Chapter 12 – Pure Monopoly

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Pure monopoly refers to:
A. any market in which the demand curve to the firm is downsloping.
B. a standardized product being produced by many firms.
C. a single firm producing a product for which there are no close substitutes.
D. a large number of firms producing a differentiated product.

C. A single firm Producing a product for which there are no close substitutes.

Which of the following is correct?
A. Both purely competitive and monopolistic firms are "price takers."
B. Both purely competitive and monopolistic firms are "price makers."
C. A purely competitive firm is a "price taker," while a monopolist is a "price maker."
D. A purely competitive firm is a "price maker," while a monopolist is a "price taker."

C. A purely competitive firm is a "price taker," while a monopolist is a "price maker."

A purely monopolistic firm:
A. has no entry barriers.
B. faces a downsloping demand curve.
C. produces a product or service for which there are many close substitutes.
D. earns only a normal profit in the long run.

B. Faces a downsloping demand curve

Pure monopolists may obtain economic profits in the long run because:
A. of advertising.
B. marginal revenue is constant as sales increase.
C. of barriers to entry.
D. of rising average fixed costs.

c. Of barriers to entry

Barriers to entering an industry:
A. encourage allocative efficiency.
B. encourage productive efficiency.
C. are the basis for monopoly.
D. apply only to purely monopolistic industries.

C. are the basis for monopoly

A natural monopoly occurs when:
A. long-run average costs decline continuously through the range of demand.
B. a firm owns or controls some resource essential to production.
C. long-run average costs rise continuously as output is increased.
D. economies of scale are obtained at relatively low levels of output.

A. long-run average costs decline continuously through the range of demand.

Large minimum efficient scale of plant combined with limited market demand may lead to:
A. natural monopoly.
B. patent monopoly.
C. government franchise monopoly.
D. shared monopoly.

A. Natural monopoly

What do economies of scale, the ownership of essential raw materials, and patents have in common?
A. They must all be present before price discrimination can be practiced.
B. They are all barriers to entry.
C. They all help explain why a monopolist’s demand and marginal revenue curves coincide.
D. They all help explain why the long-run average cost curve is U-shaped.

B. They are all barriers to entry

The nondiscriminating pure monopolist’s demand curve:
A. is the industry demand curve.
B. shows a direct or positive relationship between price and quantity demanded.
C. tends to be inelastic at high prices and elastic at low prices.
D. is identical to its marginal revenue curve.

A. is the industry demand curve

The nondiscriminating monopolist’s demand curve:
A. is less elastic than a purely competitive firm’s demand curve.
B. is perfectly elastic.
C. coincides with its marginal revenue curve.
D. is perfectly inelastic.

A. is less elastic than a purely competitive firm’s demand curve.

If a nondiscriminating imperfectly competitive firm is selling its 100th unit of output for $35, its marginal revenue:
A. may be either greater or less than $35.
B. will also be $35.
C. will be less than $35.
D. will be greater than $35.

C. Will be less than $35

For an imperfectly competitive firm:
A. total revenue is a straight, upsloping line because a firm’s sales are independent of product price.
B. the marginal revenue curve lies above the demand curve because any reduction in price applies to all units sold.
C. the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold.
D. the marginal revenue curve lies below the demand curve because any reduction in price applies only to the extra unit sold.

C. the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold.

When a firm is on the inelastic segment of its demand curve, it can:
A. increase total revenue by reducing price.
B. decrease total costs by decreasing price.
C. increase profits by increasing price.
D. increase total revenue by more than the increase in total cost by increasing price.

C. increase profit by increasing price

A monopolistic firm has a sales schedule such that it can sell 10 prefabricated garages per week at $10,000 each, but if it restricts its output to 9 per week it can sell these at $11,000 each. The marginal revenue of the tenth unit of sales per week is:
A. -$1,000.
B. $9,000.
C. $10,000.
D. $1,000.

D. $1,000

The demand curve faced by a pure monopolist:
A. may be either more or less elastic than that faced by a single purely competitive firm.
B. is less elastic than that faced by a single purely competitive firm.
C. has the same elasticity as that faced by a single purely competitive firm.
D. is more elastic than that faced by a single purely competitive firm.

