Economics of Social Issues 20th Edition Sharp Test Bank

Economics of Social Issues 20th
Edition Sharp Test Bank

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Chapter 08 - The Economics of Monopoly Power: Can Markets Be Controlled?
Chapter 08
The Economics of Monopoly Power: Can Markets Be Controlled?
Multiple Choice Questions
1. Imperfect competition can best be described as a situation in which

a. A few large firms produce and sell a particular product
b. Many firms produce and sell a product
c. Only one firm produces and sells a product
D. Firms exercise some monopoly power
e. Both (a) and (d)
2. The monopoly power of a firm can be measured by the firm's

a. Profits relative to other firms in the industry
b. Control over the demand for its product
c. Revenues as a percent of industry revenues
d. Prices compared to average prices in the industry
E. Control over the market supply of its product
3. Which of the following is likely to have the most monopoly power?

a. Ford Motor Corporation
B. Your local water company
c. Mobil Oil Corporation
d. Avon products (cosmetics)
e. A fast food restaurant
4. Concentration ratios are used to measure the

A. Potential monopoly power within an industry
b. Strength of the demand for an industry's product
c. Potential monopoly power of a firm
d. Degree of competition between firms in different markets
e. Level of perfection in a competitive market
8-1
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5. Suppose the U.S. auto industry sells 1,000 autos per year. Of this, GM sells 400, Ford 300,
and Dodge 250. Given this information, the four-firm concentration ratio of the industry must
be at least
A. 95%
b. 5%
c. 50%
d. 100%
e. Cannot tell without further information
Questions 06 - 08 refer to the table below.
6. The 4-firm concentration ratio in this industry is

a. 0.5
b. 0.6
c. 0.7
D. 0.8
e. 0.9
7. The 6-firm concentration ratio in this industry is

a. 0.6
b. 0.7
c. 0.8
D. 0.9
e. 1.0
8-2
8. Assume that no firm in this industry accounts for less than 5% of industry sales. What is the
largest number of firms that could be in this industry?
a. 6
b. 7
C. 8
d. 9
e. 10
9. Which of the following would cause an industry's concentration ratio to make it appear less
competitive than it really is?
a. Firms in the industry are located in one area of the country
b. Transporting the industry's output is very easy
C. Foreign firms export the industry's product to the United States
d. High barriers to entry
e. All of the above
10. A pure monopoly industry has a 4-firm concentration ratio equal to

a. 0
b. 0.25
c. 050
d. 0.9
E. 1.0
11. To maximize profits, a monopolist produces the output level at which

a. Its total receipts are greatest
b. Its total costs are minimum
C. Its marginal cost equals its marginal revenue
d. Its total costs equal its total receipts
e. None of the above
8-3
12. To maximize profits, a competitive firm produces the output level at which
a. Its total receipts are greatest
b. Its total costs are minimum
C. Its marginal cost equals its marginal revenue
d. Its total costs equal its total receipts
13. One difference between a competitive seller and a monopolistic seller is that the
a. Competitive firm faces a horizontal supply curve
b. Monopolist tries to maximize profit
C. Monopolist has some price setting ability
d. Competitive firm is free to vary output
e. Market demand curve is positively sloped for a monopoly
14. Monopoly refers to

a. A large firm
b. A firm that is one of a few firms in an industry
C. A single seller of a product for which there are no good substitutes
d. A firm that refuses to lower its price
e. All of the above
15. In a competitive market, the single firm

a. Competes with other firms for its share of the market
B. Is unable to raise the price of the product
c. Can increase its sales by advertising
d. Can increase its sales by lowering its price
e. Is all of the above
16. A major objective of firms in all types of market structures is

a. Output restriction
b. Output maximization
c. To raise prices
D. Profit maximization
e. To maximize revenues
8-4
17. A firm's total revenue equals its

a. Income minus expenses
b. Pre-tax net income
c. Income for tax purposes
D. Quantity times price
e. Quantity times costs
18. Profit equals

