A Monopoly In Microeconomics Knowledge Quiz!

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  • 1/38 Questions

    A monopolist is:

    • One of a large number of small firms that produce a homogeneous good
    • One of a small number of large firms that produce a differentiated good
    • A single seller of a product with many close substitutes
    • One of a small number of large firms that produce a homogeneous good
    • A single seller of a product with no close substitutes
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About This Quiz

This is a knowledge quiz about monopoly in microeconomics. You might only know about the word “monopoly” from the popular boardgame which is famous for making families and friends question their loyalty to one another, but the term refers to one person or firm’s exclusive control of the supply or trade in a particular commodity or service. What can you See moretell us about monopolies in relation to the world of microeconomics? Let’s find out!

A Monopoly In Microeconomics Knowledge Quiz! - Quiz

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  • 2. 

    Which of the following is true of monopoly?

    • There are no barriers to entry.

    • The firm is a price taker.

    • There are no close substitutes for the product being produced.

    • There are many firms in the industry.

    • The firm faces a horizontal demand curve.

    Correct Answer
    A. There are no close substitutes for the product being produced.
    Explanation
    In a monopoly, there are no close substitutes for the product being produced. This means that consumers do not have alternative options that are similar to the monopolized product. As a result, the monopolistic firm has a significant amount of market power and can control the price and quantity of the product without facing much competition. This lack of substitutes allows the firm to maintain its dominance in the market and potentially earn high profits.

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  • 3. 

    Which of the following could be true of perfect competition but not of monopoly?

    • The government licenses production of the good to a few firms.

    • The government grants a patent for the good.

    • A firm can earn economic profit in the long run.

    • If price falls below average variable cost, it pays to shut down.

    • There are no barriers to entry.

    Correct Answer
    A. There are no barriers to entry.
    Explanation
    In perfect competition, there are no barriers to entry, meaning that new firms can easily enter the market and compete with existing firms. This is not true in a monopoly, where there is only one firm in the market and there are significant barriers to entry, such as high start-up costs, exclusive licenses, or patents. Therefore, the absence of barriers to entry is a characteristic of perfect competition, but not of a monopoly.

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  • 4. 

    Which of the following prevents potential competitors from entering a monopolist's market?

    • Legal restrictions

    • Diseconomies of scale

    • Product differentiation

    • Stable market demand

    • Rising marginal cost

    Correct Answer
    A. Legal restrictions
    Explanation
    Legal restrictions prevent potential competitors from entering a monopolist's market. This means that the monopolist has exclusive rights or privileges granted by the government, such as patents or licenses, that make it difficult or impossible for other companies to enter the market and compete with them. These legal barriers create a barrier to entry and give the monopolist control over the market, allowing them to maintain their monopoly power.

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  • 5. 

     In the monopoly market structure, new firms:

    • Cannot profitably enter the industry, even in the long run

    • May freely enter and leave the industry in both the short run and the long run

    • May freely enter and leave the industry in the long run only

    • May freely enter and leave the industry in the short run only

    • Have no incentive to enter the industry, even if economic profits are present

    Correct Answer
    A. Cannot profitably enter the industry, even in the long run
    Explanation
    In a monopoly market structure, there is only one firm that controls the entire market. This firm has significant barriers to entry, such as high start-up costs, exclusive access to resources, or legal restrictions. As a result, new firms cannot enter the industry and compete with the monopoly firm, even in the long run. The monopoly firm has established such a strong market position that it can continue to generate profits without facing any competition. Therefore, the correct answer is that new firms cannot profitably enter the industry, even in the long run.

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  • 6. 

    Natural monopolies form when:

    • Small firms merge to form larger firms

    • One firm has control over the entire supply of a basic input required to produce the product

    • One firm's monopoly position is created and enforced by the government

    • One firm receives patent protection for certain basic production processes

    • Long-run average cost declines as a firm expands output

    Correct Answer
    A. Long-run average cost declines as a firm expands output
    Explanation
    Natural monopolies form when long-run average cost declines as a firm expands output. This means that as a firm increases its production, its average cost of producing each unit decreases. This can occur due to economies of scale, where the firm benefits from lower costs per unit as it operates at a larger scale. As a result, the firm becomes more efficient and can offer lower prices compared to smaller firms, making it difficult for competitors to enter the market and compete effectively.

