The Ultimate Microeconomics Quiz On Monopoly
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When a firm is the only producer of a given product or is the only one offering a given service in the market it has a lot of power over the pricing and this is called a monopoly market. What do you know about this type of market, its level of demand and supply and characteristics? Take up the ultimate microeconomics quiz on monopoly and see how much you know about it.
Questions and Answers
- 1.
Monopolists are price takers
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Monopolists are not price takers, as they have the power to set prices in the market due to their lack of competition. Unlike in a perfectly competitive market where firms are price takers and must accept the market price, monopolists can adjust prices to maximize their profits. They have control over the quantity supplied and can manipulate prices to their advantage, making them price makers rather than price takers. Therefore, the correct answer is False.Rate this question:
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- 2.
The most common source of a barrier to entry into a monopolist's market is that the monopolist owns a key resource necessary for production of that good
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The explanation for the given answer is that while owning a key resource can be a barrier to entry, it is not the most common source of a barrier to entry into a monopolist's market. Other factors such as high capital requirements, economies of scale, government regulations, and patents can also create barriers to entry. Therefore, the statement is false.Rate this question:
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- 3.
A monopoly is the sole seller of a product with no close substitutes
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
A monopoly is a market structure where there is only one seller and no close substitutes for the product they are selling. This means that the monopolistic seller has complete control over the price and supply of the product, as there are no competitors to challenge their market dominance. Therefore, the statement "A monopoly is the sole seller of a product with no close substitutes" is true.Rate this question:
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- 4.
A natural monopoly is a monopoly that uses its ownership of natural resrouces as a barrier to entry into its market
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A natural monopoly is a monopoly that arises due to economies of scale, where one firm can produce goods or services at a lower cost than multiple firms. It is not related to the ownership of natural resources. Therefore, the given statement is false.Rate this question:
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- 5.
The demand curve facing a monopolist is the market demand curve for its product
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The demand curve facing a monopolist is the market demand curve for its product because a monopolist is the sole producer and seller of a product in the market. Therefore, the demand curve that the monopolist faces represents the entire demand for the product in the market. Unlike in a competitive market, where individual firms face a horizontal demand curve, a monopolist faces a downward-sloping demand curve, indicating that as the monopolist increases the price of its product, the quantity demanded decreases.Rate this question:
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- 6.
For the monopolist, marginal revenue is always less than the price of the good
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
A monopolist is the sole provider of a good or service in the market, which gives them the power to control the price. In order to sell more units of the good, the monopolist must lower the price, resulting in a decrease in the marginal revenue earned from each additional unit sold. This is because the monopolist faces a downward-sloping demand curve, meaning that in order to sell more units, they must lower the price for all units sold. Therefore, the marginal revenue earned from each additional unit will always be less than the price of the good.Rate this question:
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- 7.
The monopolist chooses the quantity of output at which marginal revenue equals marginal cost and then uses the demand curve to find the price that will induce consumers to buy the quantity
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement is true because a monopolist maximizes its profit by producing the quantity of output where marginal revenue (MR) equals marginal cost (MC). This is because MR represents the change in total revenue from selling an additional unit, while MC represents the change in total cost from producing an additional unit. By setting MR equal to MC, the monopolist ensures that the last unit produced adds as much to revenue as it does to cost, maximizing profit. After determining the quantity, the monopolist looks at the demand curve to find the price that consumers are willing to pay for that quantity, as the monopolist has control over price in the market.Rate this question:
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- 8.
The supply curve for a monopolist is always positively sloped
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The supply curve for a monopolist is not always positively sloped because a monopolist has the ability to control the quantity of goods or services they produce and sell. Unlike in a competitive market where the supply curve is upward sloping, a monopolist can choose to restrict supply in order to increase prices and maximize profits. This means that the monopolist's supply curve can be upward sloping, downward sloping, or even horizontal depending on their strategic decisions. Therefore, the statement that the supply curve for a monopolist is always positively sloped is incorrect.Rate this question:
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- 9.
A monopolist produces an efficient quantity of output but it is still inefficient because it charges a price that exceeds the marginal cost and the resulting profit is a social cost.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A monopolist is inefficient because it produces less output and charges a higher price compared to a perfectly competitive market. The monopolist restricts output to increase prices and maximize its profits, which leads to a deadweight loss or social cost. Therefore, the statement that a monopolist is efficient in producing output but still inefficient due to the high price and resulting profit as a social cost is false.Rate this question:
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- 10.