A. Total revenue minus total cost
b. Marginal revenue minus marginal cost
c. Quantity times price
d. Marginal cost minus marginal revenue
e. Income minus opportunity cost
19. Profits and losses in a private enterprise economic system

a. Contribute toward a breakdown of the system
b. Lead to a monopolization of the industries in which they occur
C. Show where productive capacity should be expanded and where it should be contracted
d. Do all of the above
e. Do both (a) and (b)
20. For a firm, at the output level at which marginal revenue equals marginal cost,
A. Profits are highest
b. There is neither unemployment nor inflation
c. Output is maximized
d. Revenues are maximized
e. Costs are minimized
21. The most common forms of nonprice competition are

a. Profit maximization and loss minimization
b. Monopolization and output restriction
C. Advertising and changes in product quality and design
d. Inflation and unemployment
8-5
Questions 22-26 refer to the following graph. For each question, disregard any
irrelevant lines.
22. Suppose the market is competitive. Equilibrium market price and output will be
a. P1, X2
B. P2, X3
c. P3, X1
d. P1, X4
e. P3, X2
23. Now suppose the same market is monopolized. Equilibrium market price and output
would be
a. P3, X1
B. P3, X2
c. P2, X3
d. P1, X2
e. P1, X4
8-6
24. The area of the triangle ABC reflects the

A. Dead-weight welfare loss due to monopoly
b. Increase in production costs due to monopoly
c. Increase price to the consumer due to monopoly
d. Impact of barriers to entry on the market
e. Effect of monopoly on income distribution
25. If this industry changes from pure competition to monopoly, output changes from
a. X4 to X1
b. X4 to X2
c. X2 to X4
D. X3 to X2
e. X2 to X3
26. If this industry changes from pure competition to monopoly, price changes from
a. P3 to P2
b. b. P3 to P1
c. c. P2 to P1
d. d. P1 to P3
E. e. P2 to P3
27. If the demand curve faced by a firm is downward sloping and the market price of the
product is above marginal cost of production, which of the following is correct?
A. Not enough of the economy's resources are being allocated to producing the good
b. Too much of the economy's resources are being allocated to producing the good
c. The firm is in a competitive market
d. The firm is making profits
e. The firm is losing money
28. A monopoly is not efficient because

A. Price exceeds marginal cost
b. Entry into the market is blocked
c. Output is too large
d. Monopoly is illegal
e. Price is too low
8-7
29. The dead-weight welfare loss due to monopoly is

a. Too small to be important
b. About 10% of GDP per year
c. Unable to be determined in a complex economy such as our own
D. About 1% of GDP per year
e. About .01% of GDP per year
30. The dead-weight welfare loss due to monopoly

a. Results from the monopolist's tendency to reduce output below the competitive level
b. Is a measure of the cost to society from the monopolistic misallocation of resources
c. Is estimated to be about 1% of GDP per year
d. Is a loss to consumers not offset by anyone else's gain
E. All of the above
31. Monopolization of a previously competitive market leads to

A. Reduced production and product quality and increased costs and prices
b. Increased production and higher prices
c. Increased production, product quality and prices
d. Government regulation
32. Patents and copyright laws

A. Are governmental barriers to market entry
b. Encourage orderly market entry
c. Discourage research and development
d. Reduce monopoly power
e. Do all of the above
33. When firms earn profits,

a. They will likely expand
b. New firms will have an incentive to enter the market
c. They are providing a good or service that consumers want more of
d. The market is signaling more firms to enter
E. All of the above
8-8
34. In a competitive market in the short run, firms

A. May earn profits or losses
b. Always break even
c. Earn neither profits nor losses
d. Must be free to enter or exit the market
e. Charge a high price and produce a low quantity
Questions 35 - 39 refer to the graph below, which is for a firm in a competitive market.
35. Since this is a competitive market, the firm's marginal revenue is

