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Essentials of Economics, 3e (Hubbard/O'Brien)
Chapter 10 Monopoly and Antitrust Policy
10.1 Is Any Firm Ever Really a Monopoly?
1) To enter a local cable television market, a firm needs a license from the city government. This
is an example of
A) a government-imposed barrier.
B) occupational licensing.
C) a natural monopoly.
D) the government maintaining consistent standards in the broadcast industry.
Answer: A
Diff: 1 Page Ref: 311
Topic: Characteristics of Monopoly
Learning Outcome: Micro 5: List ways in which governments intervene in markets and explain
the consequences of such intervention
AACSB: Reflective Thinking
Special Feature: Chapter Opener: Is Cable Television a Monopoly?
2) The National Football League owns the NFL Network, a 24-hour cable channel devoted
entirely to pro football. The network is available through satellite providers but several major
cable companies, including Time Warner, do not offer the network. If Taylor chooses to pay a
higher monthly charge by switching from cable to a satellite provider so he can watch the NFL
Network and Harriet chooses not to do the same, then
A) Taylor has lost some consumer surplus by paying the additional fee.
B) Harriet has gained some consumer surplus by not having to pay the additional fee.
C) Harriet's demand for sports entertainment is more price elastic than Taylor's demand.
D) Taylor's demand for sports entertainment is more price elastic than Harriet's demand.
Answer: C
Learning Outcome: Micro 6: Explain the fundamentals of the elasticity of supply and demand
and the applications of both
Special Feature: Economics in Your Life: Why Can't I Watch the NFL Network?
1
Copyright © 2013 Pearson Education, Inc.
3) A monopoly is a seller of a product
A) with many substitutes.
B) without a close substitute.
C) with a perfectly inelastic demand.
D) without a well-defined demand curve.
Answer: B
*: Recurring
Learning Outcome: Micro 14: Discuss production and pricing decisions within monopolies and
how public policies affect monopolies
Special Feature: None
4) If we use a narrow definition of monopoly, then a monopoly is defined as a firm

A) that has been granted special production rights by the government.
B) that can ignore the actions of all other firms because it produces a superior product compared
to its rivals' products.
C) that can ignore the actions of all other firms because it produces a product for which there are
no close substitutes.
D) that has the largest market share in an industry.
Answer: C
*: Recurring
5) Which of following is the best example of a monopoly if we use a broader definition of

monopoly?
A) Spuds McKenzie, a wealthy potato farmer in Idaho
B) Cheap Gas, one of two gasoline stations in a large rural community
C) Santos Tacos, the only taqueria in the small town of Santosville
D) Zippie Rentals, a sports car rental service in the downtown Boston area
Answer: C
*: Recurring
2
6) In Walnut Creek, California, there are three very popular supermarkets: Safeway, Whole
Foods and Lunardi's. While Safeway remains open twenty-four hours a day, Whole Foods and
Lunardi's close at 9 pm. Which of the following statements is true?
A) Safeway is a monopoly all day because it produces a service that has no close substitutes.
B) Safeway has a monopoly at midnight but not during the day.
C) Safeway can ignore the pricing decisions of the other two supermarkets.
D) Safeway probably has a higher markup to compensate for its higher cost of production.
Answer: B
*: Recurring
7) A monopoly is characterized by all of the following except

A) there are only a few sellers each selling a unique product.
B) entry barriers are high.
C) there are no close substitutes to the firm's product.
D) the firm has market power.
Answer: A
*: Recurring
8) Peet's Coffee and Teas produces some flavorful varieties of Peet's brand coffee. Is Peet's a
monopoly?
A) Yes, there are no substitutes to Peet's coffee.
B) No, although Peet's coffee is a unique product, there are many different brands of coffee that
are very close substitutes.
C) Yes, Peet's is the only supplier of Peet's coffee in a market where there are high barriers to
entry.
D) No, Peet's is not a monopoly because there are many branches of Peet's.
Answer: B
*: Recurring
3
9) In 2011, Microsoft filed a complaint with the European Commission accusing Google of
taking steps to monopolize the Internet search engine business. Microsoft's primary complaint
was that
A) Google is the only Internet search engine available to Windows operating system users.
B) the European Union contracts exclusively with Google for its Internet search engine use.
C) Google has prevented competitors from gaining access to needed content and data to provide
search results to consumers.
D) Google owns the Internet advertising companies that pay for ads on search engine sites, and
has prohibited ads from being sold to competitors.
Answer: C
Diff: 2 Page Ref: 312-313
Learning Outcome: Micro 6: Explain the fundamentals of the elasticity of supply and demand
and the applications of both
Special Feature: Making the Connection: Is Google a Monopoly?
10) A firm that has the ability to control to some degree the price of the product it sells
A) is also able to dictate the quantity purchased.
B) faces a demand curve that is inelastic throughout the range of market demand.
C) is a price maker.
D) faces a perfectly inelastic demand curve.
Answer: C
*: Recurring
11) A monopolist faces

A) a perfectly elastic demand curve.
B) a perfectly inelastic demand curve.
C) a horizontal demand curve.
D) a downward-sloping demand curve.
Answer: D
*: Recurring
4
12) Compared to a monopolistic competitor, a monopolist faces
A) a more elastic demand curve.
B) a more inelastic demand curve.
C) a more elastic demand curve at higher prices and a more inelastic demand curve at lower
prices.
D) a demand curve that has a price elasticity coefficient of zero.
Answer: B
*: Recurring
13) A monopoly differs from monopolistic competition in that

A) a monopoly has market power while a firm in monopolistic competition does not have any
market power.
B) a monopoly can never make a loss but a firm in monopolistic competition can.
C) in a monopoly there are significant entry barriers but there are low barriers to entry in a
monopolistically competitive market structure.
D) a monopoly faces a perfectly inelastic demand curve while a monopolistic competitor faces
an elastic demand curve.
Answer: C
*: Recurring
14) Which of the following is a characteristic shared by a perfectly competitive firm and a
monopoly?
A) Each must lower its price to sell more output.
B) Each sets a price for its product that will maximize its revenue.
C) Each maximizes profits by producing a quantity for which marginal revenue equals marginal
cost.
D) Each maximizes profits by producing a quantity for which price equals marginal cost.
Answer: C
*: Recurring
5
15) Consider the following characteristics:
a. a market structure with barriers to entry
b. demand curves that are easily identified
c. firm cannot make zero profits in the long run
d. firm can reap long run profits.
Which of the characteristics in the list above is shared by an oligopolist and a monopolist?
A) a, b, c and d
B) a, b and d
C) a, c, and d
D) a and d
Answer: D
*: Recurring
16) A monopoly is defined as a firm that has the largest market share in an industry.
Answer: FALSE
*: Recurring
17) The market demand curve facing a monopolist is more elastic than the market demand curve
facing a monopolistic competitor.
Answer: FALSE
*: Recurring
6
18) Joe Santos owns the only pizza parlor in a small town that is also home to a McDonald's, a
Taco Bell and a Kentucky Fried Chicken. Using a broad definition of a monopoly, Joe has a
monopoly.
Answer: TRUE
*: Recurring
19) What is a monopoly? Can a firm be a monopoly if close substitutes for its product exists?
Answer: A monopoly is the only seller of a good or service that does not have a close substitute.
The firm can't be a monopoly is a close substitute for its product exists.
*: Recurring
10.2 Where Do Monopolies Come From?
1) To maintain a monopoly, a firm must have

A) a perfectly inelastic demand.
B) an insurmountable barrier to entry.
C) marginal revenue equal to demand.
D) few competitors.
Answer: B
Topic: Barriers to Entry
*: Recurring
7
2) Which one of the following about a monopoly is false?
A) A monopoly could make profits in the long run.
B) A monopoly could break even in the long run.
C) A monopoly must have some kind of government privilege or government imposed barrier to
maintain its monopoly.
D) A monopoly status could be temporary.
Answer: C
*: Recurring
3) A local electricity-generating company has a monopoly that is protected by an entry barrier

that takes the form of
A) control of a key raw material.
B) network externalities.
C) economies of scale.
D) perfectly inelastic demand curve.
Answer: C
*: Recurring
4) A patent or copyright is a barrier to entry based on

A) ownership of a key necessary raw material.
B) large economies of scale as output increases.
C) government action to protect a producer.
D) widespread network externalities.
Answer: C
Topic: Patents and Copyrights
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5) A public franchise
A) is a corporation that is owned by stockholders.
B) results from ownership of a key raw material.
C) is a government designation that a private firm is the only legal producer of a good or service.
D) is an unregulated monopoly necessary for the public good.
Answer: C
Topic: Public Franchise
*: Recurring
6) An example of a monopoly based on control of a key resource is

A) Major League Baseball.
B) the Paul Ecke Ranch monopoly on poinsettias.
C) Microsoft's Windows operating system.
D) the U.S. Food and Drug Administration.
Answer: A
*: Recurring
7) A United States government patent lasts

A) forever.
B) 50 years.
C) 20 years.
D) 7 years.
Answer: C
*: Recurring
9
8) Governments grant patents to encourage
A) research and development on new products.
B) competition.
C) low prices.
D) firms to form public enterprises.
Answer: A
*: Recurring
9) Governments grant patents to

A) compensate firms for research and development costs.
B) encourage competition.
C) encourage low prices.
D) encourage firms to reveal secret production techniques.
Answer: A
*: Recurring
10) For which of the following firms is patent protection of vital importance?
A) furniture producers
B) software firms
C) pharmaceutical firms
D) auto makers
Answer: C
*: Recurring
10
11) One reason patent protection is vitally important to pharmaceutical firms is
A) successful new drugs are not profitable. If firms are not granted patents many would go out of
business and health care would be severely diminished.
B) the approval process for new drugs through the Food and Drug Administration can take more
than 10 years and is very costly. Patents enable firms to recover costs incurred during this
process.
C) that taxes on profits from drugs are very high; profits from patent protection enable firms to
pay these taxes.
D) the high salaries pharmaceutical firms pay to scientists and doctors make their labor costs
higher than for any other business. Profits from patents are needed to pay these labor costs.
Answer: B
*: Recurring
12) Research has shown that most economic profits from selling a prescription drug are
eliminated 20 years after the drug is first offered for sale. The main reason for the elimination of
profits is
A) after 20 years most people who have taken the drug have passed away or are cured of the
illness the drug was intended to treat.
B) firms sell their patent rights to other firms so that they can concentrate on finding drugs to
treat new illnesses.
C) the quantity demanded of the drug has increased enough that the demand becomes inelastic
and revenue falls.
D) after 20 years patent protection is ended and other firms can produce less expensive generic
versions of the drug.
Answer: D
*: Recurring
11
13) What is the difference between a public franchise and a public enterprise?
A) A public franchise grants a firm the right to be the sole legal provider of a good or service. A
public enterprise refers to a service that is provided directly to consumers through the
government.
B) A public enterprise grants a firm the right to be the sole legal provider of a good or service. A
public franchise refers to a service that is provided directly to consumers through the
government.
C) A public enterprise is owned by the public through its holdings of shares of stock in the
enterprise. A public franchise is a firm owned by the government.
D) Both refer to a service provided directly to consumers through the government, but "public
franchise" is a term more commonly used in the United States while "public enterprise" is more
commonly used in European countries.
Answer: A
Topic: Public Franchise
*: Recurring
14) The United States Post Office

A) faces no competition for its mail services.
B) has a monopoly in the provision of first-class mail service.
C) can safely ignore the prices for mail services charges by its rivals such as FedEx and
UPS.
D) is an example of a monopoly that results from the ownership of a key resource: first class
mail service.
Answer: B
*: Recurring
12
15) The Aluminum Company of America (Alcoa) had a monopoly until the 1940s because
A) it was a public enterprise.
B) it had a patent on the manufacture of aluminum.
C) the company had a secret technique for making aluminum from bauxite.
D) it had control of almost all the available supply of bauxite.
Answer: D
*: Recurring
16) The Ecke's family virtual monopoly on commercial poinsettia production by grafting
together two varieties of the plant ended around 1996 when university researchers were able to
independently make the same discovery. The Ecke family did not patent their grafting process.
Would the Ecke's have been better off if they had patented their process of growing poinsettias?
A) Yes, it would have allowed them to earn economic profits indefinitely.
B) That depends on how long they had a monopoly before university researchers made the
discovery. If the discovery was made after the period of time when patents expire, then the Ecke
family is not any better off.
C) No, even with a patent protection, the Ecke family cannot prevent government-funded
academic institutions from researching into plant breeding.
D) No, seeking patent protection necessitates divulging enough information that would enable
others to information to discover ways of grafting poinsettias that were similar to the Ecke
method but that did not violate the patent.
Answer: B
Special Feature: Making the Connection: The End of the Christmas Plant Monopoly
13
17) The De Beers Company, one of the longest-lived monopolies, is facing increasing
competition. One source of competition comes from people who might resell their previously
owned diamonds. Why is De Beers worried that people might resell their previously owned
diamonds?
A) because De Beers will not be able to guarantee the quality of previously owned diamonds and
fears that its reputation might be harmed
B) because the availability of previously owned diamonds would increase the market demand for
diamonds and dilute De Beers' monopoly
C) because previously owned diamonds would be a close substitute to newly mined diamonds
and therefore reduce De Beers' market power
D) because the availability of previously owned diamonds would make the market demand curve
for diamonds more inelastic and force De Beers to lower its price
Answer: C
AACSB: Analytic Skills
Special Feature: Making the Connection: Are Diamond Profits Forever? The De Beers Diamond
Monopoly
18) What is a network externality?

A) It refers to having a network of suppliers and buyers for a good or service.
B) It refers to lobbying to form a public enterprise.
C) It refers to a situation in which a product's usefulness increases with the number of people
using it.
D) It refers to a product that requires connection to a network for it to be useful.
Answer: C
Topic: Network Externalities
*: Recurring
14
19) A virtuous cycle occurs
A) when lobbyists petition members of Congress to grant a public franchise; the lobbyist then
raise money for those Congress members who granted the franchise.
B) when monopoly profits are used to create new products for additional monopoly profits.
C) when a firm can attract enough buyers initially to increase a product's usefulness to attract
even more buyers.
D) when a firm's sales volume reaches a level where the firm can take advantage of economies of
scale; thereby reducing the price of the product to further boost its sales.
Answer: C
*: Recurring
20) For a natural monopoly to exist,

A) a firm must continually buy up its rivals.
B) a firm's long-run average cost curve must exhibit diseconomies of scale beyond the
economically efficient output level.
C) a firm's long-run average cost curve must exhibit economies of scale throughout the relevant
range of market demand.
D) a firm must have a government-imposed barrier.
Answer: C
Topic: Natural Monopoly
*: Recurring
21) In a natural monopoly, throughout the range of market demand

A) marginal cost is above average total cost and pulls average total cost upward.
B) average total cost is above marginal cost and pulls marginal cost upward.
C) marginal cost is below average total cost and pulls average total cost downward.
D) there are diseconomies of scale.
Answer: C
*: Recurring
15
22) A natural monopoly is characterized by large fixed costs relative to variable costs.
Answer: TRUE
*: Recurring
23) For a natural monopoly, the marginal cost of producing an additional unit of its product is
relatively small.
Answer: TRUE
*: Recurring
24) The National Football League has long-term leases with the stadiums in major cities. Control
of these stadiums is an entry barrier to a potential new football league.
Answer: TRUE
*: Recurring
25) Most pharmaceutical firms selling prescription drugs continue to earn economic profits long
after the patents on the prescription drugs expire because they have established a strong foothold
in the market.
Answer: FALSE
*: Recurring
16
26) Provide two examples of a government barrier to entry?
Answer:
1. A patent or copyright which gives an individual or a firm the exclusive right to produce a
product for a given period of time, for example, a patents for pharmaceutical drugs such as the
anti-depressant, Prozac, manufactured by Eli Lilly.
2. A public franchise which makes it the exclusive legal producer of a good or service, for
example, PG&E is the sole provider of gas and electric utilities in northern California.
*: Recurring
27) How does a network externality serve as a barrier to entry? Is this barrier surmountable?
Explain.
Answer: A network externality exists where the usefulness of the product increases with the
number of people who use it. It can serve as an entry barrier because the popularity of the
product attracts more and more consumers, thereby increasing the supplier's dominance in the
market. However, this barrier is not insurmountable. If a rival enters the market with a superior
product, then it is possible that customers will switch to the superior product.
*: Recurring
28) What gives rise to a natural monopoly? How do consumers benefit from a natural monopoly?
Answer: A natural monopoly arises when the production function exhibits economies of scale
over the relevant range of market demand. The average cost of production is lower as the output
produced increases. Consumers benefit from having one supplier because the supplier will be
able to pass some of the cost savings to consumers.
*: Recurring
17
10.3 How Does a Monopoly Choose Price and Output?
1) The demand curve for the monopoly's product is

A) the market demand for the product.
B) more elastic than the market demand for the product.
C) more inelastic than the market demand for the product.
D) undefined.
Answer: A
Topic: Demand and Marginal Revenue
*: Recurring
2) A monopolist's profit maximizing price and output correspond to the point on a graph
A) where average total cost is minimized.
B) where total costs are the smallest relative to price.
C) where marginal revenue equals marginal cost and charging the price on the market demand
curve for that output.
D) where price is as high as possible.
Answer: C
*: Recurring
3) Microsoft hires marketing and sales specialists to decide what prices it should set for its
products, whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity
market, does not. Why is this so?
A) because Microsoft is large enough to hire the best people in the field
B) because Microsoft could potentially lose sales if it sets prices indiscriminately
C) because the wealthy corn farmer is a price taker who chooses his optimal output
independently of market price but Microsoft's optimal output depends on the price it selects
D) because unlike Microsoft, the wealthy corn farmer is probably a monopolist
Answer: B
Topic: Comparing Monopoly and Perfect Competition
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18
4) Because a monopoly's demand curve is the same as the market demand curve for its product,
A) the monopoly's marginal revenue equals its price.
B) the monopoly is a price taker.
C) the monopoly must lower its price to sell more of its product.
D) the monopoly's average total cost always falls as it increases its output.
Answer: C
*: Recurring
5) If a theatre company expects $250,000 in ticket revenue from five performances and $288,000
in ticket revenue if it adds a sixth performance, the
A) marginal revenue of the sixth performance is $48,000.
B) marginal revenue of the sixth performance is $38,000.
C) cost of staging the sixth performance is probably higher than the cost of staging the previous
five.
D) company will be making a loss on the sixth performance because its ticket sales will be less
than the average received from the previous five.
Answer: B
*: Recurring
Learning Outcome: Micro 20: Apply the concepts of opportunity cost, marginal analysis, and
present value to make decisions
6) If a monopolist's price is $50 per unit and its marginal cost is $25, then
A) to maximize profit the firm should increase output.
B) to maximize profit the firm should decrease output.
C) to maximize profit the firm should continue to produce the output it is producing.
D) Not enough information is given to say what the firm should do to maximize profit.
Answer: D
Topic: Profit Maximization
*: Recurring
19
7) If a monopolist's marginal revenue is $25 a unit and its marginal cost is $25, then
A) to maximize profit the firm should increase output.
B) to maximize profit the firm should decrease output.
C) to maximize profit the firm should continue to produce the output it is producing.
D) Not enough information is given to say what the firm should do to maximize profit.
Answer: C
*: Recurring
Figure 10-1
Figure 10-1 above shows the demand and cost curves facing a monopolist.
8) Refer to Figure 10-1. To maximize profit, the firm will produce

A) Q1.
B) Q2.
C) Q3.
D) Q4.
Answer: B
*: Recurring
20
9) Refer to Figure 10-1. The firm's profit-maximizing price is
A) P1.
B) P2.
C) P3.
D) P4.
Answer: C
*: Recurring
10) Refer to Figure 10-1. If the firm's average total cost curve is ATC1, the firm will
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.
Answer: C
*: Recurring
A) suffer a loss.
B) break even.
C) make a profit.
Answer: B
*: Recurring
21
A) suffer a loss.
B) break even.
C) make a profit.
Answer: A
*: Recurring
13) If a firm's average total cost is less than price where MR=MC,
A) the firm should shut down.
B) the firm should raise its price.
C) the firm should continue to produce the output it is producing.
D) the firm should cut back on its output to lower its cost.
Answer: C
*: Recurring
22
Table 10-1
Quantity Total Cost of

Price per Unit
Demanded Production
(units) (dollars)
$85 10 $530
80 11 540
75 12 550
70 13 560
65 14 575
60 15 595
55 16 625
A monopoly producer of foreign language translation software faces a demand and cost structure
as given in Table 10-1.
14) Refer to Table 10-1. What is the marginal revenue from the sale of the 12th unit?
A) $75
B) $50
C) $20
D) -$5
Answer: C
Special Feature: Solved Problem: Finding the Profit-Maximizing Price and Output for a
Monopolist
15) Refer to Table 10-1. What is the firm's profit-maximizing output and what is the price
charged to sell this output?
A) P = $85; Q = 10
B) P = $80; Q = 11
C) P = $70; Q = 13
D) P = $65; Q = 14
Answer: C
Monopolist
23
16) Refer to Table 10-1. What is the amount of the firm's profit?
A) $335
B) $350
C) $880
D) $910
Answer: B
Monopolist
17) Which of the following statements applies to a monopolist but not to a perfectly competitive
firm at their profit maximizing outputs?
A) Marginal revenue is less than price.
B) Marginal revenue equals marginal cost.
C) Price equals marginal cost.
D) Average revenue equals average cost.
Answer: A
*: Recurring
18) Long-run economic profits would most likely exist in which market structure?
A) monopoly, monopolistic competition and oligopoly
B) monopoly and oligopoly
C) monopoly and monopolistic competition
D) monopoly only
Answer: B
*: Recurring
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Figure 10-2
Figure 10-2 above shows the demand and cost curves facing a monopolist.
19) Refer to Figure 10-2. Suppose the monopolist represented in the diagram above produces
positive output. What is the profit-maximizing/loss-minimizing output level?
A) 630 units
B) 800 units
C) 850 units
D) 880 units
Answer: A
*: Recurring
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positive output. What is the price charged at the profit-maximizing/loss-minimizing output
level?
A) $38
B) $54
C) $68
D) $75
Answer: C
*: Recurring
positive output. What is the profit/loss per unit?
A) loss of $7 per unit
B) profit of $30 per unit
C) loss of $21 per unit
D) profit of $14 per unit
Answer: A
*: Recurring
22) Refer to Figure 10-2. What happens to the monopolist represented in the diagram in the
long run?
A) It will raise its price at least until it breaks even.
B) If the cost and demand curves remain the same, it will exit the market.
C) The government will subsidize the monopoly to enable it to break even.
D) It will be forced out of business by more efficient producers.
Answer: B
*: Recurring
26
Figure 10-3
Figure 10-3 shows the demand and cost curves for a monopolist.
23) Refer to Figure 10-3. What is the profit-maximizing/loss-minimizing output level?

A) 600 units
B) 800 units
C) 940 units
D) 1,160 units
Answer: A
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24) Refer to Figure 10-3. What is the price charged for the profit-maximizing output level?
A) $13
B) $21
C) $27
D) $34
Answer: D
*: Recurring
25) Refer to Figure 10-3. What is the amount of the monopoly's total revenue?
A) $21,600
B) $20,400
C) $19,740
D) $7,800
Answer: B
*: Recurring
26) Refer to Figure 10-3. What is the amount of the monopoly's total cost of production?
A) $21,600
B) $17,700
C) $9,340
D) $7,800
Answer: B
*: Recurring
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27) Refer to Figure 10-3. What is the amount of the monopoly's profit?
A) $2,700
B) $4,200
C) $10,400
D) $12,600
Answer: A
*: Recurring
28) Refer to Figure 10-3. What is likely to happen to this monopoly in the long run?
A) New firms will enter the market to eliminate its profits.
B) It will expand its output to take advantage of economies of scale so as to further increase its
profit.
C) As long as there are entry barriers, this firm will continue to enjoy economic profits.
D) It will be regulated by the government because of its excess profits.
Answer: C
*: Recurring
29) If a monopolist's price is $50 at the output where marginal revenue equals marginal cost and
average total cost is $43, then the average profit is $7.
Answer: TRUE
*: Recurring
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30) If a monopolist's marginal revenue is $15 per unit and its marginal cost is $25, then to
maximize profit the firm should decrease output.
Answer: TRUE
*: Recurring
31) In the short-run, even if a monopoly's total revenue does not cover its variable costs, it
should continue to produce because ultimately in the long run, the monopoly will start earning
profits.
Answer: FALSE
*: Recurring
32) To maximize profit, a monopolist will produce and sell a quantity such that for the last unit
sold, marginal revenue equals marginal cost, and charges a price given by the demand curve at
that output level.
Answer: TRUE
*: Recurring
33) What is the relationship between marginal revenue and average revenue for a monopolist and
is it the same for a perfect competitor?
Answer: Average revenue is equal to price for any firm but for a monopolist, marginal revenue
is always less than price and therefore marginal revenue is less than average revenue. For a
perfect competitor, marginal revenue is equal to price.
*: Recurring
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34) What happens to a monopoly's revenue when it sells more units of its product?
Answer: The monopolist must lower its price to sell more. Two things happen when a
monopolist lowers its price. First, revenue will tend to rise as the monopolist sells more units and
second, revenue tend to fall because less revenue is received from each unit than the amount
received at the higher price. The total effect on total revenue could be an increase, a decrease, or
no change in total revenue.
*: Recurring
35) Explain why the monopolist has no supply curve?

Answer: A supply curve that shows the relationship between the price of a product and the
quantity that suppliers are willing and able to supply. The monopolist selects its profit
maximizing output by equating marginal revenue to marginal cost and takes the price dictated by
the demand curve. Thus, there is no array of prices and quantities supplied.
*: Recurring
31
Figure 10-4
36) Refer to Figure 10-4. Use the figure above to answer the following questions.
a. What is the profit-maximizing quantity and what price will the monopolist charge?
b. What is the total revenue at the profit-maximizing output level?
c. What is the total cost at the profit-maximizing output level?
d. What is the profit?
e. What is the profit per unit (average profit) at the profit-maximizing output level?
f. If this industry was organized as a perfectly competitive industry, what would be the profit-
maximizing price and quantity?
Answer:
a. Quantity = 50; price = 32
b. Total revenue = 50 × $32 = $1,600
c. Total cost = 50 × $20 = $1,000
d. Profit = $1,600 - $1,000 = $600
e. Profit per unit = $32 - $20 = $12
f. If purely competitive, quantity = 80; price = $22
*: Recurring
32
10.4 Does Monopoly Reduce Economic Efficiency?
1) Economic efficiency in a free market occurs when

A) consumer surplus is maximized.
B) producer surplus is maximized.
C) the sum of consumer surplus and producer surplus is maximized.
D) price is as low as possible.
Answer: C
Topic: Monopoly and Economic Efficiency
*: Recurring
Learning Outcome: Micro 7: Discuss the effects of consumer and producer surpluses in a market
2) A profit maximizing monopoly's price is

A) the same as the price that would prevail if the industry was perfectly competitive.
B) less than the price that would prevail if the industry was perfectly competitive.
C) greater than the price that would prevail if the industry was perfectly competitive.
D) not consistently related to price that would prevail if the market was perfectly competitive.
Answer: C
*: Recurring
33
Figure 10-5
Figure 10-5 shows the demand and cost curves for a monopolist.
3) Refer to Figure 10-5. What is the economically efficient output level?

A) 600 units
B) 800 units
C) 940 units
D) 1160 units
Answer: C
*: Recurring
Learning Outcome: Micro 2: Interpret and analyze information presented in different types of
graphs
34
4) Refer to Figure 10-5. What is the difference between the monopoly output and the perfectly
competitive output?
A) 140 units
B) 240 units
C) 340 units
D) 560 units
Answer: C
*: Recurring
graphs
5) Refer to Figure 10-5. What is the difference between the monopoly's price and perfectly
competitive industry's price?
A) The monopoly's price is higher by $9.50.
B) The monopoly's price is higher by $13.
C) The monopoly's price is higher by $3.50.
D) The monopoly's price is higher by $21.
Answer: B
*: Recurring
graphs
6) Refer to Figure 10-5. At the profit-maximizing quantity, what is the difference between the
monopoly's price and the marginal cost of production?
A) $8
B) $11.50
C) $21
D) There is no difference.
Answer: C
*: Recurring
graphs
35
7) Compared to perfect competition, the consumer surplus in a monopoly
A) is unchanged because price and output are the same.
B) is lower because price is higher and output is lower.
C) is higher because price is higher and output is the same.
D) is eliminated.
Answer: B
*: Recurring
8) Why does a monopoly cause a deadweight loss?

A) because it does not produce some output for which marginal benefit exceeds marginal cost
B) because it appropriates a portion of consumer surplus for itself
C) because it increases producer surplus at the expense of consumer surplus
D) because it does not produce some output for which demand exceeds supply
Answer: A
*: Recurring
9) Relative to a perfectly competitive market, a monopoly results in

A) a gain in producer surplus equal to the gain in consumer surplus.
B) a gain in producer surplus equal to the loss in consumer surplus.
C) a gain in producer surplus less than the loss in consumer surplus.
D) greater economic efficiency.
Answer: C
*: Recurring
36
Figure 10-6
10) Refer to Figure 10-6. What is the area that represents consumer surplus under a monopoly?
A) the triangle P0P1F
B) the triangle P0P2E
C) the trapezium P1P2EF
D) the rectangle P1P3HF
Answer: A
*: Recurring
37
11) Refer to Figure 10-6. Compared to a perfectly competitive market, consumer surplus is
lower in a monopoly by an amount equal to the
A) area FHE.
B) area FGE.
C) area P1P2EF.
D) area P1P2GF.
Answer: C
*: Recurring
12) Refer to Figure 10-6. What is the area that represents producer surplus under a monopoly?
A) the triangle 0P2E
B) the triangle 0P3H
C) the trapezium 0P1FH
D) the rectangle P1P3HF
Answer: C
*: Recurring
13) Refer to Figure 10-6. The deadweight loss due to a monopoly is represented by the area
A) FHE.
B) FGE.
C) GEH.
D) FQ1Q2E.
Answer: A
*: Recurring
38
Table 10-2
Price per Quantity Total Cost of

Dose Demanded Production
(dose) (dollars)
$80 0 $80
72 1 82
64 2 88
56 3 100
48 4 124
40 5 164
32 6 208
24 7 268
16 8 340
Shakti Inc. has been granted a patent for its Arnica toothache balm. Table 10-2 shows the
demand and the total cost schedule for the firm.
14) Refer to Table 10-2. What is Shakti's profit-maximizing output?

A) 4 units
B) 5 units
C) 6 units
D) 7 units
Answer: A
*: Recurring
15) Refer to Table 10-2. What is the amount of Shakti's profit?

A) $68
B) $72
C) $124
D) $192
Answer: A
*: Recurring
39
16) Refer to Table 10-2. What is the economically efficient output level?
A) 5 units
B) 6 units
C) 7 units
D) 8 units
Answer: A
*: Recurring
17) Refer to Table 10-2. What is the amount of the deadweight loss generated by Shakti when it
produces the monopoly output?
A) $124
B) $42
C) $36
D) $12
Answer: D
*: Recurring
18) Market power refers to

A) the ability of consumers to dictate what products should be produced.
B) the ability of a firm to advertise its product and succeed in selling more output.
C) the ability of a firm to sell at a lower price than rival sellers.
D) the ability of a firm to charge a price higher than the marginal cost of production.
Answer: D
Topic: Market Power
*: Recurring
Learning Outcome: Micro 9: Discuss the fundamental characteristics of firms
40
19) Firms do not have market power in which of the following market structures?
A) perfect competition only
B) perfect competition and monopolistic competition
C) oligopoly
D) monopoly
Answer: A
Topic: Market Power
*: Recurring
Learning Outcome: Micro 9: Discuss the fundamental characteristics of firms
41
Figure 10-7
In 2011, Verizon was granted permission to enter the market for cable TV in Upstate New York,
ending the virtual monopoly that Time Warner Cable had in most local communities in the
region. Figure 10-7 shows the cable television market in Upstate New York.
20) Refer to Figure 10-7. Suppose the local government imposes a $2.50 per month tax on cable
companies. What happens to the price charged by the cable company following the imposition of
this tax?
A) The price rises from PM to (PM + $2.50).
B) The price rises from PM but it increases by an amount less than $2.50.
C) The price rises from PM but it increases by an amount greater than $2.50 to reflect the
monopoly's markup.
D) The price remains at PM .
Answer: D
Topic: Antitrust Law and Enforcement
Special Feature: Don't Let This Happen to YOU!: Don't Assume That Charging a Higher Price
is Always More Profitable for a Monopolist
42
21) The size of a deadweight loss in a market is reduced by
A) government legislating a ceiling price.
B) government legislating a price floor.
C) market price being close to marginal cost.
D) creative destruction.
Answer: C
*: Recurring
22) A market economy benefits from market power

A) if the majority of the population are entrepreneurs.
B) if firms with market power do research and development with the profits earned.
C) if market power gets so bad the government creates public enterprises.
D) under no circumstances.
Answer: B
Topic: Market Power
*: Recurring
23) Which of the following statements is consistent with the views of Joseph Schumpeter?
A) Research and development by competitive firms is responsible for most technological
changes.
B) An economy benefits from firms having market power because these firms are more likely to
be able to commit funds for research and development.
C) Enforcement of antitrust laws is necessary to promote competition among firms.
D) A lack of competition discourages firms from developing new technologies.
Answer: B
Topic: Market Power
*: Recurring
43
24) If a per-unit tax on output sold is imposed on a monopoly's product, the monopolist will
increase its market price by the full amount of the tax.
Answer: FALSE
25) Suppose a monopoly is producing its profit-maximizing output level. Now suppose the
government imposes a lump-sum tax on the monopoly, independent of its output. As a result the
monopoly's profit will fall.
Answer: TRUE
26) In reality, because few markets are perfectly competitive, some loss of economic efficiency
occurs in the market for nearly every good or service.
Answer: TRUE
*: Recurring
Learning Outcome: Micro 19: Explain the concept of efficiency in the economy and obstacles to
achieving it
27) Market power in the United States causes a huge loss of economic efficiency.
Answer: FALSE
Topic: Market Power
*: Recurring
Learning Outcome: Micro 19: Explain the concept of efficiency in the economy and obstacles to
achieving it
44
28) How do the price and quantity of a monopoly compare to that of a perfectly competitive
industry?
Answer: A monopolist sells a smaller quantity and charges a price greater than the perfectly
competitive price.
*: Recurring
29) Suppose that a perfectly competitive industry becomes a monopoly. What effect will this
have on consumer surplus, producer surplus, and deadweight loss?
Answer: If a perfectly competitive industry is monopolized, consumer surplus will decrease,
producer surplus will increase, and there will be a deadweight loss.
*: Recurring
45
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Essentials of Economics 3rd Edition Hubbard Test Bank Full Chapter PDF

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Essentials of Economics 3rd Edition

Hubbard Test Bank

10.1 Is Any Firm Ever Really a Monopoly?

4) If we use a narrow definition of monopoly, then a monopoly is defined as a firm

5) Which of following is the best example of a monopoly if we use a broader definition of

7) A monopoly is characterized by all of the following except

11) A monopolist faces

13) A monopoly differs from monopolistic competition in that

10.2 Where Do Monopolies Come From?

1) To maintain a monopoly, a firm must have

3) A local electricity-generating company has a monopoly that is protected by an entry barrier

4) A patent or copyright is a barrier to entry based on

6) An example of a monopoly based on control of a key resource is

7) A United States government patent lasts

9) Governments grant patents to

14) The United States Post Office

18) What is a network externality?

20) For a natural monopoly to exist,

21) In a natural monopoly, throughout the range of market demand

1) The demand curve for the monopoly's product is

8) Refer to Figure 10-1. To maximize profit, the firm will produce

Quantity Total Cost of

23) Refer to Figure 10-3. What is the profit-maximizing/loss-minimizing output level?

35) Explain why the monopolist has no supply curve?

1) Economic efficiency in a free market occurs when

2) A profit maximizing monopoly's price is

3) Refer to Figure 10-5. What is the economically efficient output level?

8) Why does a monopoly cause a deadweight loss?

9) Relative to a perfectly competitive market, a monopoly results in

Price per Quantity Total Cost of

14) Refer to Table 10-2. What is Shakti's profit-maximizing output?

15) Refer to Table 10-2. What is the amount of Shakti's profit?

18) Market power refers to

22) A market economy benefits from market power

Ahdistetun sielun tunnustus.

Isä! elköön meidän tahtomme tapahtuko, vaan Sinun. Kaikki

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