Chapter 15
Monopoly
TRUE/FALSE
1.
Monopolists can achieve any level of profit they desire because they have unlimited market power.
ANS:
F
DIF:
2
REF:
15-0
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
2.
T
DIF:
2
REF:
15-0
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
F
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Definitional
T
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
T
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
F
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
NAT:
Analytic
NAT:
Analytic
The amount of power that a monopoly has depends on whether there are close substitutes for its product.
ANS:
T
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
8.
Analytic
The De Beers Diamond company is not worried about differentiating its product from all other gemstones.
ANS:
7.
NAT:
The De Beers Diamond company advertises heavily to promote the sale of all diamonds, not just its own. This
is evidence that it has a monopoly position to some degree.
ANS:
6.
Analytic
The fundamental cause of monopolies is barriers to entry.
ANS:
5.
NAT:
One characteristic of a monopoly market is that the product is virtually identical to products produced by
competing firms.
ANS:
4.
Analytic
Even with market power, monopolists cannot achieve any level of profit they desire because they will sell
lower quantities at higher prices.
ANS:
3.
NAT:
NAT:
Analytic
If the ABC company owns the exclusive rights to mine land in Afghanistan for Lapis Lazuli, a rare stone used in
jewelry which is found only in Afghanistan, the company benefits from a barrier to entry.
ANS:
T
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Applicative
1002
NAT:
Analytic
Chapter 15/Monopoly  1003
9.
Copyrights and patents are examples of barriers to entry that afford firms monopoly pricing powers.
ANS:
T
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Patents
MSC:
Interpretive
10.
F
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Patents
MSC:
Interpretive
T
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
REF:
T
DIF:
1
LOC:
Monopoly
TOP:
Natural monopoly
REF:
F
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
REF:
F
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
REF:
T
DIF:
1
LOC:
Monopoly
TOP:
Average revenue
REF:
MSC:
Applicative
15-1
NAT:
Analytic
MSC:
Definitional
15-2
NAT:
Analytic
MSC:
Interpretive
15-2
NAT:
Analytic
MSC:
Applicative
15-2
NAT:
Analytic
MSC:
Definitional
For a monopoly, marginal revenue is often greater than the price they charge for their good.
ANS:
F
DIF:
1
LOC:
Monopoly
TOP:
Marginal revenue
17.
Analytic
Average revenue for a monopoly is the total revenue divided by the quantity produced.
ANS:
16.
NAT:
A monopolist produces an output level where marginal revenue equals marginal cost and charges a price
where marginal cost equals average total cost.
ANS:
15.
15-1
A monopolist maximizes profit by producing an output level where marginal cost equals price.
ANS:
14.
Analytic
Declining average total cost with increased production is one of the defining characteristics of a natural
monopoly.
ANS:
13.
NAT:
A natural monopoly has economies of scale for most if not all of its range of output.
ANS:
12.
Analytic
If the government deems a newly invented drug to be truly original, the pharmaceutical company is given the
exclusive right to manufacture and sell the drug for 50 years.
ANS:
11.
NAT:
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
Like competitive firms, monopolies choose to produce a quantity in which marginal revenue equals marginal
cost.
ANS:
T
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1004
18.
Like competitive firms, monopolies charge a price equal to marginal cost.
ANS:
F
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
19.
REF:
T
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
REF:
F
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
T
DIF:
2
LOC:
Monopoly
TOP:
Supply curve
F
DIF:
1
LOC:
Monopoly
TOP:
Supply curve
F
DIF:
1
LOC:
Monopoly
TOP:
Supply curve
REF:
REF:
REF:
REF:
T
DIF:
1
LOC:
Monopoly
TOP:
Profit maximization
REF:
Analytic
MSC:
Interpretive
15-2
NAT:
Analytic
MSC:
Interpretive
15-2
NAT:
Analytic
MSC:
Interpretive
15-2
NAT:
Analytic
MSC:
Applicative
15-2
NAT:
Analytic
MSC:
Applicative
15-2
NAT:
Analytic
MSC:
Interpretive
The socially efficient quantity is found where the demand curve intersects the marginal cost curve.
ANS:
T
DIF:
2
LOC:
Monopoly
TOP:
Deadweight loss
26.
NAT:
During the life of a drug patent, the monopoly pharmaceutical firm maximizes profit by producing the
quantity at which marginal revenue equals marginal cost.
ANS:
25.
15-2
A monopolist’s supply curve is horizontal.
ANS:
24.
Interpretive
A monopolist’s supply curve is vertical.
ANS:
23.
MSC:
A monopolist does not have a supply curve because the firm’s decision about how much to supply is
impossible to separate from the demand curve it faces.
ANS:
22.
Analytic
A monopolist produces where P = MC = MR.
ANS:
21.
NAT:
A monopolist produces where P > MC = MR.
ANS:
20.
15-2
REF:
15-3
NAT:
Analytic
MSC:
Interpretive
The deadweight loss for a monopolist equals one-half of its profits for any given level of output.
ANS:
F
DIF:
2
REF:
LOC:
Monopoly
TOP:
Deadweight loss
15-3
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1005
27.
A monopoly creates a deadweight loss to society because it earns both short-run and long-run positive
economic profits.
ANS:
F
DIF:
2
LOC:
Monopoly
TOP:
Deadweight loss
28.
REF:
T
DIF:
2
LOC:
Monopoly
TOP:
Deadweight loss
REF:
F
DIF:
3
LOC:
Monopoly
TOP:
Deadweight loss
REF:
T
DIF:
3
LOC:
Monopoly
TOP:
Deadweight loss
REF:
T
DIF:
3
LOC:
Monopoly
TOP:
Deadweight loss
REF:
15-3
NAT:
Analytic
MSC:
Interpretive
15-3
NAT:
Analytic
MSC:
Analytical
15-3
NAT:
Analytic
MSC:
Analytical
15-3
NAT:
Analytic
MSC:
Analytical
In order for a firm to maximize profits through price discrimination, the firm must have some market power
and be able to prevent arbitrage.
ANS:
T
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
33.
Interpretive
Suppose a profit-maximizing monopolist faces a constant marginal cost of $20, produces an output level of
100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the
demand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly
deadweight loss equals $1,500.
ANS:
32.
MSC:
Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces an output level of
100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the
demand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly
deadweight loss equals $2,000.
ANS:
31.
Analytic
Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces an output level of
100 units, and charges a price of $50. The socially efficient level of output is 200 units. Assume that the
demand curve and marginal revenue curve are the typical downward-sloping straight lines. The monopoly
deadweight loss equals $4,000.
ANS:
30.
NAT:
A monopoly creates a deadweight loss to society because it produces less output than the socially efficient
level.
ANS:
29.
15-3
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
NAT:
Analytic
MSC:
Interpretive
Price discrimination is prohibited by antitrust laws.
ANS:
F
DIF:
2
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
Chapter 15/Monopoly  1006
34.
A monopolist earns higher profits by charging one price than by practicing price discrimination.
ANS:
F
DIF:
3
LOC:
Monopoly
TOP:
Price discrimination
35.
REF:
15-4
T
DIF:
3
LOC:
Monopoly
TOP:
Perfect price discrimination
REF:
T
DIF:
1
LOC:
Monopoly
TOP:
Price discrimination
REF:
F
DIF:
1
LOC:
Monopoly
TOP:
Price discrimination
REF:
T
DIF:
1
LOC:
Monopoly
TOP:
Price discrimination
REF:
T
DIF:
1
LOC:
Monopoly
TOP:
Price discrimination
REF:
T
DIF:
1
LOC:
Monopoly
TOP:
Price discrimination
MSC:
Interpretive
15-4
NAT:
Analytic
MSC:
Interpretive
15-4
NAT:
Analytic
MSC:
Interpretive
15-4
NAT:
Analytic
MSC:
Interpretive
15-4
NAT:
Analytic
MSC:
Interpretive
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
Goods that do not have close substitutes have downward-sloping demand curves.
ANS:
T
DIF:
1
LOC:
Monopoly
TOP:
Demand curve
42.
Analytic
By offering lower prices to customers who buy a large quantity, a monopoly is price discriminating.
ANS:
41.
NAT:
University financial aid can be viewed as a type of price discrimination.
ANS:
40.
15-4
Airlines often separate their customers into business travelers and personal travelers by giving a discount to
those travelers who stay over a Saturday night.
ANS:
39.
Interpretive
Movie theatres charge different prices to different groups of people based on the differing marginal costs that
exist from group to group.
ANS:
38.
MSC:
By selling hardcover books to die-hard fans and paperback books to less enthusiastic readers, the publisher is
able to price discriminate and raise its profits.
ANS:
37.
Analytic
A monopolist that can practice perfect price discrimination will not impose a deadweight loss on society.
ANS:
36.
NAT:
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
If the government regulates the price a natural monopolist can charge to be equal to the firm’s average total
cost, the firm has no incentive to reduce costs.
ANS:
T
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Regulation
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1007
43.
If the government regulates the price a natural monopolist can charge to be equal to the firm’s marginal cost,
the government will likely need to subsidize the firm.
ANS:
T
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Regulation
MSC:
Interpretive
44.
T
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
T
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
T
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
T
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Regulation
MSC:
Interpretive
T
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Do nothing
MSC:
Interpretive
NAT:
Analytic
NAT:
Analytic
NAT:
Analytic
Government intervention always reduces monopoly deadweight loss.
ANS:
F
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Do nothing
MSC:
Interpretive
50.
Analytic
The government may choose to do nothing to reduce monopoly inefficiency because the “fix” may be worse
than the problem.
ANS:
49.
NAT:
The proper level of government intervention is unclear when dealing with a monopoly.
ANS:
48.
Analytic
A common solution to monopoly in European countries is public ownership.
ANS:
47.
NAT:
Some companies merge in order to lower costs through efficient joint production.
ANS:
46.
Analytic
Antitrust laws give the Justice Department the authority to challenge potential mergers between companies
in an effort to safeguard society from monopoly power.
ANS:
45.
NAT:
NAT:
Analytic
Firms with substantial monopoly power are quite common because many goods are truly unique.
ANS:
F
DIF:
1
REF:
15-6
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1008
SHORT ANSWER
1.
Describe how government is involved in creating a monopoly. Why might the government create one? Give
an example.
ANS:
The government can create a monopoly by giving a single firm the exclusive right to produce some good.
Monopolies are created for many reasons. When an industry is characterized by high fixed costs, a single firm can
usually supply the entire market at a lower cost than having multiple firms in the industry. Examples include most
utility companies. The government also grants sole ownership of inventions through patent laws in order to help
eliminate the market failure that is likely to otherwise occur in the markets for those goods. Patents encourage
creativity and research and development.
DIF:
2
TOP:
Patents | Regulation
2.
REF:
15-1
NAT:
Analytic
MSC:
Applicative
LOC:
Monopoly
What is the defining characteristic of a natural monopoly? Give an example of a natural monopoly.
ANS:
The defining characteristic of a natural monopoly is when a firm can supply a good or service to an entire market at
a lower cost than could two or more firms. The example in the text is a bridge.
DIF:
2
TOP:
Natural monopoly
3.
REF:
15-1
NAT:
Analytic
MSC:
Definitional
LOC:
Monopoly
In the market for "home heating" consumers typically have several options (e.g., electricity, heating fuel,
natural gas, propane, etc.), yet we often think of firms in this industry as behaving like monopolists. Discuss
the context in which your electricity provider is a monopolist. Is this characterization universally applicable?
Explain your answer.
ANS:
In this case, the firms are monopolists in the short run when consumers are unable to change their "home heating"
systems. In the long run, consumers can change from electric appliances to natural gas appliances and thus lessen
the monopoly power of utility providers. As long as consumers are able to substitute, in the long run the monopoly
pricing power is reduced.
DIF:
3
REF:
15-2
TOP:
Monopoly
MSC:
Analytical
NAT:
Analytic
LOC:
Monopoly
Chapter 15/Monopoly  1009
4.
There has been much discussion of deregulating electricity and natural gas delivery companies in the United
States. Discuss the likely effect of deregulation on prices in these two industries.
ANS:
If deregulation leads to increased competition, then production and prices should move toward the competitive
equilibrium. If deregulation does not lead to increased competition, then the monopoly production and price
outcome is likely. The success of deregulation movements hinges on their ability to use markets to promote
competitive market outcomes. If the industry is characterized by economies of scale, deregulation may worsen
rather than improve the market as costs and prices could rise if more than one firm supplies output to the market.
DIF:
2
REF:
15-2
TOP:
Regulation
MSC:
Analytical
5.
NAT:
Analytic
LOC:
Monopoly
Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods.
ANS:
A profit-maximizing monopolist produces the output level where marginal revenue equals marginal cost and
charges the corresponding price from the market demand curve. Note that a monopolist charges a price that
exceeds marginal cost, unlike a competitive firm, for which price equals marginal cost.
DIF:
2
REF:
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Analytical
LOC:
Monopoly
Chapter 15/Monopoly  1010
6.
Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from
taxation?
ANS:
A profit-maximizing monopolist will choose to produce Q 0 units of output and sell at price P0. However, marginal
cost is MC0. This is identical to the deadweight loss of taxation when the tax forces a wedge between market price
and marginal cost.
DIF:
2
TOP:
Deadweight loss
7.
REF:
15-3
NAT:
Analytic
MSC:
Analytical
LOC:
Monopoly
What is the deadweight loss due to profit-maximizing monopoly pricing under the following conditions: The
price charged for goods produced is $10. The intersection of the marginal revenue and marginal cost curves
occurs where output is 100 units and marginal revenue is $5. The socially efficient level of production is 110
units. The demand curve is linear and downward sloping, and the marginal cost curve is constant.
ANS:
1/2*(110-100)*($10-$5) = $25
DIF:
3
REF:
TOP:
Deadweight loss
15-3
NAT:
Analytic
MSC:
Applicative
LOC:
Monopoly
Chapter 15/Monopoly  1011
8.
Assume that a monopolist decides to maximize revenue rather than profit. How does this operating objective
change the size of the deadweight loss? If you are a "benevolent" manager of a monopoly firm and are
interested in reducing the deadweight loss of monopoly, should you maximize profits or maximize revenue?
Explain your answer.
ANS:
A revenue maximizer operates where MR = 0. This solution moves the monopolist closer to the socially optimal
competitive outcome and reduces deadweight loss. Revenue maximization is potentially a more "socially" optimal
objective for monopoly markets than profit maximization.
DIF:
3
TOP:
Total revenue
9.
REF:
15-3
NAT:
Analytic
MSC:
Analytical
LOC:
Monopoly
One example of price discrimination occurs in the publishing industry when a publisher initially releases an
expensive hardcover edition of a popular novel and later releases a cheaper paperback edition. Use this
example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy.
ANS:
The answer should address the three basic lessons of price discrimination. First, price discrimination is a rational
strategy that can lead to higher monopoly profits. Second, price discrimination requires an ability to separate
customers according to their willingness to pay. Third, price discrimination can raise economic welfare.
DIF:
2
TOP:
Price discrimination
10.
REF:
15-4
NAT:
Analytic
MSC:
Analytical
LOC:
Monopoly
What are the four ways that government policymakers can respond to the problem of monopoly?
ANS:
First, the government can try to make monopolized industries more competitive by using the power of antitrust
laws. Second, the government can regulating the behavior of monopolies, which usually occurs with natural
monopolies. Third, the government can own and run a monopoly. Four, the government can do nothing.
DIF:
2
REF:
15-5
TOP:
Government
MSC:
Interpretive
11.
NAT:
Analytic
LOC:
Monopoly
Give some examples of the benefits and costs of antitrust laws.
ANS:
Benefits include promoting competition by preventing mergers and breaking-up companies. Costs are that they
may increase cost of operating if they restrict synergy mergers.
DIF:
2
REF:
15-5
TOP:
Antitrust
MSC:
Interpretive
NAT:
Analytic
LOC:
Monopoly
Chapter 15/Monopoly  1012
12.
In many countries, the government chooses to "internalize" the monopoly by owning monopoly providers of
goods and services. (In some cases these firms are "nationalized," and the government actually buys or
confiscates firms that operate in monopoly markets). What would be the advantages and disadvantages of
such an approach to ensure that the "best interest of society" is promoted in these markets? Explain your
answer.
ANS:
As long as the government "owner" pursues a production and pricing policy that approaches a competitive
outcome, social well-being can be enhanced. In this case the government ownership would benefit society.
However, in most cases, government owners operate much like private sector monopolists. The political economy
of government institutions does not ensure that government owners will pursue socially optimal policy. Also,
governments have no incentive to reduce costs or innovate.
DIF:
3
REF:
15-5
TOP:
Government
MSC:
Analytical
13.
NAT:
Analytic
LOC:
Monopoly
Why might economists prefer private ownership of monopolies over public ownership of monopolies?
ANS:
The private monopolist is governed by the market. Even though the market solution is sub-optimal, it may be better
than outcomes generated by publicly owned monopolies. Publicly owned monopolies may restrict output to levels
below the private market outcome and thus generate an even lower level of social surplus than a private profitmaximizing monopolist.
Private owners have an incentive to minimize cost as long as they reap benefits in the form of higher profits.
Government bureaucrats have no incentive to reduce costs. The losers are customers and taxpayers, whose only
recourse is the political system.
DIF:
2
REF:
15-5
TOP:
Monopoly
MSC:
Analytical
14.
NAT:
Analytic
LOC:
Monopoly
One solution to the problems of marginal-cost pricing of a regulated natural monopolist is average cost
pricing. In this model, the monopolist is allowed to price its production at average total cost. How does
average-cost pricing differ from marginal-cost pricing? Does this solution maximize social well-being?
ANS:
Under average-cost pricing, the monopolist earns zero economic profits, but average-cost pricing does not ensure a
socially optimal market solution. Under marginal-marginal cost pricing, the monopolist cannot cover its total costs,
so it will earn negative economic profits. (Recall that for a natural monopoly, ATC is declining for all relevant
quantities, and MC is below ATC.
DIF:
3
REF:
15-5
TOP:
Regulation
MSC:
Interpretive
NAT:
Analytic
LOC:
Monopoly
Chapter 15/Monopoly  1013
Sec 00 - Monopoly
MULTIPLE CHOICE
1.
Which of the following statements is correct?
a.
Both a competitive firm and a monopolist are price takers.
b.
Both a competitive firm and a monopolist are price makers.
c.
A competitive firm is a price taker, whereas a monopolist is a price maker.
d.
A competitive firm is a price maker, whereas a monopolist is a price taker.
ANS:
C
DIF:
1
REF:
15-0
LOC:
Monopoly
TOP:
Monopoly
MSC:
Definitional
2.
Analytic
One difference between a perfectly competitive firm and a monopoly is that a perfectly competitive firm
produces where
a.
marginal cost equals price, while a monopolist produces where price exceeds marginal cost.
b.
marginal cost equals price, while a monopolist produces where marginal cost exceeds price.
c.
price exceeds marginal cost, while a monopolist produces where marginal cost equals price.
d.
marginal cost exceeds price, while a monopolist produces where marginal cost equals price.
ANS:
A
DIF:
2
REF:
15-0
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
3.
NAT:
NAT:
Analytic
A monopoly
a.
can set the price it charges for its output and earn unlimited profits.
b.
takes the market price as given and earns small but positive profits.
c.
can set the price it charges for its output but faces a downward-sloping demand curve so it cannot
earn unlimited profits.
d.
can set the price it charges for its output but faces a horizontal demand curve so it can earn
unlimited profits.
ANS:
C
DIF:
2
REF:
15-0
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1014
4.
A perfectly competitive market
a.
may not be in the best interests of society, whereas a monopoly market promotes general
economic well-being
b.
promotes general economic well-being, whereas a monopoly market may not be in the best
interests of society.
c.
and a monopoly market are equally likely to promote general economic well-being.
d.
is less likely to promote general economic well-being than a monopoly market.
ANS:
B
DIF:
2
REF:
15-0
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
5.
NAT:
Analytic
Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly
is often
a.
not in the best interest of society.
b.
one that fails to maximize total economic well-being.
c.
inefficient.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
15-0
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
NAT:
Analytic
Sec 01 - Monopoly - Why Monopolies Arise
MULTIPLE CHOICE
1.
Which of the following is not a characteristic of a monopoly?
a.
barriers to entry
b.
one seller
c.
one buyer
d.
a product without close substitutes
ANS:
C
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Definitional
Chapter 15/Monopoly  1015
2.
The fundamental source of monopoly power is
a.
barriers to entry.
b.
profit.
c.
decreasing average total cost.
d.
a product without close substitutes.
ANS:
A
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Applicative
3.
NAT:
Analytic
NAT:
Analytic
NAT:
Analytic
A monopoly market is characterized by
a.
many buyers and sellers.
b.
“natural” products.
c.
barriers to entry.
d.
a Nash equilibrium.
ANS:
C
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Definitional
4.
A benefit of a monopoly is
a.
lower prices.
b.
a wide variety of similar products.
c.
decreasing long-run average total costs.
d.
greater creativity by authors who can copyright their novels.
ANS:
D
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
5.
Which of the following are necessary characteristics of a monopoly?
(i)
The firm is the sole seller of its product.
(ii)
The firm's product does not have close substitutes.
(iii)
The firm generates a large economic profit.
(iv)
The firm is located in a small geographic market.
Chapter 15/Monopoly  1016
a.
(i) and (ii) only
b.
(i) and (iii) only
c.
(i), (ii), and (iii) only
d.
(i), (ii), (iii), and (iv)
ANS:
A
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
6.
a.
decrease its price below its competitors’ prices.
b.
decrease production to increase demand for its product.
c.
make pricing decisions jointly with other firms.
d.
own a key resource.
D
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds. Then
DeBeers, a large diamond company, has
a.
less incentive to advertise than it would otherwise have.
b.
less market power than it would otherwise have.
c.
more control over the price of diamonds than it would otherwise have.
d.
higher profits than it would otherwise have.
ANS:
B
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
8.
Analytic
The simplest way for a monopoly to arise is for a single firm to
ANS:
7.
NAT:
NAT:
Analytic
Which of the following is not a reason for the existence of a monopoly?
a.
sole ownership of a key resource
b.
patents
c.
copyrights
d.
diseconomies of scale
ANS:
D
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1017
9.
Which of the following would be most likely to have monopoly power?
a.
a long-distance telephone service provider
b.
a local cable TV provider
c.
a large department store
d.
a gas station
ANS:
B
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Applicative
10.
a.
perfectly competitive.
b.
monopolistically competitive.
c.
an oligopolist.
d.
a monopolist.
D
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Definitional
NAT:
Analytic
NAT:
Analytic
Most markets are not monopolies in the real world because
a.
firms usually face downward-sloping demand curves.
b.
supply curves slope upward.
c.
price is usually set equal to marginal cost by firms.
d.
there are reasonable substitutes for most goods.
ANS:
D
DIF:
1
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
12.
Analytic
A firm that is the sole seller of a product without close substitutes is
ANS:
11.
NAT:
Which of the following is not an example of a barrier to entry?
a.
Mighty Mitch’s Mining Company owns a unique plot of land in Tanzania, under which lies the only
large deposit of Tanzanite in the world.
b.
A pharmaceutical company obtains a patent for a specific high blood pressure medication.
c.
A musician obtains a copyright for her original song.
d.
An entrepreneur opens a popular new restaurant.
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Barriers to entry
15-1
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1018
13.
Which of the following is not an example of a barrier to entry?
a.
Mighty Mitch’s Mining Company owns a unique plot of land in Tanzania, under which lies the only
large deposit of Tanzanite in the world.
b.
A college student starts a part-time tutoring business.
c.
A novelist obtains a copyright for her new book.
d.
A taxi cab driver in New York City obtains a license to legally provide transportation in New York
City.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Barriers to entry
14.
REF:
Analytic
MSC:
Applicative
a.
Tom charges a higher price than his competitors for his house-painting services.
b.
Dick obtains a copyright for the new computer game that he invented.
c.
Harry offers free concerts on Sunday afternoons as a form of advertising.
d.
Larry charges a lower price than his competitors for his lawn-mowing services.
B
DIF:
2
LOC:
Monopoly
TOP:
Barriers to entry
REF:
15-1
NAT:
Analytic
MSC:
Applicative
Which of the following is an example of a barrier to entry?
a.
Matthew offers free samples of his latest flavored coffee drink to entice customers to buy a cup.
b.
Mark charges a lower price to students than to faculty for his tattoo services.
c.
Luke charges a higher hourly price to business students than to liberal arts students for his
economics tutoring.
d.
John obtained a copyright for the song he wrote and recorded.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Barriers to entry
16.
NAT:
Which of the following is an example of a barrier to entry?
ANS:
15.
15-1
REF:
15-1
NAT:
Analytic
MSC:
Applicative
Which of the following is an example of a barrier to entry?
(i)
A key resource is owned by a single firm.
(ii)
The costs of production make a single producer more efficient than a large number of
producers.
(iii)
The government has given the existing monopolist the exclusive right to produce the good.
Chapter 15/Monopoly  1019
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) only
d.
(i), (ii), and (iii)
ANS:
D
DIF:
1
LOC:
Monopoly
TOP:
Barriers to entry
17.
REF:
a.
perfectly elastic demand.
b.
perfectly inelastic demand.
c.
barriers to entry.
d.
availability of "free" natural resources, such as water or air.
C
DIF:
2
LOC:
Monopoly
TOP:
Barriers to entry
REF:
Analytic
MSC:
Interpretive
15-1
NAT:
Analytic
MSC:
Interpretive
The fundamental cause of monopoly is
a.
incompetent management in competitive firms.
b.
the zero-profit feature of long-run equilibrium in competitive markets.
c.
advertising.
d.
barriers to entry.
ANS:
D
DIF:
1
LOC:
Monopoly
TOP:
Barriers to entry
19.
NAT:
A fundamental source of monopoly market power arises from
ANS:
18.
15-1
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
Sizable economic profits can persist over time under monopoly if the monopolist
a.
produces that output where average total cost is at a maximum.
b.
is protected by barriers to entry.
c.
operates as a price taker rather than a price maker.
d.
realizes revenues that exceed variable costs.
ANS:
B
DIF:
1
REF:
LOC:
Monopoly
TOP:
Barriers to entry
15-1
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1020
20.
Patent and copyright laws are major sources of
a.
natural monopolies.
b.
government-created monopolies.
c.
resource monopolies.
d.
antitrust regulation.
ANS:
B
DIF:
1
LOC:
Monopoly
TOP:
Patents | Copyrights
21.
REF:
a.
resource monopolies.
b.
natural monopolies.
c.
government-created monopolies.
d.
breaking up monopolies into smaller firms.
C
DIF:
1
LOC:
Monopoly
TOP:
Patents | Copyrights
REF:
Analytic
MSC:
Interpretive
15-1
NAT:
Analytic
MSC:
Interpretive
A government-created monopoly arises when
a.
government spending in a certain industry gives rise to monopoly power.
b.
the government exercises its market control by encouraging competition among sellers.
c.
the government gives a firm the exclusive right to sell some good or service.
d.
Both a and c are correct.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Patents | Copyrights
23.
NAT:
Encouraging firms to invest in research and development and individuals to engage in creative endeavors
such as writing novels is one justification for
ANS:
22.
15-1
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
Which of the following statements is true about patents and copyrights?
(i)
They have benefits and costs.
(ii)
They lead to higher prices.
(iii)
They enhance the ability of monopolists to earn above-average profits.
Chapter 15/Monopoly  1021
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(ii) only
d.
(i), (ii), and (iii)
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Patents | Copyrights
24.
REF:
Analytic
MSC:
Interpretive
a.
promote monopolies.
b.
are intended to serve private interests, not the public’s interest.
c.
have costs but not benefits.
d.
eliminate the need for firms to engage in research and development.
A
DIF:
2
LOC:
Monopoly
TOP:
Patents | Copyrights
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
A benefit to society of the patent and copyright laws is that those laws
a.
help to keep prices down.
b.
help to prevent a single firm from acquiring ownership of a key resource.
c.
encourage creative activity.
d.
discourage excessive amounts of output of certain products.
ANS:
C
DIF:
1
LOC:
Monopoly
TOP:
Patents | Copyrights
26.
NAT:
The laws governing patents and copyrights
ANS:
25.
15-1
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
NAT:
Analytic
MSC:
Interpretive
Patent and copyright laws encourage
a.
creative activity.
b.
research and development.
c.
competition among firms.
d.
Both a and b are correct.
ANS:
D
DIF:
1
REF:
LOC:
Monopoly
TOP:
Patents | Copyrights
15-1
Chapter 15/Monopoly  1022
27.
Patent and copyright laws encourage
a.
creative activity.
b.
lower prices due to decreasing average total costs.
c.
competition among firms.
d.
Both a and b are correct.
ANS:
A
DIF:
1
LOC:
Monopoly
TOP:
Patents | Copyrights
28.
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
Allowing an inventor to have the exclusive rights to market her new invention will lead to
(i)
a product that is priced higher than it would be without the exclusive rights.
(ii)
desirable behavior in the sense that inventors are encouraged to invent.
(iii)
higher profits for the inventor.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
D
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Patents
MSC:
Interpretive
29.
NAT:
Analytic
Granting a pharmaceutical company a patent for a new medicine will lead to
(i)
a product that is priced higher than it would be without the exclusive rights.
(ii)
incentives for pharmaceutical companies to invest in research and development.
(iii)
higher quantities of output than without the patent.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
A
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Patents
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1023
30.
Drug companies are allowed to be monopolists in the drugs they discover in order to
a.
allow drug companies to charge a price that is equal to their marginal cost.
b.
discourage new firms from entering the drug market.
c.
encourage research.
d.
allow the government to earn patent revenue.
ANS:
C
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Patents
MSC:
Interpretive
31.
a.
encourage authors to write more and better books.
b.
correct for the negative externalities that the Internet and television impose.
c.
satisfy literary advocacy groups that exercise their lobbying power.
d.
promote a society in which people think for themselves and learn from whichever books they
please.
A
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Copyrights
MSC:
Interpretive
NAT:
Analytic
Which of the following is a characteristic of a natural monopoly?
a.
Marginal cost declines over large regions of output.
b.
Average total cost declines over large regions of output.
c.
The product sold is a natural resource such as diamonds or water.
d.
All of the above are correct.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
33.
Analytic
Authors are allowed to be monopolists in the sale of their books in order to
ANS:
32.
NAT:
REF:
15-1
NAT:
Analytic
MSC:
Definitional
Which of the following is a characteristic of a natural monopoly?
a.
Average cost exceeds marginal cost over large regions of output.
b.
Increasing the number of firms increases each firm’s average total cost.
c.
One firm can supply output at a lower cost than two firms.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Natural monopoly
15-1
NAT:
Analytic
MSC:
Definitional
Chapter 15/Monopoly  1024
34.
A natural monopoly occurs when
a.
the product is sold in its natural state, such as water or diamonds.
b.
there are economies of scale over the relevant range of output.
c.
the firm is characterized by a rising marginal cost curve.
d.
production requires the use of free natural resources, such as water or air.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
35.
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
An industry is a natural monopoly when
(i)
the government assists the firm in maintaining the monopoly.
(ii)
a single firm owns a key resource.
(iii)
a single firm can supply a good or service to an entire market at a smaller cost than could
two or more firms.
a.
(ii) only
b.
(iii) only
c.
(i) and (ii) only
d.
(ii) and (iii) only
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
36.
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
When a natural monopoly exists, it is
a.
always cost effective for government-owned firms to produce the product.
b.
never cost effective for one firm to produce the product.
c.
always cost effective for two or more private firms to produce the product.
d.
never cost effective for two or more private firms to produce the product.
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Natural monopoly
15-1
NAT:
Analytic
MSC:
Definitional
Chapter 15/Monopoly  1025
37.
The defining characteristic of a natural monopoly is
a.
constant marginal cost over the relevant range of output.
b.
economies of scale over the relevant range of output.
c.
constant returns to scale over the relevant range of output.
d.
diseconomies of scale over the relevant range of output.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
38.
REF:
Analytic
MSC:
Definitional
a.
are not subject to barriers to entry.
b.
are not regulated by government.
c.
generally don't make a profit.
d.
are generally not worried about competition eroding their monopoly position in the market.
D
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
When a firm's average total cost curve continually declines, the firm is a
a.
government-created monopoly.
b.
natural monopoly.
c.
revenue monopoly.
d.
All of the above are correct.
ANS:
B
DIF:
1
LOC:
Monopoly
TOP:
Natural monopoly
40.
NAT:
Natural monopolies differ from other forms of monopoly because they
ANS:
39.
15-1
REF:
15-1
NAT:
Analytic
MSC:
Definitional
NAT:
Analytic
MSC:
Interpretive
A natural monopolist's ability to price its product is
a.
constrained by the market demand curve.
b.
constrained by market supply.
c.
not affected by market demand.
d.
enhanced by regulatory control of the government.
ANS:
A
DIF:
2
REF:
LOC:
Monopoly
TOP:
Natural monopoly
15-1
Chapter 15/Monopoly  1026
Figure 15-1
Costs
ATC
Quantity
41.
Refer to Figure 15-1. The shape of the average total cost curve reveals information about the nature of the
barrier to entry that might exist in a monopoly market. Which of the following monopoly types best coincides
with the figure?
a.
ownership of a key resource by a single firm
b.
natural monopoly
c.
government-created monopoly
d.
a patent or copyright monopoly
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
42.
REF:
15-1
NAT:
Analytic
MSC:
Analytical
Refer to Figure 15-1. The shape of the average total cost curve in the figure suggests an opportunity for a
profit-maximizing monopolist to take advantage of
a.
economies of scale.
b.
diseconomies of scale.
c.
diminishing marginal product.
d.
increasing marginal cost.
ANS:
A
DIF:
1
REF:
LOC:
Monopoly
TOP:
Natural monopoly
15-1
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1027
43.
Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the marginal
cost curve for this firm
a.
must lie entirely above the average total cost curve.
b.
must lie entirely below the average total cost curve.
c.
must be upward sloping.
d.
does not exist.
ANS:
B
DIF:
3
LOC:
Monopoly
TOP:
Natural monopoly
44.
REF:
NAT:
Analytic
MSC:
Analytical
NAT:
Analytic
MSC:
Definitional
When an industry is a natural monopoly,
a.
it is characterized by constant returns to scale.
b.
it is characterized by diseconomies of scale.
c.
a larger number of firms may lead to a lower average cost.
d.
a larger number of firms will lead to a higher average cost.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
45.
15-1
REF:
15-1
If the distribution of water is a natural monopoly, then
(i)
multiple firms would likely each have to pay large fixed costs to develop their own network
of pipes.
(ii)
allowing for competition among different firms in the water-distribution industry is efficient.
(iii)
a single firm can serve the market at the lowest possible average total cost.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(iii) only
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Natural monopoly
15-1
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1028
46.
A firm that is a natural monopoly
a.
is not likely to be concerned about new entrants eroding its monopoly power.
b.
is taking advantage of economies of scale.
c.
would experience a higher average total cost if more firms entered the market.
d.
All of the above are correct.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
47.
REF:
NAT:
Analytic
MSC:
Interpretive
A firm that is a natural monopoly
a.
is not likely to be concerned about new entrants eroding its monopoly power.
b.
is taking advantage of diseconomies of scale.
c.
would experience a lower average total cost if more firms entered the market.
d.
All of the above are correct.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
48.
15-1
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
Additional firms often do not try to compete with a natural monopoly because
a.
they fear retaliation in the form of pricing wars from the natural monopolist.
b.
they are unsure of the size of the market in general.
c.
they know they cannot achieve the same low costs that the natural monopolist enjoys.
d.
the natural monopoly doesn't make a huge profit.
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Natural monopoly
15-1
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1029
Scenario 15-1
Consider a transportation corporation named C.R. Evans that has just completed the development of a new subway
system in a medium-sized town in the Northwest. Currently, there are plenty of seats on the subway, and it is never
crowded. Its capacity far exceeds the needs of the city. After just a few years of operation, the shareholders of C.R.
Evans experienced incredible rates of return on their investment, due to the profitability of the corporation.
49.
Refer to Scenario 15-1. Which of the following statements are most likely to be true?
(i)
New entrants to the market know they will have a smaller market share than C.R. Evans
currently has.
(ii)
C.R. Evans is most likely experiencing increasing average total cost.
(iii)
C.R. Evans is a natural monopoly.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
50.
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
Refer to Scenario 15-1. Which of the following statements are most likely to be true?
(i)
New entrants to the market know they will have a smaller market share than C.R. Evans
currently has.
(ii)
C.R. Evans is most likely experiencing decreasing average total cost.
(iii)
C.R. Evans is a natural monopoly.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Natural monopoly
15-1
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1030
51.
Refer to Scenario 15-1. C.R. Evans will continue to be a monopolist in the subway transportation industry
only if
a.
population growth leads to an overcrowding of the subway cars.
b.
there are no new entrants to the market.
c.
demand for transportation services decreases.
d.
All of the above are correct.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
52.
REF:
a.
resource industry.
b.
exclusive industry.
c.
government monopoly.
d.
natural monopoly.
D
DIF:
1
LOC:
Monopoly
TOP:
Natural monopoly
REF:
Analytic
MSC:
Interpretive
15-1
NAT:
Analytic
MSC:
Definitional
A natural monopoly arises when
a.
there are constant returns to scale over the relevant range of output.
b.
there are economies of scale over the relevant range of output.
c.
one firm owns a key natural resource.
d.
the government gives a single firm the exclusive right to produce a particular good or service.
ANS:
B
DIF:
1
LOC:
Monopoly
TOP:
Natural monopoly
54.
NAT:
When a single firm can supply a product to an entire market at a lower cost than could two or more firms, the
industry is called a
ANS:
53.
15-1
REF:
15-1
NAT:
Analytic
MSC:
Definitional
When a firm has a natural monopoly, the firm's
a.
marginal cost always exceeds its average total cost.
b.
total cost curve is horizontal.
c.
average total cost curve is downward sloping.
d.
marginal cost curve must lie above the firm’s average total cost curve.
Chapter 15/Monopoly  1031
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
55.
REF:
NAT:
Analytic
MSC:
Interpretive
If government officials break a natural monopoly up into several smaller firms, then
a.
competition will force firms to attain economic profits rather than accounting profits.
b.
competition will force firms to produce surplus output, which drives up price.
c.
the average costs of production will increase.
d.
the average costs of production will decrease.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
56.
15-1
REF:
15-1
NAT:
Analytic
MSC:
Interpretive
Which of the following statements is not correct?
a.
Consumers will likely benefit in the form of lower prices from buying a product made by a natural
monopoly than if the market were served by several firms.
b.
Monopolists typically charge higher prices than competitive firms.
c.
Monopolists typically produce larger quantities of output than competitive firms.
d.
Consumers may benefit from monopolies if the firms invest their higher profits into something
that benefits society such as medical research.
ANS:
C
DIF:
2
REF:
15-1
LOC:
Monopoly
TOP:
Monopoly | Natural monopoly
NAT:
Analytic
MSC:
Applicative
Sec 02 - Monopoly - How Monopolies Make Production and Pricing Decisions
MULTIPLE CHOICE
1.
Which of the following statements is (are) true of a monopoly?
(i)
A monopoly has the ability to set the price of its product at whatever level it desires.
(ii)
A monopoly's total revenue will always increase when it increases the price of its product.
(iii)
A monopoly can earn unlimited profits.
a.
(i) only
b.
(ii) only
c.
(i) and (ii) only
d.
(ii) and (iii) only
Chapter 15/Monopoly  1032
ANS:
A
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
2.
NAT:
Analytic
Young Johnny inherited the only local cable TV company in town after his father passed away. The company is
completely unregulated by the government and is therefore free to operate as it wishes. Assume that Johnny
understands the true power of his new monopoly. Which of the following statements is (are) correct?
(i)
He will be able to set the price of cable TV service at whatever level he wishes.
(ii)
The customers will be forced to purchase cable TV service at whatever price he wants to set.
(iii)
He will be able to achieve any profit level that he desires.
a.
(i) only
b.
(ii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
A
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
3.
Analytic
NAT:
Analytic
NAT:
Analytic
The market demand curve for a monopolist is typically
a.
unit price elastic.
b.
downward sloping.
c.
horizontal.
d.
vertical.
ANS:
B
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
4.
NAT:
When a firm operates under conditions of monopoly, its price is
a.
not constrained.
b.
constrained by marginal cost.
c.
constrained by demand.
d.
constrained only by its social agenda.
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
Chapter 15/Monopoly  1033
5.
In order to sell more of its product, a monopolist must
a.
sell to the government.
b.
sell in international markets.
c.
lower its price.
d.
use its market power to force up the price of complementary products.
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
6.
NAT:
Analytic
NAT:
Analytic
Economists assume that monopolists behave as
a.
cost minimizers.
b.
profit maximizers.
c.
price maximizers.
d.
maximizers of social welfare.
ANS:
B
DIF:
1
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
7.
Because a monopolist is the sole producer in its market, it can necessarily alter the price of its good
(i)
without affecting the quantity sold.
(ii)
without affecting its average total cost.
(iii)
by adjusting the quantity it supplies to the market.
a.
(ii) only
b.
(iii) only
c.
(i) and (ii) only
d.
(ii) and (iii) only
ANS:
B
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1034
8.
When a monopolist decreases the price of its good, consumers
a.
continue to buy the same amount.
b.
buy more.
c.
buy less.
d.
may buy more or less, depending on the price elasticity of demand.
ANS:
B
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Analytical
9.
a.
stays the same.
b.
increases.
c.
decreases.
d.
may increase or decrease depending on the price elasticity of demand.
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Analytical
NAT:
Analytic
NAT:
Analytic
The supply curve for the monopolist
a.
is horizontal.
b.
is vertical.
c.
is upward sloping.
d.
does not exist.
ANS:
D
DIF:
1
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
11.
Analytic
When a monopolist increases the amount of output that it produces and sells, the price of its output
ANS:
10.
NAT:
Which of the following statements is true of a monopoly firm?
a.
A monopoly firm is a price taker and has no supply curve.
b.
A monopoly firm is a price maker and has no supply curve
c.
A monopoly firm is a price maker and has a downward-sloping supply curve.
d.
A monopoly firm is a price maker and has an upward-sloping supply curve.
ANS:
B
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1035
12.
Monopolies use their market power to
a.
charge prices that equal minimum average total cost.
b.
increase the quantity sold as they increase price.
c.
charge a price that is higher than marginal cost.
d.
dump excess supplies of their product on the market.
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
13.
NAT:
Analytic
In a market characterized by monopoly, the market demand curve is
a.
upward sloping.
b.
horizontal.
c.
downward sloping.
d.
vertical.
ANS:
C
DIF:
1
REF:
LOC:
Monopoly
TOP:
Demand curve
15-2
NAT:
Analytic
MSC:
Definitional
Figure 15-2
Price
Panel A
Price
Price
Panel B
Price
Panel C
D
Panel D
D
D
D
Quantity
14.
Quantity
Quantity
Quantity
Refer to Figure 15-2. Which of the following statements is correct?
a.
Panel C represents the typical demand curve for a perfectly competitive firm, and Panel B
represents the typical demand curve for a monopoly.
b.
Panel B represents the typical demand curve for a perfectly competitive firm, and Panel C
represents the typical demand curve for a monopoly.
c.
Panel A represents the typical demand curve for a perfectly competitive firm, and Panel B
represents the typical demand curve for a monopoly.
d.
Panel C represents the typical demand curve for a perfectly competitive firm, and Panel D
represents the typical demand curve for a monopoly.
ANS:
A
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly | Perfect Competition
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1036
15.
Refer to Figure 15-2. Which of the following statements is correct?
a.
Panel C represents the typical demand curve for a perfectly competitive firm.
b.
Panel B represents the typical demand curve for a monopoly.
c.
Panel B represents the typical demand curve for a perfectly competitive industry.
d.
All of the above are correct.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Monopoly | Perfect Competition
16.
REF:
15-2
Analytic
MSC:
Interpretive
Refer to Figure 15-2. Which of the following statements is correct?
a.
Panel C represents the typical demand curve for a perfectly competitive industry.
b.
Panel B represents the typical demand curve for a monopoly.
c.
Panel B represents the typical demand curve for a perfectly competitive firm.
d.
All of the above are correct.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Monopoly | Perfect Competition
17.
NAT:
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
Which of the following statements is correct?
a.
The demand curve facing a competitive firm is horizontal, as is the demand curve facing a
monopolist.
b.
The demand curve facing a competitive firm is downward sloping, whereas the demand curve
facing a monopolist is horizontal.
c.
The demand curve facing a competitive firm is horizontal, whereas the demand curve facing a
monopolist is downward sloping.
d.
The demand curve facing a competitive firm is downward sloping, as is the demand curve facing a
monopolist.
ANS:
C
DIF:
1
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly | Perfect Competition
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1037
18.
Competitive firms have
a.
downward-sloping demand curves, and they can sell as much output as they desire at the market
price.
b.
downward-sloping demand curves, and they can sell only a limited quantity of output at each
price.
c.
horizontal demand curves, and they can sell as much output as they desire at the market price.
d.
horizontal demand curves, and they can sell only a limited quantity of output at each price.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Perfect Competition
19.
REF:
15-2
MSC:
Interpretive
a.
downward-sloping demand curves and they can sell as much output as they desire at the market
price.
b.
downward-sloping demand curves and they can sell only a limited quantity of output at each price.
c.
horizontal demand curves and they can sell as much output as they desire at the market price.
d.
horizontal demand curves and they can sell only a limited quantity of output at each price.
B
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
Because many good substitutes exist for a competitive firm's product, the demand curve that it faces is
a.
unit-elastic.
b.
perfectly inelastic.
c.
perfectly elastic.
d.
inelastic only over a certain region.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Perfect Competition
21.
Analytic
Monopoly firms have
ANS:
20.
NAT:
REF:
15-2
NAT:
Analytic
MSC:
Analytical
In a competitive market, a firm's supply curve dictates the amount it will supply. In a monopoly market the
a.
same is true.
b.
supply curve conceptually makes sense, but in practice is never used.
c.
supply curve will have limited predictive capacity.
d.
decision about how much to supply is impossible to separate from the demand curve it faces.
Chapter 15/Monopoly  1038
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Perfect Competition | Monopoly
22.
15-2
NAT:
Analytic
MSC:
Interpretive
As a monopolist increases the quantity of output it sells, the price consumers are willing to pay for the good
a.
is unaffected.
b.
decreases.
c.
increases.
d.
There is not enough information given in answer the question.
ANS:
B
DIF:
1
LOC:
Monopoly
TOP:
Demand curve
23.
REF:
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
Competitive firms differ from monopolies in which of the following ways?
(i)
Competitive firms do not have to worry about the price effect lowering their total revenue.
(ii)
Marginal revenue for a competitive firm equals price, while marginal revenue for a
monopoly is less than the price it is able to charge.
(iii)
Monopolies must lower their price in order to sell more of their product, while competitive
firms do not.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
D
DIF:
3
REF:
15-2
LOC:
Monopoly
TOP:
Perfect Competition | Monopoly
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1039
24.
The profit-maximization problem for a monopolist differs from that of a competitive firm in which of the
following ways?
a.
A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a
monopolist maximizes profit at the point where marginal revenue exceeds marginal cost.
b.
A competitive firm maximizes profit at the point where average revenue equals marginal cost; a
monopolist maximizes profit at the point where average revenue exceeds marginal cost.
c.
For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to
marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profitmaximizing level of output is smaller than it is for larger levels of output.
d.
For a profit-maximizing competitive firm, thinking at the margin is much more important than it is
for a profit-maximizing monopolist.
ANS:
B
DIF:
3
LOC:
Monopoly
TOP:
Monopoly | Perfect Competition
25.
REF:
15-2
Analytic
MSC:
Interpretive
Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town.
Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to
restaurants. Assuming that Angelo is maximizing his profit, which of the following statements is true?
a.
Meatball prices will be less than marginal cost.
b.
Meatball prices will equal marginal cost.
c.
Meatball prices will exceed marginal cost.
d.
Costs are irrelevant to Angelo because he is a monopolist.
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Pricing
MSC:
Interpretive
26.
NAT:
NAT:
Analytic
NAT:
Analytic
MSC:
Interpretive
A monopoly's marginal cost will
a.
be less than its average fixed cost.
b.
be less than the price per unit of its product.
c.
exceed its marginal revenue.
d.
equal its average total cost.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Marginal cost
REF:
15-2
Chapter 15/Monopoly  1040
27.
Which of the following statements is correct for a monopolist?
i) The firm maximizes profits by equating marginal revenue with marginal cost.
ii) The firm maximizes profits by equating price with marginal cost.
iii) Demand equals marginal revenue.
iv) Average revenue equals price.
a.
i), iii), and iv) only
b.
i) and iv) only
c.
i), ii), and iv) only
d.
i), ii), iii), and iv)
ANS:
B
DIF:
3
LOC:
Monopoly
TOP:
Marginal revenue | Average revenue
MSC:
Interpretive
28.
REF:
15-2
NAT:
Analytic
Which of the following statements is correct for both a monopolist and a perfectly competitive firm?
i) The firm maximizes profits by equating marginal revenue with marginal cost.
ii) The firm maximizes profits by equating price with marginal cost.
iii) Demand equals marginal revenue.
iv) Average revenue equals price.
a.
i), iii), and iv) only
b.
i) and iv) only
c.
i), ii), and iv) only
d.
i), ii), iii), and iv)
ANS:
B
DIF:
3
REF:
15-2
LOC:
Monopoly
TOP:
Marginal revenue | Average revenue
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1041
29.
Because a monopolist must lower its price in order to sell another unit of output,
a.
marginal revenue is less than price.
b.
long-term economic profits will be zero.
c.
total revenue increases as price increases.
d.
average revenue is less than price.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
30.
REF:
a.
a downward-sloping line that is identical to the demand curve
b.
a downward-sloping line that lies below the demand curve
c.
a horizontal line that is identical to the demand curve
d.
a horizontal line that lies below the demand curve
B
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
REF:
Analytic
MSC:
Interpretive
15-2
NAT:
Analytic
MSC:
Interpretive
For a monopolist, marginal revenue is
a.
equal to price, as it is for a perfectly competitive firm.
b.
less than price, as it is for a perfectly competitive firm.
c.
equal to price, whereas marginal revenue is less than price for a perfectly competitive firm.
d.
less than price, whereas marginal revenue is equal to price for a perfectly competitive firm.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
32.
NAT:
What is the shape of the monopolist’s marginal revenue curve?
ANS:
31.
15-2
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
NAT:
Analytic
MSC:
Definitional
A monopolist's average revenue is always
a.
equal to marginal revenue.
b.
greater than the price of its product.
c.
equal to the price of its product.
d.
less than the price of its product.
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Average revenue
15-2
Chapter 15/Monopoly  1042
33.
If a profit-maximizing monopolist faces a downward-sloping market demand curve, its
a.
average revenue is less than the price of the product.
b.
average revenue is less than marginal revenue.
c.
marginal revenue is less than the price of the product.
d.
marginal revenue is greater than the price of the product.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Average revenue
34.
REF:
a.
demand effect and the supply effect.
b.
competition effect and the cost effect.
c.
competitive effect and the monopoly effect.
d.
output effect and the price effect.
D
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
REF:
Analytic
MSC:
Analytical
15-2
NAT:
Analytic
MSC:
Interpretive
For a monopolist, marginal revenue is
a.
positive when the demand effect is greater than the supply effect.
b.
positive when the monopoly effect is greater than the competitive effect.
c.
negative when the price effect is greater than the output effect.
d.
negative when the output effect is greater than the price effect.
ANS:
C
DIF:
3
LOC:
Monopoly
TOP:
Marginal revenue
36.
NAT:
When a monopolist increases the number of units it sells, there are two effects on revenue. They are the
ANS:
35.
15-2
REF:
15-2
NAT:
Analytic
MSC:
Analytical
For a monopolist, when the price effect is greater than the output effect, marginal revenue is
a.
positive.
b.
negative.
c.
zero.
d.
maximized.
ANS:
B
DIF:
3
REF:
LOC:
Monopoly
TOP:
Marginal revenue
15-2
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1043
37.
For a monopolist, when the output effect is greater than the price effect, marginal revenue is
a.
positive.
b.
negative.
c.
zero.
d.
maximized.
ANS:
A
DIF:
3
LOC:
Monopoly
TOP:
Marginal revenue
38.
REF:
Analytic
MSC:
Analytical
a.
both the output effect and the price effect work to increase total revenue.
b.
the output effect works to increase total revenue, and the price effect works to decrease total
revenue.
c.
the output effect works to decrease total revenue, and the price effect works to increase total
revenue.
d.
both the output effect and the price effect work to decrease total revenue.
B
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
When a monopolist increases the amount of output that it produces and sells, average revenue
a.
increases, and marginal revenue increases.
b.
increases, and marginal revenue decreases.
c.
decreases, and marginal revenue increases.
d.
decreases, and marginal revenue decreases.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Average revenue
40.
NAT:
When a monopoly increases its output and sales,
ANS:
39.
15-2
REF:
15-2
Marginal revenue for a monopolist is computed as
a.
average revenue divided by quantity sold.
b.
average revenue times quantity divided by price.
c.
total revenue divided by quantity sold.
d.
change in total revenue per one unit increase in quantity sold.
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1044
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
41.
REF:
15-2
NAT:
Analytic
MSC:
Definitional
Which of the following statements is true?
(i)
When a competitive firm sells an additional unit of output, its revenue increases by an
amount less than the price.
(ii)
When a monopoly firm sells an additional unit of output, its revenue increases by an
amount less than the price.
(iii)
Average revenue is the same as price for both competitive and monopoly firms.
a.
(ii) only
b.
(iii) only
c.
(i) and (ii) only
d.
(ii) and (iii) only
ANS:
D
DIF:
3
LOC:
Monopoly
TOP:
Marginal revenue
42.
REF:
NAT:
Analytic
MSC:
Interpretive
For a monopoly firm, which of the following equalities is always true?
a.
price = marginal revenue
b.
price = average revenue
c.
price = total revenue
d.
marginal revenue = marginal cost
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Average revenue
43.
15-2
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
The marginal revenue curve for a monopoly firm starts at the same point on the vertical axis as the
(i)
average revenue curve.
(ii)
marginal cost curve.
(iii)
demand curve.
Chapter 15/Monopoly  1045
a.
(i) only
b.
(i) and (ii) only
c.
(i) and (iii) only
d.
(iii) only
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
44.
REF:
NAT:
Analytic
MSC:
Analytical
NAT:
Analytic
MSC:
Interpretive
Marginal revenue can become negative for
a.
both competitive and monopoly firms.
b.
competitive firms but not for monopoly firms.
c.
monopoly firms but not for competitive firms.
d.
neither competitive nor monopoly firms.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
45.
15-2
REF:
15-2
For a monopoly firm, the shape and position of the demand curve play a role in determining
(i)
the profit-maximizing price.
(ii)
the shape and position of the marginal cost curve.
(iii)
the shape and position of the marginal revenue curve.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Demand curve | Marginal revenue
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1046
46.
For a monopolist, when does marginal revenue exceed average revenue?
a.
never
b.
when output is less than the profit-maximizing level of output
c.
when output is greater than the profit-maximizing level of output
d.
for all levels of output greater than zero
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
47.
NAT:
Analytic
MSC:
Analytical
a.
less marginal revenue on the 100th widget than it received on the 99th widget.
b.
more average revenue on the 100th widget than it received on the 99th widget.
c.
more total revenue on the 100 widgets than it received on the first 99 widgets.
d.
a lower average cost per unit at 100 units output than at 99 units of output.
A
DIF:
2
LOC:
Monopoly
TOP:
Demand curve
REF:
15-2
NAT:
Analytic
MSC:
Analytical
For a monopoly, the level of output at which marginal revenue equals zero is also the level of output at which
a.
average revenue is zero.
b.
profit is maximized.
c.
total revenue is maximized.
d.
marginal cost is zero.
ANS:
C
DIF:
3
LOC:
Monopoly
TOP:
Total revenue
49.
15-2
Suppose a firm has a monopoly on the sale of widgets and faces a downward-sloping demand curve. When
selling the 100th widget, the firm will always receive
ANS:
48.
REF:
REF:
15-2
NAT:
Analytic
MSC:
Analytical
For a monopolist,
a.
average revenue is always greater than the price of the good.
b.
marginal revenue is always less than the price of the good.
c.
marginal cost is always greater than average total cost.
d.
marginal revenue equals marginal cost at the point where total revenue is maximized.
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Marginal revenue
15-2
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1047
50.
For a monopoly,
a.
average revenue exceeds marginal revenue.
b.
average revenue equals marginal revenue.
c.
average revenue is less than marginal revenue.
d.
price equals marginal revenue.
ANS:
A
DIF:
1
LOC:
Monopoly
TOP:
Marginal revenue
51.
REF:
a.
total revenue must increase.
b.
total revenue must decrease.
c.
marginal revenue must increase.
d.
marginal revenue must decrease.
D
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
REF:
Analytic
MSC:
Definitional
15-2
NAT:
Analytic
MSC:
Interpretive
With no price discrimination, the monopolist sells every unit at the same price. Therefore
a.
marginal revenue is equal to price.
b.
marginal revenue is equal to average revenue.
c.
price is greater than marginal revenue.
d.
Both a and b are correct.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
53.
NAT:
If a monopoly lowers its price, its
ANS:
52.
15-2
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
If a monopolist's marginal costs increase by $1 for all levels of output, then
a.
the monopoly price will rise by $1.
b.
the monopoly price will rise by more than $1.
c.
the monopoly price will rise by less than $1.
d.
there is no change in the monopoly price and profits fall.
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Pricing
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1048
54.
If a monopolist has zero marginal costs, it will produce
a.
the output at which total revenue is maximized.
b.
in the range in which marginal revenue is still increasing.
c.
at the point at which marginal revenue is at a maximum.
d.
in the range in which marginal revenue is negative.
ANS:
A
DIF:
3
REF:
15-2
LOC:
Monopoly
TOP:
Pricing
MSC:
Analytical
55.
a.
producing an output level where marginal revenue equals marginal cost.
b.
charging a price equal to marginal revenue and marginal cost.
c.
charging a price where marginal cost equals average total cost.
d.
Both a and b are correct.
A
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
A monopolist maximizes profits by
a.
producing an output level where marginal revenue equals marginal cost.
b.
charging a price that is greater than marginal revenue.
c.
earning a profit of (P - MC) x Q.
d.
Both a and b are correct.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
57.
Analytic
A monopolist maximizes profits by
ANS:
56.
NAT:
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
A profit-maximizing monopolist will produce the level of output at which
a.
average revenue is equal to average total cost.
b.
average revenue is equal to marginal cost.
c.
marginal revenue is equal to marginal cost.
d.
total revenue is equal to opportunity cost.
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1049
58.
For a profit-maximizing monopolist,
a.
P > MR = MC.
b.
P = MR = MC.
c.
P > MR > MC.
d.
MR < MC < P.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
59.
REF:
a.
marginal cost and demand
b.
marginal cost and marginal revenue
c.
average total cost and marginal revenue
d.
average variable cost and average revenue
B
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
REF:
Analytic
MSC:
Analytical
15-2
NAT:
Analytic
MSC:
Interpretive
A monopolist will choose to increase output when
a.
market price increases.
b.
at all levels of output, marginal cost increases.
c.
at the present level of output, marginal revenue exceeds marginal cost.
d.
the demand curve shifts to the left.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
61.
NAT:
The monopolist's profit-maximizing quantity of output is determined by the intersection of which of the
following two curves?
ANS:
60.
15-2
REF:
15-2
NAT:
Analytic
MSC:
Analytical
NAT:
Analytic
MSC:
Definitional
Which of the following statements is not correct?
a.
The competitive firm produces where P = MC.
b.
The monopolist produces where P = MC.
c.
The competitive firm produces where MR = MC.
d.
The monopolist produces where MR = MC.
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
Chapter 15/Monopoly  1050
62.
Which of the following statements is correct?
a.
If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase
profit by selling more units at a lower price per unit.
b.
If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase
profit by selling fewer units at a higher price per unit.
c.
When a monopolist produces where price equals the minimum of average total cost, it earns a
positive economic profit.
d.
If the monopolist is earning a positive economic profit, it must be producing where MR = MC.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
63.
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
A reduction in a monopolist's fixed costs would
a.
decrease the profit-maximizing price and increase the profit-maximizing quantity produced.
b.
increase the profit-maximizing price and decrease the profit-maximizing quantity produced.
c.
not effect the profit-maximizing price or quantity.
d.
possibly increase, decrease or not effect profit-maximizing price and quantity, depending on the
elasticity of demand.
ANS:
C
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
64.
A monopolist
15-2
NAT:
Analytic
MSC:
Interpretive
a.
has a supply curve that is upward-sloping, just like a competitive firm.
b.
does not have a supply curve because the monopolist sets its price at the same time it chooses the
quantity to supply.
c.
has a horizontal supply curve, just like a competitive firm.
d.
does not have a supply curve because marginal revenue exceeds the price it charges for its
products.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Supply curve
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1051
Figure 15-3
Price
P
MC
A
B
C
ATC
F
G
H
D
O
65.
J K
L
Quantity
MR
Refer to Figure 15-3. What price will the monopolist charge?
a.
A
b.
B
c.
C
d.
F
ANS:
B
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
66.
Analytic
Refer to Figure 15-3. How much output will the monopolist produce?
a.
O
b.
J
c.
K
d.
L
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
67.
NAT:
NAT:
Refer to Figure 15-3. What area measures the monopolist’s profit?
a.
(B-F)*K
b.
(A-H)*J
c.
(B-G)*K
d.
0.5[(B-F)*(L-K)]
Analytic
Chapter 15/Monopoly  1052
ANS:
C
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Interpretive
Figure 15-4
Price
Curve C
Curve D
P4
P3
P2
P1
P0
Curve B
Curve A
Q0 Q2 Q3 Q4
Q1
68.
Quantity
Refer to Figure 15-4. The demand curve for a monopoly firm is depicted by curve
a.
A.
b.
B.
c.
C.
d.
D.
ANS:
A
DIF:
1
LOC:
Monopoly
TOP:
Demand curve
69.
REF:
15-2
NAT:
Analytic
MSC:
Interpretive
Refer to Figure 15-4. The marginal revenue curve for a monopoly firm is depicted by curve
a.
A.
b.
B.
c.
C.
d.
D.
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Marginal revenue
15-2
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1053
70.
Refer to Figure 15-4. The marginal cost curve for a monopoly firm is depicted by curve
a.
A.
b.
B.
c.
C.
d.
D.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Marginal cost
71.
REF:
a.
A.
b.
B.
c.
C.
d.
D.
D
DIF:
2
LOC:
Monopoly
TOP:
Average total cost
REF:
Analytic
MSC:
Interpretive
15-2
NAT:
Analytic
MSC:
Interpretive
Refer to Figure 15-4. If the monopoly firm is currently producing Q3 units of output, then a decrease in
output will necessarily cause profit to
a.
remain unchanged.
b.
decrease.
c.
increase as long as the new level of output is at least Q2.
d.
increase as long as the new level of output is at least Q1.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
73.
NAT:
Refer to Figure 15-4. The average total cost curve for a monopoly firm is depicted by curve
ANS:
72.
15-2
REF:
15-2
NAT:
Analytic
MSC:
Analytical
Refer to Figure 15-4. Profit can always be increased by increasing the level of output by one unit if the
monopolist is currently operating at
(i)
Q0.
(ii)
Q1.
(iii)
Q2.
(iv)
Q3.
Chapter 15/Monopoly  1054
a.
(ii) only
b.
(i) or (ii) only
c.
(i) only
d.
(i), (ii), or (iii) only
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
74.
REF:
a.
Q1.
b.
Q2.
c.
Q3.
d.
Q4.
B
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
REF:
Analytic
MSC:
Analytical
15-2
NAT:
Analytic
MSC:
Analytical
Refer to Figure 15-4. Profit will be maximized by charging a price equal to
a.
P1.
b.
P2.
c.
P3.
d.
P4.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
76.
NAT:
Refer to Figure 15-4. If the monopoly firm wants to maximize its profit, it should operate at a level of output
equal to
ANS:
75.
15-2
REF:
15-2
NAT:
Analytic
MSC:
Analytical
Refer to Figure 15-4. A profit-maximizing monopoly's total revenue is equal to
a.
P4 x Q2.
b.
P3 x Q4.
c.
(P4-P2) x Q2.
d.
(P4-P3) x Q2.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Total revenue
REF:
15-2
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1055
Figure 15-5
Price
Curve C
Curve D
P5
P4
P3
P2
P1
P0
Curve B
Curve A
Q1 Q2 Q3 Q4
77.
Quantity
Refer to Figure 15-5. A profit-maximizing monopoly will produce an output level of
a.
Q1.
b.
Q2.
c.
Q3.
d.
Q4.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
78.
REF:
15-2
NAT:
Analytic
MSC:
Analytical
Refer to Figure 15-5. A profit-maximizing monopoly will charge a price of
a.
P5.
b.
P4.
c.
P3.
d.
P2.
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1056
79.
Refer to Figure 15-5. A profit-maximizing monopoly's total revenue is equal to
a.
P4 x Q3.
b.
P5 x Q1.
c.
P3 x Q4.
d.
(P4-P2) x Q3.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Total revenue
80.
REF:
15-2
a.
P4 x Q3.
b.
P2 x Q3.
c.
P1 x Q3.
d.
(P4-P1) x Q3.
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Total cost
MSC:
Analytical
MSC:
Analytical
NAT:
Analytic
Refer to Figure 15-5. A profit-maximizing monopoly's profit is equal to
a.
P4 x Q3.
b.
(P4-P2) x Q3.
c.
(P4-P1) x Q3.
d.
(P5-P0) x Q1.
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Profit
MSC:
Analytical
82.
Analytic
Refer to Figure 15-5. A profit-maximizing monopoly's total cost is equal to
ANS:
81.
NAT:
NAT:
Analytic
Refer to Figure 15-5. Profit on a typical unit sold for a profit-maximizing monopoly would equal
a.
P5-P0.
b.
P4-P2.
c.
P4-P1.
d.
P4-P3.
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Profit
MSC:
Analytical
NAT:
Analytic
Chapter 15/Monopoly  1057
83.
Refer to Figure 15-5. At the profit-maximizing level of output,
a.
marginal revenue is equal to P3.
b.
marginal cost is equal to P3.
c.
average revenue is equal to P4.
d.
average total cost is equal to P0.
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Average revenue
15-2
NAT:
Analytic
MSC:
Interpretive
Scenario 15-2
A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its marginal
revenue is $30, its average revenue is $60, and its average total cost is $34.
84.
Refer to Scenario 15-2. The firm's profit-maximizing price is
a.
$30.
b.
between $30 and $34.
c.
between $34 and $60.
d.
$60.
ANS:
D
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Pricing
MSC:
Analytical
85.
Analytic
NAT:
Analytic
MSC:
Applicative
Refer to Scenario 15-2. At Q = 500, the firm's total revenue is
a.
$13,000.
b.
$15,000.
c.
$17,000.
d.
$30,000.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Total revenue
86.
NAT:
REF:
15-2
Refer to Scenario 15-2. At Q = 500, the firm's profit is
a.
$13,000.
b.
$15,000.
c.
$17,000.
d.
$30,000.
Chapter 15/Monopoly  1058
ANS:
A
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
87.
NAT:
Analytic
NAT:
Analytic
MSC:
Analytical
Refer to Scenario 15-2. At Q = 500, the firm's marginal cost is
a.
less than $30.
b.
$30.
c.
$34.
d.
greater than $34.
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Marginal cost
15-2
Table 15-1
Total
Average
Marginal
Revenue
Revenue
$32
$29
Quantity
Price
Revenue
1
$35
$35
2
$64
3
$29
4
$17
5
$23
6
$11
$120
7
$17
$-1
8
88.
$-7
9
$99
$11
10
$80
$8
$-13
Refer to Table 15-1. If the monopolist sells 8 units of its product, how much total revenue will it receive from
the sale?
a.
14
b.
40
c.
112
d.
164
Chapter 15/Monopoly  1059
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Total revenue
89.
a.
4
b.
5
c.
6
d.
8
C
DIF:
2
LOC:
Monopoly
TOP:
Total revenue
REF:
NAT:
Analytic
MSC:
Applicative
15-2
NAT:
Analytic
MSC:
Applicative
Refer to Table 15-1. When 4 units of output are produced and sold, what is average revenue?
a.
17
b.
21
c.
23
d.
26
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Average revenue
91.
15-2
Refer to Table 15-1. If the monopolist wants to maximize its revenue, how many units of its product should it
sell?
ANS:
90.
REF:
REF:
15-2
NAT:
Analytic
MSC:
Applicative
Refer to Table 15-1. What is the marginal revenue for the monopolist for the sixth unit sold?
a.
3
b.
5
c.
11
d.
17
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Marginal revenue
15-2
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1060
92.
Refer to Table 15-1. Assume this monopolist's marginal cost is constant at $12. What quantity of output (Q)
will it produce and what price (P) will it charge?
a.
Q = 4, P = $29
b.
Q = 4, P = $26
c.
Q = 5, P = $23
d.
Q = 7, P = $17
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Applicative
Table 15-2
Dreher's Designer Shirt Company, a monopolist, has the following cost and revenue information.
COSTS
REVENUES
Quantity
Total Cost
Marginal
Quantity
Price
Total
Marginal
Produced
($)
Cost
Demanded
($/unit)
Revenue
Revenue
0
100
--
0
170
1
140
1
160
2
184
2
150
3
230
3
140
4
280
4
130
5
335
5
120
6
395
6
110
7
475
7
100
8
565
8
90
93.
Refer to Table 15-2. What is the marginal cost of the 6th shirt?
a.
$44
b.
$46
c.
$55
d.
$60
--
Chapter 15/Monopoly  1061
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Marginal cost
94.
a.
$50
b.
$60
c.
$90
d.
$110
C
DIF:
2
LOC:
Monopoly
TOP:
Marginal cost
a.
$100
b.
$600
c.
$625
d.
$660
D
DIF:
2
LOC:
Monopoly
TOP:
Total revenue
Analytic
MSC:
Applicative
REF:
15-2
NAT:
Analytic
MSC:
Applicative
REF:
15-2
NAT:
Analytic
MSC:
Applicative
Refer to Table 15-2. What is the total revenue from selling 8 shirts?
a.
$90
b.
$695
c.
$720
d.
$800
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Total revenue
97.
NAT:
Refer to Table 15-2. What is the total revenue from selling 6 shirts?
ANS:
96.
15-2
Refer to Table 15-2. What is the marginal cost of the 8th shirt?
ANS:
95.
REF:
REF:
15-2
NAT:
Analytic
MSC:
Applicative
Refer to Table 15-2. What is the marginal revenue from selling the 2nd shirt?
a.
$140
b.
$150
c.
$160
d.
$170
Chapter 15/Monopoly  1062
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
98.
REF:
NAT:
Analytic
MSC:
Applicative
Refer to Table 15-2. What is the marginal revenue from selling the 8th shirt?
a.
$10
b.
$20
c.
$40
d.
$90
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
99.
15-2
REF:
15-2
NAT:
Analytic
MSC:
Applicative
Refer to Table 15-2. What is the average revenue when 7 shirts are sold?
a.
$40
b.
$90
c.
$100
d.
$700
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Average revenue
15-2
NAT:
Analytic
MSC:
Applicative
100. Refer to Table 15-2. Which of the following quantities will achieve the maximum profit?
a.
3
b.
4
c.
6
d.
7
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Applicative
101. Refer to Table 15-2. What is total profit at the profit-maximizing quantity?
a.
$100
b.
$245
c.
$265
d.
$395
Chapter 15/Monopoly  1063
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
NAT:
Analytic
102. Refer to Table 15-2. What are Dreher's Designer Shirt Company's fixed costs?
a.
$0
b.
$100
c.
$600
d.
$745
ANS:
B
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Fixed cost
MSC:
Applicative
NAT:
Analytic
103. Refer to Table 15-2. What is the total variable cost of production when six units are produced?
a.
$100
b.
$295
c.
$600
d.
$620
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Variable costs
REF:
15-2
NAT:
Analytic
MSC:
Applicative
Table 15-3
George has the following demand curve for selling vegemite sandwiches. Assume that George has a marginal cost
of $3 per unit.
Price
Quantity
$10
1
$8
2
$6
3
$4
4
$2
5
Chapter 15/Monopoly  1064
104. Refer to Table 15-3. What is George's profit-maximizing level of output?
a.
1
b.
2
c.
3
d.
4
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Applicative
NAT:
Analytic
MSC:
Applicative
105. Refer to Table 15-3. What is George's profit-maximizing price?
a.
$2
b.
$4
c.
$6
d.
$8
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
Table 15-4
Consider the following demand and cost information for a monopoly.
Quantity
Price
Total Cost
0
$30
$3
1
$25
$7
2
$20
$12
3
$15
$18
4
$10
$25
106. Refer to Table 15-4. The marginal revenue of the second unit is
a.
$10.
b.
$15.
c.
$20.
d.
$25.
Chapter 15/Monopoly  1065
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Marginal revenue
15-2
NAT:
Analytic
MSC:
Applicative
NAT:
Analytic
MSC:
Applicative
107. Refer to Table 15-4. The marginal cost of the fourth unit is
a.
$7.
b.
$12.
c.
$25.
d.
$60.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Marginal cost
REF:
15-2
108. Refer to Table 15-4. The maximum profit this monopolist can earn is
a.
$5.
b.
$15.
c.
$16.
d.
$28.
ANS:
D
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
NAT:
Analytic
109. Refer to Table 15-4. To maximize profit, the monopolist sets price at
a.
$10.
b.
$15.
c.
$20.
d.
$25.
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1066
110. A monopolist faces the following demand curve:
Price
Quantity
$51
1
$47
2
$42
3
$36
4
$29
5
$21
6
$12
7
The monopolist has total fixed costs of $60 and has a constant marginal cost of $15. What is the profit-maximizing
level of production?
a.
2 units
b.
3 units
c.
4 units
d.
5 units
ANS:
C
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
111. A monopolist faces the following demand curve:
Price
Quantity
$51
1
$47
2
$42
3
$36
4
$29
5
$21
6
$12
7
15-2
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1067
The monopolist has total fixed costs of $60 and has a constant marginal cost of $15. What is the profit-maximizing
price?
a.
$4
b.
$39
c.
$36
d.
$42
ANS:
C
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Applicative
112. A monopolist faces the following demand curve:
Price
Quantity
$10
5
$9
10
$8
16
$7
23
$6
31
$5
45
$4
52
$3
60
The monopolist has total fixed costs of $40 and a constant marginal cost of $5. What is the profit-maximizing level
of output?
a.
7 units
b.
16 units
c.
23 units
d.
31 units
ANS:
B
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1068
113. A monopolist faces the following demand curve:
Price
Quantity
$10
5
$9
10
$8
16
$7
23
$6
31
$5
45
$4
52
$3
60
The monopolist has total fixed costs of $40 and a constant marginal cost of $5. At the profit-maximizing level of
output, the monopolist's average total cost is
a.
$9.00.
b.
$7.50.
c.
$6.74.
d.
$5.82.
ANS:
B
DIF:
3
REF:
LOC:
Monopoly
TOP:
Average total cost
15-2
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1069
114. A monopolist faces the following demand curve:
Price
Quantity
$10
5
$9
10
$8
16
$7
23
$6
31
$5
45
$4
52
$3
60
The monopolist has total fixed costs of $40 and a constant marginal cost of $5. At the profit-maximizing level of
output, the monopolist's profit is
a.
$88.
b.
$8.
c.
$6.
d.
We do not have enough information to determine profit.
ANS:
B
DIF:
3
REF:
15-2
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
NAT:
Analytic
Chapter 15/Monopoly  1070
115. The following table shows quantity, price, and marginal cost information for a monopoly. What price should
the firm charge to maximize its profit?
Output
Price
MC
0
$10
--
1
$9
$3
2
$8
$4
3
$7
$5
4
$6
$6
5
$5
$7
6
$4
$8
a.
$4
b.
$5
c.
$6
d.
$7
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Analytical
116. The following table provides information on the price, quantity, and average cost for a monopoly. At what
price will the firm maximize its profit?
Price
Output
ATC
$5
0
--
$4
4
$1.00
$3
8
$0.75
$2
12
$0.75
$1
16
$0.81
$0
20
$0.90
Chapter 15/Monopoly  1071
a.
$1
b.
$2
c.
$3
d.
$4
ANS:
C
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Analytical
117. The following table gives information on the price, quantity, and total cost of production for a monopolist.
How much profit will the firm earn at the profit-maximizing price?
Price
Output
Total Costs
$5
0
$3
$4
5
$8
$3
10
$18
$2
15
$33
$1
20
$53
$0
25
$78
a.
$9
b.
$12
c.
$15
d.
$18
ANS:
B
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1072
118. The following table gives information on the price, quantity, and total cost of production for a monopolist.
What is the profit-maximizing price?
Price
Output
Total Costs
$5
0
$3
$4
5
$8
$3
10
$18
$2
15
$33
$1
20
$53
$0
25
$78
a.
$5
b.
$4
c.
$3
d.
$2
ANS:
C
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Analytical
119. A profit-maximizing monopolist charges a price of $12. The intersection of the marginal revenue and marginal
cost curves occurs where output is 10 units and marginal cost is $6. Average total cost for 10 units of output
is $5. What is the monopolist’s profit?
a.
$60
b.
$70
c.
$100
d.
$120
ANS:
B
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
NAT:
Analytic
Chapter 15/Monopoly  1073
120. A profit-maximizing monopolist charges a price of $14. The intersection of the marginal revenue curve and
the marginal cost curve occurs where output is 15 units and marginal cost is $7. What is the monopolist’s
profit?
a.
$90
b.
$105
c.
$180
d.
Not enough information is given to determine the answer.
ANS:
D
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
NAT:
Analytic
121. If a monopolist sells 100 units at $8 per unit and realizes an average total cost of $6 per unit, what is the
monopolist's profit?
a.
$200
b.
$400
c.
$600
d.
$800
ANS:
A
DIF:
1
REF:
15-2
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
NAT:
Analytic
122. A monopolist can sell 200 units of output for $36 per unit. Alternatively, it can sell 201 units of output for
$35.80 per unit. The marginal revenue of the 201 st unit of output is
a.
$-4.20.
b.
$-0.20.
c.
$4.20.
d.
$35.80.
ANS:
A
DIF:
2
REF:
LOC:
Monopoly
TOP:
Marginal revenue
15-2
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1074
123. A monopoly firm can sell 150 units of output for $10 per unit. Alternatively, it can sell 151 units of output for
$9.95 per unit. The marginal revenue of the 151 st unit of output is
a.
$-2.45.
b.
$-0.05.
c.
$2.45.
d.
$9.95.
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Marginal revenue
15-2
NAT:
Analytic
MSC:
Applicative
124. When a certain monopoly sets its price at $8 it sells 64 units. When the monopoly sets its price at $10 it sells
60 units. The marginal revenue for the firm over this range is
a.
$11.
b.
$22.
c.
$33.
d.
$44.
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Marginal revenue
15-2
NAT:
Analytic
MSC:
Analytical
125. Suppose when a monopolist produces 50 units its average revenue is $8 per unit, its marginal revenue is $4
per unit, its marginal cost is $4 per unit, and its average total cost is $3 per unit. What can we conclude about
this monopolist?
a.
The monopolist is currently maximizing profits, and its total profits are $200.
b.
The monopolist is currently maximizing profits, and its total profits are $250.
c.
The monopolist is not currently maximizing its profits; it should produce more units and charge a
lower price to maximize profit.
d.
The monopolist is not currently maximizing its profits; it should produce fewer units and charger a
higher price to maximize profit.
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1075
126. Suppose when a monopolist produces 75 units its average revenue is $10 per unit, its marginal revenue is $5
per unit, its marginal cost is $6 per unit, and its average total cost is $5 per unit. What can we conclude about
this monopolist?
a.
The monopolist is currently maximizing profits, and its total profits are $375.
b.
The monopolist is currently maximizing profits, and its total profits are $300.
c.
The monopolist is not currently maximizing profits; it should produce more units and charge a
lower price to maximize profits.
d.
The monopolist is not currently maximizing profits; it should produce fewer units and charge a
higher price to maximize profits.
ANS:
D
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-2
NAT:
Analytic
MSC:
Analytical
127. If a monopolist can sell 7 units when the price is $4 and 8 units when the price is $3, then marginal revenue
of selling the eighth unit is equal to
a.
$3.
b.
$4.
c.
$24.
d.
-$4.
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Marginal revenue
15-2
NAT:
Analytic
MSC:
Applicative
128. If a pharmaceutical company discovers a new drug and successfully patents it, patent law gives the firm
a.
partial ownership of the right to sell the drug for a limited number of years.
b.
partial ownership of the right to sell the drug for an unlimited number of years.
c.
sole ownership of the right to sell the drug for a limited number of years.
d.
sole ownership of the right to sell the drug for an unlimited number of years.
ANS:
C
DIF:
1
REF:
15-2
LOC:
Monopoly
TOP:
Patents
MSC:
Definitional
NAT:
Analytic
Chapter 15/Monopoly  1076
129. Due to the nature of the patent laws on pharmaceuticals, the market for such drugs
a.
always remains a competitive market.
b.
always remains a monopolistic market.
c.
switches from competitive to monopolistic once the firm's patent runs out.
d.
switches from monopolistic to competitive once the firm's patent runs out.
ANS:
D
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Patents
MSC:
Interpretive
NAT:
Analytic
130. What happens to the price and quantity sold of a drug when its patent runs out?
(i)
The price will fall.
(ii)
The quantity sold will fall.
(iii)
The marginal cost of producing the drug will rise.
a.
(i) only
b.
(i) and (ii) only
c.
(ii) and (iii) only
d.
(i), (ii), and (iii)
ANS:
A
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Patents
MSC:
Interpretive
NAT:
Analytic
131. Generic drugs enter the pharmaceutical drug market once
a.
the ingredients to the name brand drug have been discovered.
b.
10 years have passed.
c.
they are patented.
d.
the patent on the name brand drug expires.
ANS:
D
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Patents
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1077
132. Name brand drugs are able to continue capitalizing on their market power even after generic drugs enter the
market because
(i)
almost all people fear the generic drug companies are devoting too few resources to
research and development.
(ii)
some people fear that generic drugs are inferior.
(iii)
some people are loyal to the name brand.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
B
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Patents
MSC:
Interpretive
NAT:
Analytic
133. After the patent runs out on a brand name drug, generic drugs enter the market. What happens next in the
market?
a.
Price increases, and total surplus decreases.
b.
Price decreases, and total surplus decreases.
c.
Price decreases, and total surplus increases.
d.
Price increases, and total surplus increases.
ANS:
C
DIF:
2
REF:
15-2
LOC:
Monopoly
TOP:
Patents
MSC:
Interpretive
NAT:
Analytic
NAT:
Analytic
MSC:
Applicative
Sec 03 - Monopoly - The Welfare Cost of Monopolies
MULTIPLE CHOICE
1.
Deadweight loss
a.
measures monopoly inefficiency.
b.
exceeds monopoly profits.
c.
equals monopoly profits.
d.
equals monopoly revenues minus profits.
ANS:
A
DIF:
1
REF:
LOC:
Monopoly
TOP:
Deadweight loss
15-3
Chapter 15/Monopoly  1078
2.
A monopoly is an inefficient way to produce a product because
a.
it can earn both short-run and long-run profits.
b.
it faces a downward-sloping demand curve.
c.
the cost to the monopolist of producing one more unit exceeds the value of that unit to potential
buyers.
d.
it produces a smaller level of output than would be produced in a competitive market.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Deadweight loss
3.
REF:
Analytic
MSC:
Interpretive
a.
maximizes profits.
b.
produces an output level less than the socially optimal level.
c.
produces an output level greater than the socially optimal level.
d.
equates marginal revenue with marginal cost.
B
DIF:
2
LOC:
Monopoly
TOP:
Deadweight loss
REF:
15-3
NAT:
Analytic
MSC:
Interpretive
When we compare economic welfare in a monopoly market to a competitive market, the profits earned by
the monopolist represent
a.
a transfer of benefits from the consumer to the producer.
b.
a loss in total welfare.
c.
the higher marginal costs incurred by the monopolists in comparison to competitive firms.
d.
the higher marginal revenues gained by the monopolists in comparison to competitive firms.
ANS:
A
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Welfare
MSC:
Interpretive
5.
NAT:
The deadweight loss associated with a monopoly occurs because the monopolist
ANS:
4.
15-3
A monopoly market
a.
always maximizes total economic well-being.
b.
always minimizes consumer surplus.
c.
generally fails to maximize total economic well-being.
d.
generally fails to maximize producer surplus.
NAT:
Analytic
Chapter 15/Monopoly  1079
ANS:
C
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Welfare
MSC:
Interpretive
6.
NAT:
Analytic
Suppose a monopolist chooses the price and production level that maximizes its profit. From that point, to
increase society’s economic welfare, output would need to be increased as long as
a.
average revenue exceeds marginal cost.
b.
average revenue exceeds average total cost.
c.
marginal revenue exceeds marginal cost.
d.
marginal revenue exceeds average total cost.
ANS:
A
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Welfare
MSC:
Analytical
7.
NAT:
Analytic
The economic inefficiency of a monopolist can be measured by the
a.
number of consumers who are unable to purchase the product because of its high price.
b.
excess profit generated by monopoly firms.
c.
poor quality of service offered by monopoly firms.
d.
deadweight loss.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Deadweight loss
8.
REF:
15-3
NAT:
Analytic
MSC:
Interpretive
Monopolies are inefficient because they
(i)
eliminate barriers to entry.
(ii)
price their product at a level where marginal revenue exceeds marginal cost.
(iii)
restrict output below the socially efficient level of production.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(iii) only
d.
(i), (ii), and (iii)
ANS:
C
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1080
9.
The socially efficient level of production occurs where the marginal cost curve intersects
a.
average variable cost.
b.
average total cost.
c.
demand.
d.
marginal revenue.
ANS:
C
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Welfare
MSC:
Analytical
10.
a.
of little concern to society.
b.
a deadweight loss to society.
c.
a sunk cost to society.
d.
also observed in competitive markets.
B
DIF:
2
LOC:
Monopoly
TOP:
Deadweight loss
REF:
15-3
NAT:
Analytic
MSC:
Interpretive
The difference in total surplus between the socially efficient level of production and the monopolist's level of
production is
a.
offset by regulatory revenues.
b.
called a deadweight loss.
c.
equal to the monopolist’s profit.
d.
Both b and c are correct.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Total surplus
12.
Analytic
Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized mutually
beneficial trades are
ANS:
11.
NAT:
REF:
Economic welfare is generally measured by
(i)
profit.
(ii)
total surplus.
(iii)
the price consumers pay for the product.
15-3
NAT:
Analytic
MSC:
Definitional
Chapter 15/Monopoly  1081
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(ii) only
d.
(i), (ii), and (iii)
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Total surplus
13.
a.
producers minus the cost incurred by consumers.
b.
producers plus the cost incurred by consumers.
c.
consumers minus the costs of producing the good.
d.
consumers plus the cost of producing the good.
C
DIF:
2
LOC:
Monopoly
TOP:
Total surplus
REF:
NAT:
Analytic
MSC:
Interpretive
15-3
NAT:
Analytic
MSC:
Definitional
Consumers' willingness to pay for a good minus the amount they actually pay for it equals
a.
consumer surplus.
b.
consumer benefit.
c.
price discriminant.
d.
deadweight loss.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Consumer surplus
15.
15-3
For a monopoly market, total surplus can be defined as the value of the good to
ANS:
14.
REF:
REF:
15-3
NAT:
Analytic
MSC:
Definitional
The amount that producers receive for a good minus their costs of producing it equals
a.
quantity supplied.
b.
supply price.
c.
deadweight loss.
d.
producer surplus.
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Producer surplus
15-3
NAT:
Analytic
MSC:
Definitional
Chapter 15/Monopoly  1082
Figure 15-6
Price
Marginal Cost
Demand
(value to buyers)
Quantity
Q0
16.
Refer to Figure 15-6. A benevolent social planner would have the monopoly operate at an output level
a.
less than Q0.
b.
greater than Q0.
c.
equal to Q0.
d.
equal to zero.
ANS:
C
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Welfare
MSC:
Analytical
17.
NAT:
Analytic
Refer to Figure 15-6. If the monopoly operates at an output level less than Q0, then an increase in output
toward (but not exceeding) Q0 would
a.
raise the price and raise total surplus.
b.
lower the price and raise total surplus.
c.
raise the price and lower total surplus.
d.
lower the price and lower total surplus.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Total surplus
REF:
15-3
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1083
18.
Selling a good at a price determined by the intersection of the demand curve and the marginal cost curve is
consistent with the
(i)
socially-optimal level of output.
(ii)
market solution for profit-maximizing competitive firms.
(iii)
market solution for a profit-maximizing monopoly.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
A
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Welfare
MSC:
Interpretive
19.
Analytic
A monopoly chooses to supply the market with a quantity of a product that is determined by the intersection
of the
a.
marginal cost and demand curves.
b.
average total cost and demand curves.
c.
marginal revenue and average total cost curves.
d.
marginal revenue and marginal cost curves.
ANS:
D
DIF:
1
LOC:
Monopoly
TOP:
Profit maximization
20.
NAT:
REF:
15-3
NAT:
Analytic
MSC:
Interpretive
When the government creates a monopoly, the social loss may include
a.
declining marginal costs.
b.
the cost of lawyers and lobbyists hired to convince lawmakers to continue the monopoly.
c.
excessive monopoly profits.
d.
diminishing marginal revenue.
ANS:
B
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Welfare
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1084
21.
If a social planner were running a monopoly, that planner could achieve an efficient outcome by charging the
price that is determined by the
a.
minimum point on the average total cost curve.
b.
intersection of the average total cost curve and the demand curve.
c.
intersection of the marginal cost curve and the demand curve.
d.
intersection of the marginal cost curve and the marginal revenue curve.
ANS:
C
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Welfare
MSC:
Analytical
22.
a.
quantity is lower than the socially-optimal quantity.
b.
price equals marginal revenue.
c.
price is the same as average revenue.
d.
earns positive profits.
A
DIF:
2
LOC:
Monopoly
TOP:
Deadweight loss
REF:
15-3
NAT:
Analytic
MSC:
Interpretive
Which of the following statements is correct?
a.
The benefits that accrue to a monopoly’s owners are equal to the costs that are incurred by
consumers of that firm's product.
b.
The deadweight loss that arises in monopoly stems from the fact that the profit-maximizing
monopoly firm produces a quantity of output that exceeds the socially-efficient quantity.
c.
The deadweight loss caused by monopoly is similar to the deadweight loss caused by a tax on a
product.
d.
The primary social problem caused by monopoly is monopoly profit.
ANS:
C
DIF:
3
LOC:
Monopoly
TOP:
Deadweight loss
24.
Analytic
The deadweight loss that arises from a monopoly is a consequence of the fact that the monopoly
ANS:
23.
NAT:
REF:
15-3
NAT:
Analytic
MSC:
Interpretive
To maximize total surplus with a monopoly firm, a benevolent social planner would
a.
choose the level of output where MR = MC.
b.
choose the level of output where MR intersects the demand curve.
c.
choose the level of output where MC intersects the demand curve.
d.
allow the free market system to determine the level of output.
Chapter 15/Monopoly  1085
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Total surplus
25.
REF:
15-3
MSC:
Interpretive
a.
more than the socially efficient quantity of output but at a higher price than in a competitive
market.
b.
less than the socially efficient quantity of output but at a higher price than in a competitive
market.
c.
the socially efficient quantity of output but at a higher price than in a competitive market.
d.
possibly more or possibly less than the socially efficient quantity of output, but definitely at a
higher price than in a competitive market.
B
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
NAT:
Analytic
NAT:
Analytic
MSC:
Interpretive
For a monopoly, the socially efficient level of output occurs where
a.
marginal revenue equals marginal cost.
b.
average revenue equals marginal cost.
c.
marginal revenue equals average total cost.
d.
average revenue equals average total cost.
ANS:
B
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Welfare
MSC:
Interpretive
27.
Analytic
A monopolist produces
ANS:
26.
NAT:
The social cost of a monopoly is equal to its
a.
economic profit.
b.
fixed cost.
c.
dead weight loss.
d.
variable cost.
ANS:
C
DIF:
1
REF:
LOC:
Monopoly
TOP:
Deadweight loss
15-3
Chapter 15/Monopoly  1086
28.
"Monopolists do not worry about efficient production and minimizing costs since they can just pass along any
increase in costs to their consumers." This statement is
a.
false; price increases will mean fewer sales, which may lower profits.
b.
true; this is the primary reason why economists believe that monopolies result in economic
inefficiency.
c.
false; the monopolist is a price taker.
d.
true; consumers in a monopoly market have no substitutes to turn to when the monopolist raises
prices.
ANS:
A
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
29.
NAT:
Analytic
Many economists criticize monopolists because they
a.
charge a price that equals marginal cost rather than a price that equals average cost.
b.
don't innovate.
c.
produce a large quantity of waste.
d.
produce less than the socially efficient level of output.
ANS:
D
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Inefficiency
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1087
Figure 15-7
MC
Price
F
G
D
MR
A
30.
B
D
C
Quantity
Refer to Figure 15-7. What is the socially efficient price and quantity?
a.
price = F; quantity = A
b.
price = G; quantity = B
c.
price = G; quantity = A
d.
price = D; quantity = A
ANS:
B
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Monopoly
MSC:
Applicative
31.
Analytic
NAT:
Analytic
Refer to Figure 15-7. What is the monopoly price and quantity?
a.
price = F; quantity = A
b.
price = G; quantity = B
c.
price = G; quantity = A
d.
price = D; quantity = A
ANS:
A
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Monopoly
MSC:
Applicative
32.
NAT:
Refer to Figure 15-7. What is the area of deadweight loss?
a.
the rectangle (F-D)xA
b.
the triangle 1/2[(F-D)x(B-A)]
c.
the triangle 1/2[(F-G)x(B-A)]
d.
the rectangle (F-D)xA plus the triangle 1/2[(F-D)x(B-A)]
Chapter 15/Monopoly  1088
ANS:
B
DIF:
3
LOC:
Monopoly
TOP:
Deadweight loss
33.
REF:
15-3
NAT:
Analytic
MSC:
Applicative
Refer to Figure 15-7. What area represents the total surplus lost due to monopoly pricing?
a.
the rectangle (F-D)xA
b.
the triangle 1/2[(F-D)x(B-A)]
c.
the triangle 1/2[(F-G)x(B-A)]
d.
the rectangle (F-D)xA plus the triangle 1/2[(F-D)x(B-A)]
ANS:
B
DIF:
3
REF:
LOC:
Monopoly
TOP:
Deadweight loss
15-3
NAT:
Analytic
MSC:
Applicative
Figure 15-8
Price
M arginal Cost
20
15
10
Demand
100
150
200
Quantity
M arginal Revenue
34.
Refer to Figure 15-8. To maximize total surplus, a benevolent social planner would choose which of the
following outcomes?
a.
100 units of output and a price of $10 per unit
b.
150 units of output and a price of $10 per unit
c.
150 units of output and a price of $15 per unit
d.
200 units of output and a price of $10 per unit
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Total surplus
REF:
15-3
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1089
35.
Refer to Figure 15-8. To maximize its profit, a monopolist would choose which of the following outcomes?
a.
100 units of output and a price of $10 per unit
b.
100 units of output and a price of $20 per unit
c.
150 units of output and a price of $15 per unit
d.
200 units of output and a price of $20 per unit
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Profit maximization
36.
REF:
15-3
Analytic
MSC:
Analytical
NAT:
Analytic
Refer to Figure 15-8. The monopolist's maximum profit
a.
is $800.
b.
is $1,000.
c.
is $1,250.
d.
cannot be determined from the diagram.
ANS:
D
DIF:
2
REF:
15-3
LOC:
Monopoly
TOP:
Profit
MSC:
Analytical
37.
NAT:
Refer to Figure 15-8. The deadweight loss caused by a profit-maximizing monopoly amounts to
a.
$150.
b.
$200.
c.
$250.
d.
$500.
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Deadweight loss
15-3
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1090
Figure 15-9
Price
P
MC
A
B
C
ATC
F
G
H
D
O
38.
J K
L
Quantity
MR
Refer to Figure 15-9. What area measures the deadweight loss?
a.
(B-F)*K
b.
0.5[(P-O)*(L-O)]
c.
0.5[(A-H)*(L-J)]
d.
0.5[(B-F)*(L-K)]
ANS:
D
DIF:
3
REF:
LOC:
Monopoly
TOP:
Deadweight loss
15-3
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1091
Figure 15-10
39.
Refer to Figure 15-10. Which area represents the deadweight loss from monopoly?
a.
J
b.
H
c.
A+B+C+D+F+I+J+H
d.
J+H
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Deadweight loss
15-3
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1092
Table 15-5
Quantity
Price
0
$10
1
$9
2
$8
3
$7
4
$6
5
$5
6
$4
7
$3
8
$2
9
$1
10
$0
40.
Refer to Table 15-5. If the monopolist faces a constant marginal cost of $5, how much output should the firm
produce?
a.
3 units
b.
4 units
c.
5 units
d.
6 units
ANS:
A
DIF:
3
LOC:
Monopoly
TOP:
Profit maximization
41.
REF:
15-3
NAT:
Analytic
MSC:
Analytical
Refer to Table 15-5. If the monopolist faces a constant marginal cost of $4, how much output should the firm
produce?
a.
3 units
b.
4 units
c.
5 units
d.
6 units
ANS:
A
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-3
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1093
42.
Refer to Table 15-5. If the monopolist faces a constant marginal cost of $3, how much output should the firm
produce?
a.
3 units
b.
4 units
c.
5 units
d.
6 units
ANS:
B
DIF:
3
LOC:
Monopoly
TOP:
Profit maximization
43.
REF:
NAT:
Analytic
MSC:
Analytical
Refer to Table 15-5. If the monopolist faces a constant marginal cost of $2, how much output should the firm
produce?
a.
3 units
b.
4 units
c.
5 units
d.
6 units
ANS:
B
DIF:
3
LOC:
Monopoly
TOP:
Profit maximization
44.
15-3
REF:
15-3
NAT:
Analytic
MSC:
Analytical
Refer to Table 15-5. If the monopolist faces a constant marginal cost of $1, how much output should the firm
produce?
a.
3 units
b.
4 units
c.
5 units
d.
6 units
ANS:
C
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-3
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1094
45.
Suppose that a monopolist produces good A. The profit-maximizing quantity is 40 units, the profitmaximizing price is $160, and the marginal cost of the 40th unit is $120. If good A were produced in a
perfectly competitive market, the equilibrium quantity would be 50, and the equilibrium price would be
$150. What is the value of the deadweight loss created by the monopolist?
a.
$40
b.
$100
c.
$200
d.
$400
ANS:
C
DIF:
3
LOC:
Monopoly
TOP:
Deadweight loss
46.
REF:
15-3
NAT:
Analytic
MSC:
Analytical
Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maximizing price
charged for goods produced is $12.The intersection of the marginal revenue and marginal cost curves occurs
where output is 10 units and marginal cost is $6. The socially efficient level of production is 12 units. The
demand curve and marginal cost curves are linear. What is the deadweight loss?
a.
$4
b.
$6
c.
$12
d.
$16
ANS:
B
DIF:
3
REF:
LOC:
Monopoly
TOP:
Deadweight loss
15-3
NAT:
Analytic
MSC:
Applicative
Scenario 15-3
Suppose a monopolist has a demand curve that can be expressed as P=90-Q. The monopolist’s marginal revenue
curve can be expressed as MR=90-2Q. The monopolist has constant marginal costs and average total costs of $10.
47.
Refer to Scenario 15-3. The profit-maximizing monopolist will produce an output level of
a.
80 units.
b.
40 units.
c.
20 units.
d.
10 units.
ANS:
B
DIF:
3
REF:
LOC:
Monopoly
TOP:
Profit maximization
15-3
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1095
48.
Refer to Scenario 15-3. The profit-maximizing monopolist will charge a price of
a.
$50.
b.
$40.
c.
$20.
d.
$10.
ANS:
A
DIF:
3
LOC:
Monopoly
TOP:
Profit maximization
49.
REF:
a.
$6,400.
b.
$3,200.
c.
$1,600.
d.
$800.
C
DIF:
3
LOC:
Monopoly
TOP:
Profit maximization
REF:
Analytic
MSC:
Applicative
15-3
NAT:
Analytic
MSC:
Applicative
Refer to Scenario 15-3. The profit-maximizing monopolist will have a deadweight loss of
a.
$6,400.
b.
$3,200.
c.
$1,600.
d.
$800.
ANS:
D
DIF:
3
LOC:
Monopoly
TOP:
Profit maximization
51.
NAT:
Refer to Scenario 15-3. The profit-maximizing monopolist will earn profits of
ANS:
50.
15-3
REF:
15-3
NAT:
Analytic
MSC:
Applicative
Which of the following statements is not correct?
a.
Part of the deadweight loss associated with monopoly is measured by the monopolist's economic
profit.
b.
Marginal cost is always less than average total cost in a natural monopoly.
c.
Discount coupons available free to the public are a type of price discrimination.
d.
Anti-trust laws make it harder for firms to create synergies.
ANS:
A
DIF:
2
REF:
LOC:
Monopoly
TOP:
Deadweight loss
15-3
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1096
Sec 04 - Monopoly - Price Discrimination
MULTIPLE CHOICE
1.
Price discrimination
a.
is illegal in the United States and Europe.
b.
can occur in both perfectly competitive and monopoly markets.
c.
is illogical because it does not maximize profits.
d.
can maximize profits if the seller can prevent the resale of goods between customers.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
2.
REF:
Analytic
MSC:
Applicative
a.
bundling related products to increase total sales.
b.
selling the same good at different prices to different customers.
c.
pricing above marginal cost.
d.
hiring marketing experts to increase consumers’ brand loyalty.
B
DIF:
1
LOC:
Monopoly
TOP:
Price discrimination
REF:
15-4
NAT:
Analytic
MSC:
Definitional
When a monopolist is able to sell its product at different prices, it is engaging in
a.
distribution pricing.
b.
quality-adjusted pricing.
c.
price differentiation.
d.
price discrimination.
ANS:
D
DIF:
1
LOC:
Monopoly
TOP:
Price discrimination
4.
NAT:
Price discrimination is the business practice of
ANS:
3.
15-4
REF:
15-4
NAT:
Analytic
MSC:
Definitional
The practice of selling the same goods to different customers at different prices, but with the same marginal
cost, is known as
a.
price segregation.
b.
price discrimination.
c.
arbitrage.
d.
monopoly pricing.
Chapter 15/Monopoly  1097
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
5.
REF:
MSC:
Definitional
it must be a natural monopoly.
b.
it must be regulated by the government.
c.
it must have some market power.
d.
consumers must tell the firm what they are willing to pay for the product.
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
NAT:
Analytic
MSC:
Interpretive
NAT:
Analytic
MSC:
Interpretive
A rational pricing strategy for a profit-maximizing monopolist is
a.
price discrimination.
b.
price segregation.
c.
synergy pricing.
d.
average cost pricing.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
REF:
15-4
Price discrimination requires the firm to
a.
separate customers according to their willingness to pay.
b.
differentiate between different units of its product.
c.
engage in arbitrage.
d.
use coupons.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
8.
Analytic
a.
C
7.
NAT:
For a firm to price discriminate,
ANS:
6.
15-4
REF:
15-4
Which of the following can eliminate the inefficiency inherent in monopoly pricing?
a.
arbitrage
b.
cost-plus pricing
c.
price discrimination
d.
regulations that force monopolies to reduce their levels of output
Chapter 15/Monopoly  1098
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
9.
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
NAT:
Analytic
MSC:
Interpretive
A firm cannot price discriminate if it
a.
has perfect information about consumer demand.
b.
operates in a competitive market.
c.
faces a downward-sloping demand curve.
d.
is regulated by the government.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
10.
REF:
A firm cannot price discriminate if
a.
its has declining marginal revenue.
b.
it operates in a competitive market.
c.
buyers only reveal the price they are willing to pay for the product.
d.
it has a constant marginal cost.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
11.
15-4
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
NAT:
Analytic
MSC:
Interpretive
Price discrimination adds to social welfare in the form of
(i)
increased total surplus.
(ii)
reduced costs of production.
(iii)
increased consumer surplus.
a.
(i) only
b.
(i) and (ii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
A
DIF:
2
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
Chapter 15/Monopoly  1099
12.
Compared to the monopoly outcome with a single price, imperfect price discrimination
(i)
sometimes raises total surplus.
(ii)
sometimes lowers total surplus.
(iii)
always leads to a lower quantity of output.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i), (ii), and (iii)
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
13.
REF:
NAT:
Analytic
MSC:
Interpretive
Price discrimination
a.
forces monopolies to charge a lower price as a result of government regulation.
b.
is an attempt by a monopoly to prevent some customers from purchasing its product by charging a
high price.
c.
is an attempt by a monopoly to increases its profit by selling the same good to different customers
at different prices.
d.
increases the consumer surplus associated with a monopolistic market.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
14.
15-4
REF:
15-4
NAT:
Analytic
MSC:
Applicative
What do economists call the business practice of selling the same good at difference prices to different
customers?
a.
price discrimination
b.
collusion
c.
compensating differential
d.
Both a and b are correct
ANS:
A
DIF:
1
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
NAT:
Analytic
MSC:
Definitional
Chapter 15/Monopoly  1100
15.
A monopolist's profits with price discrimination will be
a.
lower than if the firm charged a single, profit-maximizing price
b.
the same as if the firm charged a single, profit-maximizing price.
c.
higher than if the firm charged just one price because the firm will capture more consumer
surplus.
d.
higher than if the firm charged a single price because the costs of selling the good will be lower.
ANS:
C
DIF:
1
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
NAT:
Analytic
MSC:
Interpretive
Figure 15-11
Price
50
45
40
35
30
25
20
M C=ATC
15
10
MR
5
Demand
50 100 150 200 250 300 350 400 450 500 550 600
16.
Quantity
Refer to Figure 15-11. If the monopoly firm is not allowed to price discriminate, then consumer surplus
amounts to
a.
$0.
b.
$500.
c.
$1,000.
d.
$2,000.
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Consumer surplus
15-4
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1101
17.
Refer to Figure 15-11. If the monopoly firm perfectly price discriminates, then consumer surplus amounts to
a.
$0.
b.
$250.
c.
$500.
d.
$1,000.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
18.
REF:
a.
$50.
b.
$100.
c.
$500.
d.
$1,000.
D
DIF:
3
LOC:
Monopoly
TOP:
Deadweight loss
REF:
15-4
Analytic
MSC:
Analytical
NAT:
Analytic
MSC:
Applicative
Refer to Figure 15-11. If the monopoly firm perfectly price discriminates, then the deadweight loss amounts
to
a.
$0.
b.
$100.
c.
$200.
d.
$500.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
20.
NAT:
Refer to Figure 15-11. If the monopoly firm is not allowed to price discriminate, then the deadweight loss
amounts to
ANS:
19.
15-4
REF:
15-4
NAT:
Analytic
MSC:
Analytical
Refer to Figure 15-11. If there are no fixed costs of production, monopoly profit without price discrimination
equals
a.
$500.
b.
$1,000.
c.
$2,000.
d.
$4,000.
Chapter 15/Monopoly  1102
ANS:
C
DIF:
3
REF:
15-4
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
21.
NAT:
Analytic
Refer to Figure 15-11. If there are no fixed costs of production, monopoly profit with perfect price
discrimination equals
a.
$500.
b.
$1,000.
c.
$2,000.
d.
$4,000.
ANS:
D
DIF:
3
REF:
15-4
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
NAT:
Analytic
Figure 15-12
Price
50
45
40
35
30
25
22.5
20
15
M C=ATC
10
5
Demand
MR
50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800
22.
Quantity
Refer to Figure 15-12. If the monopoly firm is not allowed to price discriminate, then consumer surplus
amounts to
a.
$0.
b.
$1,562.50.
c.
$3,125.
d.
$6,250.
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Consumer surplus
15-4
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1103
23.
Refer to Figure 15-12. If the monopoly firm perfectly price discriminates, then consumer surplus amounts to
a.
$0.
b.
$1,562.50.
c.
$3,125.
d.
$6,250.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
24.
REF:
a.
$0.
b.
$1,562.50.
c.
$3,125.
d.
$6,250.
B
DIF:
3
LOC:
Monopoly
TOP:
Deadweight loss
REF:
15-4
Analytic
MSC:
Analytical
NAT:
Analytic
MSC:
Applicative
Refer to Figure 15-12. If the monopoly firm perfectly price discriminates, then the deadweight loss amounts
to
a.
$0.
b.
$1,562.50.
c.
$3,125.
d.
$6,250.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
26.
NAT:
Refer to Figure 15-12. If the monopoly firm is not allowed to price discriminate, then the deadweight loss
amounts to
ANS:
25.
15-4
REF:
15-4
NAT:
Analytic
MSC:
Analytical
Refer to Figure 15-12. If there are no fixed costs of production, monopoly profit without price discrimination
equals
a.
$0.
b.
$1,562.50.
c.
$3,125.
d.
$6,250.
Chapter 15/Monopoly  1104
ANS:
C
DIF:
3
REF:
15-4
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
27.
NAT:
Analytic
Refer to Figure 15-12. If there are no fixed costs of production, monopoly profit with perfect price
discrimination equals
a.
$1.
b.
$1,562.5.
c.
$3,125.
d.
$6,250.
ANS:
D
DIF:
3
REF:
15-4
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
NAT:
Analytic
Scenario 15-4
Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area.
Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box
has already installed cable to all of the homes in its market area, the marginal cost of delivering PMC to subscribers
is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit.
Before setting price, she hires an economist to estimate demand for the PMC service. The economist discovers that
there are two types of subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who
will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to about
20,000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC.
28.
Refer to Scenario 15-4. If Black Box Cable TV is unable to price discriminate, what price will it choose to
maximize its profit, and what is the amount of the profit?
a.
price = $20; profit = $400,000
b.
price = $20; profit = $330,000
c.
price = $150; profit = $450,000
d.
price = $150; profit = $600,000
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1105
29.
Refer to Scenario 15-4. If Black Box Cable TV is able to price discriminate, what would be the maximum
amount of profit it could generate?
a.
$500,000
b.
$600,000
c.
$850,000
d.
$925,000
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
30.
REF:
15-4
NAT:
Analytic
MSC:
Applicative
Refer to Scenario 15-4. What is the deadweight loss associated with the nondiscriminating pricing policy
compared to the price discriminating policy?
a.
$375,000
b.
$400,000
c.
$475,000
d.
It cannot be determined from the information provided.
ANS:
B
DIF:
3
REF:
LOC:
Monopoly
TOP:
Deadweight loss
15-4
NAT:
Analytic
MSC:
Applicative
Scenario 15-5
Mega Media Cable TV is able to purchase an exclusive right to sell a premium sports channel in its market area.
Let's assume that Mega Media pays $100,000 a year for the exclusive marketing rights to the sports channel. Since
Mega Media has already installed cable to all of the homes in its market area, the marginal cost of delivering the
sports channel to subscribers is zero. The manager of Mega Media needs to know what price to charge for the
sports channel service to maximize her profit. Before setting price, she hires an economist to estimate demand for
the sports channel. The economist discovers that there are two types of subscribers who value premium sporting
channels. First are the 3,000 die-hard sports fans who will pay as much as $150 a year for the new channel. Second,
the premium sports channel will appeal to about 20,000 occasional sports viewers who will pay as much as $25 a
year for a subscription to it.
31.
Refer to Scenario 15-5. If Black Box Cable TV is unable to price discriminate, what price will it choose to
maximize its profit, and what is the amount of the profit?
a.
price = $25; profit = $450,000
b.
price = $25; profit = $350,000
c.
price = $150; profit = $500,000
d.
price = $150; profit = $400,000
Chapter 15/Monopoly  1106
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
32.
REF:
a.
$950,000
b.
$850,000
c.
$400,000
d.
$350,000
B
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
REF:
Analytic
MSC:
Applicative
15-4
NAT:
Analytic
MSC:
Applicative
Refer to Scenario 15-5. What is the deadweight loss associated with the nondiscriminating pricing policy
compared to the price discriminating policy?
a.
$500,000
b.
$450,000
c.
$400,000
d.
It cannot be determined from the information provided.
ANS:
B
DIF:
3
LOC:
Monopoly
TOP:
Deadweight loss
34.
NAT:
Refer to Scenario 15-5. If Black Box Cable TV is able to price discriminate, what would be the maximum
amount of profit it could generate?
ANS:
33.
15-4
REF:
15-4
NAT:
Analytic
MSC:
Applicative
Which of the following can defeat the profit-maximizing strategy of price discrimination?
a.
consumer surplus
b.
deadweight loss
c.
market power
d.
arbitrage
ANS:
D
DIF:
1
REF:
15-4
LOC:
Monopoly
TOP:
Arbitrage
MSC:
Definitional
NAT:
Analytic
Chapter 15/Monopoly  1107
35.
Price discrimination is a rational strategy for a profit-maximizing monopolist when
a.
the monopolist finds itself able to produce only limited quantities of output.
b.
consumers are unable to be segmented into identifiable markets.
c.
the monopolist wishes to increase the deadweight loss that results from profit-maximizing
behavior.
d.
there is no opportunity for arbitrage across market segments.
ANS:
D
DIF:
2
REF:
15-4
LOC:
Monopoly
TOP:
Arbitrage
MSC:
Interpretive
36.
a.
fluctuating resource prices.
b.
arbitrage.
c.
high fixed costs.
d.
marginal-cost pricing.
B
DIF:
2
REF:
15-4
LOC:
Monopoly
TOP:
Arbitrage
MSC:
Interpretive
NAT:
Analytic
The process of buying a good in one market at a low price and selling the good in another market for a higher
price in order to profit from the price difference is known as
a.
sabotage.
b.
conspiracy.
c.
arbitrage.
d.
collusion.
ANS:
C
DIF:
1
REF:
15-4
LOC:
Monopoly
TOP:
Arbitrage
MSC:
Definitional
38.
Analytic
A market force that can prevent firms from price discriminating is
ANS:
37.
NAT:
NAT:
Perfect price discrimination
a.
eliminates deadweight loss.
b.
reduces profits to the monopolist.
c.
decreases the total quantity sold by the monopolist.
d.
requires arbitrage in order for the monopolist to maximize profits.
Analytic
Chapter 15/Monopoly  1108
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
39.
REF:
15-4
a.
increases profits to the firm.
b.
increases total surplus.
c.
decreases consumer surplus.
d.
All of the above are correct.
D
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
REF:
15-4
Applicative
NAT:
Analytic
MSC:
Applicative
a.
maximize profit and produce a socially-optimal level of output.
b.
maximize profit, but not produce a socially-optimal level of output.
c.
produce a socially-optimal level of output, but not maximize profit.
d.
exercise illegal preferences regarding the race and/or gender of its employees.
A
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
If a monopolist is able to perfectly price discriminate,
a.
consumer surplus is always increased.
b.
total surplus is always decreased.
c.
consumer surplus and deadweight losses are transformed into monopoly profits.
d.
the price effect dominates the output effect on monopoly revenue.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
42.
MSC:
A perfectly price-discriminating monopolist is able to
ANS:
41.
Analytic
Perfect price discrimination
ANS:
40.
NAT:
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
In theory, perfect price discrimination
a.
decreases the monopolist's profits.
b.
decreases consumer surplus.
c.
increases deadweight loss.
d.
reduces the number of consumers who purchase the monopoly’s product.
Chapter 15/Monopoly  1109
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
43.
REF:
15-4
MSC:
Interpretive
a.
knows the exact willingness to pay of each of its customers.
b.
charges exactly two different prices to exactly two different groups of customers.
c.
maximizes consumer surplus.
d.
experiences a zero economic profit.
A
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
NAT:
Analytic
MSC:
Interpretive
In reality, perfect price discrimination is
a.
used by about 75 percent of all monopolies.
b.
used by about 50 percent of all monopolies.
c.
seldom used by monopolies because it leads to lower profits.
d.
rarely possible.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
45.
Analytic
Perfect price discrimination describes a situation in which the monopolist
ANS:
44.
NAT:
REF:
15-4
How does a competitive market compare to a monopoly that engages in perfect price discrimination?
a.
In both cases, total social welfare is the same.
b.
Total social welfare is higher in the competitive market than with the perfectly price discriminating
monopoly.
c.
In both cases, some potentially mutually beneficial trades do not occur.
d.
Consumer surplus is the same in both cases.
ANS:
A
DIF:
3
REF:
15-4
LOC:
Monopoly
TOP:
Perfect price discrimination
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1110
46.
A monopolist that practices perfect price discrimination
a.
creates no deadweight loss.
b.
charges one group of buyers a higher price than another group, such as offering a student
discount.
c.
charges a higher price but produces the same monopoly level of output as when a single price is
charged.
d.
charges some customers a price below marginal cost because costs are covered by the high-priced
buyers.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Perfect price discrimination
47.
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
A monopolist faces the following demand curve:
Price
Quantity
$8
300
$7
400
$6
500
$5
600
$4
700
$3
800
$2
900
$1
1,000
The monopolist has fixed costs of $1,000 and has a constant marginal cost of $2 per unit. If the monopolist were
able to perfectly price discriminate, how many units would it sell?
a.
400
b.
500
c.
900
d.
4,200
ANS:
C
DIF:
3
REF:
15-4
LOC:
Monopoly
TOP:
Perfect price discrimination
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1111
48.
With perfect price discrimination the monopoly
a.
eliminates all price discrimination by charging each customer the same price.
b.
charges each customer an amount equal to the monopolist's marginal cost of production.
c.
eliminates deadweight loss.
d.
eliminates profits and increases consumer surplus.
ANS:
C
DIF:
2
REF:
15-4
LOC:
Monopoly
TOP:
Perfect price discrimination
NAT:
Analytic
MSC:
Applicative
Scenario 15-6
An airline knows that there are two types of travelers: business travelers and vacationers. For a particular flight,
there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for
a ticket. There are 150 seats available on the plane. Suppose the cost to the airline of providing the flight is
$20,000, which includes the cost of the pilots, flight attendants, fuel, etc.
49.
Refer to Scenario 15-6. How much profit will the airline earn if it sets the price of a ticket at $600?
a.
-$5,000
b.
$15,000
c.
$40,000
d.
$60,000
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
50.
REF:
15-4
NAT:
Analytic
MSC:
Analytical
Refer to Scenario 15-6. How much profit will the airline earn if it sets the price of a ticket at $300?
a.
-$15,000
b.
-$5,000
c.
$25,000
d.
$45,000
ANS:
C
DIF:
2
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1112
51.
Refer to Scenario 15-6. How much profit will the airline earn if it engages in price discrimination?
a.
-$5,000
b.
$40,000
c.
$55,000
d.
$75,000
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
52.
REF:
15-4
NAT:
Analytic
MSC:
Analytical
Refer to Scenario 15-6. How much additional profit can the firm earn by charging each customer their
willingness to pay relative to charging a flat price of $600 per ticket?
a.
$15,000
b.
$25,000
c.
$40,000
d.
$70,000
ANS:
A
DIF:
3
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1113
Table 15-6
Dreher's Designer Shirt Company, a monopolist, has the following cost and revenue information. Assume that
Dreher’s is able to engage in perfect price discrimination.
COSTS
Quantity
REVENUES
Total Cost
Produced
53.
Marginal
Quantity
Price
Cost
Demanded
--
0
$170
0
$100
1
$140
1
$160
2
$184
2
$150
3
$230
3
$140
4
$280
4
$130
5
$335
5
$120
6
$395
6
$110
7
$475
7
$100
8
$575
8
$95
Total
Marginal
Revenue
Revenue
--
Refer to Table 15-6. If the monopolist can engage in perfect price discrimination, what is the marginal
revenue from selling the 5th shirt?
a.
$80
b.
$100
c.
$110
d.
$120
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Marginal revenue
15-4
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1114
54.
Refer to Table 15-6. If the monopolist can engage in perfect price discrimination, what is the marginal
revenue from selling the 8th shirt?
a.
$45
b.
$60
c.
$80
d.
$95
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Marginal revenue
55.
a.
$140
b.
$420
c.
$450
d.
$620
C
DIF:
3
LOC:
Monopoly
TOP:
Total revenue
NAT:
Analytic
MSC:
Applicative
REF:
15-4
NAT:
Analytic
MSC:
Applicative
Refer to Table 15-6. If the monopolist can engage in perfect price discrimination, what is the total revenue
when 7 shirts are sold?
a.
$650
b.
$700
c.
$910
d.
$1080
ANS:
C
DIF:
3
LOC:
Monopoly
TOP:
Total revenue
57.
15-4
Refer to Table 15-6. If the monopolist can engage in perfect price discrimination, what is the total revenue
when 3 shirts are sold?
ANS:
56.
REF:
REF:
15-4
NAT:
Analytic
MSC:
Applicative
Refer to Table 15-6. If the monopolist can engage in perfect price discrimination, what is the average revenue
when 7 shirts are sold?
a.
$90
b.
$100
c.
$110
d.
$130
Chapter 15/Monopoly  1115
ANS:
D
DIF:
3
LOC:
Monopoly
TOP:
Average revenue
58.
REF:
a.
5
b.
6
c.
7
d.
8
C
DIF:
3
LOC:
Monopoly
TOP:
Profit maximization
REF:
15-4
Analytic
MSC:
Applicative
NAT:
Analytic
MSC:
Applicative
Refer to Table 15-6. If the monopolist can engage in perfect price discrimination, what is total profit at the
profit-maximizing quantity?
a.
$325
b.
$435
c.
$565
d.
$1000
ANS:
B
DIF:
3
REF:
15-4
LOC:
Monopoly
TOP:
Profit
MSC:
Applicative
60.
NAT:
Refer to Table 15-6. If the monopolist can engage in perfect price discrimination, what is the quantity that
maximizes economic profit?
ANS:
59.
15-4
NAT:
Analytic
Refer to Table 15-6. What are Dreher's Designer Shirt Company's fixed costs?
a.
$100
b.
$150
c.
$354
d.
$654
ANS:
A
DIF:
2
REF:
15-4
LOC:
Monopoly
TOP:
Fixed cost
MSC:
Applicative
NAT:
Analytic
Chapter 15/Monopoly  1116
61.
Which of the following is not an example of price discrimination?
a.
A movie theater charges a lower price for a child’s ticket than for an adult’s ticket.
b.
A university rebates part of the cost of tuition in the form of financial aid for needy students.
c.
A local pizza chain offers a “buy three get one free” deal.
d.
An ice cream parlor charges a higher price for ice cream than for sherbet.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
62.
REF:
Analytic
MSC:
Applicative
a.
can prevent children from buying the lower-priced tickets and selling them to adults.
b.
has some degree of monopoly pricing power.
c.
can easily distinguish between the two groups of customers.
d.
All of the above are correct.
D
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
REF:
15-4
NAT:
Analytic
MSC:
Applicative
Financial aid to college students, quantity discounts, and senior citizen discounts are all examples of
a.
consumer surplus.
b.
deadweight loss.
c.
price discrimination.
d.
nonprofit pricing strategies.
ANS:
C
DIF:
1
LOC:
Monopoly
TOP:
Price discrimination
64.
NAT:
A movie theater can increase its profits through price discrimination by charging a higher price to adults and
a lower price to children if it
ANS:
63.
15-4
REF:
15-4
NAT:
Analytic
MSC:
Applicative
When deciding what price to charge consumers, the monopolist may choose to charge them different prices
based on the customers'
a.
geographical location.
b.
age.
c.
income.
d.
All of the above are correct.
Chapter 15/Monopoly  1117
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
65.
REF:
Analytic
MSC:
Interpretive
a.
senior-citizen laws mandate such discounts.
b.
goodwill efforts show community respect and win loyal patrons.
c.
the theaters are profit maximizers.
d.
senior citizens lobby city councils for lower prices.
C
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you fly back. What is the
reason for this price discrepancy?
a.
Airlines are practicing imperfect price discrimination to raise their profits.
b.
Airlines charge a different rate based on the different nature of peoples' travel needs.
c.
Airlines are attempting to charge people based on their willingness to pay.
d.
All of the above are correct.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
67.
NAT:
Many movie theaters allow discount tickets to be sold to senior citizens because
ANS:
66.
15-4
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
When a local grocery store offers discount coupons in the Sunday paper it is most likely trying to
a.
reduce prices for all customers.
b.
encourage literacy.
c.
encourage arbitrage.
d.
price discriminate.
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1118
68.
Price discrimination explains why Ivy League universities often base tuition costs on students'
a.
age.
b.
financial resources.
c.
high school GPA.
d.
gender.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
69.
REF:
NAT:
Analytic
MSC:
Analytical
Some prescription drugs sell for more in the United States than they do in other countries. Which of the
following statements about this issue is most likely to be true?
a.
Drug companies are engaging in price discrimination, and this practice certainly reduces global
social welfare.
b.
Global social welfare could be improved if the price in the United States were reduced to the price
charged in other countries.
c.
Global social welfare could be improved if the price in the other countries were increased to the
price charged in the United States.
d.
Drug companies are engaging in price discrimination, but this might improve global social welfare
if it gives more people access to the drugs.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
70.
15-4
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
Which of the following is not an example of price discrimination by a firm?
a.
children's meals at a restaurant
b.
a natural gas company charging customers a higher rate in the winter than in the summer
c.
a senior citizens' discount
d.
coupons in the Sunday newspaper
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
NAT:
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1119
71.
Customers who purchase a book from Dave's Bookstore are charged 20% more than customers who purchase
the same book from the Dave's Bookstore website. This is an example of
a.
perfect price discrimination.
b.
price discrimination.
c.
deadweight loss.
d.
socially inefficient output.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
72.
REF:
NAT:
Analytic
MSC:
Applicative
During the holiday season, high-end retailers frequently place a high price on merchandise on weekends and
discount the price during the week. They do this because they believe that two groups of customers exist:
shoppers with little free time and bargain hunters. Bargain hunters have time to shop around and frequently
shop during the week. What do economists call this price strategy used by high-end retailers?
a.
oligopoly
b.
price discrimination
c.
compensating differential
d.
in-kind transfers
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Price discrimination
73.
15-4
REF:
15-4
NAT:
Analytic
MSC:
Interpretive
Which of the following is an example of price discrimination?
a.
Nabisco provides cents-off coupons for its products.
b.
Amtrak offers a lower price for weekend travel compared to weekday rates on the same routes.
c.
Hotel rates for AAA members are lower than for nonmembers.
d.
All of the above are correct.
ANS:
D
DIF:
1
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
NAT:
Analytic
MSC:
Analytical
Chapter 15/Monopoly  1120
74.
Which of the following statements comparing monopoly with competition is correct?
a.
A monopolist produces a higher level of output and charges a lower price than a competitive firm
would.
b.
With perfect price discrimination, the total surplus under monopoly can be the same as under
competition.
c.
With or without price discrimination, the consumer surplus under monopoly is at least as large as
it would be under competition.
d.
The deadweight loss associated with monopoly is caused by the positive economic profits of the
monopolist; competitive firms do not earn a positive economic profit so there is no deadweight
loss under competition.
ANS:
B
DIF:
1
LOC:
Monopoly
TOP:
Price discrimination
75.
REF:
15-4
NAT:
Analytic
MSC:
Analytical
Which of the following is the most likely reason the city council in New York City consistently denies licenses
to independent van drivers selling rides to the public?
a.
Allowing the vans to operate would reduce social welfare.
b.
The van drivers engage in price discrimination.
c.
Allowing the vans to operate would allow them to unfairly take advantage of poor residents.
d.
The vans are a threat to the public transit monopoly, which makes campaign contributions to the
city council members.
ANS:
D
DIF:
1
REF:
LOC:
Monopoly
TOP:
Price discrimination
15-4
NAT:
Analytic
MSC:
Analytical
Sec 05 - Monopoly - Public Policy Toward Monopolies
MULTIPLE CHOICE
1.
Which of the following may eliminate some or all of the inefficiency that results from monopoly pricing?
a.
The government can regulate the monopoly.
b.
The monopoly can be prohibited from price discriminating.
c.
The monopoly can be forced to operate at a point where its marginal revenue is equal to its
marginal cost.
d.
None of the above would eliminate any inefficiency associated with a monopoly.
ANS:
A
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Applicative
NAT:
Analytic
Chapter 15/Monopoly  1121
2.
Antitrust laws have economic benefits that outweigh the costs if they
a.
prevent mergers that would decrease competition and lower the costs of production.
b.
prevent mergers that would decrease competition and raise the costs of production.
c.
allow mergers that would decrease competition and raise the costs of production.
d.
None of the above is correct because antitrust laws never have economic benefits that outweigh
the costs.
ANS:
B
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Applicative
3.
a.
Two examples of early antitrust laws are the Sherman and Clayton Antitrust Acts.
b.
Antitrust laws automatically prevent mergers between companies that produce similar products.
c.
Antitrust laws give the government power to increase competition.
d.
Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through
more efficient joint production.
B
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
NAT:
Analytic
Which of the following statements is correct?
a.
Two examples of early antitrust laws are the Clinton and Stigler Antitrust Acts.
b.
Antitrust laws automatically prevent mergers between companies that produce similar products.
c.
Antitrust laws reduce the government’s power to regulate private companies.
d.
Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through
more efficient joint production.
ANS:
D
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
5.
Analytic
Which of the following statements is not correct?
ANS:
4.
NAT:
The first major piece of antitrust legislation was the
a.
Clayton Act.
b.
Reagan-Bush Act.
c.
Sherman Act.
d.
Clinton-Gore Act.
NAT:
Analytic
Chapter 15/Monopoly  1122
ANS:
C
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Definitional
6.
a.
Morgan Act.
b.
Sherman Act.
c.
Clayton Act.
d.
14th Amendment.
B
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Definitional
NAT:
Analytic
The legislation passed by Congress in 1914 to strengthen the government’s powers and authorize private
lawsuits is called the
a.
Morgan Act.
b.
Sherman Act.
c.
Clayton Act.
d.
14th Amendment.
ANS:
C
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Definitional
8.
Analytic
The legislation passed by Congress in 1890 to reduce the market power of large and powerful "trusts" is
called the
ANS:
7.
NAT:
NAT:
Analytic
The collection of statutes aimed at curbing monopoly power is called
a.
the 14th amendment.
b.
the Clayton Act.
c.
the Sherman Act.
d.
antitrust law.
ANS:
D
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1123
9.
In order for antitrust laws to raise social welfare, the government must
a.
disallow synergy benefits from accruing to monopolists.
b.
disallow any mergers from taking place.
c.
be able to determine which mergers are desirable and which are not.
d.
always attempt to keep markets in their most competitive form.
ANS:
C
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
10.
a.
if the cost from the synergies exceeds the benefit of increased market power.
b.
if the benefit from the synergies exceeds the social cost of increased market power.
c.
always.
d.
never.
B
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
NAT:
Analytic
One method used to control the ability of firms to capture monopoly profit in the United States is through
a.
government purchase of products produced by monopolists.
b.
government distribution of a monopolist's excess production.
c.
enforcement of antitrust laws.
d.
regulation of firms in highly competitive markets.
ANS:
C
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
12.
Analytic
Reduced competition through merging of companies will raise social welfare
ANS:
11.
NAT:
NAT:
Analytic
Antitrust laws may
a.
enhance the ability of firms to capture profits from a concentration of market power.
b.
enhance the ability of firms to reduce economic losses.
c.
restrict the ability of firms to operate at the socially efficient level of production.
d.
restrict the ability of firms to merge.
ANS:
D
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1124
13.
Antitrust laws allow the government to
a.
prevent mergers.
b.
break up companies.
c.
promote competition.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
14.
a.
collect revenues through the antitrust tax.
b.
break up companies.
c.
purchase privately-held companies through eminent domain.
d.
All of the above are correct.
B
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
NAT:
Analytic
NAT:
Analytic
Splitting up a monopoly is often justified on the grounds that
a.
consumers prefer dealing with small firms.
b.
small firms have lower costs.
c.
competition is inherently efficient.
d.
nationalization is a less-preferred option.
ANS:
C
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust
MSC:
Interpretive
16.
Analytic
Antitrust laws allow the government to
ANS:
15.
NAT:
Which of the following statements is not correct?
a.
Part of the deadweight loss associated with monopoly is measured by the monopolist's economic
profit.
b.
Marginal cost is always less than average total cost in a natural monopoly.
c.
Discount coupons available free to the public are a type of price discrimination.
d.
Anti-trust laws make it harder for firms to create synergies.
ANS:
A
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Antitrust | Natural monopoly
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1125
17.
One problem with government operation of monopolies is that
a.
a benevolent government is likely to be interested in generating profits for political gain.
b.
monopolies typically have rising average costs.
c.
the government typically has little incentive to reduce costs.
d.
a government-regulated outcome will increase the profitability of the monopoly.
ANS:
C
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Regulation
MSC:
Interpretive
18.
a.
by focusing on costs, the regulators ignore profits.
b.
it does not provide an incentive for the monopolist to reduce its cost.
c.
a monopolist's costs, by definition, are higher than costs of perfectly competitive firms.
d.
a monopolist is still able to generate excessive economic profits.
B
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Regulation
MSC:
Interpretive
NAT:
Analytic
NAT:
Analytic
The task of economic regulation is to
a.
protect monopoly profits.
b.
approximate the results of the competitive market.
c.
replace competition with government ownership.
d.
increase competition within the market.
ANS:
B
DIF:
1
REF:
15-5
LOC:
Monopoly
TOP:
Regulation
MSC:
Interpretive
20.
Analytic
One problem with regulating a monopolist on the basis of cost is that
ANS:
19.
NAT:
Policymakers are discussing various proposals regarding how to deal with natural monopolies. Senator Huff
wants to regulate natural monopolies by equating price with average total cost. Huff contends that such a
policy will ensure that monopolies make every effort to reduce costs. Senator Puff wants the government to
own natural monopolies. Puff argues that government-owned monopolies usually do a better job of holding
down costs than privately owned monopolies. Which senator's argument is correct?
a.
Senator Huff
b.
Senator Puff
c.
both senators
d.
neither senator
Chapter 15/Monopoly  1126
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Public ownership | Regulation
21.
REF:
a.
antitrust laws
b.
regulation
c.
public ownership
d.
“do nothing”
C
DIF:
2
LOC:
Monopoly
TOP:
Public ownership
REF:
Analytic
MSC:
Interpretive
15-5
NAT:
Analytic
MSC:
Applicative
Which of the following is an example of public ownership of a monopoly?
a.
DeBeers
b.
Microsoft
c.
U.S. Postal Service
d.
AT&T
ANS:
C
DIF:
1
LOC:
Monopoly
TOP:
Public ownership
23.
NAT:
Which type of public policy toward monopolies is much more common in Europe than in the United States?
ANS:
22.
15-5
REF:
15-5
NAT:
Analytic
MSC:
Applicative
Private ownership of a monopoly may benefit society because the monopoly will have an incentive to
a.
charge a price that is consistent with that of a benevolent social planner.
b.
charge a price that prevents some people from buying.
c.
price its good according to the intersection of marginal cost and average revenue.
d.
lower its costs to earn a higher profit.
ANS:
D
DIF:
2
REF:
LOC:
Monopoly
TOP:
Public ownership
15-5
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1127
24.
If government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the
natural monopolist will
a.
earn economic losses.
b.
earn economic profits.
c.
earn zero economic profits.
d.
produce a lower quantity of output than is socially optimal.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Regulation | Natural monopoly
25.
REF:
15-5
a.
earn zero profits.
b.
earn positive profits, causing other firms to enter the industry.
c.
earn negative profits, causing the firm to exit the industry.
d.
minimize costs in order to lower the price that it charges.
C
DIF:
2
LOC:
Monopoly
TOP:
Regulation | Natural monopoly
REF:
15-5
MSC:
Applicative
NAT:
Analytic
MSC:
Applicative
If the government regulates the price that a natural monopolist can charge to be equal to the firm’s average
total cost, the firm will
a.
earn zero profits.
b.
earn positive profits, causing other firms to enter the industry.
c.
earn negative profits, causing the firm to exit the industry.
d.
minimize costs in order to lower the price that it charges.
ANS:
A
DIF:
2
LOC:
Monopoly
TOP:
Regulation | Natural monopoly
27.
Analytic
If the government regulates the price that a natural monopolist can charge to be equal to the firm’s marginal
cost, the firm will
ANS:
26.
NAT:
REF:
15-5
NAT:
Analytic
MSC:
Applicative
When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated monopoly
a.
will experience a loss.
b.
will experience a price below average total cost.
c.
may rely on a government subsidy to remain in business.
d.
All of the above are correct.
Chapter 15/Monopoly  1128
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Regulation | Natural monopoly
28.
REF:
15-5
a.
cause the monopolist to operate at a loss.
b.
result in a less than optimal total surplus.
c.
maximize producer surplus.
d.
result in higher profits for the monopoly.
A
DIF:
2
LOC:
Monopoly
TOP:
Regulation | Natural monopoly
REF:
15-5
MSC:
Interpretive
NAT:
Analytic
MSC:
Interpretive
The key issue in determining the efficiency of public versus private ownership of a monopoly is
a.
the tendency for efficient management of publicly owned enterprises.
b.
the inability of private monopolies to get rid of managers that are doing a bad job.
c.
the propensity of private monopolies to generate excessive profits.
d.
how ownership of the firm affects the cost of production.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Public ownership | Natural monopoly
MSC:
Interpretive
30.
Analytic
Since natural monopolies have a declining average cost curve, regulating natural monopolies by setting price
equal to marginal cost would
ANS:
29.
NAT:
REF:
15-5
NAT:
Analytic
NAT:
Analytic
MSC:
Analytical
For a typical natural monopoly, average total cost is
a.
falling, and marginal cost is above average total cost.
b.
falling, and marginal cost is below average total cost.
c.
rising, and marginal cost is below average total cost.
d.
rising, and marginal cost is above average total cost.
ANS:
B
DIF:
2
REF:
LOC:
Monopoly
TOP:
Natural monopoly
15-5
Chapter 15/Monopoly  1129
31.
In the majority of cases where there is a natural monopoly, the U. S. government usually deals with the
problem
a.
by splitting the natural monopoly into smaller companies.
b.
through regulation.
c.
by turning the natural monopoly into a public enterprise.
d.
by doing nothing.
ANS:
B
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
32.
REF:
NAT:
Analytic
MSC:
Interpretive
In a natural monopoly,
a.
society would be better off if antitrust laws were used to create many different firms in the market.
b.
the marginal cost curve is positively sloped.
c.
if the government requires marginal cost pricing, it will likely have to subsidize the firm.
d.
the marginal revenue curve is horizontal.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
33.
15-5
REF:
15-5
NAT:
Analytic
MSC:
Interpretive
For a long while, electricity producers were thought to be a classic example of a natural monopoly. People
held this view because
a.
the average cost of producing units of electricity by one producer in a specific region was lower
than if the same quantity were produced by two or more producers in the same region.
b.
the average cost of producing units of electricity by one producer in a specific region was higher
than if the same quantity were produced by two or more produced in the same region.
c.
the marginal cost of producing units of electricity by one producer in a specific region was higher
than if the same quantity were produced by two or more producers in the same region.
d.
electricity is a special non-excludable good that could never be sold in a competitive market.
ANS:
A
DIF:
2
REF:
LOC:
Monopoly
TOP:
Natural monopoly
15-5
NAT:
Analytic
MSC:
Interpretive
Chapter 15/Monopoly  1130
34.
The reason to regulate utilities instead of using antitrust laws to promote competition is that a utility is
usually a
a.
profit-maximizing monopoly.
b.
producer of externalities.
c.
revenue-maximizing monopoly.
d.
natural monopoly.
ANS:
D
DIF:
2
LOC:
Monopoly
TOP:
Natural monopoly
35.
REF:
15-5
NAT:
Analytic
MSC:
Interpretive
Which of the following statements is correct?
a.
Public ownership is preferred to regulation in order to minimize the deadweight losses associated
with natural monopolies.
b.
Antitrust laws are always the best way to limit monopoly power.
c.
It is possible that the best approach to monopolies is for the government to do nothing.
d.
Marginal-cost pricing requires a natural monopoly to earn zero economic profits.
ANS:
C
DIF:
2
LOC:
Monopoly
TOP:
Antitrust | Regulation | Public ownership
MSC:
Interpretive
36.
REF:
15-5
NAT:
Analytic
The assessment by George Stigler concerning the tradeoffs between "market failure" and "political failure" in
the American economy provides support for which of the following solutions to the problems of monopolies?
a.
public ownership of monopolies
b.
government regulation of monopolies
c.
government incentives to promote competition in monopolized industries
d.
doing nothing at all
ANS:
D
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Do nothing
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1131
37.
The George Stigler quote, “...the degree of ‘market failure’ for the American economy is much smaller than
the ‘political failure’ arising from the imperfections of economic policies ...” illustrates the advantage of which
type of public policy toward monopolies?
a.
antitrust laws
b.
regulation
c.
public ownership
d.
“do nothing”
ANS:
D
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Do nothing
MSC:
Interpretive
38.
Analytic
Which of the following is the preferred strategy for the government to follow to remedy the inefficient
allocation of resources associated with monopolies?
a.
preventing mergers through antitrust laws
b.
regulating the prices that monopolies can charge
c.
do nothing
d.
None of the above strategies is preferred. Each is a viable strategy.
ANS:
D
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Monopoly
MSC:
Applicative
39.
NAT:
NAT:
Analytic
Which of the following statements is not correct?
a.
The government may use antitrust laws to break up an existing company to improve competition.
b.
The government may break up a natural monopoly to lower the price charged to customers.
c.
Private ownership is typically preferred to public ownership.
d.
Sometimes the best strategy is for the government to do nothing about monopoly inefficiency
because the “fix” may be worse than the problem.
ANS:
B
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Monopoly
MSC:
Applicative
NAT:
Analytic
Chapter 15/Monopoly  1132
40.
Which of the following statements is not correct?
a.
The government may use antitrust laws to prevent a merger if the government believes the
merger will reduce competition and increase prices.
b.
By regulating a natural monopoly where price equals average total cost, the monopoly earns zero
profits.
c.
An advantage of private ownership over public ownership is that private business owners tend to
fire inefficient managers.
d.
The government should always intervene to improve monopoly inefficiency.
ANS:
D
DIF:
2
REF:
15-5
LOC:
Monopoly
TOP:
Monopoly
MSC:
Applicative
NAT:
Analytic
Sec 06 - Conclusion
MULTIPLE CHOICE
1.
Which of the following strategies is not an effective strategy to reduce monopoly inefficiency?
a.
antitrust laws
b.
price discrimination
c.
doing nothing
d.
breaking up a natural monopoly into more than one firm
ANS:
D
DIF:
2
REF:
15-6
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
2.
NAT:
Analytic
NAT:
Analytic
Most firms have
a.
no monopoly pricing power.
b.
some monopoly pricing power.
c.
absolute monopoly pricing power.
d.
the ability to earn monopoly profits.
ANS:
B
DIF:
1
REF:
15-6
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
Chapter 15/Monopoly  1133
3.
Which of the following statements is correct?
a.
Firms with some degree of monopoly power are common, but firms with substantial monopoly
power are rare.
b.
Firms with some degree of monopoly power are rare, as are firms with substantial monopoly
power.
c.
Firms with some degree of monopoly power are common, as are firms with substantial monopoly
power.
d.
Firms with some degree of monopoly power are rare, but firms with substantial monopoly power
are common.
ANS:
A
DIF:
2
REF:
15-6
LOC:
Monopoly
TOP:
Monopoly
MSC:
Interpretive
NAT:
Analytic
Chapter 16
Monopolistic Competition
TRUE/FALSE
1.
The "competition" in monopolistically competitive markets is most likely a result of having many sellers in the
market.
ANS:
T
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
2.
DIF:
NAT:
Analytic
The "monopoly" in monopolistically competitive markets is most likely a result of firms having some pricing
power due to product differentiation.
ANS:
T
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
3.
DIF:
NAT:
Analytic
Monopolistic competition is characterized by many buyers and sellers, product differentiation, and free entry.
ANS:
T
DIF:
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
Chapter 15/Monopoly  1134
4.
Monopolistic competition is characterized by many buyers and sellers, product differentiation, and barriers to
entry.
ANS:
F
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
5.
DIF:
NAT:
Analytic
A monopolistically competitive market is characterized by barriers to entry.
ANS:
F
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
6.
DIF:
NAT:
Analytic
Monopolistic competition is the only market structure that features many sellers.
ANS:
F
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Markets
MSC:
Interpretive
7.
DIF:
Product differentiation always leads to some measure of market power.
ANS:
T
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Demand curve
MSC:
Interpretive
8.
DIF:
NAT:
Analytic
Oligopoly is characterized by a few sellers offering similar products, whereas monopolistic competition is
characterized by many sellers offering differentiated products.
ANS:
T
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
9.
DIF:
NAT:
Analytic
Monopolistic competition is characterized by a few sellers offering similar products, whereas oligopoly is
characterized by many sellers offering differentiated products.
ANS:
F
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
10.
DIF:
NAT:
Analytic
Oligopoly and monopolistic competition are examples of a market structure called imperfect competition.
ANS:
T
DIF:
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
Chapter 15/Monopoly  1135
11.
Monopolistic competition and monopoly are examples of a market structure called imperfect competition.
ANS:
F
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
12.
DIF:
NAT:
A markup of price over marginal cost is inconsistent with free entry and zero profit.
ANS:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
13.
DIF:
NAT:
T
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
DIF:
NAT:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
DIF:
NAT:
Analytic
A profit-maximizing firm in a monopolistically competitive market always operates on the downward-sloping
portion of its marginal cost curve.
ANS:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
16.
Analytic
A profit-maximizing firm in a monopolistically competitive market charges a price equal to marginal cost.
ANS:
15.
Analytic
Monopolistically competitive firms, like monopoly firms, maximize their profits by charging a price that
exceeds marginal cost.
ANS:
14.
Analytic
DIF:
NAT:
Analytic
For a profit-maximizing firm in a monopolistically competitive market, when price is equal to average total
cost, price must lie above marginal cost.
ANS:
T
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
Analytic
Chapter 15/Monopoly  1136
17.
A profit-maximizing firm in a monopolistically competitive market can earn positive, negative, or zero profits
in the short run.
ANS:
T
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Interpretive
18.
DIF:
NAT:
Analytic
A firm in a monopolistically competitive market can earn both short-run and long-run profits.
ANS:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium | Long-run equilibrium
MSC:
Interpretive
19.
DIF:
NAT:
Analytic
A firm in a monopolistically competitive market can earn short-run profits but not long-run profits.
ANS:
T
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium | Long-run equilibrium
MSC:
Interpretive
20.
DIF:
NAT:
In the long run, monopolistically competitive firms produce where demand equals marginal cost.
ANS:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
21.
DIF:
NAT:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
DIF:
NAT:
Analytic
In the long run, monopolistically competitive firms produce where demand equals average total cost.
ANS:
T
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
23.
Analytic
When a firm in a monopolistically competitive market earns zero economic profit, its product price must
equal marginal cost.
ANS:
22.
Analytic
DIF:
NAT:
Analytic
In a monopolistically competitive market, the number of firms adjusts until economic profits are driven to
zero.
ANS:
T
DIF:
1
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1137
24.
When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium, marginal
cost must lie below average total cost.
ANS:
T
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
25.
DIF:
NAT:
Analytic
In a monopolistically competitive market, the demand curves faced by incumbent firms are unaffected by the
entry of new firms into the market.
ANS:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Demand curve | Long-run equilibrium
MSC:
Interpretive
26.
DIF:
NAT:
A firm in a monopolistically competitive market is usually indifferent to an additional customer walking
through the door, since a sale to that customer will not increase the firm's profit.
ANS:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
27.
DIF:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
DIF:
Analytic
NAT:
Analytic
The term excess capacity refers to the fact that a firm produces a lower quantity than it would if it operated
at the efficient scale.
ANS:
T
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
29.
NAT:
The term excess capacity refers to the fact that a firm operates on the upward-sloping portion of its averagetotal-cost curve.
ANS:
28.
Analytic
DIF:
NAT:
Analytic
Excess capacity characterizes firms in monopolistically competitive markets, even in situations of long-run
equilibrium.
ANS:
T
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1138
30.
When a firm operates with excess capacity, it must be in a monopolistically competitive market.
ANS:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
31.
DIF:
F
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
DIF:
NAT:
Analytic
When a firm operates at efficient scale, it is producing at the minimum point on its average total cost curve.
ANS:
T
1
REF:
16-2
LOC:
Monopolistic competition
TOP:
Efficient scale
MSC:
Definitional
33.
Analytic
A firm that would experience higher average total cost by increasing production is operating with excess
capacity.
ANS:
32.
NAT:
DIF:
NAT:
Analytic
Defenders of advertising argue that firms use advertising as a signal of quality, even if the advertising delivers
little helpful information about the product.
ANS:
T
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
34.
DIF:
Critics of advertising argue that advertising leads to less elastic demand for products and a larger markup of
price over marginal cost.
ANS:
T
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
35.
DIF:
The claim that advertising reduces the elasticity of demand is likely to be made by a defender of advertising.
ANS:
F
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
36.
DIF:
Critics of advertising argue that firms use advertising to manipulate consumers’ tastes.
ANS:
T
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
37.
DIF:
When advertising is used to relay information about price, each firm is able to enhance market power.
ANS:
F
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1139
38.
Policymakers have generally come to accept the view that advertising enhances the efficiency of markets.
ANS:
T
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
39.
DIF:
Economists are unanimous in their belief that advertising is socially inefficient.
ANS:
F
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Definitional
40.
DIF:
When McDonald’s opens a store in Dhaka, Bangladesh, it has a strong incentive to enforce product quality
consistent with stores in the United States.
ANS:
T
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
41.
DIF:
The Mikati Philippines Hard Rock Cafe has the exact same menu as the Hard Rock Cafe in New York. This is an
example of a brand name enhancing market efficiency for U.S. tourists visiting the Philippines.
ANS:
T
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
42.
DIF:
Empirical evidence suggests that advertising usually leads to an increase in the price for advertised products.
ANS:
F
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
43.
DIF:
Economists who argue that advertising enhances market efficiency suggest that celebrity advertising signals
inferior product quality.
ANS:
F
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
44.
DIF:
Advertising during the Super Bowl is an example of information about quality contained primarily in the
existence and expense of the advertising.
ANS:
T
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
45.
DIF:
Brand names are rarely used to convey information about product quality.
ANS:
F
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
46.
DIF:
The government of Italy will not allow any Hard Rock Cafe restaurants to open in Italy. Defenders of the
efficiency of brand-name markets would argue that this has hindered restaurant market efficiency in Italy.
ANS:
T
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1140
47.
The debate over whether advertising serves a valuable purpose in society is definitively answered by
economists who study the tastes and preferences of individuals.
ANS:
F
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
48.
DIF:
If advertising decreases the elasticity of demand for specific brand names of hard liquor, we would expect
firms to be able to charge a larger markup over marginal cost.
ANS:
T
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
49.
DIF:
There is general disagreement among economists about the role of advertising, but there is widespread
agreement about the role of brand names on market efficiency.
ANS:
F
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
50.
DIF:
The government may not be able to improve the inefficiencies of a monopolistically competitive market.
ANS:
T
2
REF:
16-4
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
51.
DIF:
NAT:
Analytic
Firms in monopolistically competitive markets and monopolies can earn long-run profits due to barriers to
entry.
ANS:
F
2
REF:
16-4
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
52.
DIF:
NAT:
Analytic
Free entry eliminates long-run profits for firms in competitive and monopolistic industries.
ANS:
T
DIF:
2
REF:
16-4
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
SHORT ANSWER
1.
List five goods that are likely sold in a monopolistically competitive market.
ANS:
Books, CDs, movies, computer games, and piano lessons are some examples.
DIF:
1
REF:
16-1
TOP:
Monopolistic competition
NAT:
Analytic
MSC:
Interpretive
LOC:
Monopolistic competition
Chapter 15/Monopoly  1141
2.
Why does a typical monopolistically competitive firm face a downward-sloping demand curve?
ANS:
Because its product is different from those offered by other firms.
DIF:
1
TOP:
Demand curve
3.
REF:
16-1
NAT:
Analytic
MSC:
Interpretive
LOC:
Monopolistic competition
In many college towns, private independent bookstores typically locate on the periphery of the college
campus. However, in some college towns, the university has used political power to restrict private
bookstores near campus through community zoning laws. Use your knowledge of markets to predict the price
and quality of service differences in the market for college textbooks under the two different market regimes.
ANS:
In monopoly markets, price will be higher and the quality of service will be lower than in monopolistically
competitive markets.
DIF:
2
TOP:
Monopolistic competition
4.
REF:
16-1
NAT:
Analytic
MSC:
Analytical
LOC:
Monopolistic competition
Use a graph to demonstrate why a profit-maximizing monopolistically competitive firm must operate at
excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint.
ANS:
Competitive firms do not face downward-sloping demand. The graph shows the firm choosing a level of production
in which the intersection of marginal revenue and marginal cost occurs at an output level where average total cost
is decreasing. This profit-maximizing output level is less than the efficient scale (minimum of average total cost),
and therefore the firm is said to be operating with excess capacity.
DIF:
2
TOP:
Excess capacity
REF:
16-2
NAT:
Analytic
MSC:
Analytical
LOC:
Monopolistic competition
Chapter 15/Monopoly  1142
5.
In a small college town, four microbreweries have opened in the last two years. Demonstrate the effect of
new market entrants on demand for existing firms (microbreweries) that already served this market. Assume
that the local community now places a moratorium on new liquor licenses for microbreweries. How will this
moratorium affect the long-run profitability of incumbent firms?
ANS:
The arrival of a new entrant should be graphically depicted by a leftward shift in the demand curves faced by all
incumbent firms. If firms are able to make economic profits, these will be able to be maintained in the long run if
new entrants are not allowed (which would essentially be a barrier to entry, meaning the market would no longer
be characterized as monopolistically competitive).
DIF:
2
TOP:
Long-run equilibrium
6.
REF:
16-2
NAT:
Analytic
MSC:
Analytical
LOC:
Monopolistic competition
What is meant by the term "excess capacity" as it relates to monopolistically competitive firms?
ANS:
Monopolistically competitive firms produce a level of output lower than the efficient scale of output and are
therefore said to have excess capacity.
DIF:
2
TOP:
Excess capacity
REF:
16-2
NAT:
Analytic
MSC:
Interpretive
LOC:
Monopolistic competition
Chapter 15/Monopoly  1143
7.
Entry of firms in a monopolistically competitive industry is characterized by two externalities. List them and
briefly describe how consumers and existing firms are influenced by them.
ANS:
Business-stealing effect: incumbent firms are affected through the loss of sales; consumers are affected by lower
price.
Product-variety effect: incumbent firms face a market with more substitutes; consumers have more product
variety from which to choose.
DIF:
2
REF:
16-2
TOP:
Externalities
MSC:
Interpretive
8.
NAT:
Analytic
LOC:
Monopolistic competition
Evaluate the following statement in the context of business-stealing and product-variety externalities: "We
have too many student apartments in this town already. Statistics show that vacancy rates average 15 percent
during any given semester."
ANS:
Business-stealing effect: if new entrants into the market can be profitable, then average vacancy rates are likely to
rise above 15 percent.
Product-variety effect: if new entrants to the market are able to identify niche markets which are profitable (i.e.,
offer club rooms, pools, athletic facilities, etc.), then product variety will increase, and average vacancy rates are
likely to rise above 15 percent.
DIF:
2
REF:
16-2
TOP:
Externalities
MSC:
Interpretive
9.
NAT:
Analytic
LOC:
Monopolistic competition
Assume the role of a critic of advertising. Describe the characteristics of advertising that reduce the
effectiveness of markets and decrease the social welfare of society.
ANS:
Advertising manipulates people's tastes and is psychological rather than informational. As a result, advertising
creates a desire for a product that might not otherwise exist. Advertising may also impede competition by
convincing consumers that products that are identical have significant differences.
DIF:
2
REF:
16-3
TOP:
Advertising
MSC:
Interpretive
NAT:
Analytic
LOC:
Monopolistic competition
Chapter 15/Monopoly  1144
10.
Assume the role of a defender of advertising. Describe the characteristics of advertising that enhance the
effectiveness of markets and increase the social welfare of society.
ANS:
Advertising provides information to consumers and thus allows consumers to make more informed (and therefore
better) choices. Advertising fosters competition by making consumers more aware of prices and product
characteristics in a market.
DIF:
2
REF:
16-3
TOP:
Advertising
MSC:
Interpretive
11.
NAT:
Analytic
LOC:
Monopolistic competition
Evaluate the following statement: "Advertisements that use celebrity endorsements are devoid of any value
and do not enhance the efficient functioning of markets."
ANS:
Some people argue that celebrity endorsements are a signal of quality due to the high cost of the advertisement. If
so, then these advertisements relay information about product quality and enhance the effective functioning of
markets.
DIF:
2
REF:
16-3
TOP:
Advertising
MSC:
Interpretive
12.
NAT:
Analytic
LOC:
Monopolistic competition
Professional organizations (for example, the American Medical Association and the American Bar Association)
have been active advocates for regulation to restrict the right of professionals to advertise. Describe what
economic incentives might exist for existing professionals to restrict advertising.
ANS:
If advertising increases information about prices and services, then providers of professional services will be
required to compete with each other on the basis of price and service. As such, existing professionals will be
subject to more competitive pressure in the markets they service, and individual profits are likely to fall.
DIF:
2
REF:
16-3
TOP:
Advertising
MSC:
Analytical
13.
NAT:
Analytic
LOC:
Monopolistic competition
Discuss how brand names may enhance the efficiency of markets in a less developed country.
ANS:
Recognizable brand names signal quality products. In the tourist- and business-services market, this signal can be
critical at the early stages of development to ensure visitors have a quality experience when other information is
unavailable or unreliable.
DIF:
2
REF:
16-3
TOP:
Advertising
MSC:
Interpretive
NAT:
Analytic
LOC:
Monopolistic competition
Chapter 15/Monopoly  1145
14.
As developing countries make a transition to market-based economies, one of the first major capital
investments is in "Western-quality" hotels. Explain why brand-name hotel accommodations are a critical step
in attracting foreign investment.
ANS:
Brand-name hotels are a critical first step to economic development because their recognized signal of quality
reduces the barriers of facilitating foreign visitors (and their money).
DIF:
2
REF:
16-3
TOP:
Advertising
MSC:
Analytical
15.
NAT:
Analytic
LOC:
Monopolistic competition
In markets where the government imposes an excise tax on unit sales, it also has a tendency to dabble with
restrictions on advertising (for example, cigarettes and hard liquor). Do potential (or actual) restrictions on
advertising in these markets serve the interest of a government that is interested in maximizing its tax
revenue from the sale of these products? Explain your answer.
ANS:
In the case of the examples given, demand is quite inelastic, so restrictions on advertising are not likely to have a
large impact on total sales but may have an impact on the distribution of sales across brand names. As such,
government revenue is largely unaffected if the tax is on unit sales.
DIF:
3
REF:
16-3
TOP:
Advertising
MSC:
Analytical
NAT:
Analytic
LOC:
Monopolistic competition
Sec 00 - Monopolistic Competition
MULTIPLE CHOICE
1.
Which of the following is a characteristic of monopolistic competition?
a.
ownership of a key resource by a single firm
b.
free entry
c.
identical product
d.
patents
ANS:
B
DIF:
1
REF:
16-0
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
Chapter 15/Monopoly  1146
2.
The market for novels is
a.
perfectly competitive.
b.
a monopoly.
c.
monopolistically competitive.
d.
an oligopoly.
ANS:
C
1
REF:
16-0
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Applicative
3.
DIF:
NAT:
Analytic
Which of the following statements is not correct?
a.
Monopolistic competition is similar to monopoly because in each market structure the firm can
charge a price above marginal costs.
b.
Monopolistic competition is similar to perfect competition because both market structures are
characterized by free entry.
c.
Monopolistic competition is similar to oligopoly because both market structures are characterized
by barriers to entry.
d.
Monopolistic competition is similar to perfect competition because both market structures are
characterized by many sellers.
ANS:
C
2
REF:
16-0
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Analytical
4.
DIF:
NAT:
Analytic
Which of the following statements is not correct?
a.
Monopolistic competition is different from monopoly because monopolistic competition is
characterized by free entry, whereas monopoly is characterized by barriers to entry.
b.
Both monopolistic competition and oligopoly fall in between the more extreme market structures
of competition and monopoly.
c.
Monopolistic competition is different from oligopoly because each seller in monopolistic
competition is small relative to the market, whereas each seller can affect the actions of other
sellers in an oligopoly.
d.
Both monopolistic competition and perfect competition are characterized by product
differentiation.
Chapter 15/Monopoly  1147
ANS:
D
2
REF:
16-0
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Analytical
5.
DIF:
NAT:
Analytic
Monopolistic competition is a type of
a.
oligopoly.
b.
market structure.
c.
price discrimination.
d.
advertising strategy.
ANS:
B
1
REF:
16-0
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
6.
DIF:
NAT:
Analytic
A monopolistically competitive market has characteristics that are similar to
a.
a monopoly only.
b.
a competitive firm only.
c.
both a monopoly and a competitive firm.
d.
neither a monopoly nor a competitive firm.
ANS:
C
DIF:
1
REF:
16-0
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Applicative
Sec01 - Monopolistic Competition - Between Monopoly and Perfect Competition
MULTIPLE CHOICE
1.
A typical firm in the U. S. economy would be classified as
a.
perfectly competitive.
b.
imperfectly competitive.
c.
a duopolist.
d.
an oligopolist.
Chapter 15/Monopoly  1148
ANS:
B
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Imperfect competition
MSC:
Interpretive
2.
DIF:
NAT:
The typical firm in the U. S. economy
a.
has some degree of market power.
b.
sells its product for a price that is equal to the marginal cost of producing the last unit.
c.
is perfectly competitive.
d.
is a monopoly.
ANS:
A
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Imperfect competition
MSC:
Interpretive
3.
DIF:
NAT:
Analytic
Which of the following pairs illustrates the two extreme examples of market structures?
a.
competition and oligopoly
b.
competition and monopoly
c.
monopoly and monopolistic competition
d.
oligopoly and monopolistic competition
ANS:
B
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Imperfect competition
MSC:
Interpretive
4.
Analytic
DIF:
NAT:
Analytic
The general term for market structures that fall somewhere in-between monopoly and perfect competition is
a.
incomplete markets.
b.
imperfectly competitive markets.
c.
oligopoly markets.
d.
monopolistically competitive markets.
ANS:
B
DIF:
1
REF:
16-1
NAT:
LOC:
Monopolistic competition
TOP:
Imperfect competition
MSC:
Definitional
Analytic
Chapter 15/Monopoly  1149
5.
The two types of imperfectly competitive markets are
a.
markets with differentiated products and monopoly.
b.
markets with differentiated products and oligopoly.
c.
oligopoly and monopoly.
d.
monopolistic competition and oligopoly.
ANS:
D
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Imperfect competition
MSC:
Interpretive
6.
DIF:
NAT:
The two types of imperfectly competitive markets are
a.
monopoly and monopolistic competition.
b.
monopoly and oligopoly.
c.
monopolistic competition and oligopoly.
d.
monopolistic competition and cartels.
ANS:
C
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Imperfect competition
MSC:
Definitional
7.
Analytic
DIF:
NAT:
Analytic
In a market that is characterized by imperfect competition,
a.
firms are price takers.
b.
there are always a large number of firms.
c.
there are at least a few firms that compete with one another.
d.
the actions of one firm in the market never have any impact on the other firms' profits.
ANS:
C
DIF:
2
REF:
16-1
NAT:
LOC:
Monopolistic competition
TOP:
Imperfect competition
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1150
8.
Firms in industries that have competitors but do not face so much competition that they are price takers are
operating in either a(n)
a.
oligopoly or perfectly competitive market.
b.
oligopoly or monopoly market.
c.
oligopoly or monopolistically competitive market.
d.
monopoly or monopolistically competitive market.
ANS:
C
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Imperfect competition
MSC:
Interpretive
9.
DIF:
NAT:
Imperfectly competitive firms are characterized by
a.
horizontal demand curves.
b.
standardized products.
c.
a large number of small firms.
d.
price making ability.
ANS:
D
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Imperfect competition
MSC:
Interpretive
10.
Analytic
DIF:
NAT:
Analytic
An oligopoly
a.
has a concentration ratio of less than 50 percent.
b.
is a price taker.
c.
is a type of imperfectly competitive market.
d.
has many firms rather than just one firm or a few firms.
ANS:
C
DIF:
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Oligopoly
MSC:
Interpretive
Chapter 15/Monopoly  1151
11.
An oligopoly is a market in which
a.
there are only a few sellers, each offering a product similar or identical to the products offered by
other firms in the market.
b.
firms are price takers.
c.
the actions of one seller in the market have no impact on the other sellers' profits.
d.
there are many price-taking firms, each offering a product similar or identical to the products
offered by other firms in the market.
ANS:
A
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Oligopoly
MSC:
Definitional
12.
DIF:
One characteristic of an oligopoly market structure is:
a.
firms in the industry are typically characterized by very diverse product lines.
b.
firms in the industry have some degree of market power.
c.
products typically sell at a price equal to their marginal cost of production.
d.
the actions of one seller have no impact on the profitability of other sellers.
ANS:
B
2
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Oligopoly
MSC:
Interpretive
13.
DIF:
A market structure with only a few sellers, each offering similar or identical products, is known as
a.
oligopoly.
b.
monopoly.
c.
monopolistic competition.
d.
perfect competition.
ANS:
A
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Oligopoly
MSC:
Definitional
14.
DIF:
The commercial jetliner industry consisting of Boeing and Airbus would best be described as a (an)
a.
perfectly competitive market.
b.
monopolistically competitive market.
c.
oligopoly.
d.
monopoly.
Chapter 15/Monopoly  1152
ANS:
C
2
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Oligopoly
MSC:
Interpretive
15.
DIF:
Crude oil is primarily supplied to the world market by a few Middle Eastern countries. Such a market is an
example of a(n)
(i)
imperfectly competitive market.
(ii)
monopoly market.
(iii)
oligopoly market.
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(iii) only
ANS:
C
2
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Oligopoly
MSC:
Interpretive
16.
DIF:
A concentration ratio
a.
measures the percentage of total output supplied by the four largest firms in the industry.
b.
reflects the level of competition in an industry.
c.
is related to the control that each firm has over price.
d.
All of the above are correct.
ANS:
D
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
17.
DIF:
NAT:
Analytic
A concentration ratio
a.
measures the percentage of total sales of the top firm in the industry.
b.
reflects the level of competition in an industry.
c.
is inversely related to the price charged by the top firm in the industry.
d.
All of the above are correct.
Chapter 15/Monopoly  1153
ANS:
B
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
18.
DIF:
NAT:
The higher the concentration ratio, the
a.
more control an individual firm has to set prices.
b.
more competitive the industry.
c.
less competitive the industry.
d.
Both a and c are correct.
ANS:
D
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Interpretive
19.
DIF:
NAT:
Analytic
The lower the concentration ratio, the
a.
more control an individual firm has to set prices.
b.
more competitive the industry.
c.
less competitive the industry.
d.
Both a and c are correct.
ANS:
B
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Interpretive
20.
Analytic
DIF:
NAT:
Analytic
Which of the following industries has the highest concentration ratio?
a.
wheat
b.
novels
c.
cigarettes
d.
dog food
ANS:
C
DIF:
2
REF:
16-1
NAT:
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1154
Table 16-1
The following table shows the percentage of output supplied by the top eight firms in four different industries.
21.
Firm
Industry A
Industry B
Industry C
Industry D
1
0.24
0.46
0.10
0.32
2
0.13
0.24
0.08
0.16
3
0.10
0.10
0.06
0.08
4
0.08
0.05
0.05
0.04
5
0.05
0.04
0.04
0.02
6
0.03
0.03
0.03
0.01
7
0.02
0.02
0.02
0.01
8
0.01
0.01
0.01
0.01
Refer to Table 16-1. What is the concentration ratio in Industry A?
a.
24%
b.
55%
c.
66%
d.
82%
ANS:
B
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
22.
DIF:
NAT:
Analytic
Refer to Table 16-1. What is the concentration ratio in Industry B?
a.
5%
b.
46%
c.
85%
d.
95%
ANS:
C
DIF:
2
REF:
16-1
NAT:
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1155
23.
Refer to Table 16-1. What is the concentration ratio in Industry C?
a.
29%
b.
39%
c.
45%
d.
56%
ANS:
A
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
24.
DIF:
NAT:
Refer to Table 16-1. What is the concentration ratio in Industry D?
a.
32%
b.
56%
c.
60%
d.
65%
ANS:
C
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
25.
Analytic
DIF:
NAT:
Analytic
Refer to Table 16-1. Which industry has the highest concentration ratio?
a.
Industry A
b.
Industry B
c.
Industry C
d.
Industry D
ANS:
B
DIF:
2
REF:
16-1
NAT:
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1156
26.
Refer to Table 16-1. Which industry is the least competitive?
a.
Industry A
b.
Industry B
c.
Industry C
d.
Industry D
ANS:
B
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
27.
DIF:
NAT:
Refer to Table 16-1. Which industry has the lowest concentration ratio?
a.
Industry A
b.
Industry B
c.
Industry C
d.
Industry D
ANS:
C
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
28.
Analytic
DIF:
NAT:
Analytic
Refer to Table 16-1. Which industry is the most competitive?
a.
Industry A
b.
Industry B
c.
Industry C
d.
Industry D
ANS:
C
DIF:
2
REF:
16-1
NAT:
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1157
Table 16-2
The following table shows the total output produced by the top six firms as well as the total industry output for
each industry.
29.
Firm
Industry A
Industry B
Industry C
Industry D
1
13,250
8,750
1,750
15,000
2
10,975
7,500
1,725
14,000
3
8,175
6,400
1,700
13,000
4
4,275
5,000
1,675
12,000
5
1,250
4,250
1,650
11,000
6
875
4,000
1,625
10,000
Total
45,350
70,900
30,125
120,000
Refer to Table 16-2. What is the concentration ratio for Industry A?
a.
about 71%
b.
about 81%
c.
about 88%
d.
100%
ANS:
B
3
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
30.
DIF:
NAT:
Analytic
Refer to Table 16-2. What is the concentration ratio for Industry B?
a.
about 12%
b.
about 32%
c.
about 39%
d.
about 51%
ANS:
C
DIF:
3
REF:
16-1
NAT:
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1158
31.
Refer to Table 16-2. What is the concentration ratio for Industry C?
a.
about 23%
b.
about 34%
c.
about 43%
d.
about 52%
ANS:
A
3
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
32.
DIF:
NAT:
Refer to Table 16-2. What is the concentration ratio for Industry D?
a.
about 13%
b.
about 35%
c.
about 45%
d.
about 63%
ANS:
C
3
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
33.
Analytic
DIF:
NAT:
Analytic
Refer to Table 16-2. Which industry has the highest concentration ratio?
a.
Industry A
b.
Industry B
c.
Industry C
d.
Industry D
ANS:
A
DIF:
3
REF:
16-1
NAT:
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1159
34.
Refer to Table 16-2. Which industry is the least competitive?
a.
Industry A
b.
Industry B
c.
Industry C
d.
Industry D
ANS:
A
3
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
35.
DIF:
NAT:
Refer to Table 16-2. Which industry has the lowest concentration ratio?
a.
Industry A
b.
Industry B
c.
Industry C
d.
Industry D
ANS:
C
3
REF:
16-1
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
36.
Analytic
DIF:
NAT:
Analytic
Refer to Table 16-2. Which industry is the most competitive?
a.
Industry A
b.
Industry B
c.
Industry C
d.
Industry D
ANS:
C
DIF:
3
REF:
16-1
NAT:
LOC:
Monopolistic competition
TOP:
Concentration ratio
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1160
37.
One key difference between an oligopoly market and a competitive market is that oligopolistic firms
a.
are price takers while competitive firms are not.
b.
can affect the profit of other firms in the market by the choices they make while firms in
competitive markets do not affect each other by the choices they make.
c.
sell completely unrelated products while competitive firms do not.
d.
sell their product at a price equal to marginal cost while competitive firms do not.
ANS:
B
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Oligopoly
MSC:
Interpretive
38.
DIF:
NAT:
Analytic
One way in which monopolistic competition differs from oligopoly is that
a.
there are no barriers to entry in oligopolies.
b.
in oligopoly markets there are only a few sellers.
c.
all firms in an oligopoly eventually earn zero economic profits.
d.
strategic interactions between firms are rare in oligopolies.
ANS:
B
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Oligopoly
MSC:
Interpretive
39.
DIF:
NAT:
Analytic
Which of the following is an example of a monopolistically competitive industry?
a.
computer operating systems
b.
tennis balls
c.
movies
d.
cable television
ANS:
C
DIF:
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Applicative
Chapter 15/Monopoly  1161
40.
Which of the following is an example of a monopolistically competitive industry?
a.
computer operating systems
b.
tennis balls
c.
restaurants in New York City
d.
cable television
ANS:
C
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Applicative
41.
DIF:
NAT:
Analytic
Which of the following goods are likely to be sold in a monopolistically competitive market?
a.
compact discs
b.
wheat
c.
corn
d.
postage stamps
ANS:
A
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Applicative
42.
DIF:
NAT:
Analytic
Which of the following goods are not likely to be sold in monopolistically competitive markets?
a.
compact discs
b.
books
c.
cookies
d.
wheat
ANS:
D
DIF:
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Applicative
Chapter 15/Monopoly  1162
43.
Examples of monopolistically competitive markets include the markets for
a.
restaurants and furniture.
b.
wheat and corn.
c.
postage stamps and wooden pencils.
d.
All of the above are correct.
ANS:
A
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Applicative
44.
DIF:
NAT:
Analytic
Which of the following markets is not likely characterized by a monopolistically competitive market?
a.
piano lessons
b.
corn
c.
cookies
d.
clothing
ANS:
B
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Applicative
45.
DIF:
NAT:
Analytic
A monopolistically competitive industry is characterized by
a.
many firms selling products that are similar but not identical.
b.
many firms selling identical products.
c.
a few firms selling products that are similar but not identical.
d.
a few firms selling highly different products.
ANS:
A
DIF:
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
Chapter 15/Monopoly  1163
46.
A monopolistically competitive industry is characterized by
a.
many firms, differentiated products, and barriers to entry.
b.
many firms, differentiated products, and free entry.
c.
a few firms, identical products, and free entry.
d.
a few firms, differentiated products, and barriers to entry.
ANS:
B
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
47.
DIF:
NAT:
Analytic
A market structure in which there are many firms selling products that are similar but not identical is known
as
a.
oligopoly.
b.
monopoly.
c.
monopolistic competition.
d.
perfect competition.
ANS:
C
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
48.
DIF:
NAT:
Analytic
What do economists call a market structure in which there are many firms selling products that are similar
but not identical?
a.
perfect competition
b.
monopoly
c.
monopolistic competition
d.
oligopoly
ANS:
C
DIF:
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
Chapter 15/Monopoly  1164
49.
Which of the following is not a characteristic of monopolistic competition?
a.
a large number of sellers
b.
firms are price takers
c.
free entry into the market
d.
a differentiated product
ANS:
B
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
50.
DIF:
NAT:
Analytic
Monopolistic competition is characterized by which of the following attributes?
(i)
free entry
(ii)
product differentiation
(iii)
many sellers
a.
(i) and (iii) only
b.
(i) and (ii) only
c.
(ii) and (iii) only
d.
(i), (ii), and (iii)
ANS:
D
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
51.
DIF:
NAT:
Analytic
In a monopolistically competitive market,
a.
there are only a few sellers.
b.
each firm takes the price of its product as given.
c.
firms can enter or exit the market without restrictions.
d.
each firm produces a product that is essentially identical to the products of other firms in the
market.
ANS:
C
DIF:
1
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
Chapter 15/Monopoly  1165
52.
A monopolistically competitive market
a.
has some features of monopoly and some features of competition.
b.
has one large, dominant firm and many other smaller firms.
c.
is difficult to enter.
d.
occurs whenever firms earn zero economic profit.
ANS:
A
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
53.
DIF:
NAT:
Analytic
Select the type of market that is described by the following attributes: many firms, differentiated products,
and free entry.
a.
natural monopoly
b.
perfectly competition
c.
monopolistic competition
d.
monopoly
ANS:
C
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Definitional
54.
DIF:
NAT:
Analytic
If firms in a particular market sell identical products, then the market is
(i)
perfectly competitive.
(ii)
monopolistically competitive.
(iii)
an oligopoly.
a.
(i) or (ii) only
b.
(ii) or (iii) only
c.
(i) or (iii) only
d.
(i) only
ANS:
D
DIF:
2
REF:
16-1
NAT:
LOC:
Monopolistic competition
TOP:
Perfect competition
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1166
55.
When an industry has many firms, the industry is
a.
an oligopoly if the firms sell differentiated products, but it is monopolistically competitive if the
firms sell identical products.
b.
an oligopoly if the firms sell differentiated products, but it is perfectly competitive if the firms sell
identical products.
c.
monopolistically competitive if the firms sell differentiated products, but it is perfectly competitive
if the firms sell identical products.
d.
perfectly competitive if the firms sell differentiated products, but it is monopolistically competitive
if the firms sell identical products.
ANS:
C
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Perfect competition
MSC:
Interpretive
56.
DIF:
NAT:
Analytic
If there are many firms participating in a market, the market is either
a.
an oligopoly or monopolistically competitive.
b.
perfectly competitive or monopolistically competitive.
c.
an oligopoly or perfectly competitive.
d.
an oligopoly or a cartel.
ANS:
B
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Perfect competition
MSC:
Interpretive
57.
DIF:
NAT:
Analytic
Which of the following statements is correct?
a.
Monopolistic competition is similar to monopoly because both market structures are characterized
by patents.
b.
Monopolistic competition is similar to perfect competition because both market structures are
characterized by each seller being small compared to the market.
c.
Monopolistic competition is similar to oligopoly because both market structures are characterized
by free entry.
d.
Monopolistic competition is similar to perfect competition because both market structures are
characterized by excess capacity.
ANS:
B
DIF:
3
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Perfect competition
MSC:
Analytical
Chapter 15/Monopoly  1167
58.
In which of the following market structures is(are) there a large number of sellers?
(i)
monopolistic competition
(ii)
perfect competition
(iii)
oligopoly
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(ii) only
d.
(i), (ii), and (iii)
ANS:
A
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Perfect competition
MSC:
Definitional
59.
DIF:
NAT:
Analytic
Monopolistic competition differs from perfect competition because in monopolistically competitive markets
a.
there are barriers to entry.
b.
all firms can eventually earn economic profits.
c.
each of the sellers offers a somewhat different product.
d.
strategic interactions between firms are important.
ANS:
C
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Perfect competition
MSC:
Interpretive
60.
DIF:
NAT:
Analytic
Monopolistically competitive markets differ from perfectly competitive markets due to
(i)
the number of sellers.
(ii)
the barriers to entry.
(iii)
the product differentiation among the sellers.
a.
(i) only
b.
(iii) only
c.
(i) and (iii) only
d.
(ii) and (iii) only
Chapter 15/Monopoly  1168
ANS:
B
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Perfect competition
MSC:
Interpretive
61.
DIF:
NAT:
Analytic
In both perfect competition and monopolistic competition, each firm
a.
has some monopoly power.
b.
sells a product that is at least slightly different from those of other firms.
c.
faces a downward-sloping demand curve.
d.
has many competitors.
ANS:
D
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Perfect competition
MSC:
Definitional
62.
DIF:
NAT:
Analytic
Which of the following conditions distinguishes monopolistic competition from perfect competition?
a.
the number of sellers in the market
b.
the freedom of entry and exit by firms in the market
c.
the size of firms in the market
d.
product differentiation
ANS:
D
1
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Perfect competition
MSC:
Interpretive
63.
DIF:
NAT:
Analytic
A similarity between monopoly and monopolistic competition is that in both market structures
a.
strategic interactions among sellers are important.
b.
there are a small number of sellers.
c.
sellers are price makers rather than price takers.
d.
there are only a few buyers but many sellers.
ANS:
C
DIF:
2
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Monopoly
MSC:
Interpretive
Chapter 15/Monopoly  1169
64.
Which of the following statements is correct?
a.
Cigarettes are likely to be produced in a monopolistically competitive industry.
b.
Novels are likely to be produced in a monopoly industry.
c.
Movies are likely to be produced in a monopolistically competitive industry.
d.
Milk is likely to be produced in an oligopoly industry.
ANS:
C
2
REF:
16-1
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
65.
DIF:
NAT:
Analytic
Which of the following statements is not correct?
a.
Novels are likely to be produced in a monopolistically competitive industry.
b.
Cable television is likely to be produced in a monopoly industry.
c.
Milk is likely to be produced in a monopolistically competitive industry.
d.
Cigarettes are likely to be produced in an oligopoly industry.
ANS:
C
DIF:
2
REF:
16-1
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
Sec02 - Monopolistic Competition - Competition with Differentiated Products
MULTIPLE CHOICE
1.
A downward-sloping demand curve
a.
is a feature of all monopolistically competitive firms.
b.
means that the firm in question will never experience a zero profit.
c.
causes marginal revenue to exceed price.
d.
prohibits firms from earning positive economic profits in the long run.
ANS:
A
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Demand curve
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1170
2.
Each firm in a monopolistically competitive firm faces a downward-sloping demand curve because
a.
there are many other sellers in the market.
b.
there are very few other sellers in the market.
c.
the firm's product is different from those offered by other firms in the market.
d.
that firm faces the threat of entry into the market by new firms.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Demand curve
MSC:
Interpretive
3.
DIF:
Analytic
For a monopolistically competitive firm,
a.
marginal revenue and price are the same.
b.
average revenue and price are the same.
c.
at the profit-maximizing quantity of output, price equals marginal cost.
d.
at the profit-maximizing quantity of output, price equals the minimum of average total cost.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Demand curve
MSC:
Interpretive
4.
NAT:
DIF:
NAT:
Analytic
For a monopolistically competitive firm, at the profit-maximizing quantity of output,
a.
price exceeds marginal cost.
b.
marginal revenue exceeds marginal cost.
c.
marginal cost exceeds average revenue.
d.
price equals marginal revenue.
ANS:
A
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Demand curve
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1171
5.
Product differentiation causes the seller of a good to face what type of demand curve?
a.
downward sloping
b.
vertical
c.
horizontal
d.
Any of the above could be correct since product differentiation does not affect the shape of the
demand curve.
ANS:
A
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Demand curve
MSC:
Interpretive
6.
DIF:
NAT:
Analytic
A firm in a monopolistically competitive market faces a
a.
downward-sloping demand curve because the firm’s product is different from those offered by
other firms.
b.
downward-sloping demand curve because there are only a few firms in the market.
c.
horizontal demand curve because there are many firms in the market.
d.
horizontal demand curve because firms can enter the market without restriction.
ANS:
A
1
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Interpretive
7.
DIF:
NAT:
Analytic
In the short run, a firm in a monopolistically competitive market operates much like a
a.
firm in a perfectly competitive market.
b.
firm in an oligopoly.
c.
monopolist.
d.
monopsonist.
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
Chapter 15/Monopoly  1172
8.
Each firm in a monopolistically competitive market
a.
earns both short-run and long-run profits.
b.
faces a downward-sloping demand curve.
c.
cannot earn economic profit in the short run.
d.
sets price equal to marginal cost.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Interpretive
9.
DIF:
NAT:
Analytic
In a monopolistically competitive industry, firms set price
a.
equal to marginal cost since each firm is a price taker.
b.
below marginal cost since each firm is a price taker.
c.
above marginal cost since each firm is a price setter.
d.
always a fraction of marginal cost since each firm is a price setter.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Interpretive
10.
DIF:
NAT:
Analytic
A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly
competitive market because the firm in the monopolistically competitive market
a.
is characterized by market-share maximization.
b.
has no barriers to entry.
c.
faces a downward-sloping demand curve for its product.
d.
faces a horizontal demand curve at the market clearing price.
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Interpretive
Chapter 15/Monopoly  1173
11.
A monopolistically competitive firm chooses
a.
the quantity of output to produce, but the market determines price.
b.
the price, but competition in the market determines the quantity.
c.
price, but output is determined by a cartel production quota.
d.
the quantity of output to produce and the price at which it will sell its output.
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Interpretive
12.
DIF:
NAT:
Analytic
Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms,
a.
marginal revenue will equal average total cost.
b.
price will exceed marginal cost.
c.
marginal cost will exceed average revenue.
d.
average variable cost will be declining.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Interpretive
13.
DIF:
NAT:
Analytic
In a monopolistically competitive industry, a firm’s demand curve also represent its
a.
marginal revenue.
b.
marginal cost.
c.
average revenue.
d.
profit.
ANS:
C
1
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Definitional
14.
DIF:
NAT:
Analytic
A firm in a monopolistically competitive market is similar to a monopoly in the sense that
(i)
they both face downward-sloping demand curves.
(ii)
they both charge a price that exceeds marginal cost.
(iii)
free entry and exit determines the long-run equilibrium.
Chapter 15/Monopoly  1174
a.
(i) only
b.
(ii) only
c.
(i) and (ii) only
d.
(i), (ii), and (iii) only
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Interpretive
15.
DIF:
NAT:
Analytic
A monopolistically competitive firm's choice of output level is virtually identical to the choice made by
a.
a perfectly competitive firm.
b.
a duopolist.
c.
a monopolist.
d.
an oligopolist.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Interpretive
16.
DIF:
NAT:
Analytic
To maximize its profit, a monopolistically competitive firm
a.
takes the price as given and chooses its quantity, just as a competitive firm does.
b.
takes the price as given and chooses its quantity, just as a colluding oligopolist does.
c.
chooses its quantity and price, just as a competitive firm does.
d.
chooses its quantity and price, just as a monopoly does.
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Interpretive
Chapter 15/Monopoly  1175
17.
Because monopolistically competitive firms produce differentiated products, each firm
a.
faces a demand curve that is horizontal.
b.
faces a demand curve that is vertical.
c.
has no control over product price.
d.
has some control over product price.
ANS:
D
1
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Demand curve
MSC:
Interpretive
18.
DIF:
NAT:
Analytic
A monopolistically competitive firm chooses its
a.
price and quantity just as a monopoly does.
b.
quantity but faces a horizontal demand curve just as a competitive firm does.
c.
price but can sell any quantity at the market price just as an oligopoly does.
d.
price and quantity based on the decisions of the other firms in the industry just as an oligopoly
does.
ANS:
A
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization | Demand curve
MSC:
Interpretive
19.
DIF:
NAT:
Analytic
When a monopolistically competitive firm raises its price,
a.
quantity demanded falls to zero.
b.
quantity demanded declines but not to zero.
c.
the market supply curve shifts outward.
d.
quantity demanded remains constant.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Analytical
Chapter 15/Monopoly  1176
20.
A monopolistically competitive firm chooses the quantity to produce where
a.
price equals marginal cost.
b.
demand equals marginal cost.
c.
marginal revenue equals marginal cost.
d.
Both a and c are correct.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
21.
DIF:
NAT:
The profit-maximizing rule for a firm in a monopolistically competitive market is to always select the quantity
at which
a.
marginal revenue is equal to marginal cost.
b.
average total cost is equal to marginal revenue.
c.
average total cost is equal to price.
d.
average revenue exceeds average total cost.
ANS:
A
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
22.
Analytic
DIF:
NAT:
Analytic
A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?
a.
average revenue exceeds marginal revenue
b.
marginal revenue exceeds average revenue
c.
average revenue is equal to marginal revenue
d.
revenue is always maximized along with profit
ANS:
A
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1177
23.
A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?
a.
average revenue exceeds marginal revenue
b.
marginal revenue equals marginal cost
c.
price exceeds marginal cost
d.
All of the above are correct.
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
24.
DIF:
NAT:
A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?
a.
marginal cost exceeds marginal revenue
b.
average revenue equals marginal cost
c.
price exceeds marginal cost
d.
All of the above are correct.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
25.
Analytic
DIF:
NAT:
Analytic
To maximize its profit, a monopolistically competitive firm chooses its level of output by looking for the level
of output at which
a.
price equals marginal cost.
b.
marginal revenue equals marginal cost.
c.
average total cost is minimized.
d.
All of the above are correct.
ANS:
B
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1178
26.
A monopolistically competitive firm faces the following demand schedule for its product:
Price ($)
10
9
8
7
6
5
4
3
2
1
Quantity
2
4
6
9
11
13
15
17
19
21
The firm has total fixed costs of $20 and a constant marginal cost of $2 per unit. The firm will maximize profit with
a.
6 units of output.
b.
9 units of output.
c.
11 units of output.
d.
13 units of output.
ANS:
B
3
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
27.
DIF:
NAT:
Analytic
A monopolistically competitive firm faces the following demand curve for its product:
Price ($)
10
9
8
7
6
5
4
3
2
1
Quantity
2
4
6
8
10
12
14
16
18
20
The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit. The firm will maximize profit with
the production of
a.
6 units of output.
b.
8 units of output.
c.
10 units of output.
d.
12 units of output.
ANS:
A
DIF:
3
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1179
28.
A monopolistically competitive firm has the following cost structure:
Output
Total Cost($)
1
2
3
4
5
6
7
30
32
36
42
50
63
77
The firm faces the following demand curve:
Price ($)
20
18
15
12
9
7
4
Quantity
1
2
3
4
5
6
7
To maximize profit (or minimize losses), the firm will produce
a.
2 units.
b.
3 units.
c.
4 units.
d.
5 units.
ANS:
B
3
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
29.
DIF:
NAT:
Analytic
A monopolistically competitive firm is currently producing 10 units of output. At this level of output the firm
is charging a price equal to $10, has marginal revenue equal to $6, has marginal cost equal to $6, and has
average total cost equal to $12. From this information we can infer that
a.
the firm is currently maximizing its profit.
b.
the profits of the firm are negative.
c.
firms are likely to leave this market in the long run.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
Analytic
Chapter 15/Monopoly  1180
30.
If "too much choice" is a problem for consumers, it would occur in which market structure(s)?
a.
perfect competition
b.
monopoly
c.
monopolistic competition
d.
perfect competition and monopolistic competition
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
31.
DIF:
NAT:
In the short run, a firm operating in a monopolistically competitive market can earn
a.
positive economic profits.
b.
economic losses.
c.
zero economic profits.
d.
All of the above are possible.
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Interpretive
32.
Analytic
DIF:
NAT:
Analytic
In the short run, a firm operating in a monopolistically competitive market
a.
produces an output level where marginal revenue equals average total cost.
b.
maximizes revenues as well as profits.
c.
can earn zero economic profits.
d.
sets price equal to marginal cost.
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1181
33.
In the short run, a firm operating in a monopolistically competitive market
a.
produces an output level where marginal revenue equals average total cost.
b.
sets price equal to demand where marginal revenue equals marginal cost.
c.
must earn zero economic profits.
d.
maximizes revenues as well as profits.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Interpretive
34.
DIF:
NAT:
When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal
cost,
a.
the firm must be earning a positive economic profit.
b.
the firm may be incurring economic losses
c.
there is a deadweight loss to society, but it is exactly offset by the benefit of excess capacity.
d.
new firms will enter the market in the long run.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Analytical
35.
Analytic
DIF:
NAT:
Analytic
Which of the following conditions is characteristic of a monopolistically competitive firm in short-run
equilibrium?
a.
P = AR
b.
MR = MC
c.
P > MC
d.
All of the above are correct.
ANS:
D
DIF:
3
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Analytical
Analytic
Chapter 15/Monopoly  1182
36.
Which of the following conditions is characteristic of a monopolistically competitive firm in short-run
equilibrium?
a.
P > AR
b.
MR > MC
c.
P > MC
d.
All of the above are correct.
ANS:
C
3
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Analytical
37.
DIF:
NAT:
Which of the following conditions is characteristic of a monopolistically competitive firm in short-run
equilibrium?
a.
P > ATC
b.
P = ATC
c.
P < ATC
d.
Any of the above could be correct.
ANS:
D
3
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Analytical
38.
Analytic
DIF:
NAT:
Analytic
Which of the following conditions is characteristic of a monopolistically competitive firm in both the short-run
and the long run?
a.
P > MC
b.
MC = ATC
c.
P < MR
d.
All of the above are correct.
ANS:
A
DIF:
3
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Short-run equilibrium | Long-run equilibrium
MSC:
Analytical
Chapter 15/Monopoly  1183
39.
For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost in
a.
the short run but not in the long run.
b.
the long run but not in the short run.
c.
both the short run and the long run.
d.
neither the short run nor the long run.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium | Long-run equilibrium
MSC:
Interpretive
40.
DIF:
NAT:
Analytic
For a profit-maximizing monopolistically competitive firm, marginal revenue equals marginal cost in
a.
the short run but not in the long run.
b.
the long run but not in the short run.
c.
both the short run and the long run.
d.
neither the short run nor the long run.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium | Long-run equilibrium
MSC:
Interpretive
41.
DIF:
NAT:
Analytic
A firm operating in a monopolistically competitive market can earn economic profits in
a.
the short run but not in the long run.
b.
the long run but not in the short run.
c.
both the short run and the long run.
d.
neither the short run nor the long run.
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Short-run equilibrium | Long-run equilibrium
MSC:
Interpretive
Chapter 15/Monopoly  1184
42.
When a market is monopolistically competitive, the typical firm in the market is likely to experience a
a.
positive profit in the short run and in the long run.
b.
positive or negative profit in the short run and a zero profit in the long run.
c.
zero profit in the short run and a positive or negative profit in the long run.
d.
zero profit in the short run and in the long run.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium | Long-run equilibrium
MSC:
Analytical
43.
DIF:
NAT:
Analytic
When a market is monopolistically competitive, the typical firm in the market can earn
a.
losses in the short run and profits in the long run.
b.
profits in the short run and the long run.
c.
losses in the short run and zero profit in the long run.
d.
zero profit in the short run and losses in the long run.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium | Long-run equilibrium
MSC:
Analytical
44.
DIF:
NAT:
Analytic
An important difference between the situation faced by a profit-maximizing monopolistically competitive firm
in the short run and the situation faced by that same firm in the long run is that in the short run,
a.
price may exceed marginal revenue, but in the long run, price equals marginal revenue.
b.
price may exceed marginal cost, but in the long run, price equals marginal cost.
c.
price may exceed average total cost, but in the long run, price equals average total cost.
d.
there are many firms in the market, but in the long run, there are only a few firms in the market.
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Short-run equilibrium | Long-run equilibrium
MSC:
Interpretive
Chapter 15/Monopoly  1185
Figure 16-1. The figure is drawn for a monopolistically competitive firm.
P
32
24
MC
18
16
12
Demand
8
MR
4
45.
8
12
16
20
24
28
32 Q
Refer to Figure 16-1. The firm’s profit-maximizing level of output is
a.
8 units.
b.
12 units.
c.
16 units.
d.
24 units.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
46.
DIF:
NAT:
Analytic
Refer to Figure 16-1. In order to maximize profit, the firm will charge a price of
a.
$8.
b.
$12.
c.
$16.
d.
$18.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1186
47.
Refer to Figure 16-1. Suppose that average total cost is $18 when Q=12. What is the profit-maximizing price
and resulting profit?
a.
P=$12, profit=$0
b.
P=$18, profit=$72
c.
P=$18, profit=$24
d.
P=$18, profit=$0
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
48.
DIF:
NAT:
Refer to Figure 16-1. If the average total cost is $15 at the profit-maximizing quantity, then the firm’s
maximum profit is
a.
$18.
b.
$24.
c.
$36.
d.
$45.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
49.
Analytic
DIF:
NAT:
Analytic
Refer to Figure 16-1. If the average variable cost is $12 at the profit-maximizing quantity, and if the firm’s
fixed costs amount to $30, then the firm’s maximum profit is
a.
$-30.
b.
$22.
c.
$36.
d.
$42.
ANS:
D
DIF:
3
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1187
50.
Refer to Figure 16-1. If the average variable cost is $13 at the profit-maximizing quantity, and if the firm’s
profit is $20 at that quantity, then its fixed costs amount to
a.
$12.
b.
$22.
c.
$40.
d.
$60.
ANS:
C
3
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
51.
DIF:
NAT:
Refer to Figure 16-1. Suppose ATC = $18 when Q = 12. Then the
a.
firm is in a long-run equilibrium when it produces 12 units of output.
b.
firm is in a long-run equilibrium when it produces 16 units of output.
c.
best the firm can do is sustain a loss of $24.
d.
best the firm can do is earn a profit of $48.
ANS:
A
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Applicative
52.
Analytic
DIF:
NAT:
Analytic
Refer to Figure 16-1. Suppose you were to add the ATC curve to the diagram to show the firm in a situation
of long-run equilibrium. You would draw the ATC curve
a.
with its minimum at the point (Q = 12, P = $18).
b.
with its minimum at the point (Q = 12, P = $12).
c.
tangent to the demand curve at the point (Q = 12, P = $18).
d.
tangent to the demand curve at the point (Q = 16, P = $16).
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1188
Figure 16-2
This figure depicts a situation in a monopolistically competitive market.
53.
Refer to Figure 16-2. What price will the monopolistically competitive firm charge in this market?
a.
$60
b.
$70
c.
$75
d.
$80
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
54.
DIF:
NAT:
Analytic
Refer to Figure 16-2. What is the profit-maximizing price, quantity, and resulting profit?
a.
P=$60, Q=20 units, profit=$200
b.
P=$80, Q=20 units, profit=$200
c.
P=$75, Q=25 units, profit=$100
d.
P=$60, Q=40 units, profit=$0
ANS:
B
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
Analytic
Chapter 15/Monopoly  1189
55.
Refer to Figure 16-2. How much consumer surplus will be derived from the purchase of this product at the
monopolistically competitive price?
a.
$200
b.
$312.50
c.
$400
d.
$800
ANS:
A
3
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
56.
DIF:
NAT:
Refer to Figure 16-2. How much profit will the monopolistically competitive firm earn in this situation?
a.
a $10 profit
b.
a $200 profit
c.
a $400 profit
d.
No profit, since monopolistically competitive firms never earn economic profit.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
57.
Analytic
DIF:
NAT:
Analytic
Refer to Figure 16-2. How much output will the monopolistically competitive firm produce in this situation?
a.
20 units
b.
25 units
c.
40 units
d.
80 units
ANS:
A
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
Analytic
Chapter 15/Monopoly  1190
Figure 16-3
$
1000
900
800
MC
700
ATC
600
500
400
300
200
100
5
58.
D
MR
10
15
20
25
30
35
40
Quantity
Refer to Figure 16-3. The firm in this figure is monopolistically competitive. It illustrates
a.
the shut-down case.
b.
a long-run economic profit.
c.
a short-run economic profit.
d.
a short-run loss.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
59.
DIF:
NAT:
Analytic
Refer to Figure 16-3. At the profit-maximizing, or loss-minimizing, output level, the firm in this figure has total
costs of approximately
a.
$2,000.
b.
$3,000.
c.
$4,000.
d.
$5,000.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1191
60.
Refer to Figure 16-3. Assume the firm in the figure is currently producing 8 units of output and charging
$400. The firm
a.
will increase its profits if it raises its price and reduces its production level.
b.
will increase its profits if it lowers its price and expands its production level.
c.
is maximizing profits.
d.
will increase its profits if it raises its prices and expands its production level.
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
61.
DIF:
NAT:
Analytic
Refer to Figure 16-3. The maximum total short-run economic profit for the monopolistically competitive firm
in this figure is
a.
$1,000.
b.
$2,000.
c.
$3,000.
d.
$5,000.
ANS:
A
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1192
Figure 16-4
62.
Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage the entry of
other firms into a monopolistically competitive industry?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Interpretive
63.
DIF:
NAT:
Analytic
Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage the exit of
some firms from a monopolistically competitive industry?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
Chapter 15/Monopoly  1193
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Interpretive
64.
DIF:
NAT:
Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will not encourage either the
entry or exit of firms in a monopolistically competitive industry?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
ANS:
A
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Short-run equilibrium
MSC:
Interpretive
65.
DIF:
NAT:
Analytic
Refer to Figure 16-4. Panel a shows a profit-maximizing monopolistically competitive firm that is
a.
earning zero economic profit.
b.
likely to exit the market in the long run.
c.
producing its efficient scale of output.
d.
not maximizing its profit.
ANS:
A
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
66.
Analytic
DIF:
NAT:
Analytic
Refer to Figure 16-4. Which of the panels depicts a firm in a monopolistically competitive market earning
positive economic profits?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
Chapter 15/Monopoly  1194
67.
Refer to Figure 16-4. Panel b is consistent with a firm in a monopolistically competitive market that is
a.
not in long-run equilibrium.
b.
in long-run equilibrium.
c.
producing its efficient scale of output.
d.
earning a positive economic profit.
ANS:
A
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
68.
DIF:
NAT:
Analytic
Refer to Figure 16-4. Which of the panels shown could illustrate the short-run situation for a monopolistically
competitive firm?
a.
panel a
b.
panel b
c.
panel c
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
Chapter 15/Monopoly  1195
Figure 16-5
69.
Refer to Figure 16-5. Which of the graphs shown would be consistent with a firm in a monopolistically
competitive market that is earning a positive profit?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
70.
DIF:
NAT:
Analytic
Refer to Figure 16-5. Which of the graphs shown would be consistent with a firm in a monopolistically
competitive market that is doing its best but still losing money?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
Chapter 15/Monopoly  1196
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
71.
DIF:
NAT:
Analytic
Refer to Figure 16-5. Which of the graphs depicts a monopolistically competitive firm in long-run
equilibrium?
a.
panel a
b.
panel b
c.
panel c
d.
None of the above is correct.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1197
Figure 16-6
72.
Refer to Figure 16-6. Which of the graphs depicts the situation for a profit-maximizing firm in a
monopolistically competitive market?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
ANS:
A
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
73.
DIF:
NAT:
Analytic
Refer to Figure 16-6. Suppose a firm is operating in the situation depicted in panel a. Which of the following
statements is correct?
a.
The firm is earning positive short-run profits.
b.
The firm is earning negative short-run profits.
c.
The firm is earning zero short-run profits.
d.
We cannot determine profits because we do not know the firm’s average total costs.
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
Chapter 15/Monopoly  1198
74.
Refer to Figure 16-6. If a firm in a monopolistically competitive market was producing the level of output
depicted as Qd in panel (d), it would
a.
not be maximizing its profit.
b.
be minimizing its losses.
c.
be losing market share to other firms in the market.
d.
be operating at excess capacity.
ANS:
A
3
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
75.
DIF:
NAT:
Refer to Figure 16-6. The firm depicted in panel b faces a horizontal demand curve. If panel b depicts a profitmaximizing firm,
a.
it could be operating in either a perfectly competitive market or in a monopolistically competitive
market.
b.
it would not have excess capacity in its production as long as it is earning zero economic profit.
c.
it is able to choose the price at which it sells its product.
d.
the firm can always raise its profit by increasing production since consumers will buy as much as
the firm can produce.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Interpretive
76.
Analytic
DIF:
NAT:
Analytic
In which of the following markets is economic profit driven to zero in the long run?
a.
oligopoly
b.
monopoly
c.
monopolistic competition
d.
cartels
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1199
77.
Which of the following conditions is characteristic of a monopolistically competitive firm in long-run
equilibrium?
a.
P > demand and P = MR
b.
ATC > demand and MR = MC
c.
P > MC and demand = ATC
d.
P < ATC and demand > MR
ANS:
C
3
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
78.
DIF:
NAT:
Which of the following conditions is characteristic of a monopolistically competitive firm in long-run
equilibrium?
a.
P > MR and P = MC
b.
ATC = demand and MR = MC
c.
P < MC and demand = ATC
d.
P > ATC and demand > MR
ANS:
B
3
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
79.
Analytic
DIF:
NAT:
Analytic
A monopolistically competitive firm
a.
charges a price that is equal to marginal cost.
b.
experiences a zero profit in the long run.
c.
produces at the efficient scale in the long run.
d.
All of the above are correct.
ANS:
B
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1200
80.
In a monopolistically competitive market,
a.
entry by new firms is impeded by barriers to entry; thus, the number of firms in the market is
never ideal.
b.
entry by new firms is impeded by barriers to entry, but the number of firms in the market is
nevertheless always ideal.
c.
free entry ensures that the number of firms in the market is ideal.
d.
there may be too few or too many firms in the market, despite free entry.
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
81.
DIF:
NAT:
In which of the following market structures does free entry and exit play an important role in the long-run
equilibrium outcome?
(i)
perfect competition
(ii)
monopolistic competition
(iii)
monopoly
a.
(i) only
b.
(i) and (ii) only
c.
(ii) and (iii) only
d.
(i), (ii), and (iii)
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
82.
Analytic
DIF:
NAT:
Analytic
If firms in a monopolistically competitive market are earning positive profits, then
a.
firms will likely be subject to regulation.
b.
barriers to entry will be strengthened.
c.
some firms will exit the market.
d.
new firms will enter the market.
Chapter 15/Monopoly  1201
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
83.
DIF:
NAT:
If firms in a monopolistically competitive market are earning economic profits, which of the following
scenarios would best describe the change existing firms would face as the market adjusts to the long-run
equilibrium?
a.
an increase in demand for each firm
b.
a decrease in demand for each firm
c.
a downward shift in the marginal cost curve for each firm
d.
an upward shift in the marginal cost curve for each firm
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
84.
DIF:
NAT:
Analytic
If firms in a monopolistically competitive market are incurring economic losses, which of the following
scenarios would best describe the change existing firms (who are able to stay in the market) would face as
the market adjusts to the long-run equilibrium?
a.
a downward shift in the marginal cost curve for each firm
b.
an upward shift in the marginal cost curve for each firm
c.
a decrease in demand for each firm
d.
an increase in demand for each firm
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
85.
Analytic
DIF:
In monopolistically competitive markets, positive economic profits
a.
suggest that some existing firms will exit the market.
b.
suggest that new firms will enter the market.
c.
are sustained through government-imposed barriers to entry.
d.
are never possible.
NAT:
Analytic
Chapter 15/Monopoly  1202
ANS:
B
1
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
86.
DIF:
NAT:
In monopolistically competitive markets, economic losses
a.
suggest that some existing firms will exit the market.
b.
suggest that new firms will enter the market.
c.
are minimized through government-imposed barriers to entry.
d.
are never possible.
ANS:
A
1
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
87.
DIF:
NAT:
Analytic
As new firms enter a monopolistically competitive market, profits of existing firms
a.
rise, and product diversity in the market increases.
b.
rise, and product diversity in the market decreases.
c.
decline, and product diversity in the market increases.
d.
decline, and product diversity in the market decreases.
ANS:
C
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
88.
Analytic
DIF:
NAT:
Analytic
As firms exit a monopolistically competitive market, profits of remaining firms
a.
decline, and product diversity in the market decreases.
b.
decline, and product diversity in the market increases.
c.
rise, and product diversity in the market decreases.
d.
rise, and product diversity in the market increases.
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
Analytic
Chapter 15/Monopoly  1203
89.
The free entry and exit of firms in a monopolistically competitive market guarantees that
a.
both economic profits and economic losses can persist in the long run.
b.
both economic profits and economic losses disappear in the long run.
c.
economic profits, but not economic losses, can persist in the long run.
d.
economic losses, but not economic profits, can persist in the long run.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
90.
DIF:
NAT:
In monopolistically competitive markets, free entry and exit suggests that
a.
the market structure will eventually be characterized by perfect competition in the long run.
b.
all firms earn zero economic profits in the long run.
c.
some firms will be able to earn economic profits in the long run.
d.
some firms will be forced to incur economic losses in the long run.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
91.
Analytic
DIF:
NAT:
Analytic
When a profit-maximizing firm in a monopolistically competitive market is producing the long-run equilibrium
quantity,
a.
its average revenue will equal its marginal cost.
b.
its marginal revenue will exceed its marginal cost.
c.
it will be earning positive economic profits.
d.
its demand curve will be tangent to its average-total-cost curve.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1204
92.
When a firm's demand curve is tangent to its average total cost curve, the
a.
firm's economic profit is zero.
b.
firm must be earning economic profits.
c.
firm must be incurring economic losses.
d.
firm must be operating at its efficient scale.
ANS:
A
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
93.
DIF:
NAT:
When a firm's demand curve is tangent to its average total cost curve, the
a.
firm's economic profit is zero.
b.
firm may be earning economic profits.
c.
firm must be operating at its efficient scale.
d.
Both a and c are correct.
ANS:
A
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
94.
Analytic
DIF:
NAT:
Analytic
When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,
a.
the demand curve will be perfectly elastic.
b.
price exceeds marginal cost.
c.
marginal cost must be falling.
d.
marginal revenue exceeds marginal cost.
ANS:
B
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1205
95.
A profit-maximizing firm operating in a monopolistically competitive market that is in a long-run equilibrium
has
a.
minimized average total cost.
b.
chosen to produce where demand is unitary elastic.
c.
produced the efficient scale of output.
d.
chosen a quantity of output where average revenue equals average total cost.
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
96.
DIF:
NAT:
In a long-run equilibrium, a firm in a monopolistically competitive market operates
a.
where marginal revenue is zero.
b.
where marginal revenue is negative.
c.
on the rising portion of its average total cost curve.
d.
on the declining portion of its average total cost curve.
ANS:
D
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
97.
Analytic
DIF:
NAT:
Analytic
When a new firm enters a monopolistically competitive market, the individual demand curves faced by all
existing firms in that market will
a.
shift to the left.
b.
shift to the right.
c.
shift in a direction that is unpredictable without further information.
d.
remain unchanged. It is the supply curve that will shift.
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Demand curve | Long-run equilibrium
MSC:
Analytical
Chapter 15/Monopoly  1206
98.
When a firm exits a monopolistically competitive market, the individual demand curves faced by all remaining
firms in that market will
a.
shift in a direction that is unpredictable without further information.
b.
shift to the right.
c.
shift to the left.
d.
remain unchanged. It is the supply curve that will shift.
ANS:
B
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Demand curve | Long-run equilibrium
MSC:
Analytical
99.
DIF:
NAT:
Analytic
Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a(n)
a.
change in the technology that the firm utilizes.
b.
shift of its demand curve.
c.
shift of its supply curve.
d.
increase in the firm’s average cost of production.
ANS:
B
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
100. Because a monopolistically competitive firm has some market power, in the long-run the price of its product
exceeds its
a.
average revenue.
b.
average total cost.
c.
marginal cost.
d.
profit per unit.
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1207
101. New firms will likely enter a monopolistically competitive market when price exceeds
a.
marginal revenue.
b.
average revenue.
c.
marginal cost.
d.
average total cost.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
102. Which two curves are tangent to each other in a monopolistically competitive market with zero economic
profit?
a.
demand and average variable cost
b.
demand and average total cost
c.
marginal revenue and average variable cost
d.
marginal revenue and average total cost
ANS:
B
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
103. In a monopolistically competitive market,
a.
strategic interactions among the firms are very important.
b.
the threat of entry by new firms is not an important consideration.
c.
the attainment of a Nash equilibrium is an important objective.
d.
firms may enter even though they will earn zero economic profit in the long run.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1208
104. Among the following situations, which one is least likely to apply to a monopolistically competitive firm?
a.
profit is positive in the short run
b.
total cost exceeds total revenue in the short run
c.
profit is positive in the long run
d.
total revenue equals total cost in the long run
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
105. Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the
transition from this initial situation to a long-run equilibrium,
a.
the number of firms in the market decreases.
b.
each existing firm experiences a decrease in demand for its product.
c.
each existing firm experiences a rightward shift of its marginal revenue curve.
d.
each existing firm experiences an upward shift in its average total cost curve.
ANS:
B
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
106. Suppose that monopolistically competitive firms in a certain market are experiencing losses. In the transition
from this initial situation to a long-run equilibrium,
a.
the number of firms in the market decreases.
b.
each existing firm experiences a decrease in demand for its product.
c.
each firm experiences an upward shift of its marginal cost and average total cost curves.
d.
each existing firm’s average total cost falls to bring economic profit back to zero.
ANS:
A
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1209
107. When a monopolistically competitive firm is in long-run equilibrium,
a.
marginal revenue is equal to marginal cost.
b.
price is equal to average total cost.
c.
demand is equal to average total cost.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
108. When a monopolistically competitive firm is in long-run equilibrium,
a.
price is equal to average total cost.
b.
price is equal to marginal cost.
c.
price is equal to marginal revenue.
d.
the firm operates at its efficient scale.
ANS:
A
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
109. Which of these types of firms can earn a positive economic profit in the long run?
a.
monopolies, but not competitive firms or monopolistically competitive firms
b.
monopolies and monopolistically competitive firms, but not competitive firms
c.
monopolies, monopolistically competitive firms, and monopolies
d.
No firms earn positive economic profit in the long run. Entry will reduce all firms’ economic profit
to zero in the long run.
ANS:
A
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1210
110. "In a long-run equilibrium, price is equal to average total cost." This statement applies to
a.
competitive markets, but not to monopolistically competitive markets or monopolies.
b.
competitive and monopolistically competitive markets, but not to monopolies.
c.
competitive markets, monopolistically competitive markets, and monopolies.
d.
None of the above is correct.
ANS:
B
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
111. Entry and exit drive each firm in a monopolistically competitive market to a point of tangency between its
a.
marginal revenue curve and its total cost curve.
b.
marginal revenue curve and its average total cost curve.
c.
demand curve and its total cost curve.
d.
demand curve and its average total cost curve.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
112. Suppose the point of tangency that characterizes long-run equilibrium for a monopolistically competitive firm
occurs at Q1 units of output. This level of output, Q1,
a.
exceeds the level of output at which marginal revenue equals marginal cost.
b.
exceeds the level of output at which marginal cost equals average total cost.
c.
falls short of the level of output at which price equals marginal cost.
d.
exceeds the firm’s efficient scale of output.
ANS:
C
DIF:
3
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
Analytic
Chapter 15/Monopoly  1211
113. Suppose for some firm that average total cost is minimized at Q 1 units of output. For a monopolistically
competitive firm in long-run equilibrium, Q1
a.
is also the level of output at which marginal cost equals average total cost.
b.
exceeds the level of output at which there is a point of tangency between the demand curve and
the average total cost curve.
c.
exceeds the level of output at which marginal revenue equals marginal cost.
d.
All of the above are correct.
ANS:
D
DIF:
3
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
114. In a long-run equilibrium,
a.
only a perfectly competitive firm operates at its efficient scale.
b.
only a monopolistically competitive firm operates at its efficient scale.
c.
neither a competitive firm nor a monopolistically competitive firm charges a markup over marginal
cost.
d.
both a perfectly competitive firm and a monopolistically competitive firm operate at their efficient
scale of production.
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
115. A monopolistically competitive firm faces the following demand curve for its product:
Price ($)
10
9
8
7
6
5
4
3
2
1
Quantity
2
4
6
8
10
12
14
16
18
20
The firm has total fixed costs of $40 and a constant marginal cost of $2 per unit. We can conclude that
a.
firms will exit this market.
b.
firms will enter this market.
c.
this market is in long-run equilibrium.
d.
this firm is operating at its efficient scale.
Chapter 15/Monopoly  1212
ANS:
C
DIF:
3
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
Analytic
116. A firm has the following cost structure:
Output
Total Cost($)
1
2
3
4
5
6
7
30
32
36
42
50
63
77
If this firm is in a typical perfectly competitive market, in the long run it will likely produce
a.
4 or fewer units of output.
b.
5 units of output.
c.
more than 5 units of output.
d.
None of the above are necessarily correct because there is not enough information to tell.
ANS:
B
DIF:
3
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
117. A firm has the following cost structure:
Output
Total Cost($)
1
2
3
4
5
6
7
30
32
36
42
50
63
77
If this firm is in a typical monopolistically competitive market, in the long run it will likely produce
a.
4 or fewer units of output.
b.
5 units of output.
c.
more than 5 units of output.
d.
None of the above are necessarily correct because there is not enough information to tell.
Chapter 15/Monopoly  1213
ANS:
A
DIF:
3
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
Analytic
118. A monopolistically competitive firm is currently earning a positive economic profit. If other firms enter the
market, we would expect that the added competition will cause this firm to adjust its output such that it
a.
will operate closer to its efficient scale.
b.
will operate further from its efficient scale.
c.
will no longer be at its efficient scale.
d.
might move either closer to or further from its efficient scale.
ANS:
B
DIF:
3
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
Analytic
119. In the long run,
a.
monopolistically competitive firms earn a higher profit than perfectly competitive firms because
monopolistically competitive firms have some monopoly power.
b.
monopolistically competitive firms produce a higher output than perfectly competitive firms
because competition drives the perfectly competitive firm's output down.
c.
both monopolistically competitive and perfectly competitive firms produce where P = MC.
d.
both monopolistically competitive and perfectly competitive firms produce where P = ATC.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
120. Cecilia's Café operates in a monopolistically competitive market. Cecilia's is currently producing where its
average total cost is minimized. In the long run we would expect Cecilia’s output to
a.
decrease and average total cost to increase.
b.
decrease and average total cost to decrease.
c.
remain unchanged as Cecilia's is doing the best it can.
d.
increase and average total costs to decrease.
Chapter 15/Monopoly  1214
ANS:
A
DIF:
3
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
Analytic
121. Which of the following statements regarding monopolistic competition is not correct?
a.
In the long-run equilibrium, price equals average total cost.
b.
In the long-run equilibrium, firms earn zero economic profit.
c.
In the long-run equilibrium, firms charge a price above marginal cost.
d.
In the long-run equilibrium, firms produce a quantity in excess of their efficient scale.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
122. Consider a monopolistically competitive firm in a market in long-run equilibrium. This firm is likely earning
a.
a positive economic profit since it is charging a price above marginal cost.
b.
no economic profit since it is charging a price equal to its marginal cost.
c.
a positive economic profit since it is charging a price above its average total cost.
d.
no economic profit since it is charging a price equal to it average total cost.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1215
Figure 16-7
The lines in the figures below illustrate the potential effect of entry and exit in a monopolistically competitive
market on either the demand curve or the marginal cost curve of existing firms.
123. Refer to Figure 16-7. Panel (d) illustrates the change that would occur if existing firms faced
a.
long-run economic losses.
b.
a decrease in the diversity of products offered in the market.
c.
new entrants in the market.
d.
firms exiting the market.
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
124. Refer to Figure 16-7. Which of the diagrams illustrates the impact of some existing firms leaving the market?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
Chapter 15/Monopoly  1216
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Table 16-3
This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive
firm.
Quantity
Price
Marginal Cost
Average Total Cost
0
$10
--
--
1
$9
$3
$14
2
$8
$6
$10
3
$7
$9
$9
4
$6
$12
$10
5
$5
$15
$12
6
$4
$18
$14
7
$3
$21
$17
8
$2
$24
$21
9
$1
$27
$25
10
$0
$30
$29
125. Refer to Table 16-3. What price will this firm charge to maximize profit?
a.
$6
b.
$7
c.
$8
d.
$9
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1217
126. Refer to Table 16-3. Which of the following is likely to happen in the long run in this market?
a.
The market is currently in a long-run equilibrium.
b.
The market price is likely to fall.
c.
Firms are likely to enter the market since firms are earning a positive economic profit.
d.
Firms are likely to leave the market since firms are earning a negative economic profit.
ANS:
D
DIF:
3
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Applicative
Analytic
127. Refer to Table 16-3. How much profit will this firm earn when it chooses its output to maximize profit?
a.
a $4 loss
b.
a $2 loss
c.
a $6 profit
d.
a $16 profit
ANS:
A
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
Table 16-4
This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive
firm.
Quantity
Price
Marginal
Average
Cost
Total Cost
0
$20
--
--
1
$16
$2
$21
2
$12
$4
$12
3
$8
$6
$9.67
4
$4
$8
$9
5
$0
$10
$9
Chapter 15/Monopoly  1218
128. Refer to Table 16-4. What price should this firm charge to maximize profit?
a.
$4
b.
$8
c.
$12
d.
$16
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
129. Refer to Table 16-4. How much profit will this firm earn at the monopolistically competitive price?
a.
$0
b.
$5
c.
$12
d.
$16
ANS:
A
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
130. Refer to Table 16-4. Which of the following statements regarding this monopolistically competitive firm is
correct?
a.
New firms will enter this market in the long run since firm profits are greater than zero.
b.
Firms will leave this market in the long run since firm profits are less than zero.
c.
This firm is currently in long-run equilibrium.
d.
This firm is currently in long-run equilibrium, and the firm is producing its efficient scale of output.
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Applicative
Analytic
Chapter 15/Monopoly  1219
Table 16-5
Traci’s Hairstyling is one salon among many in the market for hairstyling. The following table presents cost and
revenue data for hair cuts at Traci’s Hairstyling.
COSTS
REVENUES
Quantity
Total
Marginal
Quantity
Produced
Cost
Cost
Demanded
Price
0
$10
--
0
$50
1
$15
1
$45
2
$21
2
$40
3
$28
3
$35
4
$36
4
$30
5
$45
5
$25
6
$55
6
$20
7
$66
7
$15
8
$78
8
$10
Total
Marginal
Revenue
Revenue
--
131. Refer to Table 16-5. What is the profit-maximizing output for Traci’s Hairstyling?
a.
3 haircuts
b.
4 haircuts
c.
5 haircuts
d.
6 haircuts
ANS:
B
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
132. Refer to Table 16-5. When maximizing profit, what price does Traci’s charge for a haircut?
a.
$20
b.
$25
c.
$30
d.
$35
Chapter 15/Monopoly  1220
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
133. Refer to Table 16-5. At the profit-maximizing quantity, what is Traci’s total profit?
a.
$30
b.
$59
c.
$77
d.
$84
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Applicative
Analytic
134. Refer to Table 16-5. Given the cost and revenue data, Traci’s is
a.
not in a long-run equilibrium. More businesses will enter the hair salon market in the long-run.
b.
not in a short-run equilibrium.
c.
not in a long-run equilibrium. Some businesses currently in the hair salon market will exit the
market in the long-run.
d.
in a long-run equilibrium.
ANS:
A
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
135. Refer to Table 16-5. If the government required Traci’s to produce at the efficient scale of output, how many
haircuts would Traci’s sell?
a.
either 3 or 4
b.
either 4 or 5
c.
either 5 or 6
d.
either 6 or 7
ANS:
B
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Efficient scale
MSC:
Analytical
NAT:
Analytic
Chapter 15/Monopoly  1221
136. Refer to Table 16-5. If the government forced Traci’s to produce at the efficient scale of output, what is the
maximum profit Traci’s could earn?
a.
$77
b.
$80
c.
$84
d.
$96
ANS:
C
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Efficient scale
MSC:
Applicative
NAT:
Analytic
137. Refer to Table 16-5. Suppose the government forced Traci’s to produce at the efficient scale of output. Who
would be better off as a result of this policy? Who would be worse off as a result of this policy?
a.
Traci’s would be better off; consumers would be worse off.
b.
Consumers would be better off; Traci’s would be worse off.
c.
No one would be better off; consumers would be worse off.
d.
No one would be better off; no one would be worse off.
ANS:
D
DIF:
3
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare
MSC:
Interpretive
138. In which of the following market structures can firms earn economic profits in the long run?
a.
perfect competition
b.
monopolistic competition
c.
monopoly
d.
Both b and c are correct.
ANS:
C
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Analytical
Analytic
Chapter 15/Monopoly  1222
139. Consider monopoly, monopolistic competition, and perfect competition. In which of these three market
structures does a profit-maximizing firm charge a price that exceeds marginal cost?
a.
monopoly only
b.
monopoly and monopolistic competition only
c.
monopoly, monopolistic competition, and perfect competition
d.
The answer cannot be determined without knowing whether the market is in the long run or short
run.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Monopoly
MSC:
Interpretive
140. Consider monopoly, monopolistic competition, and perfect competition. In which of these three market
structures does a profit-maximizing firm experience zero economic profit?
a.
perfect competition only
b.
perfect competition and monopolistic competition only
c.
perfect competition, monopolistic competition, and monopoly
d.
The answer cannot be determined without knowing whether the market is in the long run or short
run.
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Interpretive
141. Firm A is a perfectly competitive firm. Firm B is a monopolistically competitive firm. Both firms are currently
maximizing their respective profits. Which of the following statements is correct?
a.
Both Firm A and Firm B would be eager to make an additional sale.
b.
Firm A would be eager to make an additional sale, but Firm B would not care whether it made an
additional sale or not.
c.
Firm B would be eager to make an additional sale, but Firm A would not care whether it made an
additional sale or not.
d.
Neither Firm A nor Firm B would care whether it made an additional sale or not.
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Perfect competition
MSC:
Interpretive
Chapter 15/Monopoly  1223
142. Under which of the following market structures would consumers likely pay the highest price for a product?
a.
perfect competition
b.
monopolistic competition
c.
oligopoly
d.
monopoly
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopoly
MSC:
Analytical
143. Under which of the following market structures would the highest output of a particular good be produced?
a.
perfect competition
b.
monopolistic competition
c.
oligopoly
d.
monopoly
ANS:
A
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Perfect competition
MSC:
Analytical
Analytic
144. Under which of the following market structures would consumers likely receive the most product variety?
a.
perfect competition
b.
monopolistic competition
c.
oligopoly
d.
monopoly
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Analytical
145. In the long run, a monopolistically competitive firm produces a quantity that is
a.
equal to the efficient scale.
b.
less than the efficient scale.
c.
greater than the efficient scale.
d.
consistent with diseconomies of scale.
Chapter 15/Monopoly  1224
ANS:
B
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Efficient scale
MSC:
Interpretive
Analytic
146. A monopolistically competitive firm has the following cost structure:
Output
Total Cost($)
1
2
3
4
5
6
7
30
32
36
42
50
63
77
The firm faces the following demand curve:
Price ($)
20
18
15
12
9
7
4
Quantity
1
2
3
4
5
6
7
If the government forces this firm to produce at its efficient scale, it will
a.
produce 3 units and make $9.
b.
produce 4 units and make $6.
c.
produce 5 units and lose $5.
d.
produce 7 units and lose $49.
ANS:
C
DIF:
3
REF:
16-2
LOC:
Monopolistic competition
TOP:
Efficient scale
MSC:
Applicative
NAT:
Analytic
147. In the long run, a firm in a perfectly competitive market operates
a.
at its efficient scale, and a monopolistically competitive firm operates at efficient scale.
b.
at its efficient scale, and a monopolistically competitive firm operates with excess capacity.
c.
with excess capacity, and a monopolistically competitive firm operates with excess capacity.
d.
with excess capacity, and a monopolistically competitive firm operates at its efficient scale.
Chapter 15/Monopoly  1225
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Efficient scale | Excess capacity
MSC:
Interpretive
148. Which of the following statements is correct?
a.
In the long run, both perfectly competitive firms and monopolistically competitive firms operate
with excess capacity.
b.
A firm operates with excess capacity when, in the long run, its level of output is below the efficient
scale.
c.
For any firm, efficient scale is the level of output at which the average-total-cost curve is tangent to
the demand curve.
d.
All of the above are correct.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Efficient scale | Excess capacity
MSC:
Interpretive
149. A monopolistically competitive firm
a.
has the usual deadweight loss of monopoly pricing.
b.
experiences a zero profit in a long-run equilibrium.
c.
is said to have excess capacity.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Deadweight loss | Excess capacity
MSC:
Interpretive
150. In comparison to perfect competition, monopolistic competition is characterized by
a.
efficient scale.
b.
pricing at marginal cost.
c.
excess capacity.
d.
All of the above are correct.
Chapter 15/Monopoly  1226
ANS:
C
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
NAT:
Analytic
151. In a monopolistically competitive market, social welfare would be enhanced if
a.
price equaled marginal cost.
b.
government regulation eliminated the product-variety externality.
c.
the government raised taxes to subsidize firms that price below average total cost.
d.
there were fewer firms, making the industry closer to an oligopoly.
ANS:
A
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
NAT:
Analytic
152. Since a firm in a monopolistically competitive market faces a
a.
downward-sloping demand curve, it will always operate with excess capacity.
b.
downward-sloping demand curve, it will always operate at its efficient scale.
c.
perfectly elastic demand curve, it will always operate with excess capacity.
d.
perfectly inelastic demand curve, it will always operate at efficient scale.
ANS:
A
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
NAT:
Analytic
NAT:
Analytic
153. When a firm operates with excess capacity,
a.
additional production would lower the average total cost.
b.
additional production would increase the average total cost.
c.
it must be a perfectly competitive firm.
d.
it must be a monopolistically competitive firm.
ANS:
A
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
Chapter 15/Monopoly  1227
154. In the long run, a profit-maximizing firm in a monopolistically competitive market operates at
a.
efficient scale.
b.
a level of output at which average total cost is rising.
c.
a level of output at which average total cost is falling.
d.
the level of output at which total revenue is maximized.
ANS:
C
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
NAT:
Analytic
155. Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e., on an
average night, 80 percent of the hotel rooms are full). This kind of excess capacity is indicative of what kind of
market?
a.
monopoly
b.
perfect competition
c.
monopolistic competition
d.
oligopoly
ANS:
C
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
NAT:
Analytic
156. Excess capacity is
a.
an example of the inefficiencies of monopolistically competitive markets.
b.
a short-run problem but not a long-run problem.
c.
a characteristic of rising average total cost curves.
d.
Both a and b are correct.
ANS:
A
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1228
157. In a long-run equilibrium,
a.
excess capacity applies to monopolistically competitive firms but not to competitive firms.
b.
zero economic profit applies to competitive firms but not to monopolistically competitive firms.
c.
markup over marginal cost applies to both monopolistically competitive and competitive firms.
d.
product variety externalities apply to both perfectly competitive firms and monopolistically
competitive firms.
ANS:
A
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
NAT:
Analytic
158. Monopolistically competitive firms have excess capacity. To maximize profits, firms will
a.
increase their output to lower their average total cost of production and eliminate the excess
capacity.
b.
produce where price equals marginal cost to eliminate the excess capacity.
c.
produce where average revenue equals marginal cost to eliminate the excess capacity.
d.
maintain the excess capacity.
ANS:
D
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
NAT:
Analytic
159. Which of the following best describes the idea of excess capacity in monopolistic competition?
a.
Firms produce more output than is socially desirable.
b.
The output produced by a typical firm is less than what would occur at the minimum point on its
ATC curve.
c.
Due to product differentiation, firms choose output levels where price equals average total cost.
d.
Firms keep some surplus output on hand in case there is a shift in the demand for their product.
ANS:
B
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Excess capacity
MSC:
Interpretive
NAT:
Analytic
Chapter 15/Monopoly  1229
160. Both monopolistic competition and oligopoly are market structures
a.
that fail to achieve the total surplus achieved by perfect competition.
b.
that feature only a few firms in each market.
c.
to which the concept of Nash equilibrium is frequently applied by economists.
d.
in which firms earn zero economic profit in the long run.
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Welfare
MSC:
Interpretive
161. A monopolistically competitive market could be considered inefficient because
a.
marginal revenue exceeds average revenue.
b.
price exceeds marginal cost.
c.
the efficient scale of production is only achieved in the long run, not in the short run.
d.
markup pricing does not occur in any other market structure.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare
MSC:
Interpretive
162. The deadweight loss that is associated with a monopolistically competitive market is a result of
a.
price falling short of marginal cost in order to increase market share.
b.
price exceeding marginal cost.
c.
the firm operating in a regulated industry.
d.
excessive advertising costs.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare
MSC:
Interpretive
163. Monopolistically competitive markets may be socially inefficient because
a.
most firms produce inferior products.
b.
government programs cannot effectively regulate price.
c.
firms earn zero economic profit.
d.
the market may have too much or too little entry by new firms.
Chapter 15/Monopoly  1230
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare
MSC:
Interpretive
164. In which of the following market structures do firms produce the welfare-maximizing level of output?
a.
perfect competition
b.
monopolistic competition
c.
monopoly
d.
Both a and b are correct.
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare
MSC:
Analytical
165. The traditional view of monopolistic competition holds that this type of industrial structure is inefficient
because
a.
there are too few firms to reach an efficient level of production.
b.
firms do not operate at the output that minimizes average costs.
c.
more advertising is needed to inform customers about product differences.
d.
consumers do not have enough choice among the product varieties available.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare
MSC:
Interpretive
166. Monopolistic competition is considered by some to be inefficient because
a.
price exceeds marginal cost.
b.
output is excessive.
c.
long-run profits are positive.
d.
barriers to entry limit the number of firms in the market.
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare
MSC:
Interpretive
Chapter 15/Monopoly  1231
167. Monopolistic competition is an inefficient market structure because
a.
price exceeds marginal cost.
b.
it has a deadweight loss, just as monopoly does.
c.
at the equilibrium, some consumers will value the good at more than the marginal cost of
production.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare | Deadweight loss
MSC:
Interpretive
168. Monopolistic competition is an inefficient market structure because
a.
marginal revenue equals marginal cost.
b.
it has a deadweight loss, just as monopoly does.
c.
long-run profits are zero due to free entry.
d.
All of the above are correct.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare | Deadweight loss
MSC:
Interpretive
169. Monopolistic competition is an
a.
efficient market structure because long-run profits are zero.
b.
efficient market structure because each firm produces at its efficient scale.
c.
inefficient market structure because there is deadweight loss.
d.
Both a and b are correct.
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare | Deadweight loss
MSC:
Interpretive
Chapter 15/Monopoly  1232
170. Monopolistic competition is an
a.
inefficient market structure because there is deadweight loss.
b.
inefficient market structure because price exceeds marginal cost.
c.
efficient market structure because free entry drives long-run profits to zero.
d.
Both a and b are correct.
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Welfare | Deadweight loss
MSC:
Interpretive
171. A monopolistically competitive market
a.
usually has too many firms, reducing the economic profit of each firm to zero.
b.
usually has too few firms, reducing the product variety for consumers.
c.
may have too many or too few firms, and the government can intervene to achieve the optimal
number of firms.
d.
may have too many or too few firms, but the government can do little to rectify the situation.
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Regulation
MSC:
Interpretive
172. Senator Hubris wants to pass a law that would require all monopolistically competitive firms to operate at
their efficient scale. If this law were to pass and be enforced, we would expect that monopolistically
competitive firms would
a.
see their profits increase.
b.
break even.
c.
lose money.
d.
not really be affected by the law.
ANS:
C
DIF:
3
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Regulation
MSC:
Interpretive
173. Regulation of a firm in a monopolistically competitive market
a.
usually implies a very small administrative burden.
b.
will lower the firm's costs.
c.
is commonly used to enhance market efficiency.
d.
is unlikely to improve market efficiency.
Chapter 15/Monopoly  1233
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Regulation
MSC:
Interpretive
174. The administrative burden of regulating price in a monopolistically competitive market is
a.
small due to economies of scale.
b.
large because price is usually below marginal cost.
c.
large because of the large number of firms that produce differentiated products.
d.
small because firms produce with excess capacity.
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Regulation
MSC:
Interpretive
175. If regulators required firms in monopolistically competitive markets to set price equal to marginal cost,
a.
firms would most likely experience economic losses.
b.
firms would also operate at their efficient scale.
c.
new firms would likely to enter the market.
d.
the most efficient firms would not likely to be affected.
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Regulation
MSC:
Interpretive
176. If regulators required firms in monopolistically competitive markets to set price equal to marginal cost,
a.
firms would respond by lowering their costs.
b.
firms would require a subsidy to stay in business
c.
new firms that enter the market would operate at efficient scale.
d.
the most efficient firms would not be affected.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Regulation
MSC:
Interpretive
Chapter 15/Monopoly  1234
177. Which of the following represents the best government policy to reduce the deadweight loss associated with
a monopolistically competitive market?
a.
The government should regulate firms in a manner similar to natural monopolies.
b.
The government should encourage more firms to enter the industry because without government
intervention, there are likely to be “too few” firms.
c.
The government should encourage some firms to exit the industry because without government
intervention, there are likely to be “too many” firms.
d.
There is no government policy that can reduce deadweight loss without creating other problems.
ANS:
D
DIF:
2
REF:
16-2
NAT:
LOC:
Monopolistic competition
TOP:
Deadweight loss
MSC:
Interpretive
Analytic
178. Which of the following markets impose deadweight losses on society?
(i)
perfect competition
(ii)
monopolistic competition
(iii)
monopoly
a.
(i) and (ii) only
b.
(ii) and (iii) only
c.
(i) and (iii) only
d.
(i) only
ANS:
B
DIF:
2
REF:
16-2
LOC:
Monopolistic competition
TOP:
Deadweight loss
MSC:
Interpretive
179. Monopolistic competition is characterized by
i) efficient scale
ii) markup pricing over marginal cost
iii) deadweight loss
iv) excess capacity
NAT:
Analytic
Chapter 15/Monopoly  1235
a.
i) and ii) only
b.
ii) and iv) only
c.
i), ii), and iii) only
d.
ii), iii), and iv) only
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Deadweight loss | Excess capacity
MSC:
Analytical
180. The product-variety externality is associated with the
a.
producer surplus that accrues to incumbent firms in a monopolistically competitive industry.
b.
loss of consumer surplus from exposure to additional advertising.
c.
consumer surplus that is generated from the introduction of a new product.
d.
opportunity cost of firms exiting a monopolistically competitive industry.
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
181. With respect to monopolistic competition,
a.
both the business-stealing externality and the product-variety externality are positive externalities.
b.
the business-stealing externality is a positive externality, while the product-variety externality is a
negative externality.
c.
the business-stealing externality is a negative externality, while the product-variety externality is a
positive externality.
d.
both the business-stealing externality and the product-variety externality are negative
externalities.
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
Chapter 15/Monopoly  1236
182. The fact that monopolistically competitive firms charge a price that exceeds marginal cost is responsible for
the
a.
business-stealing externality that is observed in monopolistically competitive markets.
b.
product-variety externality that is observed in monopolistically competitive markets.
c.
inefficiencies of the long-term losses earned by monopolistically competitive firms..
d.
persistence of positive profits into the long run for monopolistically competitive firms.
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
183. When consumers are exposed to additional choices that result from the introduction of a new product,
a.
their satisfaction is likely to be lowered as a result of their having to make additional choices.
b.
a product-variety externality is said to occur.
c.
an advertising externality is said to occur.
d.
consumers are likely to experience negative consumption externalities.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
184. A business-stealing externality is
a.
an externality that is likely to be punished under antitrust laws.
b.
the negative externality that occurs when one firm attempts to duplicate exactly the product of a
different firm.
c.
an externality that is considered to be an explicit cost of business in monopolistically competitive
markets.
d.
the negative externality associated with entry of new firms in a monopolistically competitive
market.
ANS:
D
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
185. When existing firms lose customers and profits due to entry of a new competitor, a
a.
predatory-pricing externality occurs.
b.
consumption externality occurs.
c.
business-stealing externality occurs.
d.
product-variety externality occurs.
Chapter 15/Monopoly  1237
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
186. When the loss from a business-stealing externality exceeds the gain from a product-variety externality,
a.
firms are more likely to operate at efficient scale.
b.
there are likely to be too many firms in a monopolistically competitive market.
c.
market efficiency is likely to be enhanced by the entry of new firms.
d.
all firms are earning economic losses.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
187. The entry of new firms into a monopolistically competitive market is accompanied by
a.
both positive and negative externalities.
b.
only positive externalities.
c.
only negative externalities.
d.
only private profit opportunities (no externalities).
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
188. The product-variety externality arises in monopolistically competitive markets because
a.
firms produce with excess capacity.
b.
firms try to differentiate their products.
c.
firms would like to produce homogeneous products, but the large number of firms prohibits it.
d.
entry and exit is not restricted.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
189. In a monopolistically competitive market,
a.
the entry of new firms creates externalities.
b.
the absence of restrictions on entry by new firms ensures that there will be no deadweight loss.
c.
there are always too many firms in the market relative to the socially-optimal number of firms.
d.
firms cannot earn positive economic profits in the short run.
Chapter 15/Monopoly  1238
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
190. Entry by new firms into a monopolistically competitive market
a.
creates additional consumer surplus.
b.
imposes a positive externality on existing firms.
c.
leads to the same externalities that are observed when new firms enter a perfectly competitive
market.
d.
increases the demand for existing firms’ products.
ANS:
A
DIF:
3
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Interpretive
Scenario 16-1
Vacation Inns of America (VIA) has recently announced intentions to build a new hotel/resort complex in Myrtle
Beach, South Carolina. Assume that the hotel/resort market in Myrtle Beach is characterized by monopolistic
competition.
191. Refer to Scenario 16-1. As a result of the new VIA hotel/resort, tourists who stay in Myrtle Beach are likely to
experience a
a.
product-variety externality, which harms consumers.
b.
product-variety externality, which benefits consumers.
c.
business-stealing externality, which harms consumers.
d.
business-stealing externality, which benefits consumers.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Applicative
192. Refer to Scenario 16-1. As a result of the new VIA hotel/resort, existing hotels, motels, and lodging facilities
in Myrtle Beach are likely to experience a
a.
product-variety externality, which harms producers.
b.
product-variety externality, which benefits producers.
c.
business-stealing externality, which harms producers.
d.
business-stealing externality, which benefits producers.
ANS:
C
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Applicative
Chapter 15/Monopoly  1239
Scenario 16-2
McDonald’s restaurants has recently announced intentions to open a new restaurant in Smalltown, Indiana.
Assume that the fast-food restaurant market in Smalltown is characterized by monopolistic competition.
193. Refer to Scenario 16-2. As a result of the new McDonald’s, residents of Smalltown are likely to benefit from
a.
a product-variety externality.
b.
a business-stealing externality.
c.
the fact that McDonald’s will increase its production to achieve the efficient scale.
d.
Both b and c are correct.
ANS:
A
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Applicative
194. Refer to Scenario 16-2. As a result of the new McDonald’s, existing fast food restaurants in Smalltown are
likely to
a.
suffer from a product-variety externality.
b.
suffer from a business-stealing externality.
c.
increase their production to achieve the efficient scale.
d.
Both b and c are correct.
ANS:
B
DIF:
2
REF:
16-2
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Externalities
MSC:
Applicative
Sec 03 - Monopolistic Competition - Advertising
MULTIPLE CHOICE
1.
Which of the following is unique to a monopolistically competitive firm when compared to an oligopoly?
a.
The monopolistically competitive firm advertises.
b.
The monopolistically competitive firm produces a quantity of output that falls short of the socially
optimal level.
c.
Monopolistic competition features many buyers.
d.
Monopolistic competition features many sellers.
ANS:
D
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Markets
MSC:
Interpretive
Chapter 15/Monopoly  1240
2.
Which of the following is a characteristic of oligopoly or monopolistic competition, but not perfect
competition?
a.
advertising and sales promotion
b.
profit maximization according to the MR = MC rule
c.
firms being price takers rather than price makers
d.
horizontal demand and marginal revenue curves
ANS:
A
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
3.
DIF:
Some firms have an incentive to advertise because they sell a
a.
similar product and charge a price equal to marginal cost.
b.
similar product and charge a price above marginal cost.
c.
differentiated product and charge a price equal to marginal cost.
d.
differentiated product and charge a price above marginal cost.
ANS:
D
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
4.
DIF:
The relationship between advertising and product differentiation is
a.
positive; the more differentiated the product, the more a firm is likely to spend on advertising.
b.
negative; the more differentiated the product, the less a firm is likely to spend on advertising.
c.
zero; there is no relationship between product differentiation and advertising.
d.
irrelevant; firms with differentiated products do not need to advertise.
ANS:
A
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Analytical
5.
DIF:
For the economy as a whole, spending on advertising comprises about what percent of total firm revenue?
a.
0.5
b.
2
c.
10
d.
20
ANS:
B
DIF:
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
Chapter 15/Monopoly  1241
6.
Firms that sell highly differentiated consumer goods, such as soft drinks, breakfast cereals, and dog food,
typically spend what percent of their revenues on advertising?
a.
0-1
b.
2-4
c.
10-20
d.
over 50
ANS:
C
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
7.
DIF:
Which of the following correctly lists the products in order from most advertised to least advertised?
a.
soft drinks, breakfast cereals, dog food
b.
corn, dog food, communication satellites
c.
dog food, communication satellites, corn
d.
wheat, corn, crude oil
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
8.
DIF:
Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell
a.
industrial products.
b.
homogeneous products.
c.
consumer goods for which there are no close substitutes.
d.
highly-differentiated consumer goods.
ANS:
D
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
9.
DIF:
Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell
a.
highly-differentiated consumer goods.
b.
goods produced by natural monopolies.
c.
agricultural products.
d.
products with a limited shelf life such as milk and lettuce.
ANS:
A
DIF:
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1242
10.
Compared to other firms, firms that sell highly differentiated products likely incur significant costs associated
with
a.
advertising.
b.
the product-variety externality.
c.
intermediate materials.
d.
taxes and regulation.
ANS:
A
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
11.
DIF:
In which of the following product markets are we likely to observe the largest amount of advertising?
a.
markets with highly differentiated products
b.
perfectly competitive markets
c.
markets in which industrial products are sold
d.
markets in which there is very little difference between different firms' products
ANS:
A
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
12.
DIF:
If we observe a great deal of advertising of men's shaving products, we can infer that
a.
the market for those products is perfectly competitive.
b.
it costs firms very little to produce those products.
c.
those products are highly differentiated.
d.
firms are irrational in their decisions to advertise.
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
13.
DIF:
If we observe a great deal of advertising of dog food, we can infer that
a.
consumers spend very little of their disposable income on dog food.
b.
dog food is cheap to produce.
c.
dog food is a highly-differentiated product.
d.
firms who do not advertise earn higher profits than those who do.
ANS:
C
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1243
14.
Firm A produces and sells in a market that is characterized by highly differentiated consumer goods. Firm B
produces and sells industrial products. Firm C produces and sells an agricultural commodity. Which firm is
likely to spend the greatest portion of its total revenue on advertising?
a.
firm A
b.
firm B
c.
firm C
d.
There is no reason to believe that any one of the three firms would spend a greater portion of its
total revenue on advertising than the other two firms.
ANS:
A
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Analytical
15.
DIF:
Advertising
a.
provides information about products, including prices and seller locations.
b.
has been proven to increase competition and reduce prices compared to markets without
advertising.
c.
signals quality to consumers, because advertising is expensive.
d.
All of the above are correct.
ANS:
D
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
16.
DIF:
Which of the following is not an argument made by critics of advertising?
a.
Advertising manipulates people’s tastes.
b.
Advertising impedes competition.
c.
Advertising promotes economies of scale.
d.
Advertising increases the perception of product differentiation.
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
17.
DIF:
Critics of advertising argue that in some markets advertising may
a.
attract products of lower quality into the market.
b.
attract less informed buyers into the market.
c.
decrease elasticity of demand allowing firms to charge a larger markup over marginal cost.
d.
enhance competition in markets to an unnecessary degree.
Chapter 15/Monopoly  1244
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
18.
DIF:
Critics of advertising argue that advertising
a.
creates desires that otherwise might not exist.
b.
hinders competition.
c.
often fails to convey substantive information.
d.
All of the above are correct.
ANS:
D
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
19.
DIF:
Critics of advertising argue that advertising
a.
creates desires that otherwise might not exist.
b.
enhances competition.
c.
benefits television viewers who enjoy tv commercials.
d.
All of the above are correct.
ANS:
A
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
20.
DIF:
If advertising reduces a consumer's price sensitivity between identical goods, it is likely to
a.
increase the elasticity of demand for differentiated products.
b.
enhance competition and encourage more product diversity.
c.
reduce competition and reduce social welfare.
d.
encourage the consumption of all homogenous goods.
ANS:
C
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1245
21.
If a firm in a monopolistically competitive market successfully uses advertising to decrease the elasticity of
demand for its product, the firm will
a.
be able to increase its markup over marginal cost.
b.
eventually have to lower price to remain competitive.
c.
increase the welfare of society.
d.
reduce its average total cost.
ANS:
A
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
22.
DIF:
Critics of advertising argue that advertising
a.
creates demand for products that people otherwise do not want or need.
b.
lowers barriers to entry into an industry because new firms can more easily establish themselves
as competitors.
c.
increases competition by providing information about prices.
d.
encourages monopolization of markets by raising entry barriers.
ANS:
A
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
23.
DIF:
Which of the following is a commonly-cited benefit of advertising?
a.
Advertising can be a signal of the quality of a product.
b.
Advertising impedes competition.
c.
Advertising reduces the deadweight loss associated with monopolistic competition.
d.
Advertising encourages free entry, which increases profits.
ANS:
A
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
24.
DIF:
Defenders of advertising
a.
concede that advertising increases firms’ market power.
b.
concede that advertising makes entry by new firms more difficult.
c.
contend that firms use advertising to provide useful information to consumers.
d.
All of the above are correct.
Chapter 15/Monopoly  1246
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
25.
DIF:
When firms in a monopolistically competitive market engage in price-related advertising, defenders of
advertising argue that
a.
the quality of products sold in the market always increases.
b.
customers are less likely to be informed about other characteristics of the product.
c.
new firms are discouraged from entering the market.
d.
each firm has less market power.
ANS:
D
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
26.
DIF:
Defenders of advertising argue that it is not rational for profit-maximizing firms to spend money on
advertising for products that have
a.
superior quality.
b.
inferior or mediocre quality.
c.
low prices.
d.
limited availability.
ANS:
B
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
27.
DIF:
The primary claim of defenders of advertising is that it
a.
conveys information about firm profitability.
b.
is psychological rather than informational.
c.
enhances the information available to consumers.
d.
reduces the elasticity of demand for a firm’s product.
ANS:
C
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1247
28.
In his 1958 book, The Affluent Society, John Kenneth Galbraith argued that
a.
brand names give firms an incentive to produce and sell high-quality products.
b.
consumers’ tastes cannot, in any real sense, be “determined” by advertising.
c.
firms use advertising to create demand for products that people otherwise do not want or need.
d.
firms use advertising to send a signal to consumers about the quality of their products.
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
29.
DIF:
Evidence suggests that, in markets with differentiated products but little advertising,
a.
consumers are not confused by conflicting signals.
b.
firms are generally less profitable.
c.
markets are less efficient.
d.
consumers make better choices.
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
30.
DIF:
In markets where restrictions on advertising have been used to curtail competition, the U.S. courts have
generally
a.
referred the matters of advertising restrictions to executive regulators.
b.
enforced industry-wide agreements to restrict advertising.
c.
been silent on the effect of explicit advertising restrictions.
d.
overturned laws that prohibit advertising.
ANS:
D
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
31.
DIF:
A law that restricts the ability of hotels/motels to advertise on billboards outside of a resort community
would likely lead to
a.
a decrease in profits for all hotels/motels.
b.
reduced efficiency of local lodging markets.
c.
a request by consumers to increase the number of billboards.
d.
increased price competition among hotels/motels in the community.
Chapter 15/Monopoly  1248
ANS:
B
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
32.
DIF:
Among arguments for and against advertising, both sides agree that advertising leads to
a.
higher prices and less competitive markets.
b.
higher prices and more competitive markets.
c.
lower prices and more competitive markets.
d.
None of the above is correct. The debate fails to resolve the question of advertising's effect on
prices and competition.
ANS:
D
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
33.
DIF:
Professional organizations and producer groups have an incentive to
a.
restrict advertising in order to enhance competition on the basis of price.
b.
restrict advertising in order to reduce competition on the basis of price.
c.
encourage advertising in order to reduce competition on the basis of price.
d.
encourage advertising in order to enhance competition on the basis of price.
ANS:
B
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
34.
DIF:
Evidence from the market for eyeglasses suggests that advertising leads to
a.
lower-quality products for consumers.
b.
lower prices for consumers.
c.
higher prices for consumers.
d.
less concern on the part of consumers about price differences among similar goods.
ANS:
B
DIF:
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1249
35.
In the study done by Lee Benham on advertising for eyeglasses,
a.
advertising increased the average price.
b.
advertising decreased the average price.
c.
there was no difference in price, but quality was better in the states that didn't allow advertising.
d.
advertising appeared to have no effect whatsoever in the states that permitted advertising.
ANS:
B
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
36.
DIF:
Results of the study done by Lee Benham on advertising for eyeglasses would suggest that
a.
brand loyalty and market power in the eyeglass market was likely to be more pervasive in states
that allowed advertising.
b.
eyeglass sales were more profitable in states that allowed advertising.
c.
optometrists would not be supportive of advertising restrictions.
d.
optometrists would enthusiastically endorse advertising restrictions.
ANS:
D
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
37.
DIF:
A study of the market for optometrists' services in the 1960s showed that
a.
all states in the United States prohibited advertising by optometrists.
b.
almost all professional optometrists opposed legal restrictions on their rights to advertise.
c.
the average price of eyeglasses would decrease if the legal restrictions on advertising by
optometrists were removed.
d.
advertising on eyeglasses limited competition among optometrists.
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
38.
DIF:
According to one theory, advertising sends a signal to consumers about the quality of the product being
offered. An implication of this theory is that
a.
the actual quality of the product is irrelevant.
b.
the content of the advertisement is irrelevant.
c.
advertising is not in the best interest of society.
d.
it is irrational for firms to pay famous people large amounts of money to appear in their
advertisements.
Chapter 15/Monopoly  1250
ANS:
B
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
39.
DIF:
Advertising that uses celebrity endorsements is most likely intended to
a.
increase elasticity of demand for the advertised product.
b.
reduce the ability of markets to allocate resources efficiently.
c.
provide a signal of product quality.
d.
be useful only for psychological effects.
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
40.
DIF:
Firms that spend a large amount of money on advertising a particular product are likely to be providing
consumers with
a.
information about the availability of the product.
b.
information about product price.
c.
a signal of product quality.
d.
a good example of wasted resources.
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
41.
DIF:
One theory of advertising suggests that
a.
information on price is important to make advertising effective.
b.
the content of advertising may be irrelevant to product success in the market.
c.
celebrity advertising is not effective in retail food markets.
d.
Post and Kellogg should not advertise new cereals.
ANS:
B
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1251
42.
Advertisements that appear to convey no information at all
a.
are usually associated with "infomercials."
b.
are useless to consumers but valuable to firms.
c.
are useless to firms but valuable to consumers for their entertainment quality alone.
d.
may convey information to consumers by providing them with a signal that firms are willing to
spend significant amounts of money to advertise.
ANS:
D
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
43.
DIF:
Television advertisements aired during major sporting events are very expensive. A theory asserting that
people buy a product simply because it is advertised would suggest that information on the high cost of
advertising
a.
enhances the effectiveness of the advertisement.
b.
reduces people's willingness to purchase advertised products.
c.
is leaked to discredit the firms that spend so much on advertising.
d.
reduces the effective staying power of a product.
ANS:
A
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
44.
DIF:
According to the signaling theory of advertising, consumers
a.
pay little or no attention to which firms advertise and which firms do not advertise.
b.
are often more impressed by a firm's willingness to spend money on advertising than they are by
the content of the advertisement.
c.
are often more impressed by low-cost advertisements than they are by high-cost advertisements.
d.
gain little or no information about product quality from advertisements.
ANS:
B
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1252
45.
ABC Company knows that it produces and sells a very good mouse trap. XYZ Company knows that it produces
and sells a lousy mouse trap. According to the signaling theory of advertising,
a.
both ABC and XYZ have incentives to spend large amounts of money on advertising their mouse
traps.
b.
ABC has an incentive to spend a large amount of money on advertising its mouse trap, but XYZ
does not.
c.
XYZ has an incentive to spend a large amount of money on advertising its mouse trap, but ABC
does not.
d.
neither ABC nor XYZ has an incentive to spend a large amount of money on advertising their
mouse traps.
ANS:
B
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Analytical
46.
DIF:
How does advertising signal to consumers that the product is a good one?
a.
By seeing famous people using the product, consumers infer that they too can be famous.
b.
By being willing to spend money on advertising, firms let consumers know the product is likely a
good one since firms would not likely advertise a poor product.
c.
By making consumers laugh during commercials, firms are associating positive experiences with
the product.
d.
Without allowing consumers to actually use the product, it is not possible for firms to signal to
consumers the product's quality.
ANS:
B
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
47.
DIF:
Most businesses advertise their products and services. Some business use SPAM emails to advertise because
the cost of a mass e-mail is close to zero. Other business spend millions of dollars to advertise in a 30-second
spot during the Super Bowl. Having observed this real world data, economists argue that the amount of
money that a business spends on advertising is a proxy for a good or service's
a.
size.
b.
quality.
c.
newness.
d.
cost of production.
ANS:
B
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1253
48.
Critics of markets that are characterized by firms that sell brand name products argue that brand names
encourage consumers to pay more for branded products that
a.
have elastic demand curves.
b.
are very different from generic products.
c.
are indistinguishable from generic products.
d.
consumer-advocate groups have found to be inferior.
ANS:
C
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
49.
DIF:
Edward Chamberlin argued that brand names
a.
hampered market efficiency.
b.
were instrumental in enhancing market efficiency.
c.
were useful in enhancing market efficiency when the government enforced the use of exclusive
trademarks.
d.
were likely to be more socially efficient when used in conjunction with advertising.
ANS:
A
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
50.
DIF:
Edward Chamberlin argued that governments should
a.
ban the use of brand names.
b.
not enforce the trademarks that companies use to identify their products.
c.
vigorously enforce the trademarks that companies use to identify their products.
d.
tax companies whose products have brand names in proportion to how much consumers
recognize their products.
ANS:
B
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
51.
DIF:
The debate over the efficiency of markets in which products with brand names are sold
a.
is framed by the role of regulation in advertising.
b.
is likely to be resolved by reference to anecdotal evidence.
c.
hinges on whether consumers are rational in their choices.
d.
hinges on the effectiveness of advertising that identifies price differences.
Chapter 15/Monopoly  1254
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
52.
DIF:
A recent outbreak of hepatitis was linked to a national fast-food restaurant chain. This is an example of a case
in which
a.
brand name identity increases the effectiveness of markets.
b.
brand name identity can be detrimental to the profitability of a firm.
c.
advertising is ineffective in salvaging perceptions of product quality.
d.
advertising cannot be used to establish brand loyalty.
ANS:
B
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Analytical
53.
DIF:
In some countries, brand name fast-food restaurants are not allowed to operate. Such restrictions are likely to
a.
enhance the social welfare of society.
b.
increase the number of fast-food restaurants.
c.
reduce barriers to entry in imperfect markets.
d.
reduce the competitive nature of local fast-food markets.
ANS:
D
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
54.
DIF:
Eunice consumes Coke exclusively. She claims that there is a clear taste difference and that competing brands
of cola leave an unsavory taste in her mouth. However, in a blind taste test, Eunice is found to prefer generic
store-brand cola to Coke eight out of ten times. The results of Eunice's taste test would reinforce claims by
critics of brand names that
a.
consumers are always willing to pay more for brand names.
b.
brand names cause consumers to perceive differences that do not really exist.
c.
brand names cause consumers to be more sensitive to product differences.
d.
brand names are a form of socially efficient advertising.
ANS:
B
DIF:
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1255
55.
Kirk consumes Pepsi exclusively. He claims that there is a clear taste difference and that competing brands of
cola leave an unsavory taste in his mouth. In a blind taste test, Kirk is found to prefer Pepsi to store-brand cola
eight out of ten times. The results of Kirk’s taste test would refute claims by critics of brand names that
a.
consumers are always willing to pay more for brand names.
b.
brand names cause consumers to perceive differences that do not really exist.
c.
consumers with the lowest levels of income are the most likely to be influenced by brand name
advertising.
d.
brand names are a form of socially efficient advertising.
ANS:
B
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
56.
DIF:
Your company has recently requested that you travel to Dhaka, Bangladesh, to work on negotiations for a
new factory to be located in one of the port cities. Your travel agent provides a list of several hundred local
hotels and a Sheraton. In this case, the Sheraton brand-name is likely to be used as a signal of
a.
perceived differences that are not likely to exist among your various options.
b.
quality when quality cannot be easily judged.
c.
inefficiency in markets characterized by recognizable brand names.
d.
the quality of general lodging accommodations in Dhaka.
ANS:
B
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
57.
DIF:
On a vacation to Cancun, Mexico, you find yourself eating every meal at the local McDonald's rather than
having a hamburger from one of the street vendors. Your traveling companion claims that you are irrational,
since you never eat McDonald's hamburgers when you are home, and McDonald's hamburgers cost more
than those prepared and sold by Cancun's street vendors. An economist would most likely explain your
behavior by suggesting that
a.
your behavior is rational, but your friend's behavior is clearly irrational.
b.
you are clearly irrational, but your friend’s behavior is rational.
c.
the McDonald's brand name suggests consistent quality.
d.
the advertising by McDonald’s in Cancun is more persuasive than the advertising by McDonald’s in
your home town.
ANS:
C
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1256
58.
Two college students, Josh and John, are spending spring break in Boston to visit Harvard University’s law
school. Josh buys a cup of coffee each morning at the local Dunkin’ Donuts rather than from one of the local
coffee shops. John claims that Josh is irrational because he never purchased Dunkin’ Donuts’ coffee at home,
and Dunkin’ Donuts’ coffee costs more than the coffee sold by local shops. An economist would most likely
explain Josh’s behavior by suggesting that
a.
Josh’s behavior is rational, but John's behavior is clearly irrational.
b.
Josh’s behavior is clearly irrational, but John’s behavior is rational.
c.
the Dunkin’ Donuts brand name suggests consistent quality.
d.
the advertising by Dunkin’ Donuts in Boston is more persuasive than the advertising by Dunkin’
Donuts in Josh and John’s home town.
ANS:
C
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
59.
DIF:
Two soft drinks sit side-by-side in a grocery store: A six-pack of Coca-Cola (a brand name) sells for $3.00,
while a six-pack of Uncle Don's cola (not a brand name) sells for $1.50. Even defenders of brand names would
have to admit that
a.
no rational consumer would spend twice as much for Coca-Cola as he would for Uncle Don's cola.
b.
the side-by-side presence of these two colas conveys no useful information to consumers.
c.
Coca-Cola has no incentive to maintain the quality of its product just because of the Coca-Cola
brand name.
d.
None of the above is correct.
ANS:
D
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
60.
DIF:
Two soft drinks sit side-by-side in a grocery store: A six-pack of Coca-Cola (a brand name) sells for $3.00,
while a six-pack of Uncle Don's cola (not a brand name) sells for $1.50. In a typical day the store sells some of
each type of cola, which suggests that
a.
no rational consumer would spend twice as much for Coca-Cola as he would for Uncle Don's cola.
b.
some consumers must perceive that Coca-Cola is a higher quality product.
c.
Coca-Cola has no incentive to maintain the quality of its product just because of the Coca-Cola
brand name.
d.
None of the above is correct.
ANS:
B
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1257
61.
Which of the following statements regarding brand names in advertising is not correct?
a.
Brand names provide consumers with information about quality when quality cannot be easily
judged in advance of purchase.
b.
Brand names give firms an incentive to maintain high quality to maintain the reputation of the
firm.
c.
Brand names allow firms to produce and sell inferior products in the long run since people will
continue to purchase the brand-name product.
d.
Brand names can cause consumers to perceive differences in products that do not actually exist.
ANS:
C
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Definitional
62.
DIF:
When quality cannot be easily judged in advance, what provides consumers with information about the
quality of a product?
a.
a brand name
b.
a tie-in
c.
the quantity available for sale
d.
the amount of deadweight loss
ANS:
A
1
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
63.
DIF:
When monopolistically competitive firms advertise, in the long run
a.
they will still earn zero economic profit.
b.
they can earn positive economic profit by increasing market share.
c.
the market price must fall.
d.
the market price must rise.
ANS:
A
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1258
64.
Which of the following statements is not correct?
a.
The typical monopolistically competitive firm could reduce its average total cost if it produced
more output.
b.
Monopolistically competitive firms advertise in order to increase the elasticity of the demand
curve they face.
c.
Expensive advertising might help consumers if it is a signal that the product is good.
d.
Brand names acquired at great cost might help consumers by assuring quality.
ANS:
B
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
65.
DIF:
Which of the following statements is correct?
a.
The more similar Firm A’s product is to Firm B’s product, the more likely Firm A is to advertise.
b.
Monopolistically competitive firms advertise in order to increase the elasticity of the demand
curve they face.
c.
According to the signaling theory, the more product information an advertisement contains, the
more effective it is.
d.
Brand names may help consumers if they provide information about the quality of a product when
acquiring such information is difficult.
ANS:
D
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
66.
DIF:
Which of the following statements is not correct?
a.
Critics of advertising argue that firms advertise to manipulate consumers’ tastes.
b.
Defenders of advertising argue that advertising provides valuable product information to
consumers.
c.
An industry with many brand name products will be more competitive than one with many generic
products.
d.
The willingness of a firm to spend a large amount of money on advertising can signal the quality of
the product.
ANS:
C
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1259
Scenario 16-3
Consider the problem facing two firms, Firm A and Firm B, in the fast-food restaurant market. Each firm has just
come up with an idea for a new fast-food menu item which it would sell for $4. Assume that the marginal cost for
each new menu item is a constant $2, and the only fixed cost is for advertising. Each company knows that if it
spends $12 million on advertising it will get 2 million consumers to try its new product. Firm A has done market
research which suggests that its product does not have any "staying" power in the market. Even though it could get
2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future.
Firm B's market research suggests that its product is very good, and consumers who try the product will continue to
be consumers over the ensuing year. On the basis of its market research, Firm B estimates that its initial 2 million
customers will buy one unit of the product each month in the coming year, for a total of 24 million units.
67.
Refer to Scenario 16-3. If Firm A decides to advertise its product it can expect to
a.
incur a loss of $8 million.
b.
incur a loss of $4 million.
c.
earn a profit of $4 million.
d.
earn a profit of $8 million.
ANS:
A
3
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
68.
DIF:
Refer to Scenario 16-3. If firm B decides to advertise its product it can expect to
a.
earn a profit of $48 million per year.
b.
earn a profit of $36 million per year.
c.
earn a profit of $12 million per year.
d.
incur a loss of $12 million per year.
ANS:
B
3
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Applicative
69.
DIF:
Refer to Scenario 16-3. By its willingness to spend money on advertising, Firm B
a.
signals the quality of its new product to consumers.
b.
signals that it is not a profit maximizer.
c.
is detracting from the efficiency of markets.
d.
will drive Firm A out of the market.
ANS:
A
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Chapter 15/Monopoly  1260
70.
Refer to Scenario 16-3. On the basis of a theory that people buy a product because it is advertised, the
content of advertisements for Firm B's product
a.
should focus on quality comparisons in order to be successful.
b.
must include celebrity endorsements in order to be successful.
c.
is critical to the success of the product in the market.
d.
is irrelevant to the success of the advertisement.
ANS:
D
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
71.
DIF:
Refer to Scenario 16-3. Which of the following is most likely?
a.
Both Firm A and Firm B will advertise.
b.
Neither Firm A nor Firm B will advertise.
c.
Firm A will advertise, but Firm B will not advertise.
d.
Firm B will advertise, but Firm A will not advertise.
ANS:
D
DIF:
2
REF:
16-3
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Advertising
MSC:
Interpretive
Sec 04 - Monopolistic Competition - Conclusion
MULTIPLE CHOICE
1.
Firms in a monopolistically competitive market
a.
are price takers.
b.
produce an output level that minimizes average total cost in the long run.
c.
maximize profits by producing where price equals marginal cost.
d.
cannot earn economic profits in the long run.
ANS:
D
DIF:
2
REF:
16-4
NAT:
LOC:
Monopolistic competition
TOP:
Long-run equilibrium
MSC:
Interpretive
Analytic
Chapter 15/Monopoly  1261
2.
Which of the following statements is correct?
a.
Firms in monopolistic competition and monopoly can earn economic profits in both the short run
and the long run.
b.
Both perfectly competitive and monopolistically competitive firms charge a price equal to marginal
cost.
c.
Firms in perfect competition, monopolistic competition, and monopoly maximize profits by
producing where marginal revenue equals marginal cost.
d.
Both perfectly competitive and monopolistically competitive firms produce the welfare-maximizing
level of output.
ANS:
C
2
REF:
16-4
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
3.
DIF:
NAT:
Which of the following statements is correct?
a.
Firms in monopolistic competition and monopoly can earn economic profits in both the short run
and the long run.
b.
Both perfectly competitive and monopolistically competitive firms are price takers.
c.
Both a monopolistically competitive industry and a monopoly are characterized by a very small
number (or one) firm.
d.
Firms can easily enter a perfectly competitive or monopolistically competitive industry.
ANS:
D
2
REF:
16-4
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
4.
Analytic
DIF:
NAT:
Analytic
Which of the following statements is not correct?
a.
Both monopolistically competitive and perfectly competitive firms can earn economic profits in the
short run.
b.
Both monopolies and monopolistically competitive firms can earn economic profits in the long run.
c.
Firms in perfect competition, monopolistic competition, and monopoly maximize profits by
producing where marginal revenue equals marginal cost.
d.
Only competitive firms produce the welfare-maximizing level of output.
ANS:
B
DIF:
2
REF:
16-4
NAT:
LOC:
Monopolistic competition
TOP:
Profit maximization
MSC:
Analytical
Analytic
Chapter 15/Monopoly  1262
5.
Which of the following statements is not correct?
a.
Firms in monopolistic competition and monopoly can earn economic profits in the short run.
b.
Firms in monopolistic competition and perfect competition produce the welfare-maximizing level
of output.
c.
Monopolistically competitive firms price above marginal cost, whereas competitive firms price at
marginal cost.
d.
Firms wishing to enter a monopolistically competitive market can do so freely, whereas firms
wishing to enter a monopoly market will face barriers.
ANS:
B
2
REF:
16-4
LOC:
Monopolistic competition
TOP:
Monopolistic competition
MSC:
Analytical
6.
DIF:
NAT:
Analytic
A market is comprised of many firms as opposed to just one firm or a few firms
a.
only when it is perfectly competitive.
b.
only when it is perfectly competitive or oligopolistic.
c.
only when it is perfectly competitive or monopolistically competitive.
d.
when it is perfectly competitive, monopolistically competitive, or oligopolistic.
ANS:
C
1
REF:
16-4
LOC:
Monopolistic competition
TOP:
Perfect competition | Monopolistic competition
MSC:
Definitional
7.
DIF:
NAT:
Analytic
A firm is a price taker
a.
only when the market is perfectly competitive.
b.
only when the market is perfectly competitive or monopolistic.
c.
only when the market is perfectly competitive or monopolistically competitive.
d.
when the market is perfectly competitive, monopolistically competitive, or monopolistic.
ANS:
A
DIF:
1
REF:
16-4
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Perfect competition | Monopolistic competition
MSC:
Interpretive
Chapter 15/Monopoly  1263
8.
A firm maximizes its profit by producing output up to the point where marginal revenue equals marginal cost
a.
only when the market is a monopoly.
b.
only when the market is a monopoly or monopolistically competitive.
c.
only when the market is monopolistically competitive or perfectly competitive.
d.
when the market is perfectly competitive, monopolistically competitive, or monopolistic.
ANS:
D
LOC:
Monopolistic competition
TOP:
Perfect competition | Monopolistic competition | Monopoly
MSC:
Interpretive
9.
DIF:
2
REF:
16-4
Analytic
A firm produces the welfare-maximizing level of output
a.
only when the market is perfectly competitive.
b.
only when the market is a monopoly or monopolistically competitive.
c.
only when the market is monopolistically competitive or perfectly competitive.
d.
when the market is perfectly competitive, monopolistically competitive, or monopolistic.
ANS:
A
LOC:
Monopolistic competition
TOP:
Perfect competition | Monopolistic competition | Monopoly
MSC:
Interpretive
10.
NAT:
DIF:
2
REF:
16-4
NAT:
Analytic
A monopolistically competitive market is like a monopoly in that
a.
both market structures feature easy entry by new firms in the long run.
b.
the main objective of firms in both market structures is something other than profit maximization.
c.
firms in both market structures produce the welfare-maximizing level of output.
d.
firms in both market structures set price above marginal cost.
ANS:
D
DIF:
2
REF:
16-4
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Monopoly
MSC:
Interpretive
Chapter 15/Monopoly  1264
11.
A monopolistically competitive market is like a competitive market in that
a.
both market structures feature easy entry by new firms in the long run.
b.
the main objective of firms in both market structures is something other than profit maximization.
c.
firms in both market structures produce the welfare-maximizing level of output.
d.
firms in both market structures set price above marginal cost.
ANS:
A
2
REF:
16-4
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Monopoly
MSC:
Interpretive
12.
DIF:
NAT:
Analytic
A monopolistically competitive market is like both a competitive market and a monopoly in that
a.
all three market structures feature easy entry by new firms in the long run.
b.
firms in all three market structures maximize profit by producing an output level where marginal
revenue equals marginal cost.
c.
firms in all three market structures produce the welfare-maximizing level of output.
d.
All of the above are correct.
ANS:
B
2
REF:
16-4
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Monopoly
MSC:
Interpretive
13.
DIF:
NAT:
Analytic
A monopolistically competitive market is like both a competitive market and a monopoly in that firms in all
three market structures
a.
can earn economic profits in the short run.
b.
can earn economic profits in the long run.
c.
charge a price above marginal cost.
d.
All of the above are correct.
ANS:
A
DIF:
2
REF:
16-4
NAT:
Analytic
LOC:
Monopolistic competition
TOP:
Monopolistic competition | Monopoly
MSC:
Interpretive
Chapter 15/Monopoly  1265
Chapter 17
Oligopoly
TRUE/FALSE
1.
The essence of an oligopolistic market is that there are only a few sellers.
ANS:
T
DIF:
1
REF:
17-0
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
2.
MSC:
Definitional
Game theory is just as necessary for understanding competitive or monopoly markets as it is for
understanding oligopolistic markets.
ANS:
F
DIF:
2
REF:
17-0
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Game theory
MSC:
Interpretive
3.
In a competitive market, strategic interactions among the firms are not important.
ANS:
T
DIF:
1
REF:
17-0
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Competitive markets
MSC:
Interpretive
4.
For a firm, strategic interactions with other firms in the market become more important as the number of
firms in the market becomes larger.
ANS:
F
DIF:
2
REF:
17-0
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Game theory
MSC:
Interpretive
5.
Suppose three firms form a cartel and agree to charge a specific price for their output. Each individual firm
has an incentive to maintain the agreement because the firm’s individual profits will be the greatest under
the cartel arrangement.
ANS:
F
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Collusion
6.
MSC:
Interpretive
If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the same
level of output as they would produce in a Nash equilibrium.
ANS:
F
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Cooperation
MSC:
Interpretive
Chapter 15/Monopoly  1266
7.
Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same.
ANS:
F
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
8.
T
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
T
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
T
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Interpretive
MSC:
Interpretive
As the number of firms in an oligopoly increases, the magnitude of the price effect increases.
ANS:
F
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
12.
Interpretive
If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the cartel is equal
to what it would be if the market were a monopoly.
ANS:
11.
MSC:
As the number of firms in an oligopoly becomes very large, the price effect disappears.
ANS:
10.
Interpretive
Cartels with a small number of firms have a greater probability of reaching the monopoly outcome than do
cartels with a larger number of firms.
ANS:
9.
MSC:
MSC:
Interpretive
All examples of the prisoner’s dilemma game are characterized by one and only one Nash equilibrium.
ANS:
F
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium | Prisoners' dilemma
MSC:
Interpretive
13.
If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more likely to
cooperate than if they play the game only once.
ANS:
T
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
14.
The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain
cooperation among its members.
ANS:
T
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
Chapter 15/Monopoly  1267
15.
In the prisoners' dilemma game, one prisoner is always better off confessing, no matter what the other
prisoner does.
ANS:
T
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
16.
In the prisoners' dilemma game, confessing is a dominant strategy for each of the two prisoners.
ANS:
T
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma | Dominant strategy
MSC:
Interpretive
17.
The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that the two
prisoners play in the prisoners' dilemma.
ANS:
T
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
18.
T
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
T
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then does
whatever the other player did last time.
ANS:
T
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
21.
Interpretive
When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes both
parties to cooperate.
ANS:
20.
Interpretive
In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to an
undesirable outcome for the firms that are involved.
ANS:
19.
MSC:
MSC:
Definitional
One way that public policy encourages cooperation among oligopolists is through antitrust law.
ANS:
F
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Antitrust
MSC:
Interpretive
Chapter 15/Monopoly  1268
22.
The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices.
ANS:
T
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Sherman Antitrust Act of 1890
MSC:
Interpretive
23.
Resale price maintenance prevents retailers from competing on price.
ANS:
T
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Interpretive
24.
Some business practices that appear to reduce competition, such as resale price maintenance, may have
legitimate economic purposes.
ANS:
T
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Interpretive
25.
In 2007 the U.S. Supreme Court ruled that it was not necessary illegal for manufacturers and distributors to
agree on minimum retail prices.
ANS:
T
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Definitional
26.
Tying can be thought of as a form of price discrimination.
ANS:
T
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
27.
MSC:
Interpretive
Policymakers should be aggressive in using their powers to place limits on firm behavior, because business
practices that appear to reduce competition never have any legitimate purposes.
ANS:
F
DIF:
2
REF:
17-4
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
Antitrust
Chapter 15/Monopoly  1269
SHORT ANSWER
1.
Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of
the cartel. Why?
ANS:
Individual profits can be increased at the expense of group profits if individuals cheat on the cartel's cooperative
agreement.
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Interpretive
2.
What effect does the number of firms in an oligopoly have on the characteristics of the market?
ANS:
As the number of firms increases, the equilibrium quantity of goods provided increases and price falls; the market
begins to resemble a competitive one.
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
MSC:
Analytical
3.
Assume that demand for a product that is produced at zero marginal cost is reflected in the table below.
Quantity
Price
0
$36
200
$33
400
$30
600
$27
800
$24
1000
$21
1200
$18
1400
$15
1600
$12
1800
$9
2000
$6
2200
$3
2400
$0
Chapter 15/Monopoly  1270
a.
What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a
cartel?
b.
Assume that this market is characterized by a duopoly in which collusive agreements are illegal. What
market price and quantity will be associated with a Nash equilibrium?
a.
Q = 1200
b.
Q = 1600, P = 12
ANS:
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Applicative
4.
Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly.
Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.
ANS:
The source of the tension exists because total profits are maximized when oligopolists cooperate on price and
quantity by operating as a monopolist. However, individual profits can be gained by individuals cheating on their
cooperative agreement. This is why cooperative agreements among members of a cartel are inherently unstable.
This is evident in the problem OPEC experiences in enforcing the cooperative agreement on production and price of
crude oil.
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Interpretive
5.
Describe the output and price effects that influence the profit-maximizing decision faced by a firm in an
oligopoly market. How does this differ from output and price effects in a monopoly market?
ANS:
Output effect: Price > Marginal cost => increased output will add to profit
Price effect: increased quantity is sold at a lower price => lower revenue (profit?)
An oligopolist must take into account how the output and price effects will be influenced by competitors'
production decisions, or it must assume competitors' production will not change in response to its own actions.
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Profit maximization | Oligopoly
MSC:
Interpretive
Chapter 15/Monopoly  1271
6.
Explain how the output effect and the price effect influence the production decision of the individual
oligopolist.
ANS:
Since the individual oligopolist faces a downward-sloping demand curve, she realizes that if she increases output,
all output must be sold at a lower market price. As such, the revenue from selling the additional units at the lower
market price must exceed the loss in revenue from selling all previous units at the new lower price. Otherwise,
profits will fall as output (production) is increased.
DIF:
2
REF:
17-1
LOC:
Oligopoly
TOP:
Profit maximization | Oligopoly
7.
NAT:
Analytic
MSC:
Interpretive
Ford and General Motors are considering expanding into the Vietnamese automobile market. Devise a simple
prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision.
ANS:
The answer should present two strategies for each company, such as “Expand” and “Don’t Expand.” To be a
prisoner’s dilemma, each firm needs a dominant strategy, but each firm choosing its dominant strategy results in an
outcome that is jointly worse than if they both chose their other strategy. A possible payoff table with payoffs
(Ford, GM) is
GM
Ford
Expand
Don’t Expand
Expand
(2, 2)
(4, 1)
Don’t Expand
(1, 4)
(3, 3)
DIF:
3
REF:
17-2
LOC:
Oligopoly
TOP:
Prisoners' dilemma
8.
NAT:
Analytic
MSC:
Applicative
Nike and Reebok (athletic shoe companies) are considering whether or not to advertise during the Super
Bowl. Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant
to this decision. Does the repeated game scenario differ from a single period game? Is it possible that a
repeated game (without collusive agreements) could lead to an outcome that is better than a single-period
game? Explain the circumstances in which this may be true.
ANS:
The answer should show that if both shoe companies decide to advertise they will both be worse off than if they
did not. It should also show that each company has the individual incentive to advertise. The dominant strategy of
both companies will be to advertise, regardless of what the other is doing. If the game is repeated more than once
it is possible that the shoe companies will decide not to advertise in the hopes that the other company adequately
understands the mutually beneficial gains that come from not advertising.
DIF:
3
REF:
17-2
NAT:
LOC:
Oligopoly
TOP:
Prisoners' dilemma
Analytic
MSC:
Applicative
Chapter 15/Monopoly  1272
9.
Outline the purpose of antitrust laws. What do they accomplish?
ANS:
The purpose of antitrust laws is to move markets toward a competitive equilibrium outcome. These laws are used
to prevent behavior that would lead to excessive market power by any single firm.
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Antitrust
MSC:
Interpretive
10.
Explain the practice of resale price maintenance and discuss why it is controversial.
ANS:
Resale price maintenance is a requirement by producers that retailers sell their product for a price specified by the
manufacturer. It is controversial because on the surface it appears to limit the ability of retailers to compete on the
basis of price. However, if the manufacturer does not exercise resale price maintenance a free-rider problem may
become evident among the retailers and ultimately lead to lower profits for the manufacturer.
DIF:
2
LOC:
The role of government TOP:
MSC:
Interpretive
11.
REF:
17-3
NAT:
Analytic
Resale price maintenance
Explain the practice of tying and discuss why it is controversial.
ANS:
Tying is the practice of bundling goods for sale. It is controversial because it is perceived as a tool for expanding the
market power of firms by forcing consumers to purchase additional products. However, economists are skeptical
that a buyer's willingness to pay increases just because two products are bundled together. In other words, simply
bundling two products together doesn't necessarily add any value. It is more accurately believed to be a form of
price discrimination.
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
MSC:
Interpretive
Sec00 - Oligopoly
MULTIPLE CHOICE
1.
In the language of game theory, a situation in which each person must consider how others might respond to
his or her own actions is called a
a.
quantifiable situation.
b.
cooperative situation.
c.
strategic situation.
d.
tactical situation.
Chapter 15/Monopoly  1273
ANS:
C
DIF:
1
REF:
17-0
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
2.
a.
how people behave in strategic situations.
b.
how people behave when the possible actions of other people are irrelevant.
c.
oligopolistic markets.
d.
all types of markets, including competitive markets, monopolistic markets, and oligopolistic
markets.
A
DIF:
2
REF:
17-0
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Definitional
Which of the following statements is correct?
a.
Strategic situations are more likely to arise when the number of decision-makers is very large
rather than very small.
b.
Strategic situations are more likely to arise in monopolistically competitive markets than in
oligopolistic markets.
c.
Game theory is useful in understanding certain business decisions, but it is not really applicable to
ordinary games such as chess or tic-tac-toe.
d.
Game theory is not necessary for understanding competitive or monopoly markets.
ANS:
D
DIF:
2
REF:
17-0
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
4.
Definitional
In general, game theory is the study of
ANS:
3.
MSC:
MSC:
Interpretive
In which of the following markets are strategic interactions among firms most likely to occur?
a.
markets to which patent and copyright laws apply
b.
the market for piano lessons
c.
the market for tennis balls
d.
the market for corn
ANS:
C
DIF:
2
REF:
17-0
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Interpretive
Chapter 15/Monopoly  1274
Sec01 - Oligopoly - Markets with Only a Few Sellers
MULTIPLE CHOICE
1.
A distinguishing feature of an oligopolistic industry is the tension between
a.
profit maximization and cost minimization.
b.
cooperation and self interest.
c.
producing a small amount of output and charging a price above marginal cost.
d.
short-run decisions and long-run decisions.
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
2.
MSC:
In studying oligopolistic markets, economists assume that
a.
there is no conflict or tension between cooperation and self-interest.
b.
it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly
outcome.
c.
each oligopolist cares only about its own profit.
d.
strategic decisions do not play a role in such markets.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Cooperation
MSC:
Interpretive
3.
Interpretive
The simplest type of oligopoly is
a.
monopoly.
b.
duopoly.
c.
monopolistic competition.
d.
oligopolistic competition.
ANS:
B
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
MSC:
Interpretive
Chapter 15/Monopoly  1275
4.
A special kind of imperfectly competitive market that has only two firms is called
a.
a two-tier competitive structure.
b.
an incidental monopoly.
c.
a doublet.
d.
a duopoly.
ANS:
D
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
5.
Definitional
An agreement between two duopolists to function as a monopolist usually breaks down because
a.
they cannot agree on the price that a monopolist would charge.
b.
they cannot agree on the output that a monopolist would produce.
c.
each duopolist wants a larger share of the market in order to capture more profit.
d.
each duopolist wants to charge a higher price than the monopoly price.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
6.
MSC:
MSC:
Interpretive
Which of the following statements is correct?
a.
If duopolists successfully collude, then their combined output will be equal to the output that
would be observed if the market were a monopoly.
b.
Although the logic of self-interest decreases a duopoly’s price below the monopoly price, it does
not push the duopolists to reach the competitive price.
c.
Although the logic of self-interest increases a duopoly’s level of output above the monopoly level,
it does not push the duopolists to reach the competitive level.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
MSC:
Interpretive
Chapter 15/Monopoly  1276
7.
Suppose that Sonny and Cher are duopolists in the music industry. In January, they agree to work together as
a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs.
By February, each singer is considering breaking the agreement. What would you expect to happen next?
a.
Sonny and Cher will determine that it is in each singer’s best self interest to maintain the
agreement.
b.
Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will
increase, and the new equilibrium price will decrease.
c.
Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will
decrease, and the new equilibrium price will increase.
d.
Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will
increase, and the new equilibrium price also will increase.
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
8.
Interpretive
As the number of firms in an oligopoly increases, the
a.
price approaches marginal cost, and the quantity approaches the socially efficient level.
b.
price and quantity approach the monopoly levels.
c.
price effect exceeds the output effect.
d.
individual firms’ profits increase.
ANS:
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
9.
MSC:
MSC:
Interpretive
If a certain market were a monopoly, then the monopolist would maximize its profit by producing 1,000 units
of output. If, instead, that market were a duopoly, then which of the following outcomes would be most
likely if the duopolists successfully collude?
a.
Each duopolist produces 1,000 units of output.
b.
Each duopolist produces 600 units of output.
c.
One duopolist produces 400 units of output and the other produces 600 units of output.
d.
One duopolist produces 800 units of output and the other produces 400 units of output.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
MSC:
Applicative
Chapter 15/Monopoly  1277
Table 17-1
Imagine a small town in which only two residents, Lisa and Mark, own wells that produce safe drinking water. Each
week Lisa and Mark work together to decide how many gallons of water to pump. They bring the water to town
and sell it at whatever price the market will bear. To keep things simple, suppose that Lisa and Mark can pump as
much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand
schedule and total revenue schedule for water is shown in the table below:
Quantity
Price
(in gallons)
10.
Total Revenue
(and Total Profit)
0
$120
$0
100
110
11,000
200
100
20,000
300
90
27,000
400
80
32,000
500
70
35,000
600
60
36,000
700
50
35,000
800
40
32,000
900
30
27,000
1,000
20
20,000
1,100
10
11,000
1,200
0
0
Refer to Table 17-1. If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, what
price will they charge?
a.
$20
b.
$40
c.
$60
d.
$70
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Monopoly
MSC:
Applicative
Chapter 15/Monopoly  1278
11.
Refer to Table 17-1. If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, how
many gallons of water will be produced and sold?
a.
0
b.
500
c.
600
d.
1,200
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Monopoly
MSC:
Applicative
12.
Refer to Table 17-1. If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, how
much profit will each of them earn?
a.
$0
b.
$18,000
c.
$32,000
d.
$36,000
ANS:
B
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Monopoly
MSC:
Applicative
13.
Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic, how many
gallons of water would be produced and sold?
a.
0
b.
600
c.
900
d.
1,200
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Competitive markets
MSC:
Applicative
Chapter 15/Monopoly  1279
14.
Refer to Table 17-1. What is the socially efficient quantity of water?
a.
0 gallons
b.
600 gallons
c.
900 gallons
d.
1,200 gallons
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Competitive markets
MSC:
Applicative
15.
Refer to Table 17-1. If this market for water were perfectly competitive instead of monopolistic, what price
would be charged?
a.
$0
b.
$50
c.
$60
d.
$120
ANS:
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Competitive markets
MSC:
Applicative
16.
Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating
as a monopoly. What will be the price of water once Lisa and Mark reach a Nash equilibrium?
a.
$30
b.
$40
c.
$50
d.
$60
ANS:
B
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Analytical
Chapter 15/Monopoly  1280
17.
Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating
as a monopoly. How many gallons of water will be produced and sold once Lisa and Mark reach a Nash
equilibrium?
a.
600
b.
700
c.
800
d.
900
ANS:
C
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Analytical
Table 17-2. The table shows the town of Pittsville’s demand schedule for gasoline. For simplicity, assume the
town’s gasoline seller(s) incur no costs in selling gasoline.
Quantity
Total Revenue
(in gallons)
Price
(and total profit)
0
$10
$0
100
9
900
200
8
1,600
300
7
2,100
400
6
2,400
500
5
2,500
600
4
2,400
700
3
2,100
800
2
1,600
900
1
900
1,000
0
0
Chapter 15/Monopoly  1281
18.
Refer to Table 17-2. If the market for gasoline in Pittsville is perfectly competitive, then the equilibrium price
of gasoline is
a.
$8 and the equilibrium quantity is 200 gallons.
b.
$5 and the equilibrium quantity is 500 gallons.
c.
$2 and the equilibrium quantity is 800 gallons.
d.
$0 and the equilibrium quantity is 1,000 gallons.
ANS:
D
DIF:
2
NAT:
Analytic
LOC:
Perfect competition
MSC:
Applicative
19.
REF:
17-1
TOP:
Refer to Table 17-2. If the market for gasoline in Pittsville is a monopoly, then the profit-maximizing
monopolist will charge a price of
a.
$8 and sell 200 gallons.
b.
$5 and sell 500 gallons.
c.
$2 and sell 800 gallons.
d.
$0 and sell 1,000 gallons.
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Monopoly
TOP:
Monopoly
20.
Perfect Competition
MSC:
Applicative
Refer to Table 17-2. If there are exactly two sellers of gasoline in Pittsville and if they collude, then which of
the following outcomes is most likely?
a.
Each seller will sell 500 gallons and charge a price of $5.
b.
Each seller will sell 500 gallons and charge a price of $2.50.
c.
Each seller will sell 350 gallons and charge a price of $3.
d.
Each seller will sell 250 gallons and charge a price of $5.
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
MSC:
Applicative
Chapter 15/Monopoly  1282
21.
Refer to Table 17-2. If there are exactly three sellers of gasoline in Pittsville and if they collude, then which of
the following outcomes is most likely?
a.
Each seller will sell 166.67 gallons and charge a price of $1.33.
b.
Each seller will sell 166.67 gallons and charge a price of $5.
c.
Each seller will sell 200 gallons and charge a price of $4.
d.
Each seller will sell 233.33 gallons and charge a price of $5.
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
22.
Applicative
Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and BQ. If Exxoff
sells 300 gallons and BQ sells 400 gallons, then
a.
Exxoff’s profit is $900 and BQ’s profit is $1,200.
b.
Exxoff’s profit is $2,100 and BQ’s profit is $2,400.
c.
there is an excess demand for gasoline in Pittsville.
d.
there is an excess supply of gasoline in Pittsville.
ANS:
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
23.
MSC:
MSC:
Applicative
Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and BQ. Currently,
Exxoff sells 300 gallons and BQ sells 400 gallons. Which of the following statements is correct? (Hint:
Perform simple interpolation between rows of the chart where necessary.)
a.
The current situation is a Nash equilibrium.
b.
The current situation is not a Nash equilibrium, as indicated by the fact that Exxoff’s profit would
increase if it increased its output to 400 gallons and BQ kept its output at 400 gallons.
c.
The current situation is not a Nash equilibrium, as indicated by the fact that BQ’s profit would
increase if it decreased its output to 350 gallons and Exxoff kept its output at 300 gallons.
d.
The current situation is not a Nash equilibrium, as indicated by the fact that both sellers’ profits
would increase if they colluded, decided on a total level of output, and agreed to each produce
one-half of that amount.
ANS:
C
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
Chapter 15/Monopoly  1283
24.
Which of the following statements is correct?
a.
When duopoly firms reach a Nash equilibrium, their combined level of output is the monopoly
level of output.
b.
When oligopoly firms collude, they are behaving as a cartel.
c.
In an oligopoly, self-interest drives the market to the competitive outcome.
d.
An oligopoly is an example of monopolistic competition.
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Cartels
MSC:
Interpretive
25.
As the number of firms in an oligopoly increases, the magnitude of the
a.
output effect increases.
b.
output effect decreases.
c.
price effect increases.
d.
price effect decreases.
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
26.
Interpretive
As the number of sellers in an oligopoly becomes very large,
a.
the quantity of output approaches the socially efficient quantity.
b.
the price approaches marginal cost.
c.
the price effect is diminished.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
27.
MSC:
MSC:
Interpretive
In markets characterized by oligopoly,
a.
the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
b.
collusive agreements will always prevail.
c.
collective profits are always lower with cartel arrangements than they are without cartel
arrangements.
d.
pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market.
Chapter 15/Monopoly  1284
ANS:
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
28.
a.
as if they were each seeking to maximize their own individual profits.
b.
in a manner that would prohibit collusive agreements.
c.
as a single monopolist.
d.
as a single perfectly competitive firm.
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Interpretive
As a group, oligopolists would always earn the highest profit if they would
a.
produce the perfectly competitive quantity of output.
b.
produce more than the perfectly competitive quantity of output.
c.
charge the same price that a monopolist would charge if the market were a monopoly.
d.
operate according to their own individual self-interests.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
30.
Interpretive
As a group, oligopolists would always be better off if they would act collectively
ANS:
29.
MSC:
MSC:
Interpretive
Because each oligopolist cares about its own profit rather than the collective profit of all the oligopolists
together,
a.
they are unable to maintain the same degree of monopoly power enjoyed by a monopolist.
b.
each firm's profit always ends up being zero.
c.
society is worse off as a result.
d.
Both a and c are correct.
ANS:
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Interpretive
Chapter 15/Monopoly  1285
Table 17-3. The information in the table below shows the total demand for premium-channel digital cable TV
subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per
year) to provide premium digital channels in the market area and that the marginal cost of providing the premium
channel service to a household is zero.
31.
Quantity
Price (per year)
0
$180
3,000
$150
6,000
$120
9,000
$ 90
12,000
$ 60
15,000
$ 30
18,000
$ 0
Refer to Table 17-3. If there is only one digital cable TV company in this market, what price would it charge
for a premium digital channel subscription to maximize its profit?
a.
$30
b.
$60
c.
$90
d.
$150
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Monopoly
TOP:
Monopoly
32.
MSC:
Applicative
Refer to Table 17-3. Assume there are two digital cable TV companies operating in this market. If they are
able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for
subscriptions, then their agreement will stipulate that
a.
each firm will charge a price of $90 and each firm will sell 4,500 subscriptions.
b.
each firm will charge a price of $90 and each firm will sell 9,000 subscriptions.
c.
each firm will charge a price of $120 and each firm will sell 3,000 subscriptions.
d.
each firm will charge a price of $150 and each firm will sell 1,500 subscriptions.
ANS:
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly | Collusion
MSC:
Applicative
Chapter 15/Monopoly  1286
33.
Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this
market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on
the price that will be charged for subscriptions. How much profit will each company earn?
a.
$610,000
b.
$550,000
c.
$410,000
d.
$205,000
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly | Collusion
MSC:
Applicative
34.
Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this
market. Further assume that they are not able to collude on the price and quantity of premium digital
channel subscriptions to sell. How many premium digital channel cable TV subscriptions will be sold
altogether when this market reaches a Nash equilibrium?
a.
6,000
b.
9,000
c.
12,000
d.
15,000
ANS:
C
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
35.
Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating in this
market. Further assume that they are not able to collude on the price and quantity of premium digital
channel subscriptions to sell. What price will premium digital channel cable TV subscriptions be sold at when
this market reaches a Nash equilibrium?
a.
$30
b.
$60
c.
$90
d.
$120
ANS:
B
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
Chapter 15/Monopoly  1287
36.
Refer to Table 17-3. Assume that there are two profit-maximizing digital cable TV companies operating in this
market. Further assume that they are not able to collude on the price and quantity of premium digital
channel subscriptions to sell. How much profit will each firm earn when this market reaches a Nash
equilibrium?
a.
$25,000
b.
$90,000
c.
$160,000
d.
$215,000
ANS:
C
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
Table 17-4. The information in the table below shows the total demand for high-speed Internet subscriptions in a
small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of
$200,000 (per year) and that the marginal cost of providing an additional subscription is always $80.
37.
Quantity
Price (per year)
0
$320
2,000
$280
4,000
$240
6,000
$200
8,000
$160
10,000
$120
12,000
$ 80
14,000
$ 40
16,000
$0
Refer to Table 17-4. Suppose there is only one high-speed Internet service provider in this market and it
seeks to maximize its profit. The company will
a.
sell 6,000 subscriptions and charge a price of $200 for each subscription.
b.
sell 8,000 subscriptions and charge a price of $160 for each subscription.
c.
sell 10,000 subscriptions and charge a price of $120 for each subscription.
d.
sell 12,000 subscriptions and charge a price of $80 for each subscription.
Chapter 15/Monopoly  1288
ANS:
A
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Monopoly
TOP:
Monopoly
38.
MSC:
Refer to Table 17-4. Assume there are two high-speed Internet service providers that operate in this market.
If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be
charged for subscriptions, then their agreement will stipulate that
a.
each firm will charge a price of $120 and each firm will sell 5,000 subscriptions.
b.
each firm will charge a price of $160 and each firm will sell 4,000 subscriptions.
c.
each firm will charge a price of $100 and each firm will sell 3,000 subscriptions.
d.
each firm will charge a price of $200 and each firm will sell 3,000 subscriptions.
ANS:
D
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly | Collusion
MSC:
Applicative
39.
Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers operating
in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold
and on the price that will be charged for subscriptions. How much profit will each company earn?
a.
$80,000
b.
$120,000
c.
$160,000
d.
$210,000
ANS:
C
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly | Collusion
MSC:
Applicative
40.
Applicative
Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers operating
in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to
sell. How many subscriptions will be sold altogether when this market reaches a Nash equilibrium?
a.
6,000
b.
8,000
c.
10,000
d.
12,000
Chapter 15/Monopoly  1289
ANS:
B
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
41.
Refer to Table 17-4. Assume there are two high-speed Internet service providers operating in this market.
Further assume that they are not able to collude on the price and quantity of subscriptions to sell. What price
will they charge for a subscription when this market reaches a Nash equilibrium?
a.
$120
b.
$160
c.
$200
d.
$240
ANS:
B
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
42.
Refer to Table 17-4. Assume that there are two profit-maximizing high-speed Internet service providers
operating in this market. Further assume that they are not able to collude on the price and quantity of
subscriptions to sell. How much profit will each firm earn when this market reaches a Nash equilibrium?
a.
$120,000
b.
$150,000
c.
$200,000
d.
$225,000
ANS:
A
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
Chapter 15/Monopoly  1290
Table 17-5. Imagine a small town in which only two residents, Bill and Ben, own wells that produce safe drinking
water. Each week Bill and Ben work together to decide how many gallons of water to pump, to bring the water to
town, and to sell it at whatever price the market will bear. Assume Bill and Ben can pump as much water as they
want without cost so that the marginal cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table below.
Weekly
Weekly
Price
Quantity
Total Revenue
(in gallons)
43.
(and Total Profit)
0
$12
$0
10
11
110
20
10
200
30
9
270
40
8
320
50
7
350
60
6
360
70
5
350
80
4
320
90
3
270
100
2
200
110
1
110
120
0
0
Refer to Table 17-5. Since Bill and Ben operate as a profit-maximizing monopoly in the market for water,
what price will they charge for water?
a.
$2
b.
$4
c.
$6
d.
$7
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Applicative
Chapter 15/Monopoly  1291
44.
Refer to Table 17-5. If the market for water were perfectly competitive instead of monopolistic, how many
gallons of water would be produced and sold?
a.
70
b.
90
c.
110
d.
120
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Competitive markets
MSC:
Applicative
45.
Refer to Table 17-5. As long as Bill and Ben operate as a profit-maximizing monopoly, what will their
combined weekly revenue amount to?
a.
$200
b.
$270
c.
$350
d.
$360
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
46.
MSC:
Applicative
Refer to Table 17-5. The socially efficient level of water supplied to the market would be
a.
60 gallons.
b.
80 gallons.
c.
100 gallons.
d.
120 gallons.
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Competitive markets
MSC:
Applicative
Chapter 15/Monopoly  1292
47.
Refer to Table 17-5. Suppose the town enacts new antitrust laws that prohibit Bill and Ben from operating as
a monopolist. What will the new price of water be once the Nash equilibrium is reached?
a.
$3
b.
$4
c.
$5
d.
$6
ANS:
B
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Applicative
Nash equilibrium
Scenario 17-1. Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume
that both countries have entered into an agreement to maintain certain production levels in order to maximize
profits. In the world market for oil, the demand curve is downward sloping.
48.
Refer to Scenario 17-1. The fact that both countries have colluded to earn higher profit shows their desire to
keep their combined level of output
a.
above the monopoly level.
b.
below the Nash equilibrium level.
c.
equal to the Nash equilibrium level.
d.
above the Nash equilibrium level.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
49.
MSC:
Analytical
Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium level, both
Irun and Urun have the individual incentive to
a.
hold production constant.
b.
decrease production.
c.
increase production.
d.
increase price.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Analytical
Chapter 15/Monopoly  1293
50.
Refer to Scenario 17-1. The agreed-upon production level between the two countries will invariably be
a.
lower than the Nash equilibrium level.
b.
equal to the Nash equilibrium level.
c.
equal to the duopoly market equilibrium level.
d.
higher than the duopoly market equilibrium level.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Analytical
51.
Refer to Scenario 17-1. If Irun fails to live up to the production agreement and overproduces, which of the
following statements will be true of Urun's condition?
a.
Urun will invariably be worse off than before the agreement was broken.
b.
Urun will counter by decreasing its production in order to maintain price stability.
c.
Urun's profit will be maximized by holding its production constant.
d.
Urun’s profit will decrease if it follows suit and increases production.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
52.
MSC:
Analytical
Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash
equilibrium, it
a.
is always in their best interest to supply more to the market.
b.
is always in their best interest to supply less to the market.
c.
is always in their best interest to leave their quantities supplied unchanged.
d.
may be in their best interest to do any of the above, depending on market conditions.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Interpretive
Chapter 15/Monopoly  1294
53.
When an oligopoly market reaches a Nash equilibrium,
a.
the market price will be different for each firm.
b.
the firms will not have behaved as profit maximizers.
c.
a firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
d.
a firm will not take into account the strategies of competing firms.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Interpretive
54.
In a duopoly situation, the logic of self-interest results in a total output level that
a.
equals the output level that would prevail in a competitive market.
b.
equals the output level that would prevail in a monopoly.
c.
exceeds the monopoly level of output, but falls short of the competitive level of output.
d.
falls short of the monopoly level of output.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
55.
MSC:
Analytical
As a group, oligopolists earn the highest profit when they
a.
achieve a Nash equilibrium.
b.
produce a total quantity of output that falls short of the Nash-equilibrium total quantity.
c.
produce a total quantity of output that exceeds the Nash-equilibrium total quantity.
d.
charge a price that falls short of the Nash-equilibrium price.
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Nash equilibrium
MSC:
Analytical
56.
In order to be successful, a cartel must
a.
find a way to encourage members to produce more than they would otherwise produce.
b.
agree on the total level of production for the cartel, but they need not agree on the amount
produced by each member.
c.
agree on the total level of production and on the amount produced by each member.
d.
agree on the prices charged by each member, but they need not agree on amounts produced.
Chapter 15/Monopoly  1295
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
57.
a.
duopoly, whether they collude or not.
b.
cartel, whether they collude or not.
c.
Nash industry, whether they collude or not.
d.
monopolistically competitive market if they charge the same price.
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
MSC:
Interpretive
Which of these situations produces the largest profits for oligopolists?
a.
The firms reach a Nash equilibrium.
b.
The firms reach the monopoly outcome.
c.
The firms reach the competitive outcome.
d.
The firms produce a quantity of output that lies between the competitive outcome and the
monopoly outcome.
ANS:
B
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
59.
Interpretive
In a particular town, Metrovision and Cableview are the only two providers of cable TV service. Metrovision
and Cableview constitute a
ANS:
58.
MSC:
MSC:
Interpretive
When firms have agreements among themselves on the quantity to produce and the price at which to sell
output, we refer to their form of organization as a
a.
Nash arrangement.
b.
cartel.
c.
monopolistically competitive oligopoly.
d.
perfectly competitive oligopoly.
ANS:
B
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Definitional
Chapter 15/Monopoly  1296
60.
The equilibrium quantity in markets characterized by oligopoly is
a.
higher than in monopoly markets and higher than in perfectly competitive markets.
b.
higher than in monopoly markets and lower than in perfectly competitive markets.
c.
lower than in monopoly markets and higher than in perfectly competitive markets.
d.
lower than in monopoly markets and lower than in perfectly competitive markets.
ANS:
B
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Equilibrium quantity
MSC:
Analytical
61.
The equilibrium price in a market characterized by oligopoly is
a.
higher than in monopoly markets and higher than in perfectly competitive markets.
b.
higher than in monopoly markets and lower than in perfectly competitive markets.
c.
lower than in monopoly markets and higher than in perfectly competitive markets.
d.
lower than in monopoly markets and lower than in perfectly competitive markets.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Equilibrium price
MSC:
Analytical
62.
When oligopolistic firms interacting with one another each choose their best strategy given the strategies
chosen by other firms in the market, we have
a.
a cartel.
b.
a group of oligopolists behaving as a monopoly.
c.
a Nash equilibrium.
d.
the perfectly competitive outcome.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Definitional
Chapter 15/Monopoly  1297
63.
As the number of firms in an oligopoly market
a.
decreases, the price charged by firms likely decreases.
b.
decreases, the market approaches the competitive market outcome.
c.
increases, the market approaches the competitive market outcome.
d.
increases, the market approaches the monopoly outcome.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
64.
MSC:
Assume oligopoly firms are profit maximizers, they do not form a cartel, and they take other firms' production
levels as given. Then in equilibrium the output effect
a.
must dominate the price effect.
b.
must be smaller than the price effect.
c.
must balance with the price effect.
d.
can be larger or smaller than the price effect.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Equilibrium
MSC:
Analytical
65.
For cartels, as the number of firms (members of the cartel) increases,
a.
the monopoly outcome becomes more likely.
b.
the magnitude of the price effect decreases.
c.
the more concerned each seller is about its own impact on the market price.
d.
the easier it becomes to observe members violating their agreements.
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
66.
Analytical
MSC:
Interpretive
Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time,
however, suppose the merging of firms results in the market being served by only three or four firms selling
this same product. As a result, we would expect
a.
an increase in market output and an increase in the price of the product.
b.
an increase in market output and an decrease in the price of the product.
c.
a decrease in market output and an increase in the price of the product.
d.
a decrease in market output and a decrease in the price of the product.
Chapter 15/Monopoly  1298
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
67.
a.
antitrust laws are difficult to enforce.
b.
cartel agreements are conducive to monopoly outcomes.
c.
there is always tension between cooperation and self-interest in a cartel.
d.
firms pay little attention to the decisions made by other firms.
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Interpretive
There are two types of markets in which firms face some competition yet are still able to have some control
over the prices of their products. Those two types of market are
a.
monopolistic competition and oligopoly.
b.
duopoly and triopoly.
c.
perfect competition and monopolistic competition.
d.
duopoly and imperfect competition.
ANS:
A
DIF:
1
NAT:
Analytic
LOC:
Oligopoly | Monopolistic competition
TOP:
Markets
MSC:
Interpretive
69.
Interpretive
Cartels are difficult to maintain because
ANS:
68.
MSC:
REF:
17-1
A group of firms that act in unison to maximize collective profits is called a
a.
monopolistically competitive industry.
b.
monopoly.
c.
cartel.
d.
Nash equilibrium market.
ANS:
C
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Definitional
Chapter 15/Monopoly  1299
70.
An agreement among firms regarding price and/or production levels is called
a.
an antitrust market.
b.
a free-trade arrangement.
c.
collusion.
d.
a Nash agreement.
ANS:
C
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Collusion
71.
a.
be less than the monopoly quantity.
b.
be equal to the monopoly quantity.
c.
be greater than the monopoly quantity.
d.
Any of the above are possible.
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
MSC:
Interpretive
If duopolists individually pursue their own self-interest when deciding how much to produce, the profitmaximizing price they will charge for their product will be
a.
less than the monopoly price.
b.
equal to the perfectly competitive market price.
c.
greater than the monopoly price.
d.
possibly less than or greater than the monopoly price.
ANS:
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
73.
Definitional
If duopolists individually pursue their own self-interest when deciding how much to produce, the amount
they will produce collectively will
ANS:
72.
MSC:
MSC:
Interpretive
To increase their individual profits, members of a cartel have an incentive to
a.
charge a higher price than the other members of the cartel.
b.
increase production above the level agreed upon.
c.
ignore the choices made by the other firms and act as a monopolist.
d.
charge the same price a monopolist would charge.
Chapter 15/Monopoly  1300
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
74.
Interpretive
MSC:
Interpretive
Once a cartel is formed, the market is in effect served by
a.
a monopoly.
b.
an oligopoly.
c.
imperfect competition.
d.
monopolistic competition.
ANS:
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
75.
MSC:
A situation in which firms choose their best strategy given the strategies chosen by the other firms in the
market is called
a.
a competitive equilibrium.
b.
an open-market solution.
c.
a socially-optimal solution.
d.
a Nash equilibrium.
ANS:
D
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Definitional
76.
If an oligopolist is part of a cartel that is collectively producing the monopoly level of output, then that
oligopolist has the incentive to lower production with the aim of
a.
lowering prices.
b.
increasing profits for the group of firms as a whole.
c.
increasing profits for itself, regardless of the impact on profits for the group of firms as a whole.
d.
None of the above is correct.
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Analytical
Chapter 15/Monopoly  1301
77.
When price is above marginal cost, selling one more unit at the current price will increase profit. This concept
is known as the
a.
income effect.
b.
price effect.
c.
output effect.
d.
cartel effect.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Profit maximization
MSC:
Definitional
78.
In imperfectly competitive markets, increasing production will decrease the price of all units sold. This
concept is known as the
a.
income effect.
b.
cost effect.
c.
output effect.
d.
price effect.
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Profit maximization
MSC:
Definitional
79.
In a typical cartel agreement, the cartel maximizes profit when it
a.
behaves as a monopolist.
b.
behaves as a duopolist.
c.
is flexible in enforcing production targets.
d.
behaves as a perfectly competitive firm.
ANS:
A
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Interpretive
Chapter 15/Monopoly  1302
80.
An oligopolist will increase production if the output effect is
a.
less than the price effect.
b.
equal to the price effect.
c.
greater than the price effect.
d.
The oligopolist never has an incentive to increase production.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | Profit maximization
MSC:
Interpretive
81.
As the number of firms in an oligopoly increases,
a.
each seller becomes more concerned about its impact on the market price.
b.
the output effect decreases.
c.
the total quantity of output produced by firms in the market gets closer to the socially efficient
quantity.
d.
the oligopoly has more market power and firms earn a greater profit.
ANS:
C
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
82.
Interpretive
MSC:
Interpretive
When an oligopoly grows very large, the
a.
output effect disappears.
b.
price effect disappears.
c.
output effect equals the price effect.
d.
price of the product greatly exceeds marginal cost.
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
83.
MSC:
As the number of firms in an oligopoly increases, the price approaches
a.
zero.
b.
marginal cost.
c.
infinity.
d.
the monopoly price.
Chapter 15/Monopoly  1303
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
84.
a.
reduces the price of their product.
b.
reduces their profit.
c.
reduces their revenue.
d.
reduces productivity.
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
MSC:
Interpretive
Oligopolies would like to act like a
a.
duopoly, but self-interest often drives them closer to the perfectly competitive outcome.
b.
competitive firm, but self-interest often drives them closer to the duopoly outcome.
c.
monopoly, but self-interest often drives them to charge a higher price than would be charged by a
monopoly.
d.
monopoly, but self-interest often drives them closer to the perfectly competitive outcome.
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
86.
Interpretive
Like monopolists, oligopolists are aware that an increase in the quantity of output always
ANS:
85.
MSC:
MSC:
Interpretive
Oligopolies can end up looking like competitive markets if the number of firms is
a.
large and they all cooperate.
b.
large and they do not cooperate.
c.
small and they all cooperate.
d.
small and they do not cooperate.
ANS:
B
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
MSC:
Interpretive
Chapter 15/Monopoly  1304
87.
The theory of oligopoly provides another reason that free trade can benefit all countries because
a.
increased competition leads to larger deadweight losses.
b.
as the number of firms within a given market increases, the price of the good decreases.
c.
as the number of firms within a given market increases, the profit of each firm increases.
d.
All of the above are correct.
ANS:
B
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | International trade
MSC:
Interpretive
88.
Firms do not need to be concerned about striking a balance between the price effect and the output effect
when making production decisions in which of the following types of markets?
a.
oligopoly
b.
duopoly
c.
monopoly
d.
competitive markets
ANS:
D
TOP:
Profit maximization
89.
DIF:
2
REF:
17-1
MSC:
Interpretive
If nations such as Germany, Japan, and the United States prohibited international trade in automobiles, a
likely effect would be that
a.
the price effect would become a more significant consideration for each firm that makes
automobiles.
b.
the excess of price over marginal cost would become less pronounced in the automobile market.
c.
all countries would become better off.
d.
automobile producers in the U.S. would collude to produce a large number of cars.
ANS:
A
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | International trade
MSC:
Interpretive
Chapter 15/Monopoly  1305
90.
The theory of oligopoly provides a reason as to why
a.
perfect competition is not a useful object of study.
b.
price is less than marginal cost for many firms.
c.
all countries can benefit from free trade among nations.
d.
firms do not want to capture larger shares of their markets.
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly | International trade
MSC:
Interpretive
91.
During the 1990s, the members of OPEC operated independently from one another, causing the world
market for crude oil to become close to
a.
a monopoly market.
b.
an oligopoly market.
c.
a duopoly market.
d.
a competitive market.
ANS:
D
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
OPEC
MSC:
Interpretive
Chapter 15/Monopoly  1306
92.
Consider the diagram below, which shows the market demand curve for a particular product. Suppose this
market is served by two duopolists who each face the marginal cost curve shown in the diagram. The
marginal revenue curve that a monopolist would face in this market is also shown. Which of the following
statements is true?
a.
The total output in this market will likely be 2 units when the market is served by a duopoly.
b.
The price in this market will likely be $6 when the market is served by a duopoly.
c.
The total revenue to each firm will likely be more than $16 when the market is served by a
duopoly.
d.
The total output in this market will likely be less than 4 units when the market is served by a
duopoly.
ANS:
D
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly
93.
MSC:
Interpretive
The more firms an oligopoly has,
a.
the more market power the oligopoly has. This results in higher prices and lower quantities of
output than an oligopoly with fewer firms would have.
b.
the more important the price effect is, resulting in the market price being higher than when there
are fewer firms in the oligopoly.
c.
the farther market price will be from marginal cost.
d.
the more likely the firms will charge a price closer to the perfectly competitive price.
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
MSC:
Interpretive
Chapter 15/Monopoly  1307
94.
In an oligopoly, the total output produced in the market is
a.
higher than the total output that would be produced if the market were a monopoly and higher
than the total output that would be produced if the market were perfectly competitive.
b.
higher than the total output that would be produced if the market were a monopoly but lower
than the total output that would be produced if the market were perfectly competitive.
c.
lower than the total output that would be produced if the market were a monopoly but higher
than the total output that would be produced if the market were perfectly competitive.
d.
lower than the total output that would be produced if the market were a monopoly and lower
than the total output that would be produced if the market were perfectly competitive.
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
MSC:
Interpretive
Table 17-6. The table shows the demand schedule for a particular product.
95.
Quantity
Price
0
16
1
14
2
12
3
10
4
8
5
6
6
4
7
2
8
0
Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a cartel.
What price will the cartel charge in this market if the marginal cost of production is $0?
a.
$6
b.
$8
c.
$10
d.
$12
Chapter 15/Monopoly  1308
ANS:
B
DIF:
2
REF:
17-1
NAT:
Analytic
TOP:
Cartels
MSC:
Applicative
96.
Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a cartel.
What price will the cartel charge in this market if the marginal cost of production is $4?
a.
$6
b.
$8
c.
$10
d.
$12
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
TOP:
Cartels
MSC:
Applicative
Table 17-7. The table shows the demand schedule for a particular product.
Quantity
Price
0
10
5
9
10
8
15
7
20
6
25
5
30
4
35
3
40
2
45
1
50
0
Chapter 15/Monopoly  1309
97.
Refer to Table 17-7. Suppose the market for this product is served by two duopolists who have formed a
cartel and are colluding to set the price and quantity in this market. If the marginal cost to produce this
product is constant at $2 per unit, then what price will the cartel set in this market?
a.
$4
b.
$5
c.
$6
d.
$7
ANS:
C
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
98.
MSC:
Applicative
Refer to Table 17-7. Suppose the marginal cost to produce this product is constant at $1 per unit. If this
market is served by two duopolists who choose their production levels independently, acting in their own
self-interest, what is the Nash equilibrium production level for each firm?
a.
5 units
b.
10 units
c.
15 units
d.
20 units
ANS:
C
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly | Nash equilibrium
MSC:
Applicative
99.
Refer to Table 17-7. Suppose that the marginal cost to produce this product is constant at $1 per unit and
that the fixed cost of producing this product is $10. If the market is served by two duopolists who each, acting
in their own self-interest, choose the Nash equilibrium level of production, how much profit will each firm
earn?
a.
$10
b.
$20
c.
$35
d.
$50
ANS:
C
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Duopoly | Nash equilibrium
MSC:
Applicative
Chapter 15/Monopoly  1310
Table 17-8. For a certain small town, the table shows the demand schedule for water. Assume the marginal cost of
supplying water is constant at $4 per bottle.
Price
Quantity
(bottles)
$9
100
$8
200
$7
300
$6
400
$5
500
$4
600
$3
700
$2
800
100. Refer to Table 17-8. If there were many suppliers of bottled water, what would be the price and quantity?
a.
The price would be $6 per gallon and the quantity would be 400 gallons.
b.
The price would be $5 per gallon and the quantity would be 500 gallons.
c.
The price would be $4 per gallon and the quantity would be 600 gallons.
d.
The price would be $3 per gallon and the quantity would be 700 gallons.
ANS:
C
DIF:
2
REF:
NAT:
Analytic
LOC:
Perfect competition
MSC:
Applicative
17-1
TOP:
Competitive markets
101. Refer to Table 17-8. If there were only one supplier of water, what would be the price and quantity?
a.
The price would be $7 per gallon and the quantity would be 300 gallons.
b.
The price would be $6 per gallon and the quantity would be 400 gallons.
c.
The price would be $5 per gallon and the quantity would be 500 gallons.
d.
The price would be $4 per gallon and the quantity would be 600 gallons.
ANS:
A
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Monopoly
TOP:
Monopoly
MSC:
Applicative
Chapter 15/Monopoly  1311
102. Refer to Table 17-8. If there are two suppliers of water, Mort and Callie, and if they have successfully formed
a cartel, then what would be the price and the market quantity?
a.
The price would be $7 per bottle and the market quantity would be 300 bottles.
b.
The price would be $6 per bottle and the market quantity would be 400 bottles.
c.
The price would be $5 per bottle and the market quantity would be 500 bottles.
d.
The price would be $4 per bottle and the market quantity would be 600 bottles.
ANS:
A
DIF:
2
TOP:
Cartels
MSC:
Applicative
REF:
17-1
103. Refer to Table 17-8. If there are two suppliers of water, Mort and Callie, and if they have successfully formed
a cartel and split the market evenly, then how many bottles will Callie supply?
a.
50
b.
100
c.
150
d.
200
ANS:
C
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Applicative
104. Refer to Table 17-8. If there are two suppliers of water, Mort and Callie, then what will be their combined
level of output when a Nash equilibrium is reached?
a.
200
b.
400
c.
600
d.
800
ANS:
B
DIF:
3
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
105. Cartels in the United States are
a.
legal if price is competitively determined.
b.
legal if all firms in the industry agree to the terms of the cartel.
c.
legal if all conditions of the cartel are made public.
d.
illegal.
Applicative
Chapter 15/Monopoly  1312
ANS:
D
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Interpretive
106. Which of the following would be most likely to contribute to the breakdown of a cartel in a natural resource
(e.g., bauxite) market?
a.
high prices
b.
low price elasticity of demand
c.
high compatibility of member interests
d.
unequal member ownership of the natural resource
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Interpretive
107. An equilibrium in which each firm in an oligopoly maximizes profit, given the actions of its rivals, is called
a.
a general equilibrium.
b.
a dominant equilibrium.
c.
a Nash equilibrium.
d.
an oligopoly equilibrium.
ANS:
C
DIF:
1
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Definitional
108. An oligopoly would tend to restrict output and drive up price if
a.
barriers to entering the industry are negligible.
b.
firms engage in informative advertising.
c.
firms produce a standardized product.
d.
firms collude and behave like a monopoly.
ANS:
D
DIF:
2
REF:
17-1
NAT:
Analytic
LOC:
Oligopoly
TOP:
Collusion
MSC:
Interpretive
Chapter 15/Monopoly  1313
Sec02 - Oligopoly - The Economics of Cooperation
MULTIPLE CHOICE
1.
When firms are faced with making strategic choices in order to maximize profit, economists typically use
a.
the theory of monopoly to model their behavior.
b.
the theory of aggressive competition to model their behavior.
c.
game theory to model their behavior.
d.
cartel theory to model their behavior.
ANS:
C
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
2.
a.
set the price of its product equal to marginal cost.
b.
consider how competing firms might respond to its actions.
c.
generally operate as if it is a monopolist.
d.
consider exiting the market.
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Interpretive
MSC:
Interpretive
Game theory is important for the understanding of
a.
competitive markets.
b.
monopolies.
c.
oligopolies.
d.
all market structures.
ANS:
C
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
4.
Interpretive
When strategic interactions are important to pricing and production decisions, a typical firm will
ANS:
3.
MSC:
Game theory is necessary for understanding
a.
all market structures.
b.
competition and oligopoly, but it is not necessary for understanding monopoly.
c.
monopoly and oligopoly, but it is not necessary for understanding competition.
d.
oligopoly, but it is not necessary for understanding monopoly or competition.
Chapter 15/Monopoly  1314
ANS:
D
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
5.
MSC:
The prisoners' dilemma provides insights into the
a.
difficulty of maintaining cooperation.
b.
benefits of avoiding cooperation.
c.
benefits of government ownership of monopoly.
d.
ease with which oligopoly firms maintain high prices.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
6.
In the prisoners' dilemma game, self-interest leads
a.
each prisoner to confess.
b.
to a breakdown of any agreement that the prisoners might have made before being questioned.
c.
to an outcome that is not particularly good for either prisoner.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
7.
Interpretive
The likely outcome of the standard prisoners' dilemma game is that
a.
neither prisoner confesses.
b.
exactly one prisoner confesses.
c.
both prisoners confess.
d.
Not enough information is given to answer this question.
ANS:
C
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
Chapter 15/Monopoly  1315
8.
The prisoners' dilemma is an important game to study because
a.
most games present zero-sum alternatives.
b.
it identifies the fundamental difficulty in maintaining cooperative agreements.
c.
strategic decisions faced by prisoners are identical to those faced by firms engaged in competitive
agreements.
d.
all interactions among firms are represented by this game.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
9.
The prisoners’ dilemma game
a.
provides insight into why cooperation is individually rational.
b.
provides insight into why cooperation is difficult.
c.
is a game in which neither player has a dominant strategy.
d.
is a game in which exactly one of the two players has a dominant strategy.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
10.
In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is one
a.
in which neither Bonnie nor Clyde confesses.
b.
in which both Bonnie and Clyde confess.
c.
that involves neither Bonnie nor Clyde pursuing a dominant strategy.
d.
that is ideal in terms of Bonnie’s self-interest and in terms of Clyde’s self-interest.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
Chapter 15/Monopoly  1316
11.
In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is
a.
a very good outcome for both players.
b.
a very good outcome for Bonnie, but a bad outcome for Clyde.
c.
a very good outcome for Clyde, but a bad outcome for Bonnie.
d.
a bad outcome for both players.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
12.
In a game, a dominant strategy is
a.
the best strategy for a player to follow only if other players are cooperative.
b.
the best strategy for a player to follow, regardless of the strategies followed by other players.
c.
a strategy that must appear in every game.
d.
a strategy that leads to one player's interests dominating the interests of the other players.
ANS:
B
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Definitional
13.
A dominant strategy is one that
a.
makes every player better off.
b.
makes at least one player better off without hurting the competitiveness of any other player.
c.
increases the total payoff for the player.
d.
is best for the player, regardless of what strategies other players follow.
ANS:
D
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Definitional
Chapter 15/Monopoly  1317
Table 17-9
Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare
related expenses associated with cigarette smoking. Both cigarette firms have evidence that indicates that cigarette
smoke causes lung cancer (and other related illnesses). State prosecutors do not have access to the same data used
by cigarette manufacturers and thus will have difficulty recovering full costs without the help of at least one
cigarette firm study. Each firm has been presented with an opportunity to lower its liability in the suit if it
cooperates with attorneys representing the states.
Firm B
Concede that
cigarette smoke
Argue that there is no evidence
that smoke causes cancer
causes lung cancer
Concede that
cigarette smoke
causes lung cancer
Firm A
Argue that there
is no evidence that
smoke causes cancer
14.
Firm A profit = $–20
Firm A profit = $–50
Firm B profit = $–15
Firm B profit = $–5
Firm A profit = $–5
Firm A profit = $–10
Firm B profit = $–50
Firm B profit = $–10
Refer to Table 17-9. Pursuing its own best interests, Firm A will concede that cigarette smoke causes lung
cancer
a.
only if Firm B concedes that cigarette smoke causes lung cancer.
b.
only if Firm B does not concede that cigarette smoke causes lung cancer.
c.
regardless of whether Firm B concedes that cigarette smoke causes lung cancer.
d.
None of the above. In pursuing its own best interests, Firm A will in no case concede that cigarette
smoke causes lung cancer.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Chapter 15/Monopoly  1318
15.
Refer to Table 17-9. Pursuing its own best interests, Firm B will concede that cigarette smoke causes lung
cancer
a.
only if Firm A concedes that cigarette smoke causes lung cancer.
b.
only if Firm A does not concede that cigarette smoke causes lung cancer.
c.
regardless of whether Firm A concedes that cigarette smoke causes lung cancer.
d.
None of the above; in pursuing its own best interests, Firm B will in no case concede that cigarette
smoke causes lung cancer.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
16.
a.
$-50
b.
$-20
c.
$-10
d.
$-5
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Refer to Table 17-9. If both firms follow a dominant strategy, Firm B's profits (losses) will be
a.
$-50
b.
$-15
c.
$-10
d.
$-5
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
18.
Applicative
Refer to Table 17-9. If both firms follow a dominant strategy, Firm A's profits (losses) will be
ANS:
17.
MSC:
MSC:
Applicative
Refer to Table 17-9. When this game reaches a Nash equilibrium, profits for Firm A and Firm B will be
a.
$-5 and $-50, respectively.
b.
$-10 and $-10, respectively.
c.
$-20 and $-15, respectively.
d.
$-50 and $-5, respectively.
Chapter 15/Monopoly  1319
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
Table 17-10
Each year the United States considers renewal of Most Favored Nation (MFN) trading status with Farland (a
mythical nation). Historically, legislators have made threats of not renewing MFN status because of human rights
abuses in Farland. The non-renewal of MFN trading status is likely to involve some retaliatory measures by Farland.
The payoff table below shows the potential economic gains associated with a game in which Farland may impose
trade sanctions against U.S. firms and the United States may not renew MFN status with Farland. The table contains
the dollar value of all trade-flow benefits to the United States and Farland.
Farland
Impose trade sanctions
Do not impose trade sanctions
against U.S. firms
against U.S. firms
Don't renew MFN
U.S. trade value = $65 b
U.S. trade value = $140 b
United
status with Farland
Farland trade value = $75 b
Farland trade value = $5 b
States
Renew MFN status
U.S. trade value = $35 b
U.S. trade value = $130 b
with Farland
Farland trade value = $285 b
Farland trade value = $275 b
19.
Refer to Table 17-10. Pursuing its own best interests, Farland will impose trade sanctions against U.S. firms
a.
only if the U.S. does not renew MFN status with Farland.
b.
only if the U.S. renews MFN status with Farland.
c.
regardless of whether the U.S. renews MFN status with Farland.
d.
None of the above is correct. In pursuing its own best interests, Farland will in no case impose
trade sanctions against U.S. firms.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Chapter 15/Monopoly  1320
20.
Refer to Table 17-10. Pursuing its own best interests, the U.S. will renew MFN status with Farland
a.
only if Farland does not impose trade sanctions against U.S. firms.
b.
only if Farland imposes trade sanctions against U.S. firms.
c.
regardless of whether Farland imposes trade sanctions against U.S. firms.
d.
None of the above is correct. In pursuing its own best interests, the United States will in no case
renew MFN status with Farland.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
21.
MSC:
Applicative
Refer to Table 17-10. This particular game
a.
features a dominant strategy for the U.S.
b.
features a dominant strategy for Farland.
c.
is a version of the prisoners' dilemma game.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma | Dominant strategy
MSC:
Applicative
22.
Refer to Table 17-10. If both countries follow a dominant strategy, the value of trade flow benefits for Farland
will be
a.
$5 b.
b.
$75 b.
c.
$275 b.
d.
$285 b.
ANS:
B
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Applicative
Chapter 15/Monopoly  1321
23.
Refer to Table 17-10. If both countries follow a dominant strategy, the value of trade flow benefits for the
United States will be
a.
$35 b.
b.
$65 b.
c.
$130 b.
d.
$140 b.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Applicative
24.
Refer to Table 17-10. When this game reaches a Nash equilibrium, the value of trade flow benefits will be
a.
United States $35 b and Farland $285 b.
b.
United States $65 b and Farland $75 b.
c.
United States $140 b and Farland $5 b.
d.
United States $130 b and Farland $275 b.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
25.
Refer to Table 17-10. If trade negotiators are able to communicate effectively about the consequences of
various trade policies (i.e., enter into an agreement about the policy they should adopt), then we would
expect the countries to agree to which outcome?
a.
United States $35 b and Farland $285 b
b.
United States $65 b and Farland $75 b
c.
United States $140 b and Farland $5 b
d.
United States $130 b and Farland $275 b
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Applicative
Chapter 15/Monopoly  1322
26.
Refer to Table 17-10. Assume that trade negotiators meet to discuss trade policy between the United States
and Farland. If neither party to the negotiation is able to trust the other party, then
a.
each should assume that the other will choose a strategy that optimizes total value of the trade
relationship.
b.
the Nash equilibrium will provide the largest possible gains to each party.
c.
Chinese negotiators should assume that United States negotiators will implement a policy that is in
the mutual best interest of both countries.
d.
each should follow its dominant strategy.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Applicative
Table 17-11
Two home-improvement stores (Big Box Deluxe and Homes R Us) in a growing urban area are interested in
expanding their market share. Both are interested in expanding the size of their store and parking lot to
accommodate potential growth in their customer base. The following game depicts the strategic outcomes that
result from the game. Increases in annual profits of the two home-improvement stores are shown in the table
below.
Big Box Deluxe
Increase the size
of store and
Homes
parking lot
R Us
Do not increase
the size of store
and parking lot
Increase the size of store
Do not increase the size of
and parking lot
store and parking lot
Big Box Deluxe = $0.50 million
Big Box Deluxe = $0.20 million
Homes R Us = $0.75 million
Homes R Us = $1.70 million
Big Box Deluxe = $1.60 million
Big Box Deluxe = $1.00 million
Homes R Us = $0.30 million
Homes R Us = $1.25 million
Chapter 15/Monopoly  1323
27.
Refer to Table 17-11. Increasing the size of its store and parking lot is a dominant strategy for
a.
Big Box Deluxe, but not for Homes R Us.
b.
Homes R Us, but not for Big Box Deluxe.
c.
both stores.
d.
neither store.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
28.
Refer to Table 17-11. If both stores follow a dominant strategy, Homes R Us's annual profit will grow by
a.
$0.30 million.
b.
$0.75 million.
c.
$1.25 million.
d.
$1.70 million.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
29.
Refer to Table 17-11. If both stores follow a dominant strategy, Big Box Deluxe's annual profit will grow by
a.
$0.20 million.
b.
$0.50 million.
c.
$1.00 million.
d.
$1.60 million.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
Chapter 15/Monopoly  1324
30.
Refer to Table 17-11. When this game reaches a Nash equilibrium, annual profit will grow by
a.
$0.75 million for Homes R Us and by $0.50 million for Big Box Deluxe.
b.
$1.70 million for Homes R Us and by $0.20 million for Big Box Deluxe.
c.
$0.30 million for Homes R Us and by $1.60 million for Big Box Deluxe.
d.
$1.25 million for Homes R Us and by $1.00 million for Big Box Deluxe.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
31.
Refer to Table 17-11. Suppose the owners of Big Box Deluxe and Homes R Us meet for a friendly game of golf
one afternoon and happen to discuss a strategy to optimize growth related profit. They should both agree to
a.
increase their store and parking lot sizes.
b.
refrain from increasing their store and parking lot sizes.
c.
be more competitive in capturing market share.
d.
share the context of their conversation with the Federal Trade Commission.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Applicative
Chapter 15/Monopoly  1325
Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of
output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.
ABC's Decision
High output
Low output
ABC's profit = $3 million
ABC's profit = $2.5 million
High output
XYZ's
Decision
XYZ's profit = $3 million
XYZ's profit = $4 million
ABC's profit = $4 million
ABC's profit = $3.5 million
Low output
XYZ's profit = $2.5 million
32.
XYZ's profit = $3.5 million
Refer to Figure 17-1. The dominant strategy for ABC is to
a.
produce high output, and the dominant strategy for XYZ is to produce high output.
b.
produce high output, and the dominant strategy for XYZ is to produce low output.
c.
produce low output, and the dominant strategy for XYZ is to produce high output.
d.
produce low output, and the dominant strategy for XYZ is to produce low output.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
33.
Refer to Figure 17-1. Which of the following statements is correct?
a.
ABC can potentially earn its highest possible profit if it produces a high level of output, and for that
reason it is a dominant strategy for ABC to produce a high level of output.
b.
The highest possible combined profit for the two firms occurs when both produce a low level of
output, and for that reason producing a low level of output is a dominant strategy for both firms.
c.
Regardless of the strategy pursued by ABC, XYZ’s best strategy is to produce a high level of output,
and for that reason producing a high level of output is a dominant strategy for XYZ.
d.
Our knowledge of game theory suggests that the most likely outcome of the game, if it is played
only once, is for one firm to produce a low level of output and for the other firm to produce a high
level of output.
Chapter 15/Monopoly  1326
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
34.
Refer to Figure 17-1. If this game is played only once, then the most likely outcome is that
a.
both firms produce a low level of output.
b.
ABC produces a low level of output and XYZ produces a high level of output.
c.
ABC produces a high level of output and XYZ produces a low level of output.
d.
both firms produce a high level of output.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
35.
Applicative
Much of the research on game theory in recent decades was driven by attempts to analyze actions of players
during
a.
the Great Depression of the 1930s.
b.
World War II.
c.
the Cold War between the United States and the Soviet Union.
d.
the ascendancy of the conservative movement in the United States in the 1970s and 1980s.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
36.
MSC:
MSC:
Interpretive
Consider a game of the “Jack and Jill” type in which a market is a duopoly and each firm decides to produce
either a “high” quantity of output or a “low” quantity of output. If the two firms successfully reach and
maintain the cooperative outcome of the game, then
a.
both the combined profit of the firms and total surplus are maximized.
b.
the combined profit of the firms is maximized but total surplus is not maximized.
c.
the combined profit of the firms is not maximized but total surplus is maximized.
d.
neither the combined profit of the firms nor total surplus is maximized.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
Chapter 15/Monopoly  1327
37.
Games that are played more than once generally
a.
lead to outcomes dominated purely by self-interest.
b.
lead to outcomes that do not reflect joint rationality.
c.
encourage cheating on cartel production quotas.
d.
make collusive arrangements easier to enforce.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
38.
MSC:
Very often, the reason that players can solve the prisoners' dilemma and reach the most profitable outcome
is that
a.
each player tries to capture a large portion of the market share.
b.
the players play the game not once but many times.
c.
the game becomes more competitive.
d.
self interest results in the Nash equilibrium which is the best outcome for the players.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
39.
Interpretive
In a two-person repeated game, a tit-for-tat strategy starts with
a.
cooperation and then each player mimics the other player's last move.
b.
cooperation and then each player is unresponsive to the strategic moves of the other player.
c.
noncooperation and then each player pursues his or her own self-interest.
d.
noncooperation and then each player cooperates when the other player demonstrates a desire for
the cooperative solution.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
Chapter 15/Monopoly  1328
40.
A tit-for-tat strategy starts out
a.
conciliatory and then encourages an optimal social outcome among the other players.
b.
unfriendly and then encourages friendly strategies among players.
c.
friendly, then penalizes unfriendly players, and forgives them if warranted.
d.
aggressive, then compensates losing players, and eventually forgives unfriendly players.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
41.
Individual profit earned by Dave, the oligopolist, depends on which of the following?
(i)
The quantity of output that Dave produces
(ii)
The quantities of output that the other firms in the market produce
(iii)
The extent of collusion between Dave and the other firms in the market
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(iii) only
d.
(i), (ii), and (iii)
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
42.
MSC:
Which of the following statements is (are) true of the prisoners' dilemma?
(i)
Rational self-interest leads neither party to confess.
(ii)
Cooperation between the prisoners is difficult to maintain.
(iii)
Cooperation between the prisoners is individually rational.
a.
(ii) only
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
Interpretive
Chapter 15/Monopoly  1329
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
43.
When the prisoners’ dilemma game is generalized to describe situations other than those that literally involve
two prisoners, we see that cooperation between the players of the game
a.
can be difficult to maintain, but only when cooperation would make at least one of the players of
the game worse off.
b.
can be difficult to maintain, even when cooperation would make both players of the game better
off.
c.
always works to the benefit of society as a whole.
d.
always works to the detriment of society as a whole.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
Scenario 17-2. Imagine that two oil companies, Lexxon and PB, own adjacent oil fields. Under the fields is a
common pool of oil worth $48 million. Drilling a well to recover oil costs $4 million per well. If each company drills
one well, each will get half of the oil and earn a $20 million profit ($24 million in revenue - $4 million in costs).
Assume that having X percent of the total wells means that a company will collect X percent of the total revenue.
44.
Refer to Scenario 17-2. If Lexxon were to drill a second well, what would its profit be if PB did not drill a
second well?
a.
$22 million
b.
$24 million
c.
$26 million
d.
$28 million
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma | Common resources
MSC:
Applicative
Chapter 15/Monopoly  1330
45.
Refer to Scenario 17-2. If Lexxon were to drill a second well and PB also drilled a second well, what would
Lexxon's profit be?
a.
$14 million
b.
$16 million
c.
$18 million
d.
$22 million
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma | Common resources
MSC:
Applicative
46.
Refer to Scenario 17-2. PB's dominant strategy would lead to what sort of well-drilling behavior?
a.
PB will never drill a second well.
b.
PB will always drill a second well.
c.
PB will drill a second well only if Lexxon drills a well.
d.
PB will drill a second well only if Lexxon does not drill a well.
ANS:
B
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma | Common resources
MSC:
Applicative
47.
Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth $30
million. For each well that is drilled, the company that drills the well incurs a cost of $3 million. Each
company can drill up to two wells. What is the likely outcome of this game if each company pursues its own
self-interest?
a.
Each company drills one well and experiences a profit of $12 million.
b.
Each company drills one well and experiences a profit of $10 million.
c.
Each company drills two wells and experiences a profit of $9 million.
d.
One company drills two wells and experiences a profit of $14 million; the other company drills one
well and experiences a profit of $7 million.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Common resources | Prisoners' dilemma
MSC:
Applicative
Chapter 15/Monopoly  1331
48.
We know that people tend to overuse common resources. This problem can be viewed as an example of
a.
a game in which the players succeed in reaching the cooperative outcome.
b.
the prisoners’ dilemma.
c.
a situation to which game theory does not apply because of a lack of strategic thinking.
d.
a situation to which game theory does not apply because of too many decision-makers.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Common resources | Prisoners' dilemma
MSC:
Applicative
49.
The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the monopoly
outcome is best for the oligopolists,
a.
they collude to set the output level equal to the Nash equilibrium level of output.
b.
they have incentives to increase production above the monopoly outcome.
c.
they do not behave as profit maximizers.
d.
self-interest juxtaposes the profits earned at the Nash equilibrium.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
50.
MSC:
Interpretive
Hot-dog vendors on the beach fail to cooperate with one another on the quantity of hot-dogs they should sell
to earn monopoly profits. A consequence of their failure is that, relative to the outcome the vendors would
like,
(i)
the quantity of hot dogs supplied is closer to the socially optimal level.
(ii)
the price of hot dogs is closer to marginal cost.
(iii)
the hot-dog market at the beach is less competitive.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(iii) only
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Collusion
MSC:
Analytical
Chapter 15/Monopoly  1332
51.
Why would lack of cooperation between criminal suspects be desirable for society as a whole?
a.
The suspects are able to choose optimal outcomes for themselves by acting in their own self
interest.
b.
The prisoners' dilemma safeguards the criminals' constitutional rights.
c.
More criminals will be convicted.
d.
None of the above is correct.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
52.
What happens when the prisoners' dilemma game is repeated numerous times in an oligopoly market?
(i)
The firms may well reach the monopoly outcome.
(ii)
The firms may well reach the competitive outcome.
(iii)
Buyers of the oligopolists' product will likely be worse off as a result.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
53.
In game theory, a Nash equilibrium is
a.
an outcome in which each player is doing his best given the strategies chosen by the other players.
b.
an outcome in which no player wishes to change their chosen strategy given the strategies chosen
by the other players.
c.
the outcome that occurs when all players have a dominant strategy.
d.
All of the above are correct.
Chapter 15/Monopoly  1333
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Interpretive
Scenario 17-3. Consider two countries, Muria and Zenya, that are engaged in an arms race. Each country must
decide whether to build new weapons or to disarm existing weapons. Each country prefers to have more arms than
the other because a large arsenal gives it more influence in world affairs. But each country also prefers to live in a
world safe from the other country's weapons. The following table shows the possible outcomes for each decision
combination. The numbers in each cell represent the country’s ranking of the outcome (4 = best outcome, 1 =
worst outcome).
Zenya
Build new weapons
Disarm existing weapons
Build new
weapons
Muria: 2
Muria: 4
Zenya: 2
Zenya: 1
Disarm existing
weapons
Muria: 1
Muria: 3
Zenya: 4
Zenya: 3
Muria
54.
Refer to Scenario 17-3. If Zenya chooses to build new weapons, then Muria will
a.
disarm in order to prevent the loss of influence in world affairs.
b.
disarm in order to promote world peace.
c.
build new weapons in order to prevent the loss of influence in world affairs.
d.
None of the above are correct.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
55.
MSC:
Applicative
Refer to Scenario 17-3. If Zenya chooses to disarm its existing weapons, then Muria will
a.
disarm in order to increase its influence in world affairs.
b.
disarm in order to promote world peace.
c.
build new weapons in order to promote world peace.
d.
build new weapons in order to increase its influence in world affairs.
Chapter 15/Monopoly  1334
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
56.
MSC:
Applicative
Refer to Scenario 17-3. Which of these statements is correct?
(i)
Muria is better off building new weapons if Zenya builds new weapons.
(ii)
Muria is better off building new weapons if Zenya disarms existing weapons.
(iii)
Building new weapons is Muria's dominant strategy.
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
57.
MSC:
Refer to Scenario 17-3. Building new weapons is a dominant strategy for
a.
Muria, but not for Zenya.
b.
Zenya, but not for Muria.
c.
both Muria and Zenya.
d.
neither Muria nor Zenya.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
58.
Applicative
Refer to Scenario 17-3. Suppose the two countries agreed to disarm existing weapons. In reality these two
countries may have a hard time keeping this agreement due to which of the following reasons?
(i)
Even though Muria has no incentive to cheat on the agreement, Zenya has an incentive to
cheat on the agreement.
(ii)
Much like the prisoners’ dilemma, both countries are better off reneging on the agreement
and building new weapons.
(iii)
Both countries want to increase their world power by building new weapons.
Chapter 15/Monopoly  1335
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Applicative
Scenario 17-4. Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two
companies split the market and earn $50 million each. If they both advertise, they again split the market, but
profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company
advertises while the other does not, the one that advertises attracts customers from the other. In this case, the
company that advertises earns $60 million while the company that does not advertise earns only $30 million.
59.
Refer to Scenario 17-4. What will these two companies do if they behave as individual profit maximizers?
a.
Neither company will advertise.
b.
Both companies will advertise.
c.
One company will advertise, the other will not.
d.
There is no way of knowing without knowing how many customers are stolen through advertising.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Applicative
60.
Refer to Scenario 17-4. PM Inc.'s dominant strategy is to
a.
refrain from advertising regardless of whether Brown Inc. advertises.
b.
advertise only if Brown Inc. advertises.
c.
advertise only if Brown Inc. does not advertise.
d.
advertise regardless of whether Brown Inc. advertises.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
Chapter 15/Monopoly  1336
61.
Refer to Scenario 17-4. In 1971, Congress passed a law that banned cigarette advertising on television. If
cigarette companies are profit maximizers, it is likely that
a.
neither company opposed the ban on advertising.
b.
Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights violation.
c.
both companies sued the federal government on grounds that the ban constitutes a civil rights
violation.
d.
both companies retaliated with black-market operations.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Applicative
62.
Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and
finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the
following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and
released while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If
neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for
possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should he/she do?
a.
Confess regardless of the partner's decision
b.
Confess only if the partner confesses
c.
Don’t confess regardless of the partner's decision
d.
Don’t confess only if the partner doesn’t confess
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
63.
A lack of cooperation by oligopolists trying to maintain monopoly profits
a.
is desirable for society as a whole.
b.
is not desirable for society as a whole.
c.
may or may not be desirable for society as a whole.
d.
is not a concern due to antitrust laws.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Collusion
MSC:
Interpretive
Chapter 15/Monopoly  1337
64.
Oligopolists may well be able to reach their preferred, cooperative outcome if
a.
the number of oligopolists is large.
b.
they learn that a Nash equilibrium is in their best long-term interests.
c.
a sufficient number of firms can be persuaded to lower their prices.
d.
the game they play is repeated a sufficient number of times.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
65.
Martha and Oleg are competitors in a local market and each is trying to decide if it is worthwhile to advertise.
If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit
of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $15,000
and the other will earn $7,000. To earn the highest profit, Martha
a.
should advertise, and she will earn $5,000.
b.
should advertise, and she will earn $15,000.
c.
should not advertise, and she will earn $10,000.
d.
has no dominant strategy.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
66.
Barb and Sue are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on
radio, or not at all. If they both advertise on TV, each will earn a profit of $5,000. If they both advertise on
radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one
advertises on TV and other advertises on radio, then the one advertising on TV will earn $8,000 and the other
will earn $3,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will
earn $15,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise,
then the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their
dominant strategy, then Barb will
a.
advertise on TV and earn $5,000.
b.
advertise on radio and earn $7,000.
c.
not advertise at all and earn $10,000.
d.
None of the above is correct. Barb and Sue do not have dominant strategies.
Chapter 15/Monopoly  1338
ANS:
A
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
67.
Dave and Andy are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on
radio, or not at all. If they both advertise on TV, each will earn a profit of $4,000. If they both advertise on
radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one
advertises on TV and other advertises on radio, then the one advertising on TV will earn $6,000 and the other
will earn $5,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will
earn $11,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise,
then the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their
dominant strategy, then Dave will
a.
advertise on TV and earn $4,000.
b.
advertise on radio and earn $7,000.
c.
advertise on TV and earn $11,000.
d.
not advertise and earn $10,000.
ANS:
B
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
68.
George and Jerry are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on
radio, or not at all. If they both advertise on TV, each will earn a profit of $3,000. If they both advertise on
radio, each will earn a profit of $5,000. If neither advertises at all, each will earn a profit of $10,000. If one
advertises on TV and the other advertises on radio, then the one advertising on TV will earn $4,000 and the
other will earn $2,000. If one advertises on TV and the other does not advertise, then the one advertising on
TV will earn $8,000 and the other will earn $5,000. If one advertises on radio and the other does not
advertise, then the one advertising on radio will earn $9,000 and the other will earn $6,000. If both follow
their dominant strategy, then George will
a.
advertise on TV and earn $3,000.
b.
advertise on radio and earn $5,000.
c.
advertise on TV and earn $8,000.
d.
not advertise and earn $10,000.
ANS:
D
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
Chapter 15/Monopoly  1339
69.
Laurel and Janet are competitors in a local market and each is trying to decide if it is worthwhile to advertise.
If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit
of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $12,000
and the other will earn $2,000. In this version of the prisoners' dilemma, if the game is played only once,
Laurel should
a.
advertise, but if the game is to be repeated many times she should probably not advertise.
b.
advertise, and if the game is to be repeated many times she should still probably advertise.
c.
not advertise, but if the game is to be repeated many times she should probably advertise.
d.
not advertise, and if the game is to be repeated many times she should still not advertise.
ANS:
A
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Applicative
Table 17-12. This table shows a game played between two players, A and B. The payoffs in the table are shown as
(Payoff to A, Payoff to B).
B
A
70.
Right
Lef
Up
(2, 2)
(3, 1)
Down
(1, 3)
(0, 0)
Refer to Table 17-12. Which of the following statements about this game is true?
a.
Up is a dominant strategy for A and Right is a dominant strategy for B.
b.
Up is a dominant strategy for A and Left is a dominant strategy for B.
c.
Down is a dominant strategy for A and Right is a dominant strategy for B.
d.
Down is a dominant strategy for A and Left is a dominant strategy for B.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Chapter 15/Monopoly  1340
71.
Refer to Table 17-12. Which outcome is the Nash equilibrium in this game?
a.
Up-Right
b.
Up-Left
c.
Down-Right
d.
Down-Left
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Table 17-13. This table shows a game played between two players, A and B. The payoffs in the table are shown as
(Payoff to A, Payoff to B).
B
A
72.
Lef
Center
Right
Up
(1, 4)
(6, 2)
(3, 1)
Middle
(2, 2)
(4, 6)
(5, 7)
Down
(3, 2)
(5, 5)
(4, 3)
Refer to Table 17-13. Which of the following statements regarding this game is true?
a.
Both players have a dominant strategy.
b.
Player A has a dominant strategy, but player B does not have a dominant strategy.
c.
Player A does not have a dominant strategy, but player B does have a dominant strategy.
d.
Neither player has a dominant strategy.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
73.
MSC:
Applicative
Refer to Table 17-13. Which of the following outcomes represents a Nash equilibrium in the game?
a.
Up-Center
b.
Middle-Right
c.
Down-Left
d.
Down-Center
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Chapter 15/Monopoly  1341
Table 17-14. This table shows a game played between two players, A and B. The payoffs are given in the table as
(Payoff to A, Payoff to B).
B
A
74.
Lef
Center
Right
Up
(4, 2)
(2, 5)
(3, 3)
Middle
(3, 1)
(5, 3)
(5, 2)
Down
(1, 3)
(4, 4)
(6, 1)
Refer to Table 17-14. Which of the following statements is true regarding this game?
a.
Both players have a dominant strategy.
b.
Neither player has a dominant strategy.
c.
A has a dominant strategy, but B does not have a dominant strategy.
d.
B has a dominant strategy, but A does not have a dominant strategy.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
75.
MSC:
Applicative
Refer to Table 17-14. This table shows a game played between two players, A and B. The payoffs in the table
are shown as (Payoff to A, Payoff to B). Which of the following outcomes represents a Nash equilibrium in the
game?
a.
Middle-Center
b.
Down-Center
c.
Up-Left
d.
More than one of the above is a Nash equilibrium in this game.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Chapter 15/Monopoly  1342
Table 17-15. This table shows a game played between two firms, Firm A and Firm B. In this game each firm must
decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit
for Firm A, Profit for Firm B).
Firm B
Firm A
76.
Q=2
Q=3
Q=2
(10, 10)
(8, 12)
Q=3
(12, 8)
(6, 6)
Refer to Table 17-15. In this game,
a.
neither player has a dominant strategy.
b.
both players have a dominant strategy.
c.
Firm A has a dominant strategy, but Firm B does not have a dominant strategy.
d.
Firm B has a dominant strategy, but Firm A does not have a dominant strategy.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
77.
Refer to Table 17-15. Which of the following outcomes represent the Nash equilibrium in this game?
a.
Q=2 for Firm A and Q=3 for Firm B.
b.
Q=3 for Firm A and Q=2 for Firm B.
c.
There is no Nash equilibrium in this game since neither player has a dominant strategy.
d.
Both a and b are correct.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Nash equilibrium
MSC:
Applicative
Chapter 15/Monopoly  1343
Table 17-16. This table shows a game played between two firms, Firm A and Firm B. In this game each firm must
decide how much output (Q) to produce: 5 units or 6 units. The profit for each firm is given in the table as (Profit
for Firm A, Profit for Firm B).
Firm B
Firm A
78.
Q=5
Q=6
Q=5
(24, 24)
(10, 30)
Q=6
(30, 10)
(19, 19)
Refer to Table 17-16. The dominant strategy For Firm A is to produce
a.
5 units and the dominant strategy for Firm B is to produce 5 units.
b.
5 units and the dominant strategy for Firm B is to produce 6 units.
c.
6 units and the dominant strategy for Firm B is to produce 5 units.
d.
6 units and the dominant strategy for Firm B is to produce 6 units.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma | Dominant strategy
MSC:
Applicative
79.
Refer to Table 17-16. The Nash equilibrium for this game is
a.
5 units of output for Firm A and 5 units of output for Firm B.
b.
5 units of output for Firm A and 6 units of output for Firm B.
c.
6 units of output for Firm A and 5 units of output for Firm B.
d.
6 units of output for Firm A and 6 units of output for Firm B.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma | Nash equilibrium
MSC:
Applicative
Chapter 15/Monopoly  1344
80.
The prisoners' dilemma game
a.
is a situation in which two players both have dominant strategies which lead to the highest total
payoff for the two players.
b.
has no Nash equilibrium since players, after agreeing to play their dominant strategy, will have an
incentive to switch to another strategy.
c.
has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would
agree to if they could cooperate with each other.
d.
Both a and c are correct.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
81.
In a prisoners' dilemma game,
a.
the solution when playing the game once will be the same as the solution when the players play
the game repeatedly, since agreements cannot be maintained in a prisoners' dilemma.
b.
if the players play the game repeatedly, the players can achieve a higher payoff, on average, than
when they play the game only once.
c.
repeated play will always result in a better outcome for both players than when the game is played
only once.
d.
the tit-for-tat strategy in repeated play requires players to always select the opposite strategy as
their opponent.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
Table 17-17. Consider a small town that has two grocery stores from which residents can choose to buy a gallon of
milk. The store owners each must make a decision to set a high milk price or a low milk price. The payoff table,
showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2).
Store 2
Store 1
Low Price
High Price
Low Price
(500, 500)
(800, 100)
High Price
(100, 800)
(650, 650)
Chapter 15/Monopoly  1345
82.
Refer to Table 17-17. If grocery store 2 sets a low price, what price should grocery store 1 set? And what will
grocery store 1's payoff equal?
a.
Low price, $500
b.
High price, $800
c.
Low price, $100
d.
High price, $100
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
83.
a.
Low price, $800
b.
High price, $650
c.
Low price, $100
d.
High price, $800
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Refer to Table 17-17. If grocery store 1 sets a low price, what price should grocery store 2 set? And what will
grocery store 2's payoff equal?
a.
Low price, $500
b.
High price, $800
c.
Low price, $100
d.
High price, $650
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
85.
Applicative
Refer to Table 17-17. If grocery store 2 sets a high price, what price should grocery store 1 set? And what will
grocery store 1's payoff equal?
ANS:
84.
MSC:
MSC:
Applicative
Refer to Table 17-17. If grocery store 1 sets a high price, what price should grocery store 2 set? And what will
grocery store 2's payoff equal?
a.
Low price, $800
b.
High price, $100
c.
Low price, $500
d.
High price, $650
Chapter 15/Monopoly  1346
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
86.
MSC:
Refer to Table 17-17. What is grocery store 1's dominant strategy?
a.
Grocery store 1 does not have a dominant strategy.
b.
Grocery store 1 should always set a low price.
c.
Grocery store 1 should always set a high price.
d.
Grocery store 1 should set a low price when grocery store 2 sets a low price, and grocery store 1
should set a high price when grocery store 2 sets a high price.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
87.
Refer to Table 17-17. What is grocery store 2's dominant strategy?
a.
Grocery store 2 does not have a dominant strategy.
b.
Grocery store 2 should always set a low price.
c.
Grocery store 2 should always set a high price.
d.
Grocery store 2 should set a low price when grocery store 1 sets a low price, and grocery store 2
should set a high price when grocery store 1 sets a high price.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
88.
Applicative
Refer to Table 17-17. What is the Nash Equilibrium of this price-setting game?
a.
Grocery store 1: Low price
Grocery store 2: Low price
b.
Grocery store 1: Low price
Grocery store 2: High price
c.
Grocery store 1: High price
Grocery store 2: How price
d.
Grocery store 1: High price
Grocery store 2: High price
Chapter 15/Monopoly  1347
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
Table 17-18. Amy and Heather are two college roommates who both prefer a clean common space in their dorm
room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the
dorm room's common space. The payoff table for this situation is provided below, where the higher a player’s
payoff number, the better off that player is. The payoffs in each cell are shown as (payoff for Amy, payoff for
Heather).
Heather
Amy
89.
Clean
Don’t Clean
Clean
(75, 75)
(15, 100)
Don’t Clean
(100, 15)
(20, 20)
Refer to Table 17-18. If Heather chooses to clean, then Amy will
a.
clean and Heather’s payoff will be 75.
b.
not clean and Heather’s payoff will be 100.
c.
clean and Heather’s payoff will be 15.
d.
not clean and Heather’s payoff will be 20.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
90.
MSC:
Applicative
Refer to Table 17-18. If Heather chooses not to clean, then Amy will
a.
clean, and Amy’s payoff will be 100.
b.
not clean, and Amy’s payoff will be 20.
c.
clean, and Amy’s payoff will be 15.
d.
not clean, and Amy’s payoff will be 75.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Chapter 15/Monopoly  1348
91.
Refer to Table 17-18. If Amy chooses to clean, then Heather will
a.
clean, and Heather’s payoff will be 75.
b.
not clean, and Heather’s payoff will be 100.
c.
clean, and Heather’s payoff will be 15.
d.
not clean, and Heather’s payoff will be 20.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
92.
a.
clean, and Heather’s payoff will be 20.
b.
not clean, and Heather’s payoff will be 100.
c.
clean, and Heather’s payoff will be 75.
d.
not clean, and Heather’s payoff will be 20.
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Refer to Table 17-18. What is Amy's dominant strategy?
a.
Amy has no dominant strategy.
b.
Amy should always choose Clean.
c.
Amy should always choose Don’t Clean.
d.
Amy has two dominant strategies, Clean and Don’t Clean, depending on the choice Heather
makes.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
94.
Applicative
Refer to Table 17-18. If Amy chooses to not clean, then Heather will
ANS:
93.
MSC:
Refer to Table 17-18. What is Heather's dominant strategy?
a.
Heather has no dominant strategy.
b.
Heather should always choose Clean.
c.
Heather should always choose Don’t Clean.
d.
Heather has two dominant strategies, Clean and Don’t Clean, depending on the choice Amy
makes.
Chapter 15/Monopoly  1349
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
95.
Refer to Table 17-18. What is the Nash Equilibrium in this dorm room cleaning game?
a.
Amy: Clean
Heather: Clean
b.
Amy: Don't Clean
Heather: Clean
c.
Amy: Clean
Heather: Don't Clean
d.
Amy: Don't Clean
Heather: Don't Clean
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
Chapter 15/Monopoly  1350
Figure 17-2. John and Michael are roommates. On a particular day, their apartment needs to be cleaned. Each
person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be
completely clean (if one or both roommates take part in cleaning), or it will remain dirty (if neither roommate
cleans). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as
follows:
John's Decision
Clean
Don't clean
John's happiness = 7
John's happiness = 10
Clean
Michael's
Decision
M ichael's happiness = 8
M ichael's happiness = 3
John's happiness = 3
John's happiness = 6
Don't clean
M ichael's happiness = 10
96.
M ichael's happiness = 4
Refer to Figure 17-2. The dominant strategy for John is to
a.
clean, and the dominant strategy for Michael is to clean.
b.
clean, and the dominant strategy for Michael is to refrain from cleaning.
c.
refrain from cleaning, and the dominant strategy for Michael is to clean.
d.
refrain from cleaning, and the dominant strategy for Michael is to refrain from cleaning.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
97.
Refer to Figure 17-2. In pursuing his own self-interest, Michael will
a.
refrain from cleaning whether or not John cleans.
b.
clean only if John cleans.
c.
clean only if John refrains from cleaning.
d.
clean whether or not John cleans.
Chapter 15/Monopoly  1351
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
98.
Refer to Figure 17-2. If this game is played only once, then the most likely outcome is that
a.
John and Michael both clean.
b.
John cleans and Michael does not clean.
c.
Michael cleans and John does not clean.
d.
neither John nor Michael cleans.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
99.
MSC:
Applicative
Refer to Figure 17-2. In pursuing his own self-interest, John will
a.
refrain from cleaning whether or not Michael cleans.
b.
clean only if Michael cleans.
c.
clean only if Michael refrains from cleaning.
d.
clean whether or not Michael cleans.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
100. Refer to Figure 17-2. The possible outcome in which both John and Michael clean is analogous to which of
the following outcomes of the duopoly game?
a.
The duopolists collude to achieve the monopoly outcome.
b.
The duopolists collude to achieve the monopolistically-competitive outcome.
c.
The outcome is the one that is most preferable for consumers of the duopolists’ product.
d.
The outcome is the one that is least preferable for both the duopolists and for the consumers of
their product.
ANS:
A
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Chapter 15/Monopoly  1352
Figure 17-3. Katie and Taylor are roommates. On a particular day, their lawn needs to be mowed. Each person has
to decide whether to take part in mowing the lawn. At the end of the day, either the lawn will be mowed (if one or
both roommates take part in mowing), or it will remain unmowed (if neither roommate mows). With happiness
measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows:
Katie's Decision
Mow
Don't mow
Katie's happiness = 7
Katie's happiness = 10
Mow
Taylor's happiness = 7
Taylor's
Decision
Taylor's happiness = 2
Katie's happiness = 5
Katie's happiness = 4
Don't mow
Taylor's happiness = 8
Taylor's happiness = 4
101. Refer to Figure 17-3. The dominant strategy for Taylor is to
a.
mow, and the dominant strategy for Katie is to mow.
b.
mow, and the dominant strategy for Katie is to refrain from mowing.
c.
refrain from mowing, and the dominant strategy for Katie is to mow.
d.
refrain from mowing, and there is no dominant strategy for Katie.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
102. Refer to Figure 17-3. If this game is played only once, then which of the following outcomes is the most likely
one?
a.
Katie and Taylor both mow.
b.
Katie mows and Taylor does not mow.
c.
Taylor mows and Katie does not mow.
d.
All of the above outcomes are equally likely.
Chapter 15/Monopoly  1353
ANS:
B
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
103. Refer to Figure 17-3. In pursuing her own self-interest, Taylor will
a.
refrain from mowing whether or not Katie mows.
b.
mow only if Katie mows.
c.
mow only if Katie refrains from mowing.
d.
mow whether or not Katie mows.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
104. Refer to Figure 17-3. In pursuing her own self-interest, Katie will
a.
refrain from mowing whether or not Taylor mows.
b.
mow only if Taylor mows.
c.
mow only if Taylor refrains from mowing.
d.
mow whether or not Taylor mows.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Dominant strategy
MSC:
Applicative
Table 17-19. The Chicken Game is named for a contest in which drivers test their courage by driving straight at
each other. John and Paul have a common interest to avoid crashing into each other, but they also have a personal,
competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table
for this situation is provided below. The payoffs are shown as (John, Paul).
Paul
John
Turn
Drive Straight
Turn
(10, 10)
(5, 20)
Drive Straight
(20, 5)
(0, 0)
Chapter 15/Monopoly  1354
105. Refer to Table 17-19. If Paul chooses Turn, what will John choose to do and what will John’s payoff equal?
a.
Turn, 10
b.
Drive Straight, 20
c.
Turn, 5
d.
Drive Straight, 0
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
106. Refer to Table 17-19. If Paul chooses Drive Straight, what will John choose to do and what will John’s payoff
equal?
a.
Turn, 5
b.
Drive Straight, 0
c.
Turn, 20
d.
Drive Straight, 5
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
107. Refer to Table 17-19. If John chooses Turn, what will Paul choose to do and what will Paul's payoff equal?
a.
Turn, 10
b.
Drive Straight, 20
c.
Turn, 5
d.
Drive Straight, 0
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
108. Refer to Table 17-19. If John chooses Drive Straight, what will Paul choose to do and what will Paul's payoff
equal?
a.
Turn, 5
b.
Drive Straight, 0
c.
Turn, 10
d.
Drive Straight, 200
Chapter 15/Monopoly  1355
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
109. Refer to Table 17-19. What is Paul's dominant strategy?
a.
Paul has no dominant strategy.
b.
Paul should always choose Turn.
c.
Paul should always choose Drive Straight.
d.
Paul has more than one dominant strategy.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
110. Refer to Table 17-19. What is John's dominant strategy?
a.
John has no dominant strategy.
b.
John should always choose Turn.
c.
John should always choose Drive Straight.
d.
John has two dominant strategies.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
111. Refer to Table 17-19. How many Nash equilibria are there in this Chicken game?
a.
0
b.
1
c.
2
d.
3
ANS:
C
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
Chapter 15/Monopoly  1356
112. Refer to Table 17-19. What is (are) the Nash equilibrium (equilibria) in this Chicken game?
a.
John: Turn
Paul: Turn
b.
John: Turn
Paul: Drive Straight
c.
John: Drive Straight
Paul: Turn
d.
Both b and c are Nash equilibria
ANS:
D
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
113. In the prisoners’ dilemma,
a.
the prisoners easily collude in order to achieve the best possible payoff for both.
b.
only one player has a dominant strategy.
c.
when each player chooses his dominant strategy the players achieve the best joint outcome.
d.
when each player chooses his dominant strategy the players reach a Nash equilibrium.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Analytical
114. In the game in which two oil companies own adjacent oil fields, the companies will not use the oil efficiently
because
a.
neither company has a dominant strategy in the game.
b.
the companies collude and produce a quantity of oil that is less than the socially-efficient quantity.
c.
the pool from which they recover the oil is a common resource.
d.
the pool from which they recover the oil is not large enough to allow both companies to earn a
positive profit.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Common resources | Prisoners' dilemma
MSC:
Interpretive
Chapter 15/Monopoly  1357
115. An equilibrium occurs in a game when
a.
price equals marginal cost.
b.
quantity supplied equals quantity demanded.
c.
all independent strategies counterbalance all dominant strategies.
d.
all players follow a strategy that they have no incentive to change.
ANS:
D
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Interpretive
116. The players in a two-person game are choosing between Strategy X and Strategy Y. If the second player
chooses Strategy X, the first player's best outcome is to select X. If the second player chooses Strategy Y, the
first player's best outcome is to select X. For the first player, Strategy X is called a
a.
dominant strategy.
b.
collusive strategy.
c.
repeated-trial strategy.
d.
cartel strategy.
ANS:
A
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Dominant strategy
MSC:
Applicative
117. Suppose that two poker players believe that they are superior players to the rest of the people at their table.
Further suppose that the two players make an agreement to concede hands to each other in order to drive
the other players from the game first. Economists would model such behavior as
a.
monopolistic competition.
b.
game theory.
c.
predatory pricing.
d.
a dominant strategy.
ANS:
B
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
Chapter 15/Monopoly  1358
118. After initial success, the OPEC cartel saw the price of oil and the revenues of its members decline due, in part,
to
a.
the low elasticity of demand for oil in the short run.
b.
the large number of buyers from each member nation.
c.
surging demand for oil in the early 1980s.
d.
OPEC members failing to produce their agreed-upon production levels.
ANS:
D
DIF:
1
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
MSC:
Interpretive
Table 17-20. Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price
for repair work and a high price. The annual economic profit from each strategy is indicated in the table. The profits
are shown as (Matt, Brian) in each cell.
Brian
Matt
Low Price
High Price
Low Price
(1500, 1500)
(5000, 200)
High Price
(200, 3000)
(4000, 4000)
119. Refer to Table 17-20. Which of the following statements is correct?
a.
Matt's dominant strategy is to charge a low price.
b.
Brian's dominant strategy is to charge a high price.
c.
The dominant strategy for both Brian and Matt is to charge a low price.
d.
Matt's dominant strategy is to charge a high price.
ANS:
A
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory
MSC:
Applicative
120. Refer to Table 17-20. Which of the following statements is correct if Brian and Matt will play this game only
once?
a.
The Nash equilibrium is the high price.
b.
A Nash equilibrium cannot be established unless Brian and Matt collude.
c.
A Nash equilibrium cannot be established without the players repeating the game.
d.
The Nash equilibrium price is the low price.
Chapter 15/Monopoly  1359
ANS:
D
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Nash equilibrium
MSC:
Applicative
Table 17-21. Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs,
and thus increase their profits, if they reduced their advertising budgets. But in order for the plan to work, each
firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for
the firm’s product, but each firm also believes that if neither firm advertises, the costs savings will outweigh the
lost sales. Listed in the table below are the individual profits for each firm.
Firm A
Breaks the agreement
and advertises
Maintains the agreement and
does not advertise
Breaks the agreement
Firm A profit = $9,000
Firm A profit = $8,000
and advertises
Firm B profit = $4,000
Firm B profit = $6,000
Maintains the agreement
and does not advertise
Firm A profit = $11,000
Firm A profit = $10,000
Firm B profit = $3,500
Firm B profit = $5,000
Firm B
121. Refer to Table 17-21. Suppose that the two firms, A and B, make an agreement to withhold any advertising
for one month in order to lower each firm’s costs and raise each firm’s profits. If the firms reach the Nash
equilibrium,
a.
both firms will choose not to advertise.
b.
firm A will choose not to advertise, but firm B will break the agreement and choose to advertise.
c.
firm B will choose not to advertise, but firm A will break the agreement and choose to advertise.
d.
both firms will break the agreement and choose to advertise.
ANS:
D
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Analytical
Chapter 15/Monopoly  1360
122. Refer to Table 17-21. At the Nash equilibrium, how much profit will Firm A earn?
a.
$8,000 because firm A will maintain the agreement not to advertise, but firm B will break the
agreement and choose to advertise.
b.
$9,000 because each firm will break the agreement and choose to advertise.
c.
$10,000 because each firm will maintain the agreement and choose not to advertise.
d.
$11,000 because firm B will maintain the agreement not to advertise, but firm A will break the
agreement and choose to advertise.
ANS:
B
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Analytical
123. Refer to Table 17-21. At the Nash equilibrium, how much profit will Firm B earn?
a.
$3,500 because firm B will maintain the agreement not to advertise, but firm A will break the
agreement and choose to advertise.
b.
$4,000 because each firm will break the agreement and choose to advertise.
c.
$5,000 because each firm will maintain the agreement and choose not to advertise.
d.
$6,000 because firm A will maintain the agreement not to advertise, but firm B will break the
agreement and choose to advertise.
ANS:
B
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Analytical
124. In which of the following games is it clearly the case that the cooperative outcome of the game is good for
the two players and good for society?
a.
Two guilty criminals have been captured by the police, and each prisoner decides whether to
confess or to remain silent.
b.
Two airlines dominate air travel between City A and City B, and each airline decides whether to
charge a “high” airfare or a “low” airfare.
c.
Two duopoly firms account for all of the production in a market, and each firm decides whether to
produce a “high” amount of output or a “low” amount of output.
d.
Two oil companies own adjacent oil fields over a common pool of oil, and each company decides
whether to drill one well or two wells.
Chapter 15/Monopoly  1361
ANS:
D
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
125. In which of the following games is it clearly the case that the cooperative outcome of the game is good for
the two players and bad for society?
a.
Two oil companies own adjacent oil fields over a common pool of oil, and each company decides
whether to drill one well or two wells.
b.
Two airlines dominate air travel between City A and City B, and each airline decides whether to
charge a “high” airfare or a “low” airfare on flights between those two cities.
c.
Two superpowers decide whether to build new weapons or to disarm.
d.
In all of the above cases, the cooperative outcome of the game is good for the two players and bad
for society
ANS:
B
DIF:
3
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Prisoners' dilemma
MSC:
Interpretive
126. Nobel prize-winner Thomas Schelling
a.
opposed the use of game theory as a means of analyzing strategic situations.
b.
used mathematics to give precise formulations to game theory.
c.
described drug addiction as a “game against oneself.”
d.
had his life portrayed in the movie A Beautiful Mind.
ANS:
C
DIF:
2
REF:
17-2
NAT:
Analytic
LOC:
Oligopoly
TOP:
Game theory | Economists
MSC:
Interpretive
Chapter 15/Monopoly  1362
Sec03 - Oligopoly - Public Policy toward Oligopolies
MULTIPLE CHOICE
1.
From society’s standpoint, cooperation among oligopolists is
a.
desirable, because it leads to less conflict among firms and a wider variety of products for
consumers.
b.
desirable, because it leads to an outcome closer to the competitive outcome than what would be
observed in the absence of cooperation.
c.
undesirable, because it leads to output levels that are too low and prices that are too high.
d.
undesirable, because it leads to output levels that are too high and prices that are too high.
ANS:
C
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cooperation | Oligopoly
MSC:
Interpretive
2.
The Sherman Antitrust Act
a.
was passed to encourage judicial leniency in the review of cooperative agreements.
b.
was concerned with self-interest dominated Nash equilibriums in prisoners' dilemma games.
c.
enhanced the ability to enforce cartel agreements.
d.
restricted the ability of competitors to engage in cooperative agreements.
ANS:
D
DIF:
1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
3.
REF:
17-3
Antitrust
The Sherman Act made cooperative agreements
a.
unenforceable outside of established judicial review processes.
b.
enforceable with proper judicial review.
c.
a criminal conspiracy.
d.
a crime, but did not give direction on possible penalties.
ANS:
C
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
Antitrust
Chapter 15/Monopoly  1363
4.
The Sherman Antitrust Act was passed in
a.
1836.
b.
1890.
c.
1914.
d.
1946.
ANS:
B
DIF:
1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Definitional
5.
REF:
17-3
The Sherman Antitrust Act prohibits price-fixing in the sense that
a.
competing executives cannot even talk about fixing prices.
b.
competing executives can talk about fixing prices, but they cannot take action to fix prices.
c.
a price-fixing agreement can lead to prosecution provided the government can show that the
public was not well-served by the agreement.
d.
None of the above is correct. The Sherman Act did not address the matter of price-fixing.
ANS:
A
DIF:
2
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
6.
Antitrust
REF:
17-3
Antitrust
The Sherman Antitrust Act prohibits executives of competing companies from
a.
fixing prices, but it does not prohibit them from talking about fixing prices.
b.
even talking about fixing prices.
c.
sharing with one another their knowledge of game theory.
d.
failing to stand by agreements that they had made with one another.
ANS:
B
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
Antitrust
Chapter 15/Monopoly  1364
7.
The Sherman Antitrust Act
a.
overturned centuries-old views of English and American judges on agreements among
competitors.
b.
had the effect of discouraging private lawsuits against conspiring oligopolists.
c.
strengthened the Clayton Act.
d.
elevated agreements among conspiring oligopolists from an unenforceable contract to a criminal
conspiracy.
ANS:
D
DIF:
2
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
8.
REF:
17-3
The Clayton Act
a.
preceded the Sherman Act.
b.
replaced the Sherman Act.
c.
strengthened the Sherman Act.
d.
was specifically designed to reduce the ability of cartels to organize.
ANS:
C
DIF:
1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
9.
Antitrust
REF:
17-3
Antitrust
According to the Clayton Act,
a.
lawyers are given an incentive to reduce the number of cases involving cooperative arrangements.
b.
individuals can sue to recover damages from illegal cooperative agreements.
c.
the government was able to incarcerate the CEO of a firm for illegal pricing arrangements.
d.
private lawsuits are discouraged.
ANS:
B
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
Antitrust
Chapter 15/Monopoly  1365
10.
If a person can prove that she was damaged by an illegal arrangement to restrain trade, that person can sue
and recover
a.
the damages she sustained, as provided for in the Sherman Act.
b.
the damages she sustained, as provided for in the Clayton Act.
c.
three times the damages she sustained, as provided for in the Sherman Act.
d.
three times the damages she sustained, as provided for in the Clayton Act.
ANS:
D
DIF:
2
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
11.
REF:
17-3
Antitrust laws in general are used to
a.
prevent oligopolists from acting in ways that make markets less competitive.
b.
encourage oligopolists to pursue cooperative-interest at the expense of self-interest.
c.
encourage frivolous lawsuits among competitive firms.
d.
encourage all firms to cut production levels and cut prices.
ANS:
A
DIF:
1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
12.
Antitrust
REF:
17-3
Antitrust
Economists claim that a resale price maintenance agreement is not anti-competitive because
a.
suppliers are never able to exercise noncompetitive market power.
b.
if a supplier has market power, it will be likely to exert that power through wholesale price rather
than retail price.
c.
retail markets are inherently noncompetitive.
d.
retail cartel agreements cannot increase retail profits.
ANS:
B
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Interpretive
Chapter 15/Monopoly  1366
13.
Assume that Peach Computers has entered into a resale price maintenance agreement with Computer Super
Stores Inc. (CSS Inc.) but not with CompuMart. In this case,
a.
the wholesale price of Peach computers will be different for CSS Inc. than it is for CompuMart.
b.
Peach computers will never increase profits by having a resale price maintenance agreement with
all retail outlets that sell its products.
c.
CompuMart will benefit from customers who go to CSS Inc. for information about different
computers.
d.
CSS Inc. will sell Peach computers at a lower price than CompuMart.
ANS:
C
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Interpretive
14.
Assume that Apple Computer has entered into an enforceable resale price maintenance agreement with
Computer Super Stores Inc. (CSS Inc.) and Wal-Mart. Which of the following will always be true?
a.
The wholesale price of Apple computers will be different for CSS Inc. than it is for Wal-Mart.
b.
Wal-Mart will benefit from customers who go to CSS Inc. for information about different
computers.
c.
CSS Inc. will sell Apple computers at a lower price than Wal-Mart.
d.
Wal-Mart and CSS Inc. will always sell Apple Computers for exactly the same price.
ANS:
D
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Interpretive
15.
The practice of tying is illegal on the grounds that
a.
it allows firms to expand their market power.
b.
it allows firms to form collusive arrangements.
c.
it prevents firms from forming collusive agreements.
d.
the Sherman Act explicitly prohibited such agreements.
ANS:
A
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
Tying
Chapter 15/Monopoly  1367
16.
The practice of tying is used to
a.
enhance the enforcement of antitrust laws.
b.
encourage the enforcement of collusive agreements.
c.
control the retail price of a collection of related products.
d.
package products to sell at a combined price closer to a buyer's total willingness to pay.
ANS:
D
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
MSC:
Definitional
Scenario 17-5
Assume that a local bank sells two services, checking accounts and ATM card services. The bank’s only two
customers are Mr. Donethat and Ms. Beenthere. Mr. Donethat is willing to pay $8 a month for the bank to service
his checking account and $2 a month for unlimited use of his ATM card. Ms. Beenthere is willing to pay only $5 for a
checking account, but is willing to pay $9 for unlimited use of her ATM card. Assume that the bank can provide
each of these services at zero marginal cost.
17.
Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit-maximizing price to charge for a
checking account?
a.
$13
b.
$9
c.
$8
d.
$5
ANS:
D
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
18.
MSC:
Applicative
Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit-maximizing price to charge for
unlimited use of an ATM card?
a.
$14
b.
$11
c.
$9
d.
$2
ANS:
C
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
MSC:
Applicative
Chapter 15/Monopoly  1368
19.
Refer to Scenario 17-5. If the bank is able to use tying to price checking account and ATM services, what is
the profit-maximizing price to charge for the "tied" good?
a.
$14
b.
$10
c.
$9
d.
$8
ANS:
B
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
20.
Applicative
Refer to Scenario 17-5. How much additional profit can the bank earn by switching to the use of a tying
strategy to price checking accounts and ATM service rather than pricing these services separately?
a.
$14
b.
$11
c.
$7
d.
$1
ANS:
D
DIF:
3
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
21.
MSC:
MSC:
Applicative
When individuals are damaged by an illegal arrangement to restrain trade, which law allows them to pursue
civil action and recover up to three times the damages sustained?
a.
Trade Damage Act
b.
Clayton Act
c.
Sherman Act
d.
No law allows individuals to pursue civil action and recover up to three times the damages
sustained.
ANS:
B
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
Antitrust
Chapter 15/Monopoly  1369
22.
Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust laws?
a.
the U.S. Justice Department
b.
private citizens
c.
corporations
d.
All of the above are correct.
ANS:
D
DIF:
1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
23.
REF:
17-3
Who wrote, "People of the same trade seldom meet together, but the conversation ends in a conspiracy
against the public, or in some diversion to raise prices."?
a.
Thomas Jefferson
b.
Adam Smith
c.
Bill Gates
d.
Robert Axelrod
ANS:
B
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
24.
Antitrust
MSC:
Interpretive
The practice of selling a product to retailers and requiring the retailers to charge a specific price for the
product is called
a.
fixed retail pricing.
b.
resale price maintenance.
c.
cost plus pricing.
d.
unfair trade.
ANS:
B
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Definitional
Chapter 15/Monopoly  1370
25.
The practice of requiring someone to buy two or more items together, rather than separately, is called
a.
resale maintenance.
b.
product fixing.
c.
tying.
d.
free-riding.
ANS:
C
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
26.
MSC:
Definitional
If Levi Strauss & Co. were to require every retailer that carried its clothing to charge customers $42 for each
pair of jeans, Levi Strauss & Co. would be practicing
a.
resale price maintenance.
b.
fixed retail pricing.
c.
tying.
d.
cost plus pricing.
ANS:
A
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Interpretive
27.
Which of the following prohibits executives of competing firms from even talking about fixing prices?
a.
Sherman Act
b.
Clayton Act
c.
Federal Trade Commission
d.
U.S. Justice Department
ANS:
A
DIF:
1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
28.
REF:
17-3
Antitrust
Which government entity is charged with investigating and enforcing antitrust laws?
a.
the U.S. Justice Department
b.
the U.S. Commerce Department
c.
the U.S. Treasury Department
d.
the Bureau of Alcohol, Tobacco, and Firearms
Chapter 15/Monopoly  1371
ANS:
A
DIF:
1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
29.
REF:
17-3
The argument that consumers will not be willing to pay any more for two items sold as one than they would
for the two items sold separately is used to justify the legality of which of the following?
a.
resale price maintenance
b.
tying
c.
predatory pricing
d.
free-riding
ANS:
B
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
30.
MSC:
Interpretive
MSC:
Interpretive
MSC:
Interpretive
OPEC is able to raise the price of its product by
a.
tying.
b.
setting production levels for each of its members.
c.
increasing the supply of oil above the competitive level.
d.
imposing resale price maintenance agreements on members.
ANS:
B
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
31.
Antitrust
All cartels are inherently reliant on
a.
a horizontal demand curve.
b.
an inelastic demand for their product.
c.
the cooperation of their members.
d.
enforcement of antitrust laws.
ANS:
C
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cartels
Chapter 15/Monopoly  1372
32.
In 1971, Congress passed a law that banned cigarette advertising on television. After the ban it is most likely
that the
(i)
profits of cigarette companies increased.
(ii)
prices of cigarettes increased.
(iii)
total costs incurred by cigarette companies increased.
a.
(i) only
b.
(i) and (ii)
c.
(ii) and (iii)
d.
(i), (ii), and (iii)
ANS:
A
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Oligopoly
33.
Applicative
To move the allocation of resources closer to the social optimum, policymakers should typically try to induce
firms in an oligopoly to
a.
collude with each other.
b.
form various degrees of cartels.
c.
compete rather than cooperate with each other.
d.
cooperate rather than compete with each other.
ANS:
C
DIF:
1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
34.
MSC:
REF:
17-3
Economic welfare
Which of the following is necessarily a problem with antitrust laws?
a.
They may target a business whose practices appear to be anti-competitive but in fact have
legitimate purposes.
b.
They promote competition.
c.
They limit monopoly power.
d.
They prohibit firms from entering or exiting a market.
ANS:
A
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
Antitrust
Chapter 15/Monopoly  1373
35.
Although the practice of predatory pricing is a common claim in antitrust suits, some economists are skeptical
of this argument because they believe
a.
the evidence of its practice is nearly impossible to collect.
b.
predatory pricing is not a profitable business strategy.
c.
even though predatory pricing is a profitable business strategy, it is on balance beneficial to
society.
d.
predatory pricing actually attracts new firms to the industry.
ANS:
B
DIF:
2
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
36.
REF:
17-3
Which of the following statements is true?
a.
The proper scope of antitrust laws is well defined and definite.
b.
Antitrust laws focus on granting certain firms the option to form a cartel.
c.
Policymakers have the difficult task of determining whether some firms' decisions have legitimate
purposes even though they appear anti-competitive.
d.
There is always a need for policymakers to try to limit a firm's pricing power, regardless of whether
the firm's market is competitive, a monopoly, or an oligopoly.
ANS:
C
DIF:
2
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
37.
Predatory pricing
REF:
17-3
Antitrust
A central issue in the Microsoft antitrust lawsuit involved Microsoft's integration of its Internet browser into
its Windows operating system, to be sold as one unit. This practice is known as
a.
tying.
b.
predation.
c.
wholesale maintenance.
d.
retail maintenance.
ANS:
A
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
Tying
Chapter 15/Monopoly  1374
38.
A key issue in the Microsoft case involved whether or not the bundling of the Windows operating system with
an Internet browser was an example of
a.
predatory pricing.
b.
tying.
c.
resale price maintenance.
d.
price discrimination.
ANS:
B
DIF:
2
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
39.
REF:
17-3
Tying
Which of the following statements is false?
a.
The Clayton Act allows triple damages in civil lawsuits in order to encourage lawsuits against
conspiring oligopolists.
b.
Many economists defend the practice of resale price maintenance on the grounds that it may help
solve a free-rider problem.
c.
Most economists agree that predatory pricing is a profitable business strategy that usually
preserves market power.
d.
The U.S. Supreme Court's view that the practice of tying usually allows a firm to extend its market
power is not generally supported by economic theory.
ANS:
C
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Predatory pricing
MSC:
Interpretive
40.
Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a result,
Firm A lowers its price to try to drive Firm B out of the market. This practice is known as
a.
resale price maintenance.
b.
predatory tying.
c.
tying.
d.
predatory pricing.
ANS:
D
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Predatory pricing
MSC:
Interpretive
Chapter 15/Monopoly  1375
41.
Two CEOs from different firms in the same market collude to fix the price in the market. This action violates
the
a.
Clayton Act of 1914.
b.
Sherman Antitrust Act of 1890.
c.
Crandall-Putnam ruling of 1983.
d.
Jackson-Microsoft ruling of 2000.
ANS:
B
DIF:
1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
42.
REF:
17-3
The Clayton Act of 1914 allows those harmed by illegal arrangements to restrain trade to
a.
sue for up to two times the damages they incurred.
b.
sue for up to three times the damages they incurred.
c.
sue for up to four times the damages they incurred.
d.
sue for damages, but only for the actual amount of damages they incurred.
ANS:
B
DIF:
1
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Definitional
43.
Antitrust
REF:
17-3
Antitrust
The manufacturer of Bozz Radios sells radios to retail stores for $500 each, and it requires the retail stores to
charge customers $550 per radio. Any retailer that charges less than $550 would violate its contract with Bozz
Radios. What do economists call this business practice?
a.
predatory pricing
b.
resale price maintenance
c.
tying
d.
leverage
ANS:
B
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Interpretive
Chapter 15/Monopoly  1376
44.
Suppose that Makemoney Movies produces two new films — The Hulk and The Piano. Makemoney offers
theaters the two films together at a single price but will not supply the movies separately. What do
economists call this business practice?
a.
predatory pricing
b.
resale price maintenance
c.
tying
d.
leverage
ANS:
C
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
45.
Interpretive
The primary purpose of antitrust legislation is to
a.
protect small businesses.
b.
protect the competitiveness of U.S. markets.
c.
protect the prices of American-made products.
d.
ensure firms earn only a fair profit.
ANS:
B
DIF:
2
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Interpretive
46.
MSC:
REF:
17-3
Antitrust
A law that encourages market competition by prohibiting firms from gaining or exercising excessive market
power is
a.
a patent.
b.
impossible to enforce.
c.
an antitrust law.
d.
an externality law.
ANS:
C
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
The role of government TOP:
MSC:
Definitional
Antitrust
Chapter 15/Monopoly  1377
47.
Resale price maintenance involves a firm
a.
colluding with another firm to restrict output and raise prices.
b.
selling two individual products together for a single price rather than selling each product
individually at separate prices.
c.
temporarily cutting the price of its product to drive a competitor out of the market.
d.
requiring that the firm reselling its product do so at a specified price.
ANS:
D
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Definitional
48.
Acme Computer Co. sells computers to retail stores for $400. If Acme requires the retailers to charge
customers $500 for the computers, then it is engaging in
a.
resale price maintenance.
b.
predatory pricing.
c.
tying.
d.
monopolistic competition.
ANS:
A
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Resale price maintenance
MSC:
Definitional
49.
Predatory pricing involves a firm
a.
colluding with another firm to restrict output and raise prices.
b.
selling two individual products together for a single price rather than selling each product
individually at separate prices.
c.
temporarily cutting the price of its product to drive a competitor out of the market.
d.
requiring that the firm reselling its product do so at a specified price.
ANS:
C
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Predatory pricing
MSC:
Definitional
Chapter 15/Monopoly  1378
50.
Predatory pricing occurs when a firm
a.
exercises its oligopoly power by raising its price through the formation of a cartel.
b.
exercises its monopoly power by raising its price.
c.
cuts its prices in order make itself more competitive.
d.
cuts its prices temporarily in order to drive out any competition.
ANS:
D
DIF:
1
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Predatory pricing
MSC:
Definitional
51.
Tying involves a firm
a.
colluding with another firm to restrict output and raise prices.
b.
selling two individual products together for a single price rather than selling each product
individually at separate prices.
c.
temporarily cutting the price of its product to drive a competitor out of the market.
d.
requiring that the firm reselling its product do so at a specified price.
ANS:
B
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
52.
MSC:
Definitional
A particular cable TV company requires a household to subscribe to its high-speed Internet service if it
subscribes to cable TV, and vice versa. This practice
a.
is referred to as tying.
b.
is regarded by some economists as a form of price discrimination.
c.
is controversial among economists because they disagree on whether it has adverse effects for
society as a whole.
d.
All of the above are correct.
ANS:
D
DIF:
2
REF:
17-3
NAT:
Analytic
LOC:
Oligopoly
TOP:
Tying
MSC:
Interpretive
Chapter 15/Monopoly  1379
Sec04 - Oligopoly - Conclusion
MULTIPLE CHOICE
1.
The story of the prisoners’ dilemma shows why
a.
predatory pricing is clearly not in society’s best interest.
b.
economists are unanimous in condemning resale price maintenance, since it inevitably reduces
competition.
c.
oligopolies can fail to act independently, even when independent decision-making is in their best
interest.
d.
oligopolies can fail to cooperate, even when cooperation is in their best interest.
ANS:
D
DIF:
1
REF:
16-4
NAT:
Analytic
LOC:
Oligopoly
TOP:
Cooperation | Oligopoly
MSC:
Interpretive