A. $5
b. $7
c. $20
d. $100
e. $150
8-9
36. The profit-maximizing price and quantity for this competitive firm are
A. $5 and 100
b. $5 and 150
c. $7 and 100
d. $7 and 150
e. $7 and more than 150
37. Equilibrium price and quantity in the market are

a. $5 and 100
b. $5 and 150
c. $7 and 150
d. $7 and more than 150
E. None of the above
38. The firm's total revenue is

a. $5
b. $7
c. $100
d. $150
E. $500
39. If the firm has a total cost of $400, it is earning a

a. Profit of $0
B. Profit of $100
c. Loss of $100
d. Loss of $200
e. Loss of $500
8-10
Questions 40 - 44 refer to the graph below, showing a monopoly market.
40. For the firm shown on the graph, profit maximization occurs at what price and quantity?
A. $20 and 50
b. $15 and 70
c. $15 and 50
d. $10 and 50
e. $10 and 70
41. At the profit maximizing quantity, the firm's total revenue equals
a. $10
b. $15
c. $20
D. $1,000
e. $1,400
8-11
42. If the firm has total costs of $1,200 at the profit maximizing output, then it is earning a
a. Profit of $0
b. Profit of $100
c. Profit of $200
d. Loss of $100
E. Loss of $200
43. If this were a perfectly competitive market, equilibrium price and quantity would be
a. $20 and 50
B. $15 and 70
c. $15 and 50
d. $10 and 50
e. $10 and 70
44. Monopolization of this market leads to a deadweight loss equal to

a. $0
b. $50
C. $100
d. $150
e. Cannot be determined
45. If a firm sells 100 units of output at a price of $5 and each unit costs $3 to produce, the
firm is earning a
A. Profit of $200
b. Loss of $2 per unit
c. Loss of $200
d. Profit of $500
e. Loss of $300
46. Which of the following is true of a firm's total costs? They

a. Do not include opportunity costs
b. Become lower as more is produced
c. Are greater than total revenue when the firm is earning a profit
D. Are equal to the cost per unit times the number of units produced
e. All of the above
8-12
47. If a firm sells 100 units of output at a price of $5 and each unit costs $3 to produce, the
firm's total revenue equals
a. $3
b. $5
c. $200
d. $300
E. $500
48. A perfectly competitive firm's supply curve is its

a. Demand curve
b. Marginal revenue curve
c. Total revenue curve
D. Marginal cost curve
e. Total cost curve
49. The supply curve for a monopoly

a. Is its marginal revenue curve
b. Is its total revenue curve
c. Is its marginal cost curve
d. Is its total cost curve
E. Does not exist
50. The demand curve for a

a. Monopoly firm is downward sloping
b. Monopoly industry is downward sloping
c. Perfectly competitive firm is horizontal
d. Perfectly competitive industry is downward sloping
E. All of the above
8-13
51. If a firm sells 100 units at a price of $5 and each unit costs $3 to produce, its total cost
equals
a. $3
b. $5
c. $200
D. $300
e. $500
Questions 52 - 56 refer to the graph below.
52. If this industry is perfectly competitive, equilibrium price and output in the market will be
a. $16 and 10
b. $12 and 10
C. $12 and 14
d. $8 and 14
e. $8 and 10
8-14
53. If this industry is a monopoly, equilibrium price and output in the market will be
A. $16 and 10
b. $12 and 10
c. $12 and 14
d. $8 and 14
e. $8 and 10
54. If this industry starts as perfectly competitive and then becomes a monopoly, market price
will change from
a. $16 to $12
b. $16 to $8
c. $12 to $8
d. $8 to $16
E. $12 to $16
55. If this industry starts as perfectly competitive and then becomes a monopoly, the
deadweight loss to society is equal to area
a. ABC
B. ADC
c. BDEC
d. ADEC
56. Society's net benefits are maximized when price and quantity in the market are
a. $16 and 10
b. $12 and 10
C. $12 and 14
d. $8 and 14
e. $8 and 10
8-15
57. Which of the following is a private barrier to entry?

a. An occupational license
b. A patent
C. Ownership of raw materials
d. A regulatory commission
e. All of the above
58. Which of the following is a government barrier to entry?

