economics data bank

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.