What Do You Know About Monopoly? Quiz
Micro Economics CIA 3
Questions and Answers
- 1.
Monopolists are price takers
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Monopolists are not price takers. In fact, monopolists have the power to set the price for their products or services due to their lack of competition. Unlike price takers, who must accept the prevailing market price, monopolists can manipulate prices to maximize their profits. This ability to control prices is one of the defining characteristics of a monopoly.Rate this question:
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- 2.
A monopoly is the sole seller of a product with no close substitutes
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
A monopoly occurs when a single company has exclusive control over the market for a particular product or service, with no close competitors. This means that there are no alternative products or substitutes available to consumers. In a monopoly, the company has the power to set prices and control supply, leading to potentially higher prices and reduced consumer choice. 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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- 3.
The demand curve facing a monopolist is the market demand curve for its product
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement is true because a monopolist is the sole provider of a product in the market, so the demand curve it faces is the same as the market demand curve. The monopolist has the power to set the price and quantity of its product, and its decisions will affect the overall demand in the market. Therefore, the demand curve facing a monopolist is the market demand curve for its product.Rate this question:
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- 4.
For the monopolist, marginal revenue is always less than the price of the good
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement is true because a monopolist is the sole seller of a product in the market, which gives them the power to set the price. In order to maximize their profits, monopolists often charge a higher price for their goods. However, in order to sell more units of the product, they need to lower the price. This means that the marginal revenue, which is the additional revenue earned from selling one more unit, will always be less than the price of the good.Rate this question:
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- 5.
The supply curve for a monopolist is always positively sloped
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Monopolist can control the price but they can't control the supply hence, the supply curve is not always positively slopedRate this question:
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- 6.
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 for the same product or service to different customers. In order for price discrimination to be effective, there should be no possibility of arbitrage. Arbitrage refers to the act of taking advantage of price differences in different markets to make a profit. If arbitrage is possible, customers can buy the product at a lower price in one market and resell it at a higher price in another market, which would undermine 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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- 7.
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. When a firm engages in price discrimination, it can increase its overall revenue and profit by capturing more consumer surplus. This allows the firm to produce and sell a larger quantity of goods or services, resulting in an increase in overall output. By increasing output beyond what would be possible under monopoly pricing, price discrimination can lead to higher economic welfare as more consumers are able to access and benefit from the product or service. Therefore, the statement is true.Rate this question:
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- 8.
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 to different customers for the same product or service. In this scenario, universities are engaging in price discrimination by charging different levels of tuition to poor and wealthy students. This means that students from lower-income backgrounds are charged a lower tuition fee compared to students from higher-income backgrounds. This practice allows universities to accommodate students from different financial backgrounds and make education more accessible to those who may not be able to afford higher tuition fees. Therefore, the statement is true.Rate this question:
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- 9.
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. In a monopolized market, barriers to entry are factors that make it difficult for new firms to enter and compete with existing firms. These barriers can include exclusive rights granted by the government, cost advantages of a single producer, or ownership of key resources. However, the size of a firm alone does not create a barrier to entry as other firms can still enter the market and compete, regardless of the size of the existing firm.Rate this question:
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- 10.
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 gained from selling one additional unit, while marginal cost represents the additional cost incurred to produce one additional unit. By setting the quantity where these two values are equal, the monopolist ensures that the last unit produced adds as much revenue as it costs to produce, resulting in maximum profit.Rate this question:
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- 11.
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 market and set prices at higher levels, resulting in reduced production levels compared to what would occur in a competitive market. This underproduction of goods leads to inefficiency because it restricts consumer access to the product and limits the overall welfare of society. The lack of competition also reduces incentives for innovation and improvement in quality, further contributing to the inefficiency associated with underproduction in monopolies.Rate this question:
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- 12.
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 complete control over the market, allowing them to set prices at a higher level. This results in higher prices for consumers. Additionally, since there is no competition, the monopolist has no incentive to produce at maximum capacity, leading to lower output levels compared to a perfectly competitive market. Therefore, a monopoly market will usually generate higher prices and lower output.Rate this question:
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- 13.
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 in a competitive market where firms can freely adjust their quantity supplied at a given market price, a monopolist has the ability to set both the price and quantity of their product. Therefore, there is no specific relationship between price and quantity supplied for a monopolist, and thus no supply curve can be drawn.Rate this question:
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- 14.
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 refers to a situation where a seller charges each buyer their maximum willingness to pay. In this case, there is no deadweight loss because the seller captures all consumer surplus. This is because the seller is able to extract the entire consumer surplus and convert it into additional profit. Therefore, the statement that perfect price discrimination generates a deadweight loss is not true.Rate this question:
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- 15.
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 face obstacles or restrictions that prevent them from entering the market and competing with the monopolist. These barriers could include high start-up costs, exclusive access to key resources or technology, legal or regulatory barriers, or strong brand loyalty. As a result, the monopoly is able to maintain its market power and continue earning profits without facing significant competition.Rate this question:
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