A. An occupational license
b. Ownership of raw materials
c. Product differentiation
d. Advertising
e. All of the above
59. Which of the following is a barrier to entry?

a. Import restrictions
b. Copyright laws
c. Exclusive franchises
d. Zoning ordinances
E. All of the above
60. Firms may advertise their products in order to

a. Create a barrier to entry
b. Provide consumers with information
c. Increase demand for their product
d. Differentiate their product
E. Do all of the above
61. A telephone is much more useful to a consumer when other people also have telephones.
This illustrates which of the following concepts?
a. Economies of scale
b. Diseconomies of scale
c. Natural monopoly
D. Network economies
e. Constant returns to scale
8-16
62. Which of the following is an example of nonprice competition?

a. Advertising
b. Changing the design of a product
c. Incorporating new technology in a product
d. Improving the quality of a product
E. All of the above
63. The loss to society caused by monopoly power may be greater than simply the losses
associated with deadweight losses because it also includes losses due to
a. Private barriers to entry
b. Government barriers to entry
c. Extensive product differentiation
d. Occupational licensing
E. All of the above
64. With a natural monopoly,

A. The long-run average cost curve of the firm declines over the range of production
b. Government regulation ensures that consumer's interests will be served
c. Government regulation will fail
d. There are no significant economies of scale in producing the good
65. The government's regulation of pollution

a. Is justified because of natural monopoly
B. Is justified by poorly defined property rights
c. Is justified by concentration ratios
d. Is not likely to improve on the market outcome
e. Cannot be defended on economic grounds
8-17
66. The capture theory of regulation suggests

a. In the absence of regulation, consumer welfare is often captured by firms in the market
b. The lost consumer welfare due to unfair business practices can be offset through
government regulation
c. When market failure exists, regulation is appropriate
D. The regulators of an industry are often "captured" by the firms in the market
67. Which of the following is likely to reduce monopoly power in the United States the most?
a. Placing an absolute limit on the total assets that any one company can have
B. Removing all government-imposed entry barriers to industries and occupations
c. Placing a government ban on television advertising
d. Placing a special tax on monopolists' outputs
68. Which of the following provides the strongest economic justification for regulation?
A. Natural monopoly
b. Excess consumer information
c. Shortages and high prices
d. All of the above
69. The best estimate of the dead-weight welfare loss due to monopoly is biased downward
because it does not take into account
a. Reductions in product quality
b. Higher costs of production
c. Decreases in product variety
D. All of the above
8-18
Questions 70 - 73 refer to the graph below.
70. At what level of output does the firm experience economies of scale?
a. 0
B. 0 - Q0
c. Q0
d. Above Q0
e. This firm does not experience economies of scale
71. Increasing output beyond Q0 will cause the firm to experience

a. Economies of scale
B. Diseconomies of scale
c. Constant returns to scale
d. Network economies
e. Decreasing total costs
72. At what level(s) of output do reductions in the average costs of production cease?
a. 0
b. 0 - Q0
c. Q0
D. Above Q0
e. There are no reductions in the average costs of production
8-19
73. It is cheaper per unit to produce higher quantities when output is

a. High
B. Between 0 and Q0
c. Q0
d. Above Q0
e. Decreasing
74. Which of the following is a negative consequence of allowing competition in an industry

that is a natural monopoly?
a. Deadweight welfare loss
b. Lower prices
c. Restricted output
D. Higher average costs
e. All of the above
75. Which of the following is a negative consequence of allowing an unregulated natural

monopoly?
a. Deadweight welfare loss
b. Higher prices
c. Restricted output
D. All of the above
76. Corporations
a. Are legal entities separate from their owners
b. Are owned by stockholders
c. Finance their operations through many small investors
d. Account for 20% of all businesses in the United States
E. All of the above
8-20
77. Approximately what percent of sales in the United States are made by corporations?
a. 40
b. 50
c. 60
d. 70
E. 90
78. The "agency problem" is caused by

