marginal revenue curve for a monopolist will intersect with the marginal cost curve
sooner and therefore the monopolist will charge a higher price and produce a lower quantity.

Blooms: Analyze
Difficulty: 3 Hard
40. A monopoly realizes larger profits than a comparable competitive market by charging a
_______ price and producing _______ output.
A. Higher; the same level of
B. Higher; more
C. Lower; more
D. Higher; less
Since a monopolist demand curve is downward sloping whereas a firm in a competitive market is
flat, the marginal revenue curve for a monopolist will intersect with the marginal cost curve
sooner and therefore the monopolist will charge a higher price and produce a lower quantity.
AACSB: Analytic
Blooms: Understand
41. Obstacles that make it difficult or impossible for would-be producers to enter a market are
known as:
A. Barriers to entry.
B. Monopoly profits.
7-13
C. Entry blockades.
D. Entry tariffs.
Anything that artificially prevents the entry of firms into an industry is called barriers to entry.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
42. Which of the following is not true about barriers to entry?

A. They allow a firm to control or restrict the amount of goods supplied in the market.
B. They allow a firm to earn economic profit in the long run.
C. They cause price to be lower and output higher than if they didn't exist.
D. They make it difficult for potential producers to enter a given market.
Barriers to entry restricts competition and therefore tend to cause the price to be higher and
output lower than what otherwise might be.
AACSB: Analytic
Blooms: Understand
43. Under both monopoly and perfect competition, a firm

A. a price taker.
B. a price maker.
C. operates where marginal revenue equal marginal cost.
D. will in the long-run earn economic profits.
The point where marginal revenue equals marginal cost will yield the largest profit for a firm.
AACSB: Analytic
Blooms: Understand
44. Which of the following is not an effective barrier to entry?

A. Low capital requirements.
B. Exclusive licensing.
C. Patent Protection.
D. Threat of entry.
Low capital requirements make it easier for a firm to enter a market.

7-14
Blooms: Understand
45. Which of the following helps to keep potential competitors out of a monopoly market?
A. Bundled products.
B. The profit motive.
C. Rising average total costs.
D. A high price for the good.
Bundled products are an effective barrier to entry because it forces a firm to introduce all of the
products instead of just one which means a higher entry (fixed) cost.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
46. Which of the following is not a barrier to entry into a monopoly market?
A. The exclusive right to produce a good.
B. The existence of substitute goods.
C. Legal action against new firms that enter the market.
D. A patent on important technology.
The presence of substitute goods in an industry insures competition.
AACSB: Analytic
Blooms: Understand
47. Which of the following is not a barrier to entry into a monopoly market?
A. A patent.
B. Economic profits.
C. Exclusive licensing.
D. A government franchise.
Economic profits are what a firm can expect as a consequence of barriers of entry.

Blooms: Understand
48. As noted in the text, which of the following allowed Polaroid to win the monopoly power
battle with Kodak?
A. A government franchise.
B. Natural monopoly.
7-15
C. A patent.
D. Exclusive licensing.
A federal judge finally concluded that Kodak had violated Polaroid’s patent rights.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
49. Which of the following practices is Microsoft accused of using to restrict competition?
A. The threat of legal action.
B. Bundling products.
C. Exclusive licensing.
D. Government franchises.
Bundling products such as Microsoft Employer and Office with Windows allowed Microsoft to
provide them to consumers for free so that other firms could not compete with those products.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
50. As noted in the text, which of the following was used by Nintendo to control the video game
market?
A. A natural monopoly.
B. Economies of scale.
C. A government franchise.
D. Exclusive licensing.
Nintendo forbade game creators from writing software for competing firms which made it
difficult for potential competitors to acquire the factors of production.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
51. As noted in the text, which of the following protects the U.S. Postal Service as the provider
of first-class mail?
A. A government franchise.
B. A patent.
C. Marginal cost pricing.
D. Predatory pricing.
A government franchise is an effective barrier to entry.

7-16
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
52. Which of the following is consistent with a competitive industry?

A. Marginal cost pricing.
B. High barriers to entry.
C. Economic profit in the long run.
D. Production and supplies are constrained.
In the short-run for a competitive firm the marginal cost curve determines output.
AACSB: Analytic
Blooms: Understand
Topic: COMPARATIVE OUTCOMES
53. Which of the following is similar for both a competitive industry and a monopoly?
A. The level of economic profits in the long run.
B. Continuous pressure to improve product quality.
C. Profits signal consumers' demand for more output.
D. In the long run, average total costs are minimized.
For a market system profits (or lack of) dictate the use of resources and the mix of output that
consumers want.

Blooms: Understand
54. In comparison to a competitive industry how is a monopoly different?

A. High prices and profits signal consumers’ demand for more output.
B. Firms try to operate where marginal cost equals marginal revenue.
C. The product is standardized or unique.
D. During price adjustments price equals marginal cost throughout the process.
Since a monopolist can view the downward sloping demand curve price must exceed marginal
cost because marginal cost will equal marginal revenue.

Blooms: Understand
55. Which of the following is consistent with a monopoly industry?

A. There are many firms.
7-17
B. Barriers to entry keep potential competitors out of the market.
C. There is pressure to reduce costs and improve product quality.
D. Zero economic profit in the long run.
Barriers to entry insure that the firm will remain a monopoly.
AACSB: Analytic
Blooms: Understand
56. Which of the following is not consistent with a monopoly industry?

