Managerial Economics 8th Edition Samuelson Test Bank

Managerial Economics 8th Edition
Samuelson Test Bank

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CHAPTER 8: Monopoly
MULTIPLE CHOICE
1. A monopoly earns positive economic profits in the long run because:

a) there are barriers to entry in the market.
b) demand in a monopoly market is perfectly inelastic.
c) it faces a kinked demand curve.
d) it operates with constant returns to scale.
e) it operates with an optimal plant size.
ANSWER: a
SECTION REFERENCE: Pure Monopoly
LO: Describe market outcomes under pure monopoly and barriers to entry.
DIFFICULTY LEVEL: Medium
2. A market is considered a pure monopoly when:

a) all firms in the market sell homogeneous goods.
b) there is a single buyer for the goods produced in the market.
c) the firm produces a good that has imperfect substitutes.
d) a single firm produces a good that has no close substitutes.
e) there are low entry barriers in the market.
ANSWER: d
DIFFICULTY LEVEL: Easy
3. Which of the following is true of pure monopolies?

a) Monopolies earn positive economic profits in the long run.
b) Monopolies produce output that is greater than the competitive level.
c) Monopolies produce products that have a negligible marginal cost but a high fixed cost.
d) Monopolies reduce welfare by engaging in excessive product differentiation.
e) Answers monopolies earn positive economic profits in the long run and monopolies
reduce welfare by engaging in excessive product differentiation are both correct.
ANSWER: a
8-1
Monopoly
4. A monopolist produces and sells 400 units at a price of $40 per unit. The monopolist’s
marginal cost is equal to $15 and average cost is equal to $23. The monopolist’s profit is:
a) $6,800.
b) $8,000.
c) $10,000.
d) $16,000.
e) None of these are correct.
ANSWER: a
5. Which of the following does not contribute to the existence of monopoly power?
a) A continuously decreasing long-run average cost curve
b) The possession of a patent
c) The control of essential inputs in the production process
d) A pure cost or quality advantage
e) A relatively inelastic market demand curve
ANSWER: e
6. Industry demand is given by P = 200 – .4Q. The long-run industry costs are such that: LAC
= LMC = $80. Based on this information, which of the following is true?
a) If the market is a pure monopoly, the price of the good will be $140.
b) If the market is perfectly competitive, 300 units of the good will be supplied.
c) If the market is perfectly competitive, the price of the good will be $100.
d) If the market is a pure monopoly, 200 units of the good will be produced.
e) Answers if the market is a pure monopoly, the price of the good will be $140 and if the
market is perfectly competitive, 300 units of the good will be supplied are both correct.
ANSWER: e
SECTION REFERENCE: Perfect Competition Versus Pure Monopoly
LO: Compare and contrast price and output decisions in pure monopoly versus perfect
competition.
DIFFICULTY LEVEL: Hard
8-2
Chapter 8
7. Which of the following is true of a profit-maximizing competitive firm in the short run?
a) The firm produces at the point where price is equal to marginal cost.
b) The firm produces at the point where average cost is at its minimum point.
c) The demand curve faced by each firm in the industry is downward sloping.
d) The firm always makes a zero economic profit.
e) The firm suffers a deadweight loss.
ANSWER: a
competition.
8. Which of the following is true of a pure monopoly?

a) A pure monopoly can raise the market price indefinitely.
b) A pure monopoly is typically more efficient than other firms in the market.
c) A pure monopoly faces a horizontal demand curve.
d) A pure monopoly restricts output below the competitive level.
e) A pure monopoly produces at the level where price equals marginal cost.
ANSWER: d
competition.
9. A monopolist maximizes profit by producing:

a) on the inelastic portion of the demand curve
b) at the level where average cost is minimized
c) at the point where the cost of producing the last unit of output equals price.
d) at the output level where marginal revenue equals marginal cost
e) at the level where the deadweight loss is minimized.
ANSWER: d
competition.
8-3
Monopoly
10. Compared to a perfectly competitive industry, a monopolist will generally produce:

