Chapter 15 - Monopoly

Multiple Choice 1. Which of the following statements is correct? a. A competitive firm is a price maker and a monopoly is a price taker. b. A competitive firm is a price taker and a monopoly is a price maker. c. Both competitive firms and monopolies are price takers. d. Both competitive firms and monopolies are price makers. ANS: B PTS: 1 DIF: 1 REF: 15-1 TOP: Monopoly MSC: Interpretive 2. Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, which of the following statements is true? a. Meatball prices will be less than marginal cost. b. Meatball prices will equal marginal cost. c. Meatball prices will exceed marginal cost. d. Meatball prices will be a function of supply and demand and will therefore oscillate around marginal costs. ANS: C PTS: 1 DIF: 2 REF: 15-1 TOP: Pricing MSC: Interpretive 3. A monopoly's marginal cost will a. be less than its average fixed cost. b. be less than the price per unit of its product. c. exceed its marginal revenue. d. equal its average total cost. ANS: B PTS: 1 DIF: 2 REF: 15-1 TOP: Marginal cost MSC: Interpretive 4. Which of the following statements is (are) true of a monopoly? (i) A monopoly has the ability to set the price of its product at whatever level it desires. (ii) A monopoly's total revenue will always increase when it increases the price of its product. (iii)A monopoly can earn unlimited profits. a. (i) only b. (ii) only c. (i) and (ii) d. (ii) and (iii) ANS: A PTS: 1 DIF: 2 REF: 15-1 TOP: Monopoly MSC: Interpretive 5. Young Johnny inherited the only local cable TV company in town after his father passed away. The company is completely unregulated by the government and is therefore free to operate as it wishes. Assuming that Johnny understands the true power of his new monopoly, he is probably most excited about which of the following statements? (i) He will be able to set the price of cable TV service at whatever level he wishes. (ii) The customers will be forced to purchase cable TV service at whatever price he wants to set. (iii)He will be able to achieve any profit level that he desires. a. (i) only b. (ii) only c. (i) and (iii) d. All of the above are correct. ANS: A PTS: 1 DIF: 2 REF: 15-1 TOP: Monopoly MSC: Interpretive 109 110 Chapter 15/Monopoly 6. Which of the following is an example of a barrier to entry? (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. (iii)The government has given the existing monopoly the exclusive right to produce the good. a. (i) and (ii) b. (ii) and (iii) c. (i) only d. All of the above are examples of barriers to entry. ANS: D PTS: 1 DIF: 1 REF: 15-1 TOP: Barriers to entry MSC: Interpretive 7. Which of the following are necessary characteristics of a monopoly? (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. a. (i) and (ii) b. (i) and (iii) c. (ii) and (iv) d. (i), (ii), and (iii) ANS: A PTS: 1 DIF: 2 REF: 15-1 TOP: Monopoly MSC: Interpretive 8. A fundamental source of monopoly market power arises from a. perfectly elastic demand. b. perfectly inelastic demand. c. barriers to entry. d. availability of "free" natural resources, such as water or air. ANS: C PTS: 1 DIF: 2 REF: 15-1 TOP: Barriers to entry MSC: Interpretive