A. Production and supplies are constrained.
B. Barriers to entry keep potential competitors out of the market.
C. There is no pressure to reduce costs or improve product quality
D. Many firms produce identical or similar products.
Many firms that produce identical or similar products is a characteristic of a competitive market.
AACSB: Analytic
Blooms: Understand
57. Compared to a competitive market with the same long-run costs and market demand, a
monopolist has:
A. Less pressure to reduce costs and less incentive to improve quality.
B. Less pressure to reduce costs and more incentive to improve quality.
C. More pressure to reduce costs and less incentive to improve quality.
D. More pressure to reduce costs and more incentive to improve quality.
Since a monopoly has a guaranteed market it tends to maintain the status quo.

Blooms: Understand
58. Which of the following does not have the power to set prices?
A. A duopoly.
B. A monopoly.
C. An oligopoly.
D. A perfect competitor.
Since a perfect competitor exists with many firms producing identical products it must accept the
market price.
7-18
Blooms: Remember
Difficulty: 1 Easy
59. Suppose two firms dominate a market and control price and output. This type of market is
called:
A. A duopoly.
B. A monopoly.
C. Monopolistically competitive.
D. An oligopoly.
A duopoly is a special form of an oligopoly in which two firms control the market.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
60. Suppose a market is dominated by three firms. This type of market is called:
A. Perfect competition.
B. A monopoly.
C. Monopolistic competition.
D. An oligopoly.
An oligopoly is a market that is dominated by a small number of firms.

Blooms: Remember
Difficulty: 1 Easy
61. The market structure of the U.S. soft drink industry is most likely:
A. Perfectly competitive.
B. A monopoly.
D. An oligopoly.

Blooms: Understand
62. Which market structure is characterized by a few interdependent firms?

A. Monopolistic competition.
B. Oligopoly.
7-19
C. Monopoly.
D. Perfect competition.

Blooms: Remember
Difficulty: 1 Easy
63. Suppose a market has many firms and each firm has some brand image. This type of market
is called:
A. Duopoly.
B. Monopoly.
C. Monopolistic competition.
D. Oligopoly.
Since each firm has some brand image it is able to have some control over price.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
64. A market made up of many firms, each of which has some distinct brand image, is called:
A. A price-setting market.
B. A monopolistically competitive market.
C. A perfectly competitive market.
D. An oligopoly.
Monopolistically competitive firms place considerable emphasis on advertising, brand names

and trademarks.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
65. The market structure of the U.S. fast food industry is most likely:
A. Perfectly competitive.
B. A monopoly.
D. An oligopoly.
The fast food industry is a good example of using non-price competition through the use of
advertising, brand names and trademarks.
7-20
Blooms: Understand
66. Firms that have significant market power tend to:

A. Produce at minimum average total costs.
B. Pursue cost reductions.
C. Pursue product improvements.
D. Inhibit economic growth.
Firms with significant market power tend to like the status quo.

Blooms: Remember
Learning Objective: 07-05 Discuss the pros and cons of monopoly structures.
67. Marginal cost pricing refers to the:

A. Offer of goods at prices equal to their marginal cost.
B. Sale of goods at the highest possible price.
C. Rate of output at which marginal cost equals marginal revenue.
D. Offer of goods at a price above marginal cost.
For a competitive firm the supply curve is the marginal cost curve and a firm will always try to
operate at a point where marginal revenue (price) equals marginal cost.
AACSB: Analytic
Blooms: Understand
68. Which of the following is an advantage of the competitive market structure?

A. Competitive firms have greater ability to pursue research and development.
B. Larger companies can produce goods more efficiently than smaller firms.
C. Competitive firms practice marginal cost pricing.
D. Competitive firms make better use of economies of scale.
For a competitive firm the supply curve is the marginal cost curve and a firm will always try to
operate at a point where marginal revenue (price) equals marginal cost.

Blooms: Understand
69. In which of the following industries is marginal cost pricing most likely?
A. Wheat.
7-21
B. Automobiles.
C. Breakfast cereals.
D. Computer software.
The more competitive the industry the more likely the firm will use marginal cost pricing
because the supply curve is the marginal cost curve and a firm will always try to operate at a
point where marginal revenue (price) equals marginal cost

Blooms: Understand
70. In which of the following industries is marginal cost pricing most likely?
A. Laundry detergent.
B. Toothpaste.
C. Air travel.
D. Corn.
The more competitive the industry the more likely the firm will use marginal cost pricing
because the supply curve is the marginal cost curve and a firm will always try to operate at a
point where marginal revenue (price) equals marginal cost

Blooms: Understand
71. Which of the following is an argument in support of monopolies?

A. They increase output and raise prices, contributing to greater consumption of scarce
resources.
B. They are protected from competition so they have greater ability to pursue research and
development.
C. They contribute to efficient production when there are diseconomies of scale.
D. They provide the economic profit necessary for survival and efficient production in a market.
One marginal argument in favor of monopolies is their ability to do research and development.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
Topic: ANY REDEEMING QUALITIES?
72. The argument that concentration of market power enhances research and development efforts
may be weak because:
A. Monopolies cannot afford basic research.
B. No one has attempted to gather any empirical evidence.
7-22
C. A monopoly may have no clear incentive to pursue new research and development.
D. No existing monopoly has a research and development program.
Monopolies tend to favor the status quo and so they may even impede research and development.

Blooms: Understand
73. An industry in which one firm can achieve economies of scale over the entire range of output
is referred to as:
A. A natural monopoly.
B. Perfectly competitive.
C. A neutral monopoly.
D. A contestable market.
Modern technology in some industries is such that economies of scale are extensive and this is
called a natural monopoly.

Blooms: Remember
Difficulty: 1 Easy
74. If an increase in the size of a factory results in reductions in minimum average costs, this is
known as:
B. Diminishing marginal returns.
C. Rising average total cost.
D. Economies of scale.
called a natural monopoly
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
75. Which of the following is an argument in support of market power?

