Activity based questions

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.

2. Assuming that Jerry’s Bicycle Shop operates in a competitive market for bicycles, which of the following statements is(are) true?

(i) He chooses the price at which he sells his bicycles.

(ii) He chooses the quantity of bicycles that he supplies.

(iii) His market is characterized by one or more barriers to entry.

a. (i) only

b. (ii) only

c. (i) and (ii) only

d. (ii) and (iii) only

3. 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.

4. 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.

5. 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)

6. 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.

7. 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 correct.

8. To define a monopoly, we cite the following characteristics:

(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. All of the above are correct.

9. 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.

10. Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly is often

a. not in the best interest of society.

b. one that fails to maximize total economic well-being.

c. inefficient.

d. All of the above are correct.

11. A natural monopoly occurs when

a. the product is sold in its natural state (such as water or diamonds).

b. there are economies of scale over the relevant range of output.

c. the firm is characterized by a rising marginal cost curve.

d. production requires the use of free natural resources, such as water or air.

12. An industry is a natural monopoly when

(i) government assists the firm in maintaining the monopoly.

(ii) a single firm owns a key resource.

(iii) a single firm can supply a fixed number of goods or services at a smaller cost than could two or more firms.

a. (i) only

b. (iii) only

c. (i) and (ii)

d. (ii) and (iii)

13. 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.

14. The defining characteristic of a natural monopoly is

a. constant marginal cost over the relevant range of output.

b. economies of scale over the relevant range of output.

c. constant returns to scale over the relevant range of output.

d. diseconomies of scale over the relevant range of output.

15. Natural monopolies differ from other forms of monopoly because they

a. are not subject to barriers to entry.

b. are not regulated by government.

c. generally don't make a profit.

d. are generally not worried about competition eroding their monopoly position in the market.

16. Patent and copyright laws are major sources of

a. natural monopolies.

b. government-created monopolies.

c. resource monopolies.

d. None of the above are correct.

17. Encouraging firms to invest in research and development and individuals to engage in creative endeavors such as writing novels is one justification for

a. resource monopolies.

b. natural monopolies.

c. government-created monopolies.

d. breaking up monopolies into smaller firms.

18. When a firm's average total cost curve continually declines, the firm is a

a. government-created monopoly.

b. natural monopoly.

c. revenue monopoly.

d. All of the above are correct.

19. Which of the following scenarios best represents a monopoly situation?

a. Bill and Tom work separately from one another but both sell a very rare form of the same diamond. They are the only sellers of this type of diamond in town.

b. Tom owns a fishing tackle shop in Miami, Florida, in which he sells the top-of-the-line fishing equipment.

c. Bill owns the only grocery store in a small community that lies 200 miles from the nearest city.

d. None of the above adequately represents a monopoly.

20. The simplest way for a monopoly to arise is for a single firm to

a. decrease its prices without consulting other firms.

b. decrease production to increase demand for its product.

c. jointly make pricing decisions with other firms.

d. own a key resource.

Use the following information to answer question 21 through 23.

Consider the market for water in a small town in the Old West. Assume that the only source of water is the underground aquifer that lies directly below the town. Wells are used to supply water to the entire town.

21. If dozens of residents have their own wells, which of the following statements most adequately describes the behavior of sellers of water?

a. Since water is a necessity of life, there will be no decline in the quantity of water consumed, regardless of how high the price is raised.

b. Sellers will be able to charge a premium for the water.

c. The price of a gallon of water will exceed its marginal cost.

d. The price of a gallon of water will be driven to equal its marginal cost.

22. Suppose only one resident owns all the wells in town. Which of the following statements is most likely going to be true of the market for water?

a. The price of a gallon of water will be driven to equal its marginal cost.

b. The price of a gallon of water will exceed its marginal cost.

c. Since water is a necessity of life, there will be no decline in the quantity of water consumed, regardless of how high the price is raised.

d. The seller will be able to earn unlimited profit.

23. Assume that Jack is the sole owner of all the wells in town. He decides to move to a more suitable climate and sells the wells to a couple of dozen different town residents.

a. The town residents will likely be better off.

b. The price of water is likely to fall.

c. The individual water sellers will not have as much pricing power as Jack had.

d. All of the above are correct.

24. In practice, monopolies rarely arise from exclusive ownership of a resource because

a. actual economies are quite large.

b. the natural scope of many such markets is often worldwide.

c. few firms own a resource for which there are no close substitutes.

d. All of the above are correct.

25. A government-created monopoly arises when

a. government spending in a certain industry gives rise to monopoly power.

b. the government exercises its market control by encouraging competition among sellers.

c. the government gives a firm the exclusive right to sell some good or service.

d. All of the above could qualify as government-created monopolies.

26. Allowing an inventor to have the exclusive rights to market her new invention will lead to

(i) a product that is priced higher than it would be without the exclusive rights.

(ii) desirablebehavior in the sense that inventors are encouraged to invent.

(iii) higher profits for the inventor.

a. (i) and (ii)

b. (ii) and (iii)

c. (i) and (iii)

d. All of the above are correct.

27. Drug companies are allowed to be monopolists in the drugs they discover in order to

a. allow drug companies to charge a price that is equal to their marginal cost.

b. discourage new firms from entering the drug market.

c. encourage research.

d. All of the above are correct.

28. Authors are allowed to be monopolists in the sale of their books in order to

a. encourage authors to write more and better books.

b. correct for the negative externalities that the internet and television impose.

c. satisfy literary advocacy groups that exercise their lobbying power.

d. promote a society in which people think for themselves and learn from whichever books they please.

29. Which of the following statements is true about patents and copyrights?

(i) They both have benefits and costs.

(ii) They lead to higher prices.

(iii) They enhance the ability of monopolists to earn above-average profits.

a. (i) and (ii)

b. (ii) and (iii)

c. (ii) only

d. All of the above are correct.

Use the figure to answer question 30 and 31

30. The shape of the average total cost curve reveals information about the nature of the barrier to entry that might exist in a monopoly market. Which of the following monopoly types best coincides with the figure?

a. ownership of a key resource by a single firm

b. natural monopoly

c. government-created monopoly

d. None of the above are correct.