Price discrimination is only possible if there is no arbitrage.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Price discrimination refers to the practice of charging different prices to different customers for the same product or service. In order for price discrimination to be effective, there must be no opportunity for arbitrage, which is the process of taking advantage of price differences in different markets. If arbitrage is possible, customers could buy the product or service at the lower price and resell it at the higher price, eliminating the effectiveness of price discrimination. Therefore, the statement that price discrimination is only possible if there is no arbitrage is true.Rate this question:
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- 11.
Price discrimination can raise economic welfare because output increases beyond that which would result under monopoly pricing.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Price discrimination refers to the practice of charging different prices to different customers for the same product or service. This strategy allows firms to maximize their profits by capturing additional consumer surplus. By charging higher prices to customers with a higher willingness to pay and lower prices to customers with a lower willingness to pay, firms can increase their overall revenue and output. This increased output leads to a higher level of economic welfare as more consumers are able to access the product or service at a price they are willing to pay. Therefore, the statement that price discrimination can raise economic welfare by increasing output beyond that which would result under monopoly pricing is true.Rate this question:
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- 12.
Perfect price discrimination is efficient but all of the surpluses is received by the consumer.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Perfect price discrimination occurs when a seller charges each customer the maximum price they are willing to pay for a product or service. While it may lead to efficiency in terms of maximizing the seller's profits, it does not necessarily mean that all of the surpluses are received by the consumer. In fact, perfect price discrimination often results in consumers paying higher prices and the seller capturing a larger portion of the surplus. Therefore, the statement that all of the surpluses are received by the consumer is false.Rate this question:
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- 13.
Universities are engaging in price discrimination when they charge different levels of tuition to poor and wealthy students.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Price discrimination refers to the practice of charging different prices for the same product or service to different customers based on their willingness to pay. In this scenario, universities are engaging in price discrimination by charging different levels of tuition to poor and wealthy students. This means that they are setting different prices for these two groups based on their ability to pay. By doing so, universities are able to maximize their revenue by extracting a higher price from wealthy students while still accommodating poorer students.Rate this question:
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- 14.
Using regulations to force a natural monopoly to charge a price equal to its marginal cost of production will cause the monopoly to lose money and exit the industry.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
If a natural monopoly is forced to charge a price equal to its marginal cost of production, it means that it cannot charge a price higher than what it costs to produce each additional unit. This would result in the monopoly not being able to cover its total costs, including fixed costs, and therefore it would incur losses. Eventually, if the monopoly continues to operate at a loss, it would not be sustainable and would likely exit the industry. This is because it would not be able to generate enough revenue to cover its expenses and make a profit.Rate this question:
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- 15.
Most economists argue that the most efficient solution to the problem of monopoly is that the monopoly should be publicly owned.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Most economists argue that the most efficient solution to the problem of monopoly is not that the monopoly should be publicly owned. Instead, they suggest that the best solution is to regulate monopolies and promote competition in the market. Public ownership of monopolies can lead to inefficiencies and lack of innovation, as there is no competition to drive improvement. Therefore, the statement that the most efficient solution is public ownership of monopolies is false.Rate this question:
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- 16.
Which of the following is not a barrier to entry in a monopolized market?
- A.
The government gives a single firm the exclusive right to produce some good
- B.
The cost of production make a single producer more efficient than a large number of producers
- C.
A key resource is owned by a single firm
- D.
A single firm is very large
Correct Answer
D. A single firm is very largeExplanation
A single firm being very large is not a barrier to entry in a monopolized market because the size of a firm does not prevent other firms from entering the market and competing. In fact, a large firm may even attract more competition due to its dominance in the market. Barriers to entry typically refer to factors that limit or restrict new firms from entering a market, such as exclusive rights, cost advantages, or ownership of key resources.Rate this question:
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- 17.
A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a
- A.
Perfect competitor
- B.
Natural monopoly
- C.
Government monopoly
- D.
Regulated monopoly
Correct Answer
B. Natural monopolyExplanation
A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a natural monopoly. This means that the firm has such high economies of scale that it can produce at a lower cost than any potential competitor. As a result, it is more efficient for the market to be served by a single firm rather than multiple firms. This is typically seen in industries where there are high fixed costs and low marginal costs, such as utilities or infrastructure.Rate this question:
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- 18.
A monopolist maximizes profit by producing the quantity at which
- A.
Marginal revenue equals marginal cost
- B.
Marginal revenue equals price
- C.
Marginal cost equals price
- D.
Marginal cost equals demand
- E.
