Pure Monopoly Review

1. Pure monopolists may earn 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.

2. Which of the following approximates a pure monopoly? A. the foreign exchange market B. the Kansas City wheat market C. the diamond market D. the soft drink market

3. 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.

4. 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.

5. For a nondiscriminating imperfectly competitive firm: A. the marginal revenue curve lies above the demand curve. B. the demand and marginal revenue curves coincide. C. the demand curve intersects the horizontal axis where total revenue is at a maximum. D. marginal revenue will become zero at that output where total revenue is at a maximum.

6. 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.

11. The short-run profit maximizing position of an unregulated pure monopolist is characterized by: A. P = minimum ATC. B. P = MC. C. MR = MC. D. MC = ATC.

12. A pure monopolist's short-run profit-maximizing or loss-minimizing position is such that price: A. equals marginal revenue. B. may be greater or less than ATC. C. will always equal ATC. D. always exceeds ATC.

13. 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.

14. A pure monopolist: A. will realize an economic profit if price exceeds ATC at the equilibrium output. B. will realize an economic profit if ATC exceeds MR at the equilibrium output. C. will realize an economic loss if MC intersects the downsloping portion of MR. D. always realizes an economic profit.

20. 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.

21. A pure monopolist is producing an output such that ATC = $4, P = $5, MC = $2, and MR = $3. This firm is realizing: A. a loss that could be reduced by producing more output. B. a loss that could be reduced by producing less output. C. an economic profit that could be increased by producing more output. D. an economic profit that could be increased by producing less output.

22. 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.

23. 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.

24. 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.

27. 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 negative. C. the firm would be maximizing profits. D. it would necessarily incur a loss.

28. Assuming no change in product demand, a pure monopolist: A. can increase price and increase sales simultaneously because it dominates the market. B. adds an amount to total revenue which is equal to the price of incremental sales. C. should produce in the range where marginal revenue is negative. D. must lower price to increase sales.

29. A nondiscriminating 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.

30. 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.

31. 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.

32. The pure monopolist's demand curve is: A. identical with the industry demand curve. B. of unit elasticity throughout. C. perfectly inelastic. D. perfectly elastic.

33. With respect to the pure monopolist's demand curve it can be said that: A. the stronger the barriers to entry, the more elastic is the monopolist's demand curve. B. price exceeds marginal revenue at all outputs greater than 1. C. demand is perfectly inelastic. D. marginal revenue equals price at all outputs.

34. In the short run a pure monopolist's profit: A. will be maximized where price equals average total cost. B. may be positive, zero, or negative. C. are always positive. D. will be zero.

35. Under which of the following situations would a monopolist increase profits by lowering price (and increasing output): A. if it discovered that it was producing where MC = MR B. if it discovered that it was producing where its MC curve intersects its demand curve C. if it discovered that it was producing where MC < MR D. under none of the above circumstances because a monopolist would never lower price

38. If the variable costs of a profit-maximizing pure monopolist decline, the firm should: A. produce more output and charge a higher price. B. produce more output and charge a lower price. C. reduce both output and price. D. raise both output and price.

39. In the short run a pure monopolist: A. always earns an economic profit. B. always earns a normal profit. C. always realizes a loss. D. may realize an economic profit, a normal profit, or a loss.

40. 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.

41. 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.

42. 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.

43. 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.

44. 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.

45. If a pure monopolist is producing more output than the MR = MC output: A. the firm may, or may not, be maximizing profits. B. it will be in the interest of the firm, but not necessarily of society, to reduce output. C. it will be in the interest of the firm and society to increase output. D. it will be in the interest of the firm and society to reduce output.

46. 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.

47. The profit-maximizing output of a pure monopoly is economically inefficient 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.

48. 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 cost and price is greater than marginal cost. D. because it produces beyond minimum average total cost and marginal cost is greater than price.

49. Comparing a pure monopoly and a purely competitive firm with identical costs, we would find in long-run equilibrium that the pure monopolist's: A. price, output, and average total cost would all be higher. B. price and average total cost would be higher, but output would be lower. C. price, output, and average total cost would all be lower. D. price and output would be lower, but average total cost would be higher.

53. 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.

54. Which of the following is not a possible source of natural monopoly? A. large-scale network effects. B. simultaneous consumption. C. greater use of specialized inputs. D. rent-seeking behavior.

55. 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.

56. 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.

57. 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.

58. 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 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.

59. A perfectly discriminating pure monopolist will charge each buyer: 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.

60. 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 monopolist C. a regulated monopolist charging a price equal to average total cost D. a regulated monopolist charging a price equal to marginal cost

66. The dilemma of regulation refers to the idea that: A. the regulated price which achieves allocative efficiency is also likely to result in persistent economic profits. B. the regulated price which 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 which achieves allocative efficiency is also likely to result in losses.

67. 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.

68. 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.

69. 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.

70. 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.

71. If a regulatory commission forces a natural monopoly to charge a price equal to its marginal cost: A. the monopoly may incur a loss. B. resource allocation will be worsened. C. output will decrease. D. the firm will earn only a normal profit.

72. If a regulatory commission forces a natural monopoly to charge a price equal to its average total cost: A. output will decrease. B. the monopolist will realize a normal profit. C. resource allocation will worsen. D. the firm will earn an economic profit.