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  • 7. 

    A natural monopoly results when a firm has:

    • A license

    • A patent

    • Official approval to produce a product

    • Decreasing average costs over the range of market demand

    • Exclusive use of a natural resource

    Correct Answer
    A. Decreasing average costs over the range of market demand
    Explanation
    A natural monopoly occurs when a firm is able to achieve decreasing average costs over the range of market demand. This means that as the firm produces more and more units of a product, the average cost of production decreases. This can be due to economies of scale, where the firm benefits from cost savings as it operates at a larger scale. As a result, the firm is able to produce and sell its product at a lower cost than any potential competitors, making it the most efficient and cost-effective option in the market.

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  • 8. 

    The demand curve a monopolist uses in making an output decision is:

    • The same as the demand curve facing a perfectly competitive firm

    • Vertical because there are no close substitutes for its product

    • Horizontal because there are no close substitutes for its product

    • The same as the market demand curve

    • Perfectly inelastic

    Correct Answer
    A. The same as the market demand curve
    Explanation
    The correct answer is "the same as the market demand curve." A monopolist is the sole producer in the market, so its demand curve is the same as the market demand curve. This means that the monopolist faces the entire market demand for its product and has the ability to set the price based on the quantity it decides to produce.

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  • 9. 

    Which of the following is true of marginal revenue for a monopolist that charges a single price:

    • P = MR because there are no close substitutes for the monopolist's product.

    • P > MR because the monopolist must decrease price on all units sold in order to sell an additional unit.

    • P < MR because the monopolist must decrease price on all units sold in order to sell an additional unit.

    • AR = MR because there are no close substitutes for the monopolist's product.

    • P = MR only at the profit-maximizing quantity.

    Correct Answer
    A. P > MR because the monopolist must decrease price on all units sold in order to sell an additional unit.
    Explanation
    This answer is correct because a monopolist faces a downward-sloping demand curve, meaning that in order to sell an additional unit, the monopolist must lower the price for all units sold. As a result, the marginal revenue (MR) generated from selling an additional unit will be less than the price (P) charged for that unit. Therefore, P > MR.

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  • 10. 

    The demand curve facing a single-price monopolist:

    • Is the same as its average revenue curve

    • Is the same as its marginal revenue curve

    • Is the same as the perfect competitor's demand curve

    • Lies above its average revenue curve

    Correct Answer
    A. Is the same as its average revenue curve
    Explanation
    The demand curve facing a single-price monopolist is the same as its average revenue curve because a monopolist is the sole seller in the market and has control over the price. The monopolist faces the entire market demand curve and can set the price at any level. The average revenue curve represents the revenue per unit of output, which is equal to the price for a monopolist. Therefore, the demand curve and average revenue curve are the same for a monopolist.

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  • 11. 

    Suppose that a monopolist must choose between two points on its demand curve: it can sell 100 units for $3 each, or it can sell 140 units for $2 each. Which of the following is true?

    • The monopolist is facing elastic demand.

    • The monopolist is facing unit elastic demand

    • The monopolist is facing inelastic demand.

    • The monopolist is facing perfectly elastic demand

    • The elasticity of demand cannot be determined with the information given.

    Correct Answer
    A. The monopolist is facing inelastic demand.
    Explanation
    The monopolist is facing inelastic demand because the price decreases from $3 to $2, but the quantity demanded only increases from 100 units to 140 units. This suggests that the percentage change in quantity demanded is smaller than the percentage change in price, indicating inelastic demand.

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  • 12. 

    A profit-maximizing monopolist:

    • Never produces on the inelastic portion of the demand curve because it can increase profit by increasing output

    • Never produces on the inelastic portion of the demand curve because marginal revenue exceeds marginal cost

    • Always produces on the inelastic portion of the demand curve

    • Never produces on the elastic portion of the demand curve because there are no substitutes for the good it produces

    • Never produces on the inelastic portion of the demand curve because marginal revenue is negative there

    Correct Answer
    A. Never produces on the inelastic portion of the demand curve because marginal revenue is negative there
    Explanation
    A profit-maximizing monopolist never produces on the inelastic portion of the demand curve because marginal revenue is negative there. This means that for each additional unit sold, the monopolist's total revenue decreases. To maximize profit, the monopolist would produce at a level where marginal revenue equals marginal cost. However, since marginal revenue is negative on the inelastic portion of the demand curve, producing there would result in a loss rather than a profit. Therefore, the monopolist avoids producing on the inelastic portion of the demand curve.