B. Economies of scale.
C. Price fixing.
D. Predatory pricing.
7-23
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
76. In some situations a monopoly might be considered more desirable than a perfectly
competitive firm:
A. Because a monopoly has more incentive to keep costs down.
B. Because a monopoly is the best way to increase output above the competitive level of
production.
C. If economies of scale exist and can only be realized by a single firm.
D. Since price is less than marginal revenue for a monopoly.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
77. A natural monopoly is a firm that:

A. Produces a large volume of output and drives out most of its competitors.
B. Can produce the entire market supply more efficiently than any number of smaller firms.
C. Has government assistance in erecting high barriers to entry.
D. Guarantees the lowest price for consumers.
AACSB: Analytic
Blooms: Understand
78. Consumers may not experience the benefits of economies of scale if a natural monopoly:
A. Raises price and fails to pass cost savings on to consumers.
B. Engages in marginal cost pricing.
C. Raises output beyond efficient levels.
D. Is regulated by the government.
One good reason for the regulation of monopolies is that they may raise the price or fail to pass
cost savings on to the consumers.
7-24
Blooms: Understand
79. A contestable market is:

A. A perfectly competitive market.
B. An imperfectly competitive situation with high barriers to entry.
C. An imperfectly competitive situation that is subject to entry.
D. A market with only one producer.
How contestable a market depends not so much on its structure as on entry barriers.
AACSB: Analytic
Blooms: Understand
80. Monopoly may not be a problem in contestable markets if:

A. The structure of a market is competitive.
B. Firms can exit from the market.
C. Antitrust regulations are enforced.
D. Potential competition exists.
If entry barriers are modest, a firm may enter the industry if the profits are very high.
AACSB: Analytic
Blooms: Understand
81. Carla’s Crop Dusting Service charges competitive prices even though it has no competition.
This is most likely because:
A. There are no economies of scale in the industry.
B. It operates in a contestable market.
C. It is a natural monopoly.
D. It exercises predatory pricing.
so long as Carla’s keeps prices competitive is can expect no competition.

Blooms: Understand
82. If you want to fly to Los Angeles, a place most airlines fly in and out of, the airline industry
is likely _____, but if you want to fly to a small town in Texas, where only one airline flies, the
airline industry is likely _____.
7-25
A. Competitive; duopolistic
B. Competitive; monopolistic
C. Monopolistic; competitive
D. Monopolistic; oligopolistic
The airline industry or any industry will act more competitively if conditions warrant it.

Blooms: Understand
Topic: POLICY PERSPECTIVES
83. Temporary price reductions designed to drive out competition are called:
B. Monopoly pricing.
C. Predatory pricing.
D. Price fixing.
A monopolist may use temporary price reductions to drive a firm out of the market or to
discourage a firm from entering the market.
AACSB: Analytic
Blooms: Understand
84. If American Airlines engages in predatory pricing, it might:

A. Lower fares when a new carrier enters the market and then raise fares as soon as the new
carrier gains sufficient business.
B. Raise fares when a new carrier enters the market and then lower fares once the new carrier
leaves the market.
C. Lower fares when a new carrier enters the market and then raise fares once the new carrier is
driven out of business.
D. Lower fares permanently once a new carrier enters the market in order to keep up in the
expanding airline industry.
A monopolist may use temporary price reductions to drive a firm out of the market or to
discourage a firm from entering the market.
AACSB: Analytic
Blooms: Understand
85. Table 7.1—Monopoly costs and revenue
7-26
In Table 7.1, profit maximization is achieved at a production rate of:
A. 1 plane per month.

B. 2 planes per month.
C. 3 planes per month.
D. 4 planes per month.
So long as the additional revenue is greater than the additional cost the firm’s profit will increase
AACSB: Analytic
Blooms: Understand
In Table 7.1, the maximum profit that can be achieved is:
A. $7 million per month.

B. $10 million per month.
C. $11 million per month.
D. $21 million per month.
The maximum profit will occur at the point where marginal revenue is just greater than or equal
to marginal cost.

Blooms: Understand
7-27
A monopolist achieves the most profitable rate of output by applying which of the following
rules?
A. Average variable cost equals price.

B. Average total cost equals price.
C. Marginal revenue equals marginal cost.
D. Average total cost and average variable cost are both at a minimum.
So long as marginal revenue is greater than marginal cost profit must increase.

Blooms: Understand
In Table 7.2, profit maximization is achieved at a rate of:
A. 1 unit of output.
B. 2 units of output.
C. 3 units of output.
D. 4 units of output.
7-28
At three units of output the additional revenue is $60 and the additional cost is $60 and so that
will be the point of maximum profit.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
In Table 7.2, using the profit-maximization rule, a monopolist will charge a price of:
A. $90.
B. $80.
C. $70.
D. $60.
At a price higher than $80 the additional revenue will be less than the additional cost.

Blooms: Understand
In Table 7.2, at the profit-maximizing rate of output, marginal cost is:

7-29
A. $50.
B. $60.
C. $70.
D. $80.
The change in cost between a price of $90 and a price of $80 is $60 which is equal to the
additional revenue.

Blooms: Understand
In Table 7.2, at the profit-maximizing rate of output, marginal revenue is:
A. $20.
B. $40.
C. $60.
D. $80.
At three units of output the marginal revenue is $60 which is equal to the marginal cost.

Blooms: Understand
92. The following table shows some costs and prices faced by a company that produces
submarines.
Table 7.3
7-30
In Table 7.3, profit maximization is achieved at a production rate of:
A. 1 submarine per year.

B. 3 submarines per year.
C. 4 submarines per year.
D. 5 submarines per year.
At a rate of three submarines per year the additional revenue is equal to the additional cost.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
submarines.
Table 7.3
7-31
In Table 7.3, a profit-maximizing monopolist will produce where:
A. Marginal cost equals marginal revenue.