a) a greater level of output a lower price.
b) a greater level of output at a higher price.
c) a smaller level of output a lower price.
d) a smaller level of output at a higher price.
e) roughly the same level of output but at a higher price.
ANSWER: d
competition.
11. The basic objective of a cartel is to:

a) maximize profit for the largest, most influential members.
b) increase the total consumer surplus in the market.
c) produce the highest output level possible.
d) secure monopoly profits for its members.
e) successfully practice price discrimination in the market.
ANSWER: d
competition.
12. Cartels are inherently unstable because individual members:

a) face horizontal demand curves.
b) tend to produce above their quotas.
c) are culturally and politically heterogeneous.
d) produce highly differentiated products.
e) have a low elasticity of supply.
ANSWER: b
competition.
8-4
Chapter 8
13. Which of the following is likely to take place if regulators split a natural monopoly into two
smaller firms?
a) The number of firms in the market will increase but the market price will be unchanged.
b) The output in the industry will increase.
c) The cost of production in the industry will increase.
d) The market demand curve will become flatter.
e) The total industry profits will increase.
ANSWER: c
competition.
14. Which of the following is a characteristic of a firm that is a natural monopoly?

a) The firm’s average costs decline over all levels of output.
b) The firm’s elasticity of supply is very low.
c) The firm does not incur any sunk costs.
d) The firm faces a horizontal demand curve.
e) The firm makes zero economic profit.
ANSWER: a
competition.
The following figure shows the demand curve ES, the average cost curve AC, the marginal
cost curve MC, and the marginal revenue curve MR for a firm.
Figure 8-1
8-5
Monopoly
15. Refer to Figure 8-1. If the firm operates as a monopoly in an unregulated market, its profit-
maximizing price and output would be _____, respectively.
a) C and Q
b) A and Q
c) B and R
d) D and P
e) A and T
ANSWER: a
competition.
16. Refer to Figure 8-1. Under average-cost pricing, the equilibrium price and output in the
market are _____, respectively.
a) B and R
b) A and T
c) C and Q
d) D and P
e) A and Q
ANSWER: a
competition.
8-6
Chapter 8
17. If the regulator institutes average-cost pricing in a natural monopoly market, then:
a) the firm makes zero economic profit.
b) the firm has an incentive to produce at minimum cost.
c) the marginal benefit to the consumer is less than marginal cost to the firm.
d) firms in the market will produce at the efficient level.
e) consumer surplus in the market is maximized.
ANSWER: a
competition.
The following figure shows the demand curve ES, the average cost curve AC, the marginal
cost curve MC, and the marginal revenue curve MR for a firm.
Figure 8-1
18. Refer to Figure 8-1. The efficient level of output in the market is:
a) R – P.
b) R.
c) Q.
d) P.
e) T.
ANSWER: e
competition.
8-7
Monopoly
19. Refer to Figure 8-1. If the regulator institutes marginal-cost pricing in the market, then:
a) MC = AC.
b) P = AC.
c) MR = MC.
d) P = MC > AC.
e) P = MC < AC.
ANSWER: e
competition.
20. Which of the following is a criticism of average-cost pricing as a regulatory response to a

natural monopoly?
a) With average-cost pricing, output produced is smaller than the efficient level of output.
b) Firms that practice average-cost pricing suffer persistent losses.
c) Imperfect information about the firm’s costs reduces the effectiveness of average-cost
pricing.
d) Under average-cost pricing, the market price is lower than the efficient price.
e) Answers with average-cost pricing, output produced is smaller than the efficient level of
output and imperfect information about the firm’s costs reduces the effectiveness of average-
cost pricing are both correct.
ANSWER: e
competition.
21. Which of the following is the best example of product differentiation?