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  • 13. 

    A profit-maximizing monopolist never produces along the _____ portion of the demand curve because marginal revenue is _____ there.

    • Elastic; positive

    • Elastic; negative

    • Inelastic; negative

    • Inelastic; positive

    • Inelastic; zero

    Correct Answer
    A. Inelastic; negative
    Explanation
    A profit-maximizing monopolist never produces along the inelastic portion of the demand curve because marginal revenue is negative there. This is because when demand is inelastic, a decrease in price does not lead to a significant increase in quantity demanded. As a result, the monopolist would have to lower the price significantly to sell more units, causing the marginal revenue to be negative. To maximize profit, the monopolist focuses on producing where marginal revenue is positive, typically along the elastic portion of the demand curve.

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  • 14. 

    Negative marginal revenue means that:

    • The firm is maximizing its economic profit

    • The firm is maximizing its total revenue

    • Total revenue is increasing at an increasing rate as output increases

    • Total revenue is increasing at a decreasing rate as output increases

    • Total revenue is decreasing as output increases

    Correct Answer
    A. Total revenue is decreasing as output increases
    Explanation
    When marginal revenue is negative, it means that each additional unit of output is generating less revenue than the previous unit. This indicates that total revenue is decreasing as output increases. As the firm produces more goods or services, the additional revenue generated from each unit sold is not enough to compensate for the decrease in price or demand. This suggests that the firm is facing diminishing returns or a decline in market demand, resulting in a decrease in total revenue.

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  • 15. 

     As a monopolist increases the quantity of output produced, what happens to price (P) and marginal revenue (MR)?

    • Both P and MR remain constant

    • P is constant, but MR decreases

    • Both P and MR decrease, but P falls faster than MR

    • P decreases, but MR is constant

    • Both P and MR decrease, but MR falls faster than P

    Correct Answer
    A. Both P and MR decrease, but MR falls faster than P
    Explanation
    As a monopolist increases the quantity of output produced, both price (P) and marginal revenue (MR) decrease. However, MR falls faster than P. This is because as the monopolist increases production, they have to lower the price in order to sell more units. As a result, the decrease in price is greater than the decrease in marginal revenue, leading to MR falling faster than P. This is a characteristic of monopoly power, where the monopolist has the ability to set prices higher than their marginal revenue.

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  • 16. 

    For a non-discriminating monopolist, describe the relationship between market price (P), average revenue (AR), and marginal revenue (MR).

    • P = AR = MR

    • P > AR = MR

    • P = AR > MR

    • P > AR > MR

    • P = AR < MR

    Correct Answer
    A. P = AR > MR
    Explanation
    In the case of a non-discriminating monopolist, the relationship between market price (P), average revenue (AR), and marginal revenue (MR) is that the market price and average revenue are equal, while marginal revenue is less than average revenue. This means that the monopolist is able to set the market price, and since they are the only supplier in the market, they can charge a price higher than the marginal revenue. As a result, the monopolist's average revenue is equal to the market price, but the marginal revenue is lower due to the diminishing returns of selling additional units.

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  • 17. 

    Which of the following is not true of monopolists?

    • A.The entry of new firms is not a major concern.

    • B.Monopolists seek to maximize profits.

    • C.Monopolists can charge any price they want and make a profit.

    • D.Monopolists can choose any point on the market demand curve.

    • E.Monopolists can raise price more than 10 percent.

    Correct Answer
    A. A.The entry of new firms is not a major concern.
    Explanation
    Monopolists are typically not concerned about the entry of new firms because they have a dominant position in the market with no direct competition. This allows them to have more control over pricing and profits. However, it is important to note that while the entry of new firms may not be a major concern, it does not mean that monopolists completely ignore it. They may still take measures to deter or limit the entry of new competitors to maintain their monopoly power.