B. Price equals marginal cost.
C. Total cost is minimized.
D. Total revenue is maximized.
At three units of output marginal cost equals marginal revenue and profits are maximized.

Blooms: Understand
submarines.
Table 7.3
7-32
In Table 7.3, at the profit-maximizing rate of output, marginal cost is equal to _____ and
marginal revenue is equal to _____.
A. $30 million; $90 million

B. $50 million; $50 million
C. $40 million; $70 million
D. $70 million; $30 million
At three units of output marginal cost equals marginal revenue and profits are maximized.

Blooms: Understand
submarines.
Table 7.3
7-33
In Table 7.3, at an output rate of 5 submarines per year, marginal revenue is equal to:
A. -$30 million.
B. $10 million.
C. $90 million.
D. $250 million.
If the firm increases output from 4 to 5 submarines per year the additional cost would be $90 and
the additional revenue would only be $10 resulting in a $10 million loss.

Blooms: Understand
submarines.
Table 7.3
7-34
In Table 7.3, at an output rate of 4 submarines per year, marginal revenue is equal to:
A. $30 million.
B. $60 million.
C. $70 million.
D. $240 million.
If the firm increases output from 3 to 4 submarines per year the additional cost would be $70 and
the additional revenue would be $30 resulting in profits dropping by the difference or $40.

Blooms: Understand
97. Figure 7.1
7-35
In Figure 7.1, the profit-maximizing level of output for a monopolist is:
A. 2 units.
B. 3 units.
C. 4 units.
D. Between 3 and 4 units.
At 3 units of quantity demanded the market price would be $7 according to the demand schedule.
Refer To: Figure 7.1

Blooms: Apply
Difficulty: 3 Hard
7-36
98. Figure 7.1
In Figure 7.1, the price charged by a profit-maximizing monopolist is:
A. $5.00.
B. $7.00.
C. $9.00.
D. Between $6.00 and $7.00.
At 3 units of quantity demanded the market price would be $7 according to the demand schedule.

Blooms: Apply
Difficulty: 3 Hard
99. Figure 7.1

7-37
In Figure 7.1, at the profit maximizing level of output for a monopolist, marginal cost is:
A. $5.00.
B. $7.00.
C. $9.00.
At 3 units of output the marginal cost would equal the marginal revenue of $5. Refer To: Figure
7.1

Blooms: Apply
Difficulty: 3 Hard
100. Figure 7.1

7-38
In Figure 7.1, if this industry is competitive, the profit-maximizing level of output is:
A. 2 units.
B. 3 units.
C. 4 units.
If this industry was competitive then all of the firms would see a flat demand curve at the market
price of between $6 and $7 and produce a collective output of between 3 and 4 units. Refer To:
Figure 7.1

Blooms: Apply
Difficulty: 3 Hard
101. Figure 7.1
7-39
In Figure 7.1, if this industry is competitive, the profit-maximizing price is:
A. $5.00.
B. $7.00.
C. $9.00.
price of between $6 and $7 and produce a collective output of between 3 and 4 units.

Blooms: Apply
Difficulty: 3 Hard
7-40
102. Figure 7.2
A. 3 units.
B. 4 units.
C. Between 3 and 4 units.
At 3 units of output marginal revenue is equal to marginal cost and profit is maximized.

Blooms: Apply
Difficulty: 3 Hard
103. Figure 7.2

7-41
A. $9.00.
B. $10.00.
C. $10.50.
D. $11.00.
Marginal revenue and marginal cost are equal at an output of 3. Plugging 3 into the demand
equation gives a price of $11. Refer To: Figure 7.2

Blooms: Apply
Difficulty: 3 Hard
104. Figure 7.2
7-42
A. $9.00.
B. $10.00.
C. $10.50.
D. $11.00.
At an output of 3 marginal revenue and the marginal cost are both $9 and so profit is maximized
for a monopolist. Refer To: Figure 7.2

Blooms: Apply
Difficulty: 3 Hard
105. Figure 7.2
7-43
In Figure 7.2, profit per unit for a profit-maximizing monopolist is closest to:
A. $1.00.
B. $3.50.
C. $7.50.
D. $8.00.
The profit per unit would be the difference between the market demand curve and the average
total cost curve of about $3.50. Refer To: Figure 7.2

Blooms: Apply
Difficulty: 3 Hard
106. Figure 7.2
7-44
In Figure 7.2, if this industry is competitive, the profit-maximizing level of output is:
A. 3 units.
B. 4 units.
C. Between 3 and 4 units.
price of between $10 and $11 and collectively produce an output of between 3 and 4 units. Refer
To: Figure 7.2

Blooms: Apply
Difficulty: 3 Hard
107. Figure 7.2
7-45
A. $9.
B. $11.
C. Between $9 and $10.
D. Between $10 and $11.
price of between $10 and $11 and collectively produce an output of between 3 and 4 units.

Blooms: Apply
Difficulty: 3 Hard
108. Figure 7.3
7-46
A. 3 units.
B. 4 units.
C. 5 units.
D. 6 units.
At 4 units of output (where MR=MC) the price as determined by the market demand curve
would be $9. Refer To: Figure 7.3

Blooms: Apply
Difficulty: 3 Hard
109. Figure 7.3
7-47
A. $6.
B. $7.
C. $8.
D. $9.
At 4 units of output (where MR=MC) the price as determined by the market demand curve
would be $9. Refer To: Figure 7.3

Blooms: Apply
Difficulty: 3 Hard
110. Figure 7.3
7-48
A. $6.
B. $7.
C. $8.
D. $9.
Marginal cost is equal to marginal revenue at an output of 4 where marginal cost is $6. Refer To:
Figure 7.3

