Name: ______Class:______Date: ______
EC1000 - Exercise 4 - Week 9
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
____ 1. When a natural monopoly exists, it is
a. always cost effective for government-owned firms to produce the product.
b. never cost effective for one firm to produce the product.
c. always cost effective for two or more private firms to produce the product.
d. never cost effective for two or more private firms to produce the product.
____ 2. Generally, the market for ice cream would be considered
a. a monopolistic market.
b. a competitive market.
c. more organized than an auction.
d. a market where individual sellers have significant market power.
____ 3. A market with only a few sellers would be
a. a monopoly.
b. an oligopoly.
c. a competitive market.
d. a monopolistically competitive market.
____ 4. Reduced competition through merging of companies will raise social welfare
a. if the cost from the synergies exceeds the benefit of increased market power.
b. if the benefit from the synergies exceeds the social cost of increased market power.
c. Always.
d. Never.
____ 5. Private ownership of a monopoly, as opposed to public property, may benefit society because
the monopoly will have an incentive to
a. charge a price that is consistent with that of a benevolent social planner.
b. charge a price that prevents some people from buying.
c. price its good according to the intersection of marginal cost and average revenue.
d. lower its costs so that it can earn more profit.
____ 6. A monopolist's market power is highest if
a. demand is very inelastic.
b. demand is very elastic.
c. the elasticity of demand is equal to one.
d. Market power is independent of the elasticity of demand.
____ 7. A monopolist's profits with price discrimination will be
a. lower than if the firm charged a single, profit-maximizing price
b. the same as if the firm charged a single, profit-maximizing price.
c. higher than if the firm charged just one price because the firm will capture more
consumer surplus.
d. higher than if the firm charged a single price because the costs of selling the good will be
lower.
____ 8. If duopolists individually pursue their own self-interest when deciding how much to produce,
the amount they will produce collectively will
a. be less than the monopoly quantity.
b. be equal to the monopoly quantity.
c. be greater than the monopoly quantity.
d. any of the above are possible.
____ 9. Equilibrium quantity in markets characterized by oligopoly are
a. higher than in monopoly markets and higher than the socially efficient quantity.
b. higher than in monopoly markets and lower than the socially efficient quantity.
c. lower than in monopoly markets and higher than the socially efficient quantity.
d. lower than in monopoly markets and lower than the socially efficient quantity.
____ 10. For the oligopolist that does not collude with its competitors , there are two factors that
affect the decision to raise production. These factors are the
a. production effect and the output effect.
b. output effect and the cost effect.
c. output effect and the price effect.
d. cost effect and the price effect.
____11. Which of the following costs would be regarded as an implicit cost?
a. the cost of accounting services.
b. the opportunity cost of financial capital that has been invested in the business.
c. the cost of compliance with government regulation.
d. all costs that involve outlays of money by the firm.
____12. A French publisher intends to publish a French edition of Mankiw-Taylor. The cost of
translating the book into French is
a. a fixed cost.
b. a variable cost.
c. the total cost.
d. the marginal cost.
____ 13. An equilibrium occurs in a game when
a. price equals marginal cost.
b. quantity supplied equals quantity demanded.
c. all independent strategies counterbalance all dominant strategies.
d. all players follow a strategy that they have no incentive to change.
____ 14. Which of the following might be an effect of advertising?
a. increased product differentiation.
b. increased total costs of production.
c. increased demand for the product.
d. All of the above are correct.
____ 15. What happens in a monopolistically competitive market when firms are doing their best but
still losing money?
a. more firms would enter the market.
b. all firms will exit the market.
c. some firms will exit the market.
d. production stops unless the government subsidises the firms.
____ 16. Firm in a monopolistic competition equilibrium produce
a. at the efficient scale.
b. less than the efficient scale.
c. more than the efficient scale.
d. more or less than the efficient scale depending on whether marginal costs are increasing or decreasing, respectively
.
____ 17. Under monopolistic competition, in the long run equilibrium the price
a. is equal to the marginal and average cost.
b. is greater than the marginal cost and equal to the average cost.
c. is greater than the average cost and equal to the marginal cost.
d. is greater than both the average and marginal costs.
____ 18. When a profit-maximizing firm finds itself minimizing losses because it is unable to earn a
positive profit, this task is accomplished by producing the quantity at which marginal
revenue is equal to
a. sunk cost.
b. average fixed cost.
c. average variable cost.
d. marginal cost.
____ 19. When the marginal cost curve intersects the average cost curve
a. the average cost is lowest.
b. the average cost is highest.
c. the average cost is increasing.
d. the average cost is decreasing.
____ 20. Under duopoly, the sum of the firms’ profit is
a. greater than the monopoly profit.
b. necessarily equal to zero.
c. lower than the monopoly profit but generally positive.
d. equal to the monopoly profit.
True/False
Indicate whether the sentence or statement is true or false.
____ 21. Market power is inversely related to the elasticity of demand.
____ 22. A monopoly maximises its profit when price is equal to average cost.
____ 23. Under monopoly, consumers generally do not benefit from a cost decrease since price is independent of cost.
____ 24. If marginal cost is greater than average cost, the average cost is decreasing.
____ 25. In an oligopolistic market, strategic interactions among the firms are not important.
____ 26. Oligopolistic firms have an incentive to collude since the price tends to be lower than the profit maximising price.
____ 27. A monopolistically competitive market is characterized by barriers to entry.
____ 28. When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium, marginal cost must lie below average total cost.
____ 29. Brand names allow low-quality firms to charge high prices by confounding consumers.
____ 30. The marginal cost can be constant, increasing or decreasing.
Short Answer
31. In the market for "transport" consumers typically have several options (i.e., train, private car, coach, plane, etc.) yet we often think of firms in the railway industry as behaving like monopolists. Using your understanding of monopoly, discuss the context in which East Midlands Trains is a monopolist. Is this characterization universally applicable? Carefully explain your answer.
32. Let us assume that a monopolist decides to maximize revenue, rather than profit. How does this operating objective change the size of the deadweight loss? If you are a "benevolent" manager of a monopoly firm and are interested in reducing the deadweight loss of monopoly, should you maximize profits or maximize revenue? Carefully explain your answer.
33. What is bundling? It has long been claimed that a firm that holds a monopoly over product A and bundles A with B may improperly acquire a monopoly over product B as well. Do you think this argument is compelling?