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  • 18. 

    Which of the following is true at the profit-maximizing quantity for both a perfectly competitive firm and a monopoly?

    • Price equals marginal cost.

    • Price is greater than marginal cost.

    • Marginal revenue equals marginal cost

    • Marginal revenue is less than marginal cost.

    • Marginal revenue is greater than average revenue.

    Correct Answer
    A. Marginal revenue equals marginal cost
    Explanation
    At the profit-maximizing quantity, both a perfectly competitive firm and a monopoly aim to maximize their profits. In order to do so, they both set their output level where marginal revenue equals marginal cost. This is because at this point, the additional revenue generated from selling one more unit is equal to the additional cost incurred in producing that unit. By setting their output at this point, they can maximize their profits by avoiding any additional costs that would outweigh the revenue gained.

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  • 19. 

    A monopolist:

    • Can charge whatever price it wants

    • Charges more than almost any consumer is willing to pay

    • Is constrained by marginal cost in setting price

    • Is constrained by demand in setting price

    • Always earns an economic profit

    Correct Answer
    A. Is constrained by demand in setting price
    Explanation
    A monopolist is constrained by demand in setting price because they have market power and are the sole provider of a particular good or service. They can charge higher prices than in a competitive market, but they still need to consider the demand for their product. If they set a price that is too high, consumers may choose not to purchase their product, resulting in a decrease in demand and potentially lower profits. Therefore, the monopolist must consider the demand elasticity and set a price that maximizes their profits while still attracting customers.

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  • 20. 

    A monopolist earning short-run economic profit determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit?

    • Raise price and lower output.

    • Lower price and lower output.

    • Raise price and raise output.

    • Lower price and raise output.

    • Lower output but leave price unchanged.

    Correct Answer
    A. Raise price and lower output.
    Explanation
    The monopolist should raise price and lower output in order to increase profit. This is because the marginal revenue is less than the marginal cost at the current level of output, indicating that the firm is not maximizing its profit. By raising the price, the monopolist can increase its revenue per unit sold, while lowering the output helps to reduce the costs associated with producing additional units. This combination allows the firm to increase its profit by improving the balance between revenue and cost.

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  • 21. 

    Irving R. Associates is granted a patent for a new product for which there are no close substitutes. Which of the following must be true at the profit-maximizing quantity?

    • Price is equal to marginal cost.

    • Average revenue is equal to marginal cost.

    • Marginal revenue is positive.

    • Marginal revenue is less than marginal cost.

    • Price is greater than average revenue.

    Correct Answer
    A. Marginal revenue is positive.
    Explanation
    In order for Irving R. Associates to maximize profit, the marginal revenue must be positive. This means that for each additional unit sold, the revenue generated is greater than the cost of producing that unit. This is because if the marginal revenue were negative, it would mean that the revenue generated from selling an additional unit is less than the cost of producing it, resulting in a decrease in profit. Therefore, in order to maximize profit, the marginal revenue must be positive.

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  • 22. 

    One likely result of monopoly power is:

    • A wide variety of substitute products from which consumers can choose

    • An elimination of barriers to industry entry

    • A decline in government regulation

    • A higher price than would exist in a competitive industry

    • An improvement in allocative efficiency

    Correct Answer
    A. A higher price than would exist in a competitive industry
    Explanation
    Monopoly power refers to a situation where a single firm has control over a particular market or industry. In such a scenario, the firm has the ability to set prices higher than what would exist in a competitive industry. This is because monopolies face limited or no competition, allowing them to charge higher prices and earn greater profits. Without competition, consumers have fewer options and are forced to pay the higher prices set by the monopoly. Therefore, the likely result of monopoly power is a higher price than what would be seen in a competitive market.

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  • 23. 

    If marginal cost is positive, which of the following is true?

    • A monopolist always produces on the inelastic portion of the firm's demand curve.

    • A monopolist always produces on the inelastic portion of the market demand curve.

    • A monopolist always produces on the elastic portion of the market demand curve.

    • A monopolist always produces on the unit elastic portion of the market demand curve.