Blooms: Apply
Difficulty: 3 Hard
111. In Figure 7.3, profit per unit for a profit-maximizing monopolist is:
A. $3.
B. $6.
C. $7.
D. $9.
The profit per unit would be the difference between the market price and the average total cost
where the marginal revenue is equal to the marginal cost. Refer To: Figure 7.3

Blooms: Apply
Difficulty: 3 Hard
7-49
112. In Figure 7.3, if this industry is competitive, the profit-maximizing level of output is:
A. 3 units.
B. 4 units.
C. 5 units.
D. 6 units.
price of $8 and would collectively produce an output of 5 units. Refer To: Figure 7.3

Blooms: Apply
Difficulty: 3 Hard
113. Figure 7.3
A. $6.
B. $7.
C. $8.
D. $9.
price of $8 and collectively produce an output of 5 units. Refer To: Figure 7.3
7-50
Blooms: Apply
Difficulty: 3 Hard
114. A text NEWSWIRE article about Microsoft reported: "Microsoft mounted a deliberate
assault upon entrepreneurial efforts that…could well have prevented the introduction of
competition…" This passage suggests that Microsoft was able to erect barriers to entry and
behave like:
A. A perfectly contestable market.
B. A perfectly competitive market.
C. A natural monopoly.
D. A monopoly.
A monopoly will attempt to erect barriers to entry to keep firms out of the market.

Blooms: Analyze
Difficulty: 3 Hard
115. A NEWSWIRE article in the text is titled "OPEC Keeps Output Target on Hold Despite
Weak Economy". When OPEC member nations work collectively to set their combined rate of
output, they are attempting to duplicate ______ outcomes.
A. Monopoly
B. Perfect competition
C. Monopolistic competition
D. Oligopoly
Oligopolies often attempt to collude so as to reap the benefits of a monopoly.

Blooms: Understand
116. A NEWSWIRE article in the text, titled "Music Firms Settle Lawsuit" discusses price fixing
by music companies and retailers. Which market structure is most likely to be successful in price
fixing?
A. Monopolistic competition but not perfect competition.
B. Perfect competition but not monopoly.
C. Oligopoly but not perfect competition.
D. Perfect competition but not monopolistic competition.
Since an oligopoly is composed of a small number of firms, it is easier to be successful in price

fixing.

7-51
Blooms: Understand
117. A monopolist has market power because it faces a downward-sloping demand curve.
TRUE
Unlike a firm operating in a competitive market the monopolist is able to adjust the quantity to
affect the market price.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
118. Although there are other pizza restaurants in town, Pecos' Pizza Place is the oldest and
largest so it is a monopoly.
FALSE
Pecos’ Pizza Place is likely operating in a monopolistic competitive industry.
AACSB: Analytic
Blooms: Understand
119. The demand curve for a monopolist's product is the same as the market demand curve for
the product.
TRUE
Since a monopolist’s is the only firm in the market the firm’s demand curve is the same as the
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
120. Marginal revenue is the additional revenue from producing one more unit of output.
TRUE
The change in total revenue that results from one additional unit of output.
AACSB: Analytic
7-52
Blooms: Remember
Difficulty: 1 Easy
121. The marginal revenue curve for a monopolist is greater than the price because the
monopolist faces a downward sloping demand curve for its product.
FALSE
The marginal revenue curve for a monopolist is always less than the price because with each
additional unit of output the marginal revenue is declining which results from the downward
sloping market demand curve.
AACSB: Analytic
Blooms: Understand
122. For a monopoly a firms’ marginal revenue is always equal to price.
FALSE
With pure competition a firm faces a horizontal demand curve which means that both the
marginal revenue and price are horizontal however the monopolist is in a market structure where
it is the only seller and so the additional revenue will always be less than the average revenue
(demand curve).
AACSB: Analytic
Blooms: Understand
123. According to the profit-maximization rule, a firm should produce at the rate of output where
marginal revenue equals marginal cost.
TRUE
At any point past the point where at a rate of output marginal revenue equals marginal cost the
additional revenue added will be less than the additional cost added and total profit will decline.
AACSB: Analytic
Blooms: Understand
124. For a monopoly, profits are maximized at the output level where price and marginal cost are
equal.
7-53
FALSE
For a monopoly profits are maximized at an output level where marginal revenue and marginal
cost are equal and the profit would equal the price minus average total cost multiplied by the
units of output.
AACSB: Analytic
Blooms: Understand
125. For both perfectly competitive and monopoly firms, price will exceed marginal cost at the
profit-maximizing output.
FALSE
All firms in any industry attempt to operate at a point where marginal revenue equals marginal
cost to maximize profits but for the perfect competitor price, which equals marginal revenue, will
equal marginal cost.

Blooms: Understand
126. In order to sell additional output, a monopolist must lower its price.
TRUE
Since the marginal utility of an additional unit declines a consumer will not purchase it unless the
price is lower.
AACSB: Analytic
Blooms: Understand
127. A monopolist produces more output at a lower price than a competitive market would,
ceteris paribus.
FALSE
A monopolist produces less output at a higher price than a competitive market would since its
marginal revenue curve crosses the marginal cost curve at a lower output.
AACSB: Analytic
Blooms: Understand
7-54
128. If a market changes from perfectly competitive to monopolistic, output will increase and the
price will decrease, ceteris paribus
FALSE
A monopolist produces less output at a higher price than a competitive market would since its
marginal revenue curve crosses the marginal cost curve at a lower output.

Blooms: Understand
129. Barriers to entry are obstacles that make it difficult or impossible for additional producers to
enter a market.
TRUE
Barriers to entry are an effective way to block all potential competition.

Blooms: Remember
Difficulty: 1 Easy
130. Barriers to entry are not strong enough to protect monopoly profits.
FALSE
Barriers to entry are an effective way to block all potential competition.

