Economics 251

Review Questions Chapter 24 (9) - Monopoly

(1) If a firm can change market prices by altering its output, then:

(a) it has market power.

(b) it is a price taker.

(d) it engages in marginal cost pricing.

(2) Suppose that a monopoly firm produces tables and can sell 10 tables per month at a price of $400 per table. In order to increase sales by one table per month, the monopolist must lower the price of its tables by $30 to $370 per table. The marginal revenue of the eleventh table is:

(a) $370

(b) $30

(d) $4,070

(3) Which of the following rules will always be satisfied when any firm (that is, perfectly competitive or monopoly) has maximized profits?

(a) Price = lowest level of Average Total Cost Curve.

(b) Price = Marginal Cost.

(d) None of the above.

(4) A monopoly:

(a) maximizes profits at the output where Price = Marginal Cost.

(b) is one of many sellers in a given market.

(d) All of the above.

(5) In monopoly and perfect competition, a firm should expand production when:

(a) Marginal Revenue is below Marginal Cost.

(b) Marginal Revenue is above Marginal Cost.

(d) Price is above Marginal Cost.

(6) Price discrimination allows a producer to:

(a) reap the highest possible average price for the quantity supplied.

(b) increase the elasticity of consumer demand.

(d) decrease total costs.

(7) In a contestable market:

(a) there are possibilities for entry.

(b) there are high barriers that prevent entry.

(d) many firms compete and prices are driven down to minimum long run average total costs.

Consider the data in the following table in answering Question (8) below.

Output and Sales (planes per month)

0 1 2 3 4

Price (millions of $’s per plane) -- $9 $8 $7 $6

Total Cost (millions of $’s per month) $1 $2 $7 $12 $20

Total Revenue -- -- -- -- --

Marginal Revenue -- -- -- -- --

Marginal Cost -- -- -- -- --

(8) Given the data in the table, profit maximization is achieved at a production rate of:

(a) 1 plane per month.

(b) 2 planes per month.

(d) 4 planes per month.

(9) In some situations a monopoly might be considered more desirable that a perfectly competitive firm:

(a) because a monopoly has more incentive to keep costs down.

(b) because a monopoly is the best way to increase output above the competitive level of production.

(d) since price is less than marginal cost for a monopoly.

Consider Figure 1 below in answering Questions (10), (11), and (12).

Figure 1

Quantity (Q)

10 20 30

(10) In Figure 1, the profit maximizing level of output is approximately:

(a) 10 units.

(b) 20 units.

(d) None of the above.

(11) In Figure 1, total profit for the monopolist is represented by the area:

(a) CDJI.

(b) GHJI.

(d) ADJI.

(12) In Figure 1, the price charged by the profit maximizing monopolist would be:

(a) $2

(b) $4

(d) $8

(13) The argument that concentration of market power enhances research and development efforts may be weak because:

(a) monopolies cannot afford basic research.

(b) a monopoly may have no clear incentive to pursue new research and development.

(d) None of the above are true.

(14) Which of the following is an argument in support of market power?

(a) It increases output and raises prices, contributing to the profits of monopolies.

(b) It protects firms from competition so that they can pursue research and development.

(d) It contributes to the expansion of production beyond that of a perfectly competitive industry.

(15) If you want to fly to St. Louis, MO, a place served by most airlines, the airline industry may be _______, but if you want to fly to Harrisburg, Pennsylvania, which is served by only one airline, the airline industry may be _______ .

(a) competitive; duopolistic.

(b) competitive; monopolistic.

(d) monopolistic; oligopolistic.