A. Corporate managers pursuing goals different from stockholder's goals
b. Stockholders attempting to micromanage corporations
c. Regulatory agencies interfering with corporate operations
d. Sudden declines in stock prices
e. Over-investment in new capital
79. A guarantee that allows the purchase of shares of stock at a fixed price is a(n)
a. Non-pecuniary benefit of employment
B. Stock option
c. Disincentive to expand a corporation
d. Illegal means to compensate CEOs
e. Stock split
80. Some would argue that one of the primary benefits of possessing a monopoly is
a. The chance to erect entry barriers
B. The opportunity to live the quiet life
c. The ability to restrict output
d. The chance to create deadweight losses
e. The ability to jack up prices to consumers
81. There is the possibility that the sheer size of some firms—their “bigness”—is a problem
for an economy because
a. Big firms possess larger entry barriers
b. Bigness implies that the people who run such firms are unethical
c. Bigger firms are more inefficient
D. The effects that the failure of large firms can have on the US economy
e. The number of shares of stock that are traded in large firms
8-21
82. The US government in 2008 did NOT step into the market to bail out which firm?
a. Chrysler
b. General Motors
C. Ford
d. AIG
e. The government stepped in to bail out all of these firms
True / False Questions
83. Firms with monopoly power yield higher than average returns to investors.
TRUE
84. The monopoly power of a firm in an imperfectly competitive market is greater the larger
the firm's output relative to the industry output.
TRUE
85. The more sellers there are in, the less control any one seller has over the price it can
charge.
TRUE
86. Shortages are important evidence that firms are exercising monopoly power.
FALSE
87. A four-firm concentration ratio of 0.9 indicates that the four largest firms in the industry
control 90% of the industry's sales.
TRUE
88. In a perfectly competitive industry the four-firm concentration ratio is close to zero.
TRUE
8-22
89. Concentration ratios provide a good measure of a firm's potential for exercising monopoly
power.
TRUE
90. Ford Motors more closely resembles a monopoly than does your local electric company.
FALSE
91. Concentration ratios tend to be biased downward because they do not account for
international competition.
FALSE
92. Profit maximization as an objective of a firm is a logical extension of the general principle
that people prefer more to less.
TRUE
93. Sellers in a competitive market must take into account what buyers will do and those in
the monopolized market do not.
FALSE
94. Generally monopolists will be more concerned with profit maximization and competitive
firms will be more concerned with earning a fair rate of return on investment.
FALSE
95. To maximize profits a firm tends to produce an output level at which its marginal revenue
equals its marginal costs.
TRUE
96. Marginal revenue for a monopolist is less than the price it charges for its product.
TRUE
8-23
97. Marginal revenue for a competitive firm is equal to the price it charges for its product.
TRUE
98. If its marginal revenue is less than its marginal cost, a firm should reduce its output
product.
TRUE
99. Like other demand curves, the demand curve facing a competitive firm slopes downward.
FALSE
100. A firm that sells in a competitive market restricts output and charges higher prices than it
would if it were a monopolist.
FALSE
101. Profits serve no useful purpose in a private enterprise economy and should be taxed
away by the government.
FALSE
102. A firm in a competitive market has no price setting capability.

TRUE
103. Some monopolists block entry into their markets through their control of the raw
materials needed to produce the product.
TRUE
104. Licensing of barbers insures that we will get better haircuts at the same prices or the
same quality of haircuts at lower prices.
FALSE
8-24
105. Licensing of M.D.'s has nothing to do with the fact that they are among the economy's
highest paid professionals.
FALSE
106. Changes in the design and quality of a product often results in greater consumer
satisfaction from the product.
TRUE
107. Monopoly power in the U.S. does not pose a significant economic problem.
FALSE
108. Unlike in competition, the monopolist is driven by a desire to maximize profit.

FALSE
109. Any firm, whether monopolistic or competitive, must produce where marginal cost
equals marginal revenue in order to maximize profit.
TRUE
110. The monopolization of a previously competitive industry will lead to restricted

production and higher prices.
TRUE
111. Without barriers to entry, a high-profit monopoly is unlikely to be able to maintain its
monopoly status.
TRUE
112. Monopoly firms typically have lower costs than competitive firms because they receive
bulk-buying discounts for their inputs.
FALSE
8-25
113. In addition to reducing production and raising prices, monopoly decreases product
quality.
TRUE
114. Monopolies will have higher production costs than competitive firms.
TRUE
115. Monopoly can lead to a perverse redistribution of income if the owners of the monopoly
are wealthier than buyers.
TRUE
116. Severe competition in a market leads to a dead weight welfare loss to society.
FALSE
117. Extremely large firms cause dead weight loss to increase.