None of the above occurs
Correct Answer
A. Marginal revenue equals marginal costExplanation
A monopolist maximizes profit by producing the quantity at which marginal revenue equals marginal cost. This is because marginal revenue represents the additional revenue generated by selling one more unit of a product, while marginal cost represents the additional cost incurred in producing one more unit. By setting production at the point where these two values are equal, the monopolist ensures that the revenue gained from selling an additional unit is equal to the cost of producing that unit, maximizing their profit.Rate this question:
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- 19.
Which of the following statements about price and marginal cost in competitive and monopolized markets is true?
- A.
In competitive markets, price equals marginal cost; in monopolized markets, price equals marginal cost
- B.
In competitive markets, price exceeds marginal cost; in monopolized markets, price exceeds marginal cost
- C.
In competitive markets, price equals marginal cost; in monopolized markets, price exceeds marginal cost
- D.
In competitive markets, price exceeds marginal cost; in monopolized markets, price equals marginal cost
Correct Answer
C. In competitive markets, price equals marginal cost; in monopolized markets, price exceeds marginal costExplanation
In competitive markets, price equals marginal cost because in a competitive market, firms have no market power and are price takers. Therefore, they set their prices equal to their marginal costs in order to maximize their profits. On the other hand, in monopolized markets, price exceeds marginal cost because monopolies have market power and can set prices higher than their marginal costs to maximize their profits. This is because monopolies face less competition and can control the market by restricting output and raising prices.Rate this question:
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- 20.
South-Western is a monopolist in the production of your textbook because
- A.
South-Western owns a key resource in the production of textbooks
- B.
South-Western is a natural monopoly
- C.
The government has granted South-Western exclusive rights to produce this textbook
- D.
South-Western is a very large company
Correct Answer
C. The government has granted South-Western exclusive rights to produce this textbookExplanation
The correct answer is "the government has granted South-Western exclusive rights to produce this textbook". This means that South-Western has been given a legal monopoly by the government, which prohibits any other company from producing the same textbook. This exclusive right gives South-Western complete control over the production and distribution of the textbook, making it the sole provider in the market.Rate this question:
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- 21.
The inefficiency associated with monopoly is due to
- A.
The monopoly's profits
- B.
The monopoly's losses
- C.
Overproduction of the good
- D.
Underproduction of the good
Correct Answer
D. Underproduction of the goodExplanation
Monopolies have the ability to control the supply of a good or service, which often leads to underproduction. This is because monopolies have no competition and can set prices higher than the marginal cost of production, resulting in reduced output. By limiting the quantity of the good or service available in the market, monopolies can maintain higher prices and maximize their profits. However, this underproduction can lead to inefficiency as it restricts consumer choice and can result in a misallocation of resources.Rate this question:
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- 22.
Compared to a perfectly competitive market, a monopoly market will usually generate
- A.
Higher prices and higher output
- B.
Higher prices and lower output
- C.
Lower prices and lower output
- D.
Lower prices and higher output
Correct Answer
B. Higher prices and lower outputExplanation
In a monopoly market, there is only one seller who has control over the supply of a particular product or service. This lack of competition allows the monopolist to charge higher prices since consumers have no alternative options. Additionally, the monopolist may choose to produce a lower quantity of the product in order to maintain higher prices and maximize profits. Therefore, compared to a perfectly competitive market, a monopoly market will usually generate higher prices and lower output.Rate this question:
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- 23.
The monopolist's supply curve
- A.
Is the marginal-cost curve above average variable cost
- B.
Is the marginal-cost curve above average total cost
- C.
Is the upward-sloping portion of the average-total cost curve
- D.
Is the upward-sloping portion of the average variable cost
- E.
Does not exist
Correct Answer
E. Does not existExplanation
The monopolist's supply curve does not exist because a monopolist does not have a supply curve in the traditional sense. Unlike competitive markets where firms can adjust their quantity supplied based on the market price, a monopolist has the ability to set the price and quantity simultaneously. Therefore, the monopolist's supply is not determined by the marginal cost or any other cost curve.Rate this question:
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- 24.
Using government regulations to force a natural monopoly to charge a price equal to its marginal cost will:
- A.
Improve efficiency
- B.
Raise the price of the good
- C.
Attract additional firms to enter the market
- D.
Cause the monopolist to exit the market
Correct Answer
D. Cause the monopolist to exit the marketExplanation
If a natural monopoly is forced to charge a price equal to its marginal cost, it will likely face financial losses as its costs exceed its revenue. This can lead to the monopolist exiting the market as it becomes unsustainable for them to continue operating. By exiting the market, it creates an opportunity for other firms to enter and potentially compete, which can improve efficiency and provide consumers with more choices. Therefore, causing the monopolist to exit the market is the most likely outcome if government regulations enforce pricing equal to marginal cost.Rate this question:
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- 25.