a) A cookie manufacturer introduces a new variant of cookies for Halloween.
b) A firm that sells printers starts a new manufacturing unit to manufacture printer
cartridges.
c) A firm that produces laptops introduces a new line of tablet personal computers.
d) A leading women’s fashion house introduces a line of men’s clothing.
e) A supermarket introduces a range of pre-packaged salads.
ANSWER: a
SECTION REFERENCE: Monopolistic Competition
LO: Describe the characteristics and market results of monopolistic competition.
8-8
Chapter 8
22. Unlike perfectly competitive markets, monopolistically competitive markets:

a) have significant barriers to entry.
b) face declining average costs at all levels of output.
c) have fewer firms.
d) produce differentiated products.
e) Answers face declining average costs at all levels of output and produce differentiated
products are both correct.
ANSWER: d
23. The profit margins for fast food firms like Wendy's have fallen because of an increase in
competition from similar fast food chains and microwaveable food available in
supermarkets. Based on this information, which of the following is true?
a) The elasticity of demand for Wendy’s fast food is relatively inelastic.
b) Wendy's operates as a monopoly firm in the fast food market.
c) The fast food market is monopolistically competitive.
d) Wendy’s fast food is an inferior good for most consumers.
e) There are strategic entry barriers in the fast-food market.
ANSWER: c
24. Which of the following, if true, would be an example of a monopolistically competitive

industry?
a) In the utilities industry, average cost declines over all levels of output.
b) In the automobile industry, fixed costs as well as variable costs are high.
c) In the retail trade industry, a large number of firms provide similar products.
d) The market for basic office supplies (pencils, paper, and clips) is served by scores of
online suppliers.
e) In the pharmaceuticals industry, the entire market is served by a small number of large
firms.
ANSWER: c
8-9
Monopoly

25. In the long run, monopolistically competitive firms:

a) earn zero economic profit.
b) face perfectly elastic demand curves.
c) tend to standardize their products.
d) produce output at minimum marginal cost.
e) merge and form a few dominant firms to maximize profit.
ANSWER: a
26. The demand curve faced by individual firms under monopolistic competition is:
a) perfectly elastic.
b) perfectly inelastic.
c) downward-sloping.
d) upward-sloping.
e) the same as the market demand curve.
ANSWER: c
27. In comparing monopolistic competition to perfect competition, the major difference lies in:
a) the number of firms in each industry.
b) the typical firm size in each industry.
c) the degree of entry barriers in each industry.
d) the demand curves faced by individual firms in each industry.
e) the long-run profits of firms in each industry.
ANSWER: d
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Chapter 8
28. In the long run, the economic profit earned by a firm under monopolistic competition:
a) is positive because firms produce with excess capacity.
b) is zero because of price wars among a small number of firms.
c) is zero because of free entry and exit possibilities in the market.
d) is positive because of advertising and product differentiation by the firms.
e) is positive because of collusive behavior between firms.
ANSWER: c
29. The demand curve for a monopolistically competitive firm slopes downward because:
a) the demand for the product drops to zero after a slight price increase.
b) competing firms produce differentiated products.
c) there is a very little brand loyalty towards a single firm’s product.
d) customers are not influenced by advertising.
e) buyers are not sensitive to changes in the price of the product.
ANSWER: b
30. Unlike a pure monopoly firm, a monopolistically competitive firm:

a) makes a positive economic profit in the long-run.
b) faces downward sloping demand curve.
c) have no entry barriers to protect it from new entrants.
d) produces a standardized good or service.
e) produces at the level where marginal revenue equals marginal cost.
ANSWER: c
31. Which of the following is true in the long run under monopolistic competition?
a) P = MC.
8-11
Monopoly
b) P = AC.
c) P > AC > MC.
d) Price > AC = MC.
e) MR > MC.
ANSWER: b
SHORT ANSWERS
32. A monopolist faces the demand curve P = 100 – 2Q, where P = price and Q is quantity
demanded. If the monopolist has a total cost of C = 50 + 20Q, determine its profit-
maximizing price and output.
ANSWER: From the total cost function, marginal cost = 20. In turn, total revenue = R = PQ
= 100Q – 2Q2‚ so that marginal revenue is: MR = 100 – 4Q. The monopolist maximizes
profit at the level of output where MR = MC, implying that 100 – 4Q = 20, so Q = 20 units.
In turn, P = 100 – (2)(20) = $60.
33. How useful is the Lerner index as a measure of monopoly power?
ANSWER: The Lerner index is given by L = (P – MC)/P. For a profit-maximizing