B. Is less elastic than that faced by a single purely competitive firm.

The marginal revenue curve for a monopolist:
A. is a straight, upsloping curve.
B. rises at first, reaches a maximum, and then declines.
C. becomes negative when output increases beyond some particular level.
D. is a straight line, parallel to the horizontal axis.

C. Becomes negative when output increase beyond some particular level.

Which of the following is characteristic of a pure monopolist’s demand curve?
A. Average revenue is less than price.
B. Its elasticity coefficient is 1 at all levels of output.
C. Price and marginal revenue are equal at all levels of output.
D. It is the same as the market demand curve.

D. It is the same as the market demand curve.

Because the monopolist’s demand curve is downsloping:
A. MR will equal price.
B. price must be lowered to sell more output.
C. the elasticity coefficient will increase as price is lowered.
D. its supply curve will also be downsloping.

B. Price must be lowered to sell more output.

The pure monopolist’s demand curve is relatively elastic:
A. in the price range where total revenue is declining.
B. at all points where the demand curve lies above the horizontal axis.
C. in the price range where marginal revenue is negative.
D. in the price range where marginal revenue is positive.

D. In the price range where Marginal revenue is positive.

A nondiscriminating profit-maximizing monopolist:
A. will never produce in the output range where marginal revenue is positive.
B. will never produce in the output range where demand is inelastic.
C. will never produce in the output range where demand is elastic.
D. may produce where demand is either elastic or inelastic, depending on the level of production costs

B. Will never produce in the output range where demand is inelastic.

For a pure monopolist the relationship between total revenue and marginal revenue is such that:
A. marginal revenue is positive when total revenue is at a maximum.
B. total revenue is positive when marginal revenue is increasing, but total revenue becomes negative when marginal revenue is decreasing.
C. marginal revenue is positive when total revenue is increasing, but marginal revenue becomes negative when total revenue is decreasing.
D. marginal revenue is positive so long as total revenue is positive.

C. Marginal revenue is positive when total revenue is increasing, but marginal revenue becomes negative when total revenue is decreasing.

For a pure monopolist marginal revenue is less than price because:
A. the monopolist’s demand curve is perfectly elastic.
B. the monopolist’s demand curve is perfectly inelastic.
C. when a monopolist lowers price to sell more output, the lower price applies to all units sold.
D. the monopolist’s total revenue curve is linear and slopes upward to the right.

C. When a monopolist lowers price to sell more output, the lower price applies to all units sold.

Assume a pure monopolist is currently operating at a price-quantity combination on the inelastic segment of its demand curve. If the monopolist is seeking maximum profits, it should:
A. retain its current price-quantity combination.
B. increase both price and quantity sold.
C. charge a lower price.
D. charge a higher price.

D. Charge a higher price

A pure monopolist should never produce in the:
A. elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price.
B. inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price.
C. inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price.
D. segment of its demand curve where the price elasticity coefficient is greater than one.

B. Inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price.

If a monopolist were to produce in the inelastic segment of its demand curve:
A. total revenue would be at a maximum.
B. marginal revenue would be positive.
C. the firm would not be maximizing profits.
D. it would necessarily incur a loss.

C. The firm would not be maximizing profits.

If a pure monopolist is operating in a range of output where demand is elastic:
A. it cannot possibly be maximizing profits.
B. marginal revenue will be positive but declining.
C. marginal revenue will be positive and rising.
D. total revenue will be declining.

B. Marginal revenue will be positive but declining.

Suppose a pure monopolist is charging a price of $12 and the associated marginal revenue is $9. We thus know that:
A. demand is inelastic at this price.
B. the firm is maximizing profits.
C. total revenue is increasing.
D. total revenue is at a maximum.

C. Total Revenue is increasing.

A pure monopolist is selling 6 units at a price of $12. If the marginal revenue of the seventh unit is $5, then:
A. price of the seventh unit is $10.
B. price of the seventh unit is $11.
C. price of the seventh unit is greater than $12.
D. firm’s demand curve is perfectly elastic.