    • The presence of a monopolist increases the elasticity of demand.

    Correct Answer
    A. A monopolist always produces on the elastic portion of the market demand curve.
    Explanation
    A monopolist always produces on the elastic portion of the market demand curve because if the marginal cost is positive, it means that the cost of producing an additional unit of output is increasing. In order to maximize profits, the monopolist will produce at a level where the marginal cost is equal to the marginal revenue. This occurs at the elastic portion of the demand curve, where a small change in price leads to a relatively larger change in quantity demanded. By producing at this point, the monopolist can charge a higher price and still sell a significant quantity of goods, maximizing their profits.

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  • 24. 

    Suppose a monopolist cannot price discriminate. To maximize profit, it will:

    • Always produce in the inelastic range of its demand curve

    • Never produce in the elastic range of its demand curve

    • Never produce in the inelastic range of its demand curve

    • Never produce in the elastic range of its marginal cost curve

    • Produce in the elastic range of the marginal revenue curve

    Correct Answer
    A. Never produce in the inelastic range of its demand curve
    Explanation
    A monopolist that cannot price discriminate will never produce in the inelastic range of its demand curve because in this range, the demand is relatively insensitive to price changes. This means that even if the monopolist increases the price, the quantity demanded will not decrease significantly, resulting in a smaller change in total revenue. To maximize profit, the monopolist needs to produce where marginal revenue equals marginal cost. Producing in the inelastic range would result in a lower marginal revenue, which would not be optimal for profit maximization.

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  • 25. 

    In the short run, how will a profit-maximizing monopolist react if its marginal cost suddenly increases? It will:

    • Lower price to expand revenue possibilities

    • Restrict output to extract a higher price from customers

    • Maintain the current price if profit is still positive

    • Increase plant size to lower marginal cost

    • Decrease plant size to lower marginal cost

    Correct Answer
    A. Restrict output to extract a higher price from customers
    Explanation
    When a profit-maximizing monopolist faces an increase in marginal cost, it will choose to restrict its output in order to extract a higher price from customers. By reducing the quantity supplied, the monopolist can create artificial scarcity, which allows them to charge a higher price for their product. This strategy helps the monopolist maintain or even increase their profit despite the increase in costs. By limiting the availability of the product, the monopolist can create a sense of exclusivity and higher demand, enabling them to charge a premium price.

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  • 26. 

    Suppose the only professional hockey team within 500 miles is the Salt Lake City Slappers team. If the State of Utah imposes a profits tax on sports teams, the Slappers will:

    • Raise ticket prices

    • Lower ticket prices to boost sales

    • Maintain ticket prices and suffer a loss in profits

    • Expand the number of home hockey games

    • Reduce the number of home hockey games

    Correct Answer
    A. Raise ticket prices
    Explanation
    The correct answer is raise ticket prices. If the State of Utah imposes a profits tax on sports teams, the Slappers will likely increase ticket prices in order to offset the additional tax burden and maintain their profitability. By raising ticket prices, they can generate more revenue to compensate for the tax and ensure that their profits are not significantly impacted.

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  • 27. 

    A profit-maximizing monopolist produces an output level at which:

    • Marginal revenue is the greatest distance from marginal cost

    • Price is less than marginal cost

    • The value to society of the last unit produced equals marginal cost

    • Marginal revenue equals marginal cost

    • Consumers wish to purchase less than what is produced because of high monopoly prices

    Correct Answer
    A. Marginal revenue equals marginal cost
    Explanation
    The correct answer is that a profit-maximizing monopolist produces an output level at which marginal revenue equals marginal cost. This means that the additional revenue generated from selling one more unit of output is equal to the additional cost incurred in producing that unit. At this level of output, the monopolist is maximizing its profit because it is neither underproducing (where marginal revenue is greater than marginal cost) nor overproducing (where marginal cost is greater than marginal revenue).

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  • 28. 