Blooms: Remember
Difficulty: 1 Easy
131. Patents, legal harassment, and bundling products are all examples of barriers to entry in
monopoly markets.
TRUE
7-55
There are a number of barriers to entry and patents, legal harassment, and bundling products are
examples.

Blooms: Remember
Difficulty: 1 Easy
132. Monopoly profits are an example of a barrier to entry in monopoly markets.
FALSE
Economic profits are a characteristic of a monopoly market.

Blooms: Remember
Difficulty: 1 Easy
133. In a competitive industry, barriers to entry prevent new suppliers from entering the market.
FALSE
A competitive industry is characterized by low barriers to entry.

Blooms: Remember
Difficulty: 1 Easy
134. For a profit-maximizing monopolist, price exceeds marginal cost at all times.
TRUE
For a profit maximizing firm marginal revenue must equal marginal cost in order to maximize
profits. For the monopolist, price, which is determined by demand, exceeds marginal revenue
and therefore marginal cost.
AACSB: Analytic
Blooms: Understand
135. In an oligopoly, one firm controls the entire market.
FALSE
An oligopoly is composed of a small number of firms

7-56
Blooms: Remember
Difficulty: 1 Easy
136. An oligopolist may decide to coordinate with others in the industry in order to maximize
profits.
TRUE
When oligopolies coordinate with one another in order to maximize profits, it is called collusion.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
137. In monopolistic competition there is more price-setting power than in perfect competition.
TRUE
In monopolistic competition considerable emphasis is placed on advertising, brand names and

trademarks in order to have more price-setting power.

Blooms: Remember
Difficulty: 1 Easy
138. Monopolies tend to inhibit technology and innovation by keeping competition out of the
market.
TRUE
In general monopolies prefer the status quo and do not want innovation to alter the
characteristics of the market.
AACSB: Analytic
Blooms: Understand
139. In order to survive the competition, monopolies must engage in research and design
activity.
FALSE
7-57
In general monopolies prefer the status quo and do not want innovation to alter the
characteristics of the market.
AACSB: Analytic
Blooms: Understand
140. Economies of scale occur when the long-run average cost curve slopes downward.
TRUE
One of the advantages of a monopoly is that it can accumulate large amounts of capital in order
to keep long-run average cost low.
AACSB: Analytic
Blooms: Understand
141. When there are economies of scale, a firm can simply increase capital and unit costs will
decline.
TRUE
One of the advantages of a monopoly is that it can accumulate huge amounts of capital in order
to keep long -run average cost low.
AACSB: Analytic
Blooms: Understand
142. A natural monopoly uses legal harassment and bundling of products to keep others out of
the market.
FALSE
A natural monopoly uses economies of scale to keep others out of the market.
AACSB: Analytic
Blooms: Understand
143. Even when a market appears to be a monopoly it can be contestable if there are many
potential entrants.
7-58
TRUE
Many times a firm will not use monopoly pricing power in order to keep competing firms out of
a market.
AACSB: Analytic
Blooms: Understand
144. Monopoly markets cannot be contestable since there is only one firm.
FALSE
Any market given enough time for technology to change is contestable.
AACSB: Analytic
Blooms: Understand
145. Why does a monopolist demand curve lie above the marginal revenue curve whereas in a
competitive market the demand curve and marginal revenue curve are equal? Would it be
possible that the marginal revenue curve and demand curve could ever be the same for a
monopolist?
Since to the monopolist the individual demand curve and the market demand curve are the same,
then the monopolist sees a downward sloping demand curve which means that the marginal
revenue must lie below the demand curve in order to bring it down. It would not be possible for
the curves to ever be the same because the demand curve depicts the relationship between
quantity and price and only when the price fell would quantity demanded increase so therefore
the marginal revenue curve would lie below the demand curve.
AACSB: Analytic
Blooms: Understand
146. List some of the barriers to entry for a monopolist. Explain how each barrier can preserve a
monopoly.
a) Barriers to entry are such things as patent protection, exclusive licensing and bundled
products. Other barriers to entry are economies of scale and high capital requirements to enter
the industry. The important point about barriers is that they make it difficult for a firm to enter an
industry. b) A patent is a legal protection from the government and is similar to exclusive
licensing that would be issued by another firm. Bundled products are used to force consumers to
use all of the firm’s products, not just the ones that they want. Some industries require huge
7-59
amounts of fixed capital to make it economically feasible to operate and some industries require
a large amount of capital just to enter.

Blooms: Understand
147. Use the following demand schedule for a monopolist to calculate total revenue, marginal
revenue and the price elasticity of demand between each price level. Using the information from
the schedule graph the demand curve, marginal revenue curve and the total revenue and identify
the portion of the demand curve that is elastic, and inelastic.
Instructions: Round your answers to two decimal places.
Price Elasticity of
Quantity Total Marginal
Price Demand
Demanded Revenue Revenue
$10.00 0 $0.00
900.00 19.00
9.00 100 900.00
700.00 5.67
8.00 200 1,600.00
500.00 3.00
7.00 300 2,100.00
100.00 1.86
6.00 400 2,400.00
-100.00 1.22
5.00 500 2,500.00
-300.00 0.82
4.00 600 2,400.00
-300.00 0.54
3.00 700 2,100.00
-500.00 0.33
2.00 800 1,600.00
-700.00 0.18
1.00 900 900.00
-900.00 0.05
0.00 1,000 0.00
7-60
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
148. List and explain some of the benefits of a monopoly? Will a monopolist always charge the
highest possible price?
a) Some of the benefits of a monopoly include research and development since it takes much
capital to fund and only a large company that does not have to worry about competition can
afford to do so. Also monopolies have the advantage of economies of scale in that a large
company can produce a standardized product at a low unit (average) cost.
b) A monopolist will not charge the highest price possible since as price rises quantity falls.
Additionally the firm seeks to maximize profit by setting MR=MC and charging the price
determined by demand. A higher or lower price would reduce profits.