B. Price of the seventh unit is $11

A nondiscriminating pure monopolist finds that it can sell its fiftieth unit of output for $50. We can surmise that the marginal:
A. cost of the fiftieth unit is also $50.
B. revenue of the fiftieth unit is also $50.
C. revenue of the fiftieth unit is less than $50.
D. revenue of the fiftieth unit is greater than $50.

C. Revenue of the fiftieth unit is less than $50.

If a nondiscriminating pure monopolist decides to sell one more unit of output, the marginal revenue associated with that unit will be:
A. equal to its price.
B. the price at which that unit is sold less the price reductions which apply to all other units of output.
C. the price at which that unit is sold plus the price increases which apply to all other units of output.
D. indeterminate unless marginal cost data are known.

B. The price at which that unit is sold less the price reductions which apply to all other units of output.

Suppose that a pure monopolist can sell 20 units of output at $10 per unit and 21 units at $9.75 per unit. The marginal revenue of the twenty-first unit of output is:
A. $9.75.
B. $204.75.
C. $4.75.
D. $.25.

C. $4.75

The MR = MC rule:
A. applies only to pure competition.
B. applies only to pure monopoly.
C. does not apply to pure monopoly because price exceeds marginal revenue.
D. applies both to pure monopoly and pure competition

D. Applies both to pure monopoly and pure competition.

In the long run a pure monopolist will maximize profits by producing that output at which marginal cost is equal to:
A. average total cost.
B. marginal revenue.
C. average variable cost.
D. average cost.

B. Marginal Revenue.

An unregulated pure monopolist will maximize profits by producing that output at which:
A. P = MC.
B. P = ATC.
C. MR = MC.
D. MC = AC.

C. MR = MC

Suppose that a pure monopolist can sell 5 units of output at $4 per unit and 6 units at $3.90 per unit. The monopolist will produce and sell the sixth unit if its marginal cost is:
A. $4 or less.
B. $3.90 or less.
C. $3.50 or less.
D. $3.40 or less.

D. $3.40 or less

Suppose that a pure monopolist can sell 4 units of output at $2 per unit and 5 units at $1.75 per unit. The monopolist will produce and sell the fifth unit if its marginal cost is:
A. $1 or less.
B. $.75 or less.
C. $1.75 or less.
D. $2 or less.

B. $.75 or less

If a monopolist’s marginal revenue is $3.00 and its marginal cost is $4.50, it will increase its profits by:
A. reducing output and raising price.
B. reducing both output and price.
C. increasing both price and output.
D. raising price while keeping output unchanged.

A. Reducing output and raising price.

57. If profits are maximized (or losses minimized), which of the following conditions is common to both unregulated monopoly and to pure competition?
A. MC = P
B. MC = ATC
C. MR = MC
D. P = MR

C. MR = MC

If a pure monopolist is producing at that output where P = ATC, then:
A. its economic profits will be zero.
B. it will be realizing losses.
C. it will be producing less than the profit-maximizing level of output.
D. it will be realizing an economic profit.

A. Its economic profits will be zero.

A pure monopolist’s short-run profit-maximizing or loss-minimizing position is such that price:
A. equals marginal revenue.
B. will vertically intersect demand where MR = MC.
C. will always equal ATC.
D. always exceeds ATC.

B. Will vertically intersect demand where MR = MC.

In the short run, a monopolist’s economic profits:
A. are always positive because the monopolist is a price-maker.
B. are usually negative because of government price regulation.
C. are always zero because consumers prefer to buy from competitive sellers.
D. may be positive or negative depending on market demand and cost conditions.

D. May be positive or negative depending on market demand and cost conditions.

When a pure monopolist is producing its profit-maximizing output, price will:
A. be less than MR.
B. equal neither MC nor MR.
C. equal MR.
D. equal MC.

B. Equal neither MC nor MR.

The supply curve for a monopolist is:
A. perfectly elastic.
B. upsloping.
C. that portion of the marginal cost curve lying above minimum average variable cost.
D. nonexistent.