    In the short run, a monopolist will always shut down when:

    • Total cost is greater than total revenue at all output levels

    • Total variable cost is greater than fixed cost

    • Total revenue is greater than total variable cost at all output levels

    • Fixed cost is greater than total revenue at all output levels

    • Total variable cost is greater than total revenue at all output levels

    Correct Answer
    A. Total variable cost is greater than total revenue at all output levels
    Explanation
    In the short run, a monopolist will always shut down when total variable cost is greater than total revenue at all output levels. This means that the cost of producing each additional unit of output exceeds the revenue generated from selling that unit. As a result, the monopolist is unable to cover its variable costs and would incur losses by continuing to produce. Therefore, it is more profitable for the monopolist to shut down operations in the short run rather than continuing to operate at a loss.

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  • 29. 

    A monopolist has no supply curve because:

    • As demand changes, each output level can be consistent with more than one profit-maximizing price

    • Monopolists tend to restrict output

    • Monopolists have no marginal cost curve

    • Monopolists can charge any price they want

    • As demand changes, the firm's profit-maximizing choice of output may change

    Correct Answer
    A. Monopolists can charge any price they want
    Explanation
    Monopolists can charge any price they want because they have sole control over the market. Unlike in a competitive market where prices are determined by supply and demand, a monopolist can set the price based on their own profit-maximizing objectives. They have the power to manipulate prices without the constraint of competition, allowing them to charge higher prices and earn higher profits. This lack of competition eliminates the need for a supply curve, as the monopolist can simply choose the price that maximizes their profits.

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  • 30. 

    Barriers to entry:

    • Prevent monopolies from earning profit in the long run

    • Prevent monopolies from earning profit in the short run

    • May allow monopolies to earn profit in the long run

    • Prevent government from regulating a monopoly

    • Prevent a natural monopoly from raising its price

    Correct Answer
    A. May allow monopolies to earn profit in the long run
    Explanation
    Barriers to entry refer to obstacles or conditions that make it difficult for new firms to enter a market and compete with existing monopolies. These barriers can include high start-up costs, economies of scale, legal restrictions, or exclusive access to resources. By preventing new competitors from entering the market, monopolies can maintain their market power and continue earning profits in the long run. Therefore, the correct answer is that barriers to entry may allow monopolies to earn profit in the long run.

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  • 31. 

    Firms can earn economic profits even in the long run if:

    • They charge the highest price possible

    • There is a cost-reducing technological change

    • There are significant barriers to entry

    • Marginal revenue equals marginal cost

    • Price is less than average variable cost at all rates of output

    Correct Answer
    A. There are significant barriers to entry
    Explanation
    Firms can earn economic profits even in the long run if there are significant barriers to entry. These barriers can prevent new firms from entering the market and competing with existing firms. As a result, the existing firms can maintain their market power and charge higher prices, leading to economic profits. These barriers can include legal restrictions, high start-up costs, patents, and exclusive access to resources or distribution channels.

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  • 32. 

    An important difference between a perfectly competitive firm and a monopolist is that:

    • The perfectly competitive firm tends to be larger

    • Only the monopolist attempts to maximize profit

    • Only the perfectly competitive firm maximizes profit

    • The perfectly competitive firm faces a horizontal demand curve and the monopolist faces a downward-sloping demand curve

    • Only the monopolist maximizes profit at the quantity where marginal cost equals marginal revenue

    Correct Answer
    A. The perfectly competitive firm faces a horizontal demand curve and the monopolist faces a downward-sloping demand curve
    Explanation
    The correct answer is that the perfectly competitive firm faces a horizontal demand curve and the monopolist faces a downward-sloping demand curve. In a perfectly competitive market, there are many buyers and sellers, and each firm is a price taker, meaning it has no control over the price and faces a horizontal demand curve. On the other hand, a monopolist is the sole seller in the market and has control over the price, allowing them to set a higher price and face a downward-sloping demand curve.

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  • 33. 

    Non-discriminating monopoly is similar to perfect competition in that:

    • They have the same level of barriers to entry

    • They have a similar number of firms in the industry

    • The demand curve facing the firm is perfectly elastic for both

    • Price equals marginal revenue for both

    • Price equals average revenue for both

    Correct Answer
    A. Price equals average revenue for both
    Explanation
    Non-discriminating monopoly is similar to perfect competition in that the price equals average revenue for both. In both market structures, the price charged by the firm is equal to the average revenue it receives per unit of output. This means that each unit sold contributes the same amount to total revenue. However, it is important to note that there are other differences between non-discriminating monopoly and perfect competition, such as barriers to entry and the number of firms in the industry.

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  • 34. 

    Compared to the productive efficiency of a perfectly competitive firm, a monopolist tends to be:

    • Very efficient because it charges a higher price

    • More efficient because it produces greater output

    • Inefficient

    • Equally efficient, as it also produces where MR = MC

    • Very efficient because it conserves resources by producing less output

    Correct Answer
    A. More efficient because it produces greater output
    Explanation
    A monopolist tends to be more efficient because it produces greater output. In a perfectly competitive market, firms produce at the point where price equals marginal cost (P=MC), which leads to allocative efficiency. However, monopolists have market power and can set their own price, which allows them to produce at a level where marginal revenue equals marginal cost (MR=MC). This means that monopolists can produce at a higher level of output compared to perfectly competitive firms, resulting in a higher level of productive efficiency.

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  • 35. 

    If a perfectly competitive industry is monopolized, consumer surplus:

    • Can be expected to decrease

    • Will usually remain constant

    • Can be expected to increase

    • Drops from a high value to zero

    • Increases from zero to a high value

    Correct Answer
    A. Can be expected to decrease
    Explanation
    In perfect competition, consumer surplus is abundant but diminishes under monopoly. Monopoly profit accrues to the monopolist, contributing to the reduction, while deadweight loss further erodes it. Despite these losses, a portion of consumer surplus persists in a monopolistic market.

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  • 36. 

    The welfare loss of monopoly is also called:

    • Converted consumer surplus

    • Deadweight loss

    • Economic profit under monopoly

    • Producer surplus

    • Contestable profit

    Correct Answer
    A. Deadweight loss
    Explanation
    Deadweight loss refers to the economic inefficiency caused by a monopoly. It occurs when the monopoly restricts output and raises prices, resulting in a loss of consumer surplus and a decrease in overall welfare. This loss is caused by the reduction in consumer choices, higher prices, and a decrease in total output compared to a perfectly competitive market. Deadweight loss represents the loss of potential gains from trade and is a key concept in understanding the negative impacts of monopolies on society.

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  • 37. 

    For which of the following products would price discrimination be easiest?

    • Orange juice

    • Diamonds

    • Compact disks

    • Haircuts

    • Gasoline

    Correct Answer
    A. Haircuts
    Explanation
    Price discrimination is easiest for products that have low production costs and high variability in consumer willingness to pay. Haircuts meet these criteria as they can be provided at a relatively low cost and consumers have different preferences and budgets for haircuts. Hair salons can easily offer different prices based on factors such as location, stylist experience, and additional services, allowing them to engage in price discrimination. This is in contrast to products like orange juice, diamonds, compact disks, and gasoline, which have more standardized prices and less room for differentiation.

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  • 38. 

    Which of the following is a major criticism of a monopoly as a cause of allocative inefficiency?

    • A monopolist fails to expand output to the level where the consumers' evaluation of an additional unit is just equal to its opportunity cost

    • A monopolist has no incentive to produce efficiently, because even if it pays no attention to the costs of production, it will be guaranteed an economic profit

    • A monopolist will always make profits therefore providing an incentive to keep prices at the level that maximizes consumer surplus

    • A monopolist has an advantage because it can purchase the resources in a competitive market

    • Consumer surplus would no longer be equal to producer surplus

    Correct Answer
    A. A monopolist fails to expand output to the level where the consumers' evaluation of an additional unit is just equal to its opportunity cost
    Explanation
    A major criticism of a monopoly as a cause of allocative inefficiency is that a monopolist fails to expand output to the level where the consumers' evaluation of an additional unit is just equal to its opportunity cost. This means that the monopolist does not produce enough to satisfy consumer demand and maximize overall welfare. By restricting output, the monopolist can charge higher prices and earn more profit, but this comes at the expense of consumer surplus and overall economic efficiency.

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  • Current Version
  • Jan 15, 2024
    Quiz Edited by
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  • Mar 29, 2011
    Quiz Created by
    Catherine Halcomb

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