The purpose of antitrust laws is to:
- A.
Regulate the prices charged by a monopoly
- B.
Increase competition in an industry by preventing mergers and breaking up large firms
- C.
Increase merger activity to help generate synergies that reduce costs and raise efficiency
- D.
Create public ownership of natural monopolies
- E.
Do all of the above
Correct Answer
B. Increase competition in an industry by preventing mergers and breaking up large firmsExplanation
Antitrust laws are put in place to promote fair competition in the market. By preventing mergers and breaking up large firms, these laws aim to prevent the formation of monopolies and promote a level playing field for all businesses. This helps to prevent a concentration of power in the hands of a few dominant companies, which can lead to higher prices and limited choices for consumers. By increasing competition, antitrust laws encourage innovation, lower prices, and ultimately benefit consumers and the overall economy.Rate this question:
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- 26.
Public ownership of natural monopolies:
- A.
Tends to be inefficient
- B.
Usually lowers the cost of production dramatically
- C.
Creates synergies between the newly acquired firm and other government-owned companies
- D.
Does none of the above
Correct Answer
A. Tends to be inefficientExplanation
Public ownership of natural monopolies tends to be inefficient because there is less incentive for these companies to operate efficiently and minimize costs. Without competition, there is less pressure to innovate and improve productivity. Additionally, decision-making processes in government-owned companies can be slower and more bureaucratic, leading to inefficiencies in operations. This can result in higher costs for consumers and a less efficient use of resources.Rate this question:
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- 27.
Which of the following statements about price discrimination is not true?
- A.
Price discrimination can raise economic welfare
- B.
Price discrimination requires that the seller be able to separate buyers according to their willingness to pay
- C.
Perfect price discrimination generates a deadweight loss
- D.
Price discrimination increases a monopolist's profits
- E.
For a monopolist to engage in price discrimination, buyers must be unable to engage in arbitrage
Correct Answer
C. Perfect price discrimination generates a deadweight lossExplanation
Perfect price discrimination generates a deadweight loss. Price discrimination refers to the practice of charging different prices to different customers based on their willingness to pay. In perfect price discrimination, the seller is able to extract the entire consumer surplus, resulting in higher profits for the monopolist. However, because the monopolist charges each consumer their maximum willingness to pay, some consumers who would have been willing to purchase the good at a lower price are excluded, leading to a deadweight loss in the market.Rate this question:
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- 28.
If regulators break up a natural monopoly into many smaller firms, the cost of production:
- A.
Will fall
- B.
Will rise
- C.
Will remain the same
- D.
Could either rise or fall depending on the elasticity of the monopolist's supply curve
Correct Answer
B. Will riseExplanation
When regulators break up a natural monopoly into many smaller firms, the cost of production will rise. This is because natural monopolies benefit from economies of scale, meaning that they can produce goods or services at a lower cost due to their large size and efficiency. Breaking up the monopoly into smaller firms eliminates these economies of scale, leading to higher production costs for each individual firm.Rate this question:
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- 29.
A monopoly is able to continue to generate economic profits in the long run because:
- A.
Potential competitors sometimes don't notice the profits
- B.
There is some barrier to entry to that market
- C.
The monopolist is financially powerful
- D.
Antitrust laws eliminate competitors for a specified number of years
- E.
Of all of the above
Correct Answer
B. There is some barrier to entry to that marketExplanation
A monopoly is able to continue generating economic profits in the long run because there is some barrier to entry to that market. This means that potential competitors are unable to easily enter the market and compete with the monopolist. The barrier to entry could be in the form of high start-up costs, exclusive access to resources or technology, legal restrictions, or other factors that make it difficult for new firms to enter the market and challenge the monopoly's dominance. This lack of competition allows the monopolist to maintain their market power and continue earning profits.Rate this question:
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- 30.
If marginal revenue exceeds marginal cost, a monopolist should:
- A.
Increase ouput
- B.
Decrease output
- C.
Keep output the same because profits are maximized when marginal revenue exceeds marginal cost
- D.
Raise the price
Correct Answer
A. Increase ouputExplanation
When marginal revenue exceeds marginal cost, it means that the additional revenue generated from producing one more unit is greater than the additional cost incurred. This indicates that the monopolist can increase their profits by producing and selling more units. Therefore, the monopolist should increase output to take advantage of the situation and maximize their profits.Rate this question:
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