ECON 2113 Practice Problems Ch 15 15 1 A competitive firm is a price maker and a monopoly is a price taker False 15 4 A monopoly s marginal cost will be less than its average fixed cost False 15 5 A monopoly has the ability to set the price of its product at whatever level it desires True 15 7 Examples of barriers to entry include 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 or iii The government has given the existing monopoly the exclusive right to produce the good True 15 8 To define a monopoly we cite the following characteristics i and ii 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 True 15 11 A natural monopoly occurs when the product is sold in its natural state such as water or diamonds False 15 14 The defining characteristic of a natural monopoly is constant marginal cost over the relevant range of output False 15 15 Natural monopolies differ from other forms of monopoly because they are not subject to barriers to entry False 15 16 Patent and copyright laws are major sources of natural monopolies False 15 19 Bill owns the only grocery store in a small community that lies 200 miles from the nearest city this represents a monopoly situation True 15 25 A government created monopoly arises when government spending in a certain industry gives rise to monopoly power False 15 26 Allowing an inventor to have the exclusive rights to market her new invention will lead to i ii and iii 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 True 1 Chapter 15 Monopoly 2 15 42 The costs of production make a single firm more efficient than a large number of firms this is a primary source of barriers to entry True 15 61 A profit maximizing monopolist will produce the level of output at which average revenue is equal to average total cost False 15 50 The key difference between a competitive firm and a monopoly firm is the ability to select the level of competition in the market False 15 62 For a profit maximizing monopolist P MR MC True 15 51 The market demand curve for a monopolist is typically unitary elastic at the point of profit maximization False 15 52 When a firm operates under conditions of monopoly its price is not constrained False 15 53 In order to sell more of its product a monopolist must sell to the government False 15 55 Economists assume that monopolists behave as cost minimizers False 15 56 A monopolist s average revenue is always equal to marginal revenue False 15 57 If a profit maximizing monopolist faces a downward sloping market demand curve its average revenue is less than the price of the product False 15 69 When a monopolist increases the amount of output that it produces and sells its average revenue increases and its marginal revenue increases False 15 70 Controlling the price of its goods is an impossible feat for a monopolist to accomplish False 15 76 Marginal revenue for a monopolist is computed as average revenue divided by quantity sold False Chapter 15 Monopoly 3 The figure below reflects the cost and revenue structure for a monopoly firm Use it to answer questions 82 through 89 15 89 Profit will be maximized by charging a price equal to P0 False The figure below reflects the cost and revenue structure for a monopoly firm Use it to answer questions 94 through 98 15 82 The demand curve for a monopoly firm is depicted by curve A True 15 83 The marginal revenue curve for a monopoly firm is depicted by curve A False 15 84 The marginal cost curve for a monopoly firm is depicted by curve A False 15 85 The average total cost curve for a monopoly firm is depicted by curve A False 15 88 If the monopoly firm wants to maximize its profit it should operate at a level of output equal to Q1 False 15 97 Profit on a typical unit sold for a profit maximizing monopoly would equal P2 P1 False 15 98 At the profit maximizing level of output marginal revenue is equal to P3 False 15 107 The monopolist s profitmaximizing quantity of output is determined by the intersection of the marginal cost and demand False 15 109 For a monopolist profit is determined by Profit Total Revenue Total Cost True Chapter 15 Monopoly 4 15 137 A monopoly market always maximizes total economic well being False 15 139 The economic inefficiency of a monopolist can be measured by the number of consumers who are unable to purchase the product because of its high price False 15 141 The socially efficient level of production occurs where the marginal cost curve intersects the average variable cost curve False The figure below depicts the demand and marginal cost curves of a profitmaximizing monopolist Use the figure to answer questions 149 and 150 15 150 If the monopoly operates at an output level below Q0 then an increase in output toward Q0 but not so large an increase as to exceed Q0 would raise the price and raise total surplus False 15 153 If a monopoly sells a quantity of its good that is smaller than the sociallyoptimal level the price will be socially efficient False 15 154 Inefficiency arises from a monopoly because the monopoly firm earns an excessively large profit False The figure below depicts the demand marginal revenue and marginal cost curves of a profit maximizing monopolist Use the figure to answer questions 155 and 156 15 149 A benevolent social planner would cause the monopoly firm to operate at an output level below Q0 False 15 155 Triangle bde represents the deadweight loss due to monopoly pricing Chapter 15 Monopoly 5 False 15 156 Total surplus lost due to monopoly pricing is reflected in triangle bde False 15 162 If a social planner were running a monopoly that planner could achieve an efficient outcome by charging the price that is determined by the minimum point on the average total cost curve False 15 172 One problem with government regulation of monopolies is that a benevolent government is likely to be interested in generating profits for political gain False 15 174 One problem with regulating a monopolist on the basis of cost is that regulators are unable to effectively control prices and or production False 15 179 Antitrust laws allow the government to prevent mergers True 15 180 Since natural