Purdue University North Central - Economics 210

Review Questions - Chapter 7 - Monopoly

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

(a) it has market power.

(b) it is a price taker.

(d) it engages in marginal cost pricing.

(2) Both a competitive firm and a monopolist:

(a) use marginal cost pricing.

(b) maximize profit where marginal revenue = marginal cost.

(d) earn zero economic profit in the long run.

(3) If the firms in a competitive market became plants operated by a monopoly, then output will:

(a) fall as the monopoly moves upward along the market demand curve.

(b) rise as the monopoly moves downward along the market demand curve.

(d) rise as the monopoly moves downward along the monopoly’s market supply curve.

(4) Compared to a competitive market with the same long run cost and market demand circumstances, a monopolist has:

(a) less reason to improve product or service quality.

(b) lower profits and higher efficiency.

(d) more reason to improve product or service quality.

(5) A monopolist achieves the most profitable rate of output by applying which of the following rules?

(a) Average Variable Cost = Price.

(b) Average Total Cost = Price.

(d) Average Total Cost and Average Variable Cost at a minimum.

Consider Figure 1 below in answering Questions (6), (7), and (8).

Figure 1

Quantity (Q)

10 20 30

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

(a) 10 units.

(b) 20 units.

(d) None of the above.

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

(a) CDJI.

(b) GHJI.

(d) ADJI.

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

(a) $2

(b) $4

(d) $8

(9) In the text, the “Headline” article about Nintendo reported: “It has managed to guard the underlying technology so closely that people who want it generally can get it from only one source.” This passage suggests that:

(a) Nintendo will have strong incentives to share the technology with other producers to increase production and lower prices to the consumer.

(b) Nintendo does not have market power.

(d) None of the above are true.

(10) 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.

(11) 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.

(12) 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.

(13) A headline article in the text titled “Judge Says Microsoft Broke Antitrust Law”, explains that Microsoft was found guilty of what crime?

(a) Bundling products to create a barrier to entry.

(b) Producing more output than the market could support.

(d) Excessive competition within the growing market.

(14) 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.