NAME........................................... MONOPOLY TEST THURSDAY, 2020.10.15 INSTRUCTIONS: Answer All Questions Duration: 45 Minutes Multiple Choice Questions 1. The diagram above represents a profit maximising monopolist. What does the shaded area represent? A The monopolist’s normal profit B The deadweight loss imposed on society as a result of the monopoly’s existence C The monopolist’s total costs D The monopolist’s supernormal profit 2. Suppose a monopoly firm decides to use a strategy of (third degree) price discrimination in order to maximise its profits. It must be the case that: A The two markets are separated geographically B The firm is a price-taker C There is no possibility of resale by consumers D The price elasticity of demand is the same in each market segment 3. The monopoly power of a business is likely to rise if: A It diversifies into producing new products B The government reduces import tariffs on identical products produced elsewhere C Barriers to entry increase D Production is concentrated into fewer factories 4. The diagram below represents a profit-maximising monopolist. At which level of output is the price elasticity of demand equal to -1? A OA B OB C OC D OD 5. A firm in monopoly faces the following situation AR: ￡10 MR: ￡6 ATC: ATC:￡9 MC: ￡6 The best action for this firm, other things being equal, would be: A Increase price because it is a monopoly B Increase output to take advantage of its profit margin C Cut AR to equal MR D Leave price and output unchanged 6. If a monopoly takes over 100% of a market previously operating under perfect competition, the long run impact on price and output will be: Price A Higher B Lower C Higher D Unknown Output Lower Higher Higher Unknown 7. Which of the following groups are most likely to benefit from a firm’s decision to price discrimination? A Low income groups B Groups with low price elasticity of demand for a product C Groups with imperfect information D Groups with few alternatives to a product 8. Which of the following is NOT a characteristic of a monopoly market structure? A Price-making power B High barriers to entry C Highly contestable D Supernormal profits earned in the long run 9. Suppose a firm that has previously enjoyed monopoly power faces a threat of entry to the market by new firms as a result of technological innovation. This firm is most likely to: A Reduce its output and raise its price B Continue with its current level of output and price C Operate closer to the level of output at which average revenue equals average cost D Leave the industry 10. A monopoly firm decides to maximise its revenue instead of maximising profit. The monopoly should produce at a level of output where: A Marginal revenue is zero B Marginal revenue is maximised C Marginal revenue equals average revenue D Price elasticity of demand is zero Structured Questions 11. Explain briefly three assumptions for monopoly [6] (i)............................................................................................................................................. ................................................................................................................................................. (ii)............................................................................................................................................ ................................................................................................................................................. (iii)........................................................................................................................................... ................................................................................................................................................ 12. Draw a diagram to show the output that will lead to profit maximization for a monopolist in the short-run [4] 13. Explain the difference between the terms monopoly and natural monopoly [4] Definition of Monopoly. Monopoly........................................................................................................ ................................................................................................................................................. ................................................................................................................................................ Definition of Natural Monopoly Monopoly.......................................................................................... ................................................................................................................................................. ................................................................................................................................................ 14. Outline TWO disadvantages and TWO advantages of monopoly to firms Advantages: [4] (i)............................................................................................................................................. ................................................................................................................................................. (ii)............................................................................................................................................ ................................................................................................................................................ Disadvantages: (i)............................................................................................................................................ ................................................................................................................................................. (ii)............................................................................................................................................ ............................................................................................................................................... 15. Describe TWO drawbacks and TWO benefits of monopoly to consumers [4] Drawbacks: (i)............................................................................................................................................. ................................................................................................................................................. (ii)............................................................................................................................................ ................................................................................................................................................ Benefits: (i)............................................................................................................................................ ................................................................................................................................................. (ii)............................................................................................................................................ ................................................................................................................................................ 16. Explain three conditions are necessary for price discrimination [3] (i)............................................................................................................................................. ................................................................................................................................................. (ii)............................................................................................................................................ ................................................................................................................................................. (iii)........................................................................................................................................... ................................................................................................................................................ 17. Draw a diagram for price discrimination by a firm charging a different prices in two Hint markets which can lead a monopolist to earn higher profits (Hint Hint: Use third degree price discrimination diagram) [8] 18. Outline TWO demerits and TWO merits of price discrimination to firms and consumers? Demerits: (i)............................................................................................................................................. ................................................................................................................................................. (ii)............................................................................................................................................ ................................................................................................................................................. Merits: (i)............................................................................................................................................ ................................................................................................................................................. (ii)............................................................................................................................................ ................................................................................................................................................ 19. Determine if oligopoly firms are productive efficient, allocative efficient and dynamic efficient. [3] (i) Productive efficient: ....................................................................................................... ................................................................................................................................................. (ii) Allocative efficient: ........................................................................................................ ................................................................................................................................................. (iii) Dynamic efficient: efficient:......................................................................................................... ................................................................................................................................................ 20. Draw a diagram to represent a natural monopoly firm [4]