monopolist, the Lerner index is equal to the inverse of the industry's price elasticity of
demand. It is a useful measure of the degree to which monopoly raises price above marginal
cost. However, it does not take into account the monopolist’s volume of production, and so
does not measure the actual magnitude of monopoly profits.
34. Why are substantial economies of scale considered a barrier to entry?
ANSWER: Economies of scale allow a large firm (enjoying lower AC) to charge a lower
price than a small firm. Small firms find it hard to compete on price in this case, and tend to
8-12
Chapter 8
grow smaller or go out of business. Because initial entry is often at a small scale, new firms
face high costs and initial large losses. This makes successful entry difficult.
35. How can the quality of a product serve as an entry barrier in a market?
ANSWER: In some industries, the quality of the product serves as an entry barrier. New
firms cannot expect to match the existing quality of the product and therefore cannot
profitably enter the market. Note that these differences in quality may be perceived or actual.
For example, Intel dominates the microchip market because Intel’s chips are considered to
be the cheapest and fastest.
36. Explain why monopolies are economically inefficient.
ANSWER: A monopoly is inefficient because it charges a higher price and sells a lower
quantity than does a competitive industry. Therefore, the price (or marginal benefit) of the
last unit bought generally exceeds the marginal cost. From a social perspective, output is too
small.
competition.
37. When competing firms or nations collude to form a cartel, the intention is to set one
common price. This tendency to avoid competition should bring about stability.
Paradoxically, however, cartels are usually unstable. Why?
ANSWER: Cartel members have incentives to cheat on the agreed price. Because the price
is far above marginal and average cost, firms can cut price slightly and increase output and
gain profits. The major problem that cartels face is that behavior that maximizes individual
profit will reduce the collective profit. Once widespread cheating sets in, the cartel is likely
to collapse.
competition.
8-13
Monopoly
38. Carefully define and describe a natural monopoly.
ANSWER: A natural monopoly is an industry in which advantages of large-scale production

make it possible for a single firm to produce the entire output of the market at lower average
cost than if the market were split among many firms, each producing a smaller quantity.
Most natural monopolies are regulated utilities.
competition.
39. Many natural monopolies are regulated. Explain the rationale for such regulation.
ANSWER: Natural monopolies exhibit falling average cost over a large range of output.
Thus, it is economically efficient for a single large firm to produce a large output. However,
the unregulated monopolist has an incentive to reduce output and raise price and profit.
Regulation is an attempt to retain the cost advantages of a natural monopoly by regulating
the price.
competition.
40. Why do monopolistically competitive firms have a tendency to advertise much more than
perfectly competitive firms?
ANSWER: Product differentiation, a key feature of monopolistic competition, is reinforced