D. nonexistent

The supply curve of a pure monopolist:
A. is that portion of its marginal cost curve which lies above average variable cost.
B. is the same as that of a purely competitive industry.
C. is its average variable cost curve.
D. does not exist because prices are not "given" to a monopolist.

D. Does not exist because prices are not "given" to a monopolist.

To maximize profit a pure monopolist must:
A. maximize its total revenue.
B. maximize the difference between marginal revenue and marginal cost.
C. maximize the difference between total revenue and total cost.
D. produce where average total cost is at a minimum.

C. Maximize the difference between Total Revenue and total cost.

Economic profit in the long run is:
A. possible for both a pure monopoly and a pure competitor.
B. possible for a pure monopoly, but not for a pure competitor.
C. impossible for both a pure monopolist and a pure competitor.
D. only possible when barriers to entry are nonexistent.

B. Possible for a pure monopoly, but not for a pure competitor.

Which of the following statements is correct?
A. The pure monopolist will maximize profit by producing at that point on the demand curve where elasticity is zero.
B. In seeking the profit-maximizing output the pure monopolist underallocates resources to its production.
C. The pure monopolist maximizes profits by producing that output at which the differential between price and average cost is the greatest.
D. Purely monopolistic sellers earn only normal profits in the long run.

B. In seeking the profit-maximizing output the pure monopolist underallocates resources to its production.

Confronted with the same unit cost data, a monopolistic producer will charge:
A. the same price and produce the same output as a competitive firm.
B. a higher price and produce a larger output than a competitive firm.
C. a higher price and produce a smaller output than a competitive firm.
D. a lower price and produce a smaller output than a competitive firm.

C. A higher price and produce a smaller output than a competitive firm.

An important economic problem associated with pure monopoly is that, at the profit maximizing outputs, resources are:
A. overallocated because price exceeds marginal cost.
B. overallocated because marginal cost exceeds price.
C. underallocated because price exceeds marginal cost.
D. underallocated because marginal cost exceeds price.

C. Underallocated because price exceeds marginal cost.

A single-price monopoly is economically inefficient because, at the profit maximizing output:
A. marginal revenue exceeds product price at all profitable levels of production.
B. monopolists always price their products on the basis of the ability of consumers to pay rather than on costs of production.
C. MC > P.
D. society values additional units of the monopolized product more highly than it does the alternative products those resources could otherwise produce.

D. Society values additional units of the monopolized product more highly than it does the alternative products those resources could otherwise produce.

At its profit-maximizing output, a pure nondiscriminating monopolist achieves:
A. neither productive efficiency nor allocative efficiency.
B. both productive efficiency and allocative efficiency.
C. productive efficiency but not allocative efficiency.
D. allocative efficiency but not productive efficiency.

A. Neither productive efficiency not allocative efficiency.

The profit-maximizing output of a pure monopoly is not socially optimal because in equilibrium:
A. price equals minimum average total cost.
B. marginal revenue equals marginal cost.
C. marginal cost exceeds price.
D. price exceeds marginal cost.

D. Price Exceeds marginal cost.

A single-price pure monopoly is economically inefficient:
A. only because it produces beyond the point of minimum average total cost.
B. only because it produces short of the point of minimum average total cost.
C. because it produces short of minimum average total cost and price is greater than marginal cost.
D. because it produces beyond minimum average total cost and marginal cost is greater than price.

C. Because it produces short of minimum average total cost and price is greater than marginal cost.

X-inefficiency refers to a situation in which a firm:
A. is not as technologically progressive as it might be.
B. encounters diseconomies of scale.
C. fails to realize all existing economies of scale.
D. fails to achieve the minimum average total costs attainable at each level of output.

D. Fails to achieve the minimum average total costs attainable at each level of output.

There is some evidence to suggest that X-inefficiency is:
A. absent whenever two or more producers are competing with one another.
B. not encountered in either competitive or monopolistic firms.
C. more likely to occur in monopolistic firms than in competitive firms.
D. more likely to occur in competitive firms than in monopolistic firms.

C. More likely to occur in monopolistic firms than in competitive firms.

Price discrimination refers to:
A. selling a given product for different prices at two different points in time.
B. any price above that which is equal to a minimum average total cost.
C. the selling of a given product at different prices that do not reflect cost differences.
D. the difference between the prices a purely competitive seller and a purely monopolistic seller would charge.

C. The selling of a given product at different prices that do not reflect cost differences.

The practice of price discrimination is associated with pure monopoly because:
A. it can be practiced whenever a firm’s demand curve is downsloping.
B. monopolists have considerable ability to control output and price.
C. monopolists usually realize economies of scale.
D. most monopolists sell differentiated products.

B. Monopolists have considerable ability to control output and price.

Which of the following is not a precondition for price discrimination?
A. The commodity involved must be a durable good.
B. The good or service cannot be profitably resold by original buyers.
C. The seller must be able to segment the market, that is, to distinguish buyers with different elasticities of demand.
D. The seller must possess some degree of monopoly power.

A. The commodity involved must be a durable good.

A price discriminating pure monopolist will attempt to charge each buyer (or group of buyers):
A. different prices to compensate for differences in the characteristics of the product.
B. the same price if per unit cost is constant for each unit of the product.
C. that price which equals the buyer’s marginal cost.
D. the maximum price each would be willing to pay.

D. The maximum price each would be willing to pay.

Other things equal, in which of the following cases would economic profit be the greatest?
A. an unregulated monopolist which is able to engage in price discrimination
B. an unregulated, nondiscriminating monopolist
C. a regulated monopolist charging a price equal to average total cost
D. a regulated monopolist charging a price equal to marginal cost

A. an unregulated monopolist which is able to engage in price discrimination.

If a monopolist engages in price discrimination, it will:
A. realize a smaller profit.
B. charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic.
C. produce a smaller output than when it did not discriminate.
D. charge a competitive price to all its customers.

B. Charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic.

Price discrimination is:
A. always legal.
B. always illegal.
C. only illegal if it hurts consumers more than non-discrimination.
D. only illegal if used to lessen or eliminate competition.

D. Only illegal if used to lessen or eliminate competition.

Other things equal, a price discriminating monopolist will:
A. realize a smaller economic profit than a nondiscriminating monopolist.
B. produce a larger output than a nondiscriminating monopolist.
C. produce the same output as a nondiscriminating monopolist.
D. produce a smaller output than a nondiscriminating monopolist.

B. Produce a larger output than a nondiscriminating monopolist.

A dilemma of regulation is that:
A. the regulated price that achieves allocative efficiency is also likely to result in persistent economic profits.
B. the regulated price that results in a "fair return" restricts output by more than would unregulated monopoly.
C. regulated pricing always conflicts with the "due process" provision of the Constitution.
D. the regulated price that achieves allocative efficiency is also likely to result in losses.

D. The regulated price that achieves allocative efficiency is also likely to result in losses.

If a regulatory commission wants to provide a natural monopoly with a fair return, it should establish a price that is equal to:
A. minimum average fixed cost.
B. average total cost.
C. marginal cost.
D. marginal revenue.

B. Average total cost

If a regulatory commission wants to establish a socially optimal price for a natural monopoly, it should select a price:
A. at which the marginal cost curve intersects the demand curve.
B. at which marginal revenue is zero.
C. at which the average total cost curve intersects the demand curve.
D. which corresponds with the equality of marginal cost and marginal revenue.

A. At which the marginal cost curve intersects the demand curve.

Suppose for a regulated monopoly that price equals minimum ATC but price exceeds MC. This means that:
A. both productive and allocative efficiency are being achieved.
B. productive efficiency is being achieved, but not allocative efficiency.
C. allocative efficiency is being achieved, but not productive efficiency.
D. neither productive nor allocative efficiency is being achieved.

B. Productive efficiency is being achieved, but not allocative efficiency.

If a regulatory commission imposes upon a nondiscriminating natural monopoly a price that is equal to marginal cost and below average total cost at the resulting output, then:
A. the firm will realize an economic profit.
B. the firm will earn only a normal profit.
C. allocative efficiency will be worsened.
D. the firm must be subsidized or it will go bankrupt.

D. The firm must be subsidized or it will go bankrupt.

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