FALSE
118. Monopolies in the U.S. economy are estimated to reduce GDP by about 1% per year.
TRUE
119. With natural monopolies, consumers may be better off with a monopoly than
competition.
TRUE
120. Market failure, by itself, is enough to justify government regulation of business.

FALSE
8-26
121. Government regulation is appropriate when there is market failure and regulation is cost-
effective.
TRUE
122. Consumers rarely have complete information about products and this lack of information
doesn't keep the market from maximizing welfare.
FALSE
123. The capture theory suggests that regulators may end up working for the interests of the
firms being regulated rather than the consuming public.
TRUE
124. Barriers to entry are often created by governments.

TRUE
125. A benefit of monopoly is that costs are lower.

FALSE
126. The capture theory of regulation suggests that government regulation of business
represents an unfair attack on private firms by government.
FALSE
127. Natural monopolies are common in the modern world economy.

FALSE
128. In their desire to achieve the quiet life, monopolists tend to allow costs to rise above
competitive levels.
TRUE
8-27
129. When a firm's average costs fall as output is increased, the firm is experiencing
economies of scale.
TRUE
130. When the value of a product to a consumer is enhanced when others also consume the
good, economies of scale exist.
FALSE
8-28

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Economics of Social Issues 20th Edition Sharp Test Bank

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Economics of Social Issues 20th

Edition Sharp Test Bank

Multiple Choice Questions

1. Imperfect competition can best be described as a situation in which

2. The monopoly power of a firm can be measured by the firm's

3. Which of the following is likely to have the most monopoly power?

4. Concentration ratios are used to measure the

Questions 06 - 08 refer to the table below.

6. The 4-firm concentration ratio in this industry is

7. The 6-firm concentration ratio in this industry is

10. A pure monopoly industry has a 4-firm concentration ratio equal to

11. To maximize profits, a monopolist produces the output level at which

14. Monopoly refers to

15. In a competitive market, the single firm

16. A major objective of firms in all types of market structures is

17. A firm's total revenue equals its

18. Profit equals

19. Profits and losses in a private enterprise economic system

21. The most common forms of nonprice competition are

24. The area of the triangle ABC reflects the

28. A monopoly is not efficient because

29. The dead-weight welfare loss due to monopoly is

30. The dead-weight welfare loss due to monopoly

31. Monopolization of a previously competitive market leads to

32. Patents and copyright laws

33. When firms earn profits,

34. In a competitive market in the short run, firms

35. Since this is a competitive market, the firm's marginal revenue is

37. Equilibrium price and quantity in the market are

38. The firm's total revenue is

39. If the firm has a total cost of $400, it is earning a

Questions 40 - 44 refer to the graph below, showing a monopoly market.

44. Monopolization of this market leads to a deadweight loss equal to

46. Which of the following is true of a firm's total costs? They

48. A perfectly competitive firm's supply curve is its

49. The supply curve for a monopoly

50. The demand curve for a

Questions 52 - 56 refer to the graph below.

57. Which of the following is a private barrier to entry?

58. Which of the following is a government barrier to entry?

59. Which of the following is a barrier to entry?

60. Firms may advertise their products in order to

62. Which of the following is an example of nonprice competition?

64. With a natural monopoly,

65. The government's regulation of pollution

66. The capture theory of regulation suggests

Questions 70 - 73 refer to the graph below.

71. Increasing output beyond Q0 will cause the firm to experience

73. It is cheaper per unit to produce higher quantities when output is

74. Which of the following is a negative consequence of allowing competition in an industry

75. Which of the following is a negative consequence of allowing an unregulated natural

78. The "agency problem" is caused by

True / False Questions

102. A firm in a competitive market has no price setting capability.

108. Unlike in competition, the monopolist is driven by a desire to maximize profit.

110. The monopolization of a previously competitive industry will lead to restricted

117. Extremely large firms cause dead weight loss to increase.

120. Market failure, by itself, is enough to justify government regulation of business.

124. Barriers to entry are often created by governments.

125. A benefit of monopoly is that costs are lower.

127. Natural monopolies are common in the modern world economy.

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