by firm advertising. By contrast, perfectly competitive firms sell homogeneous goods or
services; they have no method to distinguish their offerings and little incentive to advertise.
41. Based on your understanding of monopolistic competition, list five examples of real firms
that operate in monopolistically competitive markets.
8-14
Chapter 8
ANSWER: Monopolistically competitive industries have firms that are many in number,
each producing a product that is similar but not identical. Entry and exit should be relatively
unencumbered. Local bars, dentists, shoe stores, restaurants, barber shops, beauty shops, and
gasoline stations, among many other examples, all fit the model.
ESSAYS
42. The demand for a good produced by a firm has been reliably measured by P = 100 – 5Q,
output Q is measured in thousands of units. If the total cost function is given by: C = 10Q,
what is the optimal level of output produced by the monopolist?
ANSWER: The monopolist produces at the level where marginal revenue equals marginal
cost. Marginal revenue is given by MR = 100 – 10Q. Marginal cost s given by MC = 10.
Equating MR and MC implies: 100 – 10Q = 10, or 10Q = 90. Therefore, Q = 9 thousand
units
43. Under patent protection, a firm has a monopoly in the production of a high-tech component.
Market demand is estimated to be P = 100 – .2Q. The firm’s economic costs are given by
AC = MC = $60 per component.
(a) Determine the firm’s output and price.
ANSWER: The monopolist produces at the level where marginal revenue = marginal cost,
MR = MC. Therefore, 100 – .4Q = 60, or Q = 100 units and P = $80. The monopolist’s
economic profit is: (80 – 60)(100) = $2,000.
(b) After the firm’s patent expires, predict the new market output and price. Compute the
resulting change in consumer surplus. Calculate the net welfare gain. Assume that
competing suppliers have the same economic costs as the original producer.
ANSWER: After the patent expires, the market should approximate perfect competition.
Therefore, PC = AC = $60, and quantity QC = 200 units. Under monopoly, the consumer
surplus triangle is: (.5)(100 – 80)(100) = $1,000. Under perfect competition, the consumer
surplus triangle is: (.5)(100 – 60)(200) = $4,000. Consumer surplus is expected to increase
8-15
Monopoly
by $3,000. At the same time, industry profit falls from $2,000 to $0. Therefore, the net
welfare gain is: 3,000 – 2,000 = $1,000.
competition.
44. Kiwi Inc. dominates the wholesale chicken market in New Zealand. Its production cost is:
long-run average cost [LAC] = long-run marginal cost [LMC] = $2 per pound and demand is
given by P = 6 – 2Q, where P denotes price per pound and Q denotes output (in millions of
pounds).
(a) Determine Kiwi’s output and price (presuming it faces no other competitors).
ANSWER: As a monopolist, Kiwi maximizes profit by setting marginal revenue [MR] =

marginal cost [MC]. Therefore, MR = MC = 6 – 4Q = 2, imply Q = 1 million pounds and P
= $4 per pound.
(b) Over the last five years, a Southeast Asian nation has dramatically increased its exports
of chicken to New Zealand. That nation’s cost structure (with lower labor costs and higher
shipping costs) is the same as Kiwi’s. Find the long-run output and price under perfect
competition.
ANSWER: Under perfect competition, price [PC] = LAC = $2 per pound and quantity [QC] =
2 million pounds.
competition.
(c) New Zealand lawmakers have decided to enact a $1 per pound tariff on all chicken
imports. What is the new equilibrium price? Suppose that imports fall to QI = .5 million
pounds, what is Kiwi’s output? Compute consumer surplus and Kiwi’s profit. How has the
tariff affected total welfare?
ANSWER: The new price is $2 + $1 = $3. Total demand is 1.5 million pounds, so Kiwi’s
output is 1.5 – .5 = 1 million pounds. Consumer surplus is: (.5)(6 – 3)(1.5) = $2.25 million
and Kiwi’s profit is: (3 – 2)(1) = $1 million. Therefore total post-tariff welfare is $3.25
million. Without the tariff, total welfare in the form of consumer surplus was: (.5)(6 – 2)(2)
= $4 million. So the tariff has reduced welfare by $.75 million.
8-16
Chapter 8
competition.
45. A monopolist faces the price equation: P = 1,000 – .5Q, and total cost: C = 50,000 + 100Q +
.4Q2.
(a) Determine the price and output that maximize total revenue, and the level of profit.
ANSWER: To maximize total revenue R = 1000Q – .5Q2, the firm sets marginal revenue
[MR] = 1000 – Q = 0. Therefore, Q = 1,000, P = $500, and profit [] = R – C = (500)(1,000)
– [50,000 + (100)(1,000) + (0.4)(1,000)2 = –$50,000.
(b) Determine the price and output that maximize profit, and the level of profit.
ANSWER: To maximize profit, the firm sets MR = MC. Therefore, 1,000 – Q = 100 + 0.8Q,
or Q = 500 units. In turn, P = 1,000 – (0.5)(500) = $750, and  = (750)(500) – [50,000 +
(100)(500) + (0.4)(500)2] = $175,000.
(c) Compare the goals of revenue-maximization versus profit-maximization, and comment

on the appropriate goal of the firm.
ANSWER: Here, there is a stark profit difference between the two goals. The wrongheaded
pursuit of maximum revenue implies economic losses for the monopolist.
46. Most people believe that monopolies always have excessive profits, yet some unregulated
monopolies might have very low earnings.
(a) Why might a monopoly have little or no economic value? Explain.
ANSWER: A monopoly may exist for a good or service for which there is very little
demand. Although the firm has monopoly power, the actual size of the profit it earns will
depend on the demand and cost conditions that it faces. If the product has a highly elastic
demand or a very high average cost, the firm may not earn a high profit in spite of having
monopoly power.
8-17
Monopoly

(b) If you were given a chance to enter a perfectly competitive industry, or a monopolistic
industry, which would you choose? Explain
ANSWER: The perfectly competitive firm earns zero economic profit in the long run,
whereas the monopolist typically earns positive economic profits, making it much more
attractive.
47. Regulatory authorities tend to be concerned about barriers to entry. Why are barriers so
important?
ANSWER: Economists see entry barriers as the primary reason why monopoly and
oligopoly occur and persist. In the absence of barriers, neither type of industry could long
exist. Entry barriers imply anticompetitive and economically inefficient market outcomes,
where price exceeds marginal cost. Entry barriers also support positive economic profits in
the long run.
48. Describe the different types of entry barriers and their importance to the study of monopoly.
ANSWER: The presence of entry barriers makes it prohibitively expensive or otherwise

impossible for new firms to enter and exit a market easily. Entry barriers are critical to the
study of monopoly because a monopoly cannot persist unless there are significant barriers to
prevent other firms from entering. The lure of profits is strong, and only such entry barriers
will keep other firms out of the industry. The various types of entry barriers are:
(i) Economies of scale, which give large firms a cost advantage over small firms.
(ii) Large sunk costs of entry discourage new entrants because a great deal must be put into
the effort to enter, with no alternative economic value to the resources. The risk of failure
increases when sunk costs increase.
(iii) Technical superiority may confer a monopoly, because rivals are unable to keep up with
the leader. This may give a quality and/or cost advantage to the monopolist.
(iv) Product differentiation, often backed by advertising, may create a unique product or
brand name. Examples include many retail products, such as breakfast cereals.
8-18
Chapter 8
(v) Control of a scarce resource or input, such as raw materials. Examples include French
fine wine, DeBeers (in diamonds), and OPEC (the Organization of Petroleum Exporting
Countries).
(vi) Legal restrictions on entry, including patents, trademarks, and copyrights. Examples
include local franchises for various goods or services, or exclusive licenses for local utilities;
for e.g. cable TV.
(vii) Strategic barriers are erected by firms currently in the market to deter entry by others.
One method is to sue competitors to scare them away; another is heavy spending on
advertising to secure high customer loyalty.
49. In a perfectly competitive market, industry demand is: P = 850 – 2Q, and industry supply is:
P = 250 + 4Q (Supply is the sum of the marginal cost curves of the firms in the industry).
(a) Determine price and output under perfect competition.
ANSWER: The perfectly competitive market will reach equilibrium at the intersection of
demand and supply: 850 – 2Q = 250 + 4Q, implying competitive output, QC = 100 units. In
turn, the competitive price is: PC = 850 – (2)(100) = $650.
competition.
(b) Now suppose that all the firms collude to form a single monopoly cartel. Given that there
is no change in the demand or cost conditions of the industry, what price and total output
would the cartel set? Compare the monopoly outcome with the competitive outcome
calculated earlier.
ANSWER: The cartel, which behaves like a monopolist, will set total output such that MR =
MC. We know that MR = 850 – 4Q, and MC = 250 + 4Q (i.e., the supply curve). Therefore,
250 + 4Q = 850 – 4Q, implying monopoly output, QM = 75 units. In turn, the monopoly
price is PM = 850 – 2(75) = $700. The monopolist charges a higher price and produces a
lower output than a perfectly competitive industry.
competition.
50. Carefully explain how short-run equilibrium and long-run equilibrium in monopolistic
competition differ. Use graphs to illustrate your answer.
8-19
Monopoly
ANSWER: The short-run equilibrium for the monopolistic competitor is akin to that of
monopoly. The firm can expect to earn positive economic profit, as shown by P* and Q* in
the first graph. However, in the long run, the lure of economic profits induces entry. New
firms will take away some demand from existing firms, causing the firm’s demand curve to
shift to the left. In the long run, the typical firm earns zero economic profit, as shown by P’
and Q’ in the second graph. Profit maximization occurs where marginal cost equals marginal
revenue, which is at the quantity where price equals average cost, and where the average
cost curve is tangent to the demand curve. When profits are zero, no further entry or exit
occurs.

8-20
Chapter 8
51. Compare and contrast a monopolistically competitive firm and a perfectly competitive firm.
ANSWER: Monopolistically competitive firms, like perfectly competitive firms, operate in

industries that have a large number of firms. There are no barriers to entry in either market.
A monopolistically competitive firm is very similar to a competitive firm except for one
feature: product differentiation. Monopolistically competitive firms produce products that
are identical but not similar, which gives the firm some control over the price of the product.
To retain this control, firm continually advertise and attempt to differentiate their products in
the market. In contrast, perfectly competitive firms do not need to advertise as the product
sold is homogeneous. This product differentiation earns the monopolistically competitive
firm an economic profit in the short run. However, as in perfect competition, free entry and
exit implies that there are no long run economic profits. Monopolistic competition is a more
realistic model than perfect competition as there are few industries that satisfy all the
conditions of perfect competition.
8-21

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Managerial Economics 8th Edition

Samuelson Test Bank

1. A monopoly earns positive economic profits in the long run because:

2. A market is considered a pure monopoly when:

3. Which of the following is true of pure monopolies?

8. Which of the following is true of a pure monopoly?

9. A monopolist maximizes profit by producing:

10. Compared to a perfectly competitive industry, a monopolist will generally produce:

11. The basic objective of a cartel is to:

12. Cartels are inherently unstable because individual members:

14. Which of the following is a characteristic of a firm that is a natural monopoly?

20. Which of the following is a criticism of average-cost pricing as a regulatory response to a

21. Which of the following is the best example of product differentiation?

DIFFICULTY LEVEL: Medium

22. Unlike perfectly competitive markets, monopolistically competitive markets:

24. Which of the following, if true, would be an example of a monopolistically competitive

SECTION REFERENCE: Monopolistic Competition

25. In the long run, monopolistically competitive firms:

30. Unlike a pure monopoly firm, a monopolistically competitive firm:

33. How useful is the Lerner index as a measure of monopoly power?

ANSWER: The Lerner index is given by L = (P – MC)/P. For a profit-maximizing

34. Why are substantial economies of scale considered a barrier to entry?

36. Explain why monopolies are economically inefficient.

DIFFICULTY LEVEL: Medium

38. Carefully define and describe a natural monopoly.

ANSWER: A natural monopoly is an industry in which advantages of large-scale production

ANSWER: Product differentiation, a key feature of monopolistic competition, is reinforced

ANSWER: As a monopolist, Kiwi maximizes profit by setting marginal revenue [MR] =

(c) Compare the goals of revenue-maximization versus profit-maximization, and comment

SECTION REFERENCE: Pure Monopoly

ANSWER: The presence of entry barriers makes it prohibitively expensive or otherwise

SECTION REFERENCE: Monopolistic Competition

ANSWER: Monopolistically competitive firms, like perfectly competitive firms, operate in

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