Blooms: Understand
149. In the following industries explain what barriers to entry each has in order to allow it to be a
monopoly.
a) City of Eugene Water and Electric Board (EWEB)
b) Seattle Seahawks Football Team
c) U.S. Postal Service
EWEB has a government franchise and economies of scale, the Seattle Seahawks has an
exclusive license to operate and the Postal Service is also a government franchise with a
standardized service.

Blooms: Understand
150. If monopolies faced competition from other firms, then its demand curve would become
more horizontal.
7-61
TRUE
Competition will make the demand curve more elastic.

Blooms: Remember
Difficulty: 1 Easy
151. If a monopoly’s MR for a product is $25 and the MC is $18, the firm should do which of
the following?
A. Sell more output and lower the price
B. Sell less output and raise the price
C. Sell the current amount of output and do not change price
D. Sell more output but do not change the price
If MR>MC, the firm would be well advised to reduce the price of their product and increase
output until the optimal level of output occurs where MR=MC. The monopoly will maximize its
profits by doing so.
AACSB: Analytic
Blooms: Understand
152. If the market price is $65, MC - $35, MR = $35 and ATC = $39, the monopolist will:
A. operate at a loss
B. operate at a profit
C. have zero profits
D. have zero profits
If the monopolist produces the quantity where MR = MC and if Price > ATC, then the
monopolist will operate at a profit.
AACSB: Analytic
Blooms: Remember
153. Compared to perfect competition, the monopoly will produce more output and charge a
higher price.
7-62
FALSE
Monopolies have market power and no competition. It is not in their best financial interest to
over- produce and lower prices of their product.

Blooms: Understand
154. Explain why cartels resemble monopolies. Why would you not see the formation of cartels
in the perfectly competitive market?
Cartels collectively set their combined rate of output so to resemble a monopoly. There is too
much competition in perfectly competitive markets for "get together" and act a one company.

Blooms: Understand
155. Contrast the market of monopolistic competition with oligopolies.
Firms that are monopolistic competitive has limited market power whereas the oligopoly firm
has considerable market power. Oligopolistic firms recognize their mutual interest in higher
prices and profits. Because of competition, monopolistically competitively firms are unlikely to
agree to restricting quantities and increasing prices of their products.

Blooms: Understand
156. The demand curve facing a monopoly:

A. is equal to the industry demand curve.
B. is horizontal at the going market price.
C. is steeper than the industry demand curve.
D. is flatter than the industry demand curve.
The monopolists is the industry..

Blooms: Remember
Difficulty: 1 Easy
157. A major criticism of monopolies is that they

A. inhibit technological innovation.
7-63
B. limit consumption choices
C. experience economies of scale.
D. Both A and B are true.
Monpopolists have no incentive to innovate or offer more consumption choices because the have
no competition.
AACSB: Analytic
Blooms: Understand
158. Why do monopolies experience diminishing marginal returns as they increase output?
A. Price always equals marginal revenue for monopolies.
B. Monopolies must lower the price in order to increase quantity demanded.
C. They maximize profits at the rate of output where marginal revenue is greater than marginal
cost.
D. All of the above are correct.
Monopolies determine output at the point where MR = MC. However, they determine the price
at this output level from the demand curve. Even monopolists must be aware of the market
demand curve (and the law of demand) for their product.
AACSB: Analytic
Blooms: Understand
159. In 2009, European courts deemed Microsoft’s behavior monopolistic because it was
practicing:
A. legal harassment.
B. exclusive licensing.
C. bundling of products.
D. All of the above are true.
In 2009, European Union regulators required Microsoft to give consumers a choice of web
browsers.
AACSB: Analytic
Blooms: Understand
160. If a firm converts a previously competitive industry into a monopoly without any changes in
the cost curves, it will:
A. increase output and price to generate more profit.
B. reduce output and raise price to generate more profit.
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C. keep output the same but increase price to generate more profit.
D. reduce price and increase output to keep potential competitors from entering the industry.
Assuming equal costs, a monopolist produces a smaller output and charges a higher price than a
competitive industry.

Blooms: Understand
161. The market structure for the airline industry is determined by:
A. the number of carriers servicing a given route.
B. the fares charged by competing airlines.
C. the number of routes available.
D. the price charge for flights.
The number of carriers flying between two airports dictates the level of competition.
AACSB: Analytic
Blooms: Understand
162. When a monopoly operates in a contestable market:
A. it charges the same price as an ordinary monopoly.
B. it is unable to charge a price above cost without inducing entry by a rival firm.
C. it is able to form a cartel with the other large firms and charge prices considerably above cost.
D. Both A and B are true.
A contestable market is an imperfectly competitive industry subject to potential entry if prices or

profits increase
AACSB: Analytic
Blooms: Understand
163. Which of the following statements is true?

A. Competitive firms produce at the rate of output for which marginal revenue equals marginal
cost, but monopolists produce at a rate of output for which marginal revenue is greater than
marginal cost.
B. The competitive price is usually higher than the monopoly price.
C. Both the monopolist and the competitive firm operate at the rate of output for which marginal
revenue equals marginal cost.
7-65
D. Monopolistic theory has no relevance to the real world.
The profit-maximizing is the same for both market structures: Produce the rate of output where
marginal revenue equals marginal cost. .

Blooms: Understand
164. If firms are earning positive economic profits:

A. entry would tend to erode those profits in competitive industries but not in monopolistic
industries.
B. BARRIERS TO ENTRY would permit those profits to persist.
C. firms must be producing where marginal revenue equals marginal cost, regardless of industry
structure.
D. All of the above statements are true.
All of the above are true given the existence of positive economic profits.
AACSB: Analytic
Blooms: Understand
165. Marginal revenue is the:

A. additional revenue from selling one more of a good.
B. change in profits from a one-unit increase in the quantity sold.
C. extra money received when the least important goods are sold.
D. All of the above are true.
All of these describe marginal revenue, the extra revenue from selling one more good.

Blooms: Remember
Difficulty: 1 Easy
166. Which of the following is not an example of a natural monopoly?

A. Local telephone service
B. Cable TV
C. Public utilities
D. Agriculture
Agriculture is an example of perfect competition.

Blooms: Remember
Difficulty: 1 Easy
7-66
167. An industry structure with many firms, each of which has some distinct brand image, is
called:
A. monopoly.
B. competition.
C. monopolistic competition.
D. oligopoly.
Monopolistic competition emphasizes product differentiation.

Blooms: Remember
Difficulty: 1 Easy
168. Drug companies are willing to spend millions of dollars on developing new drugs because
A. their research will drive their competitors out of business.
B. they can patent the new drug and have a monopoly on its production and sale.
C. they can raise the prices on older drugs whose patents have expired.
D. they can produce unlimited quantities of the new drug.
Patents grant temporary monopolies, so drug manufactures are willing to invest is research and
development of a new drug from which they will be the sole supplier. A patent is a government
grant of exclusive ownership of an innovation.
AACSB: Analytic
Blooms: Understand
169. How do monopolists set the output level and price for their products?
A. Output at the market equilibrium quantity; price at market equilibrium price
B. Output at MR = MC; price at market equilibrium price
C. Output at market equilibrium quantity; price at MR = MC
D. Output at MR = MC; price on demand curve
The rate of output is set at MC=MR. Price is determined on the demand curve at the highest
price consumers are willing to pay for that level of output.
AACSB: Analytic
Blooms: Understand
170. A natural monopoly achieves _____ over the entire range of market supply.
A. higher costs
7-67
B. cost inefficiencies
C. economies of scale
D. maximum profits
A natural monopoly achieves economies of scale "naturally".
AACSB: Analytic
Blooms: Understand
Chapter 07_Test Bank Summary
Category # of Questions
AACSB: Analytic 86
AACSB: Reflective Thinking 82
Accessibility: Keyboard Navigation 139
Blooms: Analyze 16
Blooms: Apply 19
Blooms: Evaluate 1
Blooms: Remember 39
Blooms: Understand 95
Difficulty: 1 Easy 35
Difficulty: 2 Medium 98
Difficulty: 3 Hard 35
Learning Objective: 07-01 Define what a monopoly is. 30
Learning Objective: 07-
13
02 Explain why price exceeds marginal revenue in monopoly.
Learning Objective: 07-03 Describe how a monopoly sets output and price. 45
55
04 Illustrate how monopoly and competitive outcomes differ.
27
05 Discuss the pros and cons of monopoly structures.
Topic: ANY REDEEMING QUALITIES? 21
Topic: BARRIERS TO ENTRY 25
Topic: COMPARATIVE OUTCOMES 29
Topic: MONOPOLY BEHAVIOR 20
7-68
Topic: MONOPOLY STRUCTURE 40
Topic: POLICY PERSPECTIVES 35
7-69

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Chapter 07_Test Bank KEY

AACSB: Reflective Thinking

5. Which of the following is true about market demand?

8. Which of the following might be used to protect a monopoly from competition?

9. If the entire output of a market is produced by a single seller, the firm:

10. An industry dominated by one firm is:

11. Which of the following is likely to be a monopolist?

AACSB: Reflective Thinking

12. Which of the following is likely to be a monopolist?

AACSB: Reflective Thinking

13. Which of the following is not true for a monopoly?

14. Monopolists are price:

15. Which of the following is not a characteristic of a monopoly?

In general a monopolistic firm’s product is unique since it is the only producer.

17. The demand curve for a monopolist:

AACSB: Reflective Thinking

18. Since a monopoly has market power:

AACSB: Reflective Thinking

20. For a monopolist, marginal revenue is:

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

27. Which of the following is true for a monopolist?

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

A. Demand; marginal revenue and marginal cost.

B. Marginal revenue; marginal revenue and marginal cost.

C. Average total cost; price and marginal cost.

D. Demand; average total cost and marginal cost.

32. A monopolist sets its price:

33. The price charged by a profit-maximizing monopolist occurs at:

AACSB: Reflective Thinking

35. Which of the following is true for a monopoly?

36. Total profit can be calculated as:

AACSB: Reflective Thinking

42. Which of the following is not true about barriers to entry?

43. Under both monopoly and perfect competition, a firm

D. will in the long-run earn economic profits.

44. Which of the following is not an effective barrier to entry?

Low capital requirements make it easier for a firm to enter a market.

AACSB: Reflective Thinking

The presence of substitute goods in an industry insures competition.

AACSB: Reflective Thinking

A government franchise is an effective barrier to entry.

52. Which of the following is consistent with a competitive industry?

AACSB: Reflective Thinking

54. In comparison to a competitive industry how is a monopoly different?

AACSB: Reflective Thinking

55. Which of the following is consistent with a monopoly industry?

Barriers to entry insure that the firm will remain a monopoly.

56. Which of the following is not consistent with a monopoly industry?

AACSB: Reflective Thinking

An oligopoly is a market that is dominated by a small number of firms.

AACSB: Reflective Thinking

An oligopoly is a market that is dominated by a small number of firms.

AACSB: Reflective Thinking

62. Which market structure is characterized by a few interdependent firms?

An oligopoly is a market that is dominated by a small number of firms.