Microeconomics: Theