Economics 251 – Review Questions Chapter 24 – Pure Monopoly

(1) Which of the following is a characteristic of pure monopoly?

(a) one firm, complete market power.

(b) low barriers to entry.

(c) the absence of market power.

(d) firm acts as a price taker.

(2) A natural monopoly occurs when:

(a) average total costs decline continuously through the range of demand.

(a) a firm controls a market through government intervention.

(b) long run average costs rise continuously as output is increased.

(c) a firm accepts the market price as given and responds to it in its production decision.

Consider Table 1 in answering Question (3).

Table 1

Price Quantity Demanded

$7 1

$6 2

$5 3

$4 4

$3 5

(3) In Table 1, the marginal revenue obtained from selling the third unit of output is:

(a) $6

(b) $1

(c) $3

(d) $5

Consider Table 2 in answering Question (4).

Table 2

Price Quantity Demanded

$10 1

$7 2

$5 3

$3 4

$1 5

(4) In Table 2, the monopolist will select its profit-maximizing level of output somewhere within the:

(a) 3-5 output range.

(b) 1-3 output range.

(c) 1-4 output range.

(d) 2-4 output range.

(5) X-inefficiency refers to a situation in which a firm:

(a) fails to achieve the minimum average total costs attainable at each level of output.

(b) encounters diseconomies of scale.

(c) strives to minimize average total costs.

(d) faces the possibilities of entry into the industry by a firm with lower costs.

Utilize Table 3 in answering Questions (6), (7), (8), (9), and (10).

Table 3

Demand Data Cost Data

Price Quantity Demanded Output Total Cost

$5.50 3 3 $5

$5.00 4 4 $6

$4.50 5 5 $6.50

$3.85 6 6 $7.10

$3.35 7 7 $9

$2.90 8 8 $11.90

$2.50 9 9 $16.90

(6) From Table 3, the equilibrium price for a monopolist will be:

(a) $5.00

(b) $2.90

(c) $3.85

(d) $4.50

(7) From Table 3, the equilibrium level of output will be:

(a) 4 units.

(b) 7 units.

(c) 6 units.

(d) 5 units.

(8) From Table 3, the monopolist will realize a:

(a) profit of $8.50

(b) profit of $7.50

(c) profit of $16.00

(d) loss of $14.00

(9) In Table 3, if the industry was taken over by a consumers' co-operative, the price charged would be:

(a) $2.90

(b) $3.35

(c) $3.85

(d) $4.50

(10) In Table 3, if the industry was taken over by a consumers’ co-operative, the profit would be:

(a) $14.45

(b) $11.30

(c) $5.60

(d) $16,00

Consider Figure 1 in answering Questions (11) and (12).

Quantity (Q)

E M L

Figure1

(11) In Figure 1, to maximize profits or minimize losses, a monopoly firm should produce:

(a) E units and charge price G

(b) E units and charge price K.

(c) M units and charge price J.

(d) L units and charge price N.

(12) In Figure 1, if this industry is purely competitive, the profit maximizing price and quantity will be:

(a) E units at price G.

(b) E units at price K.

(c) M units at price J.

(d) L units at price N.

Consider Figure 2 in answering Questions (13), (14), and (15).

Figure 2

Demand

(13) In Figure 2, if the monopolist is unregulated, it will maximize profits by charging:

(a) a price below P(3) and selling a quantity more than Q(3).

(b) a price P(3) and producing output Q(3).

(c) a price P(2) and producing output Q(2).

(d) a price P(1) and producing output Q(1).

(14) In Figure 2, suppose a regulatory commission is created to determine a legal and "fair return" price for the monopoly. This price would be:

(a) P(1).

(b) P(2).

(c) P(3).

(d) None of the above

(15) In Figure 2, if a regulatory commission seeks to achieve the most efficient allocation of resources to this industry, it will set a price of:

(a) P(1).

(b) P(2).

(c) P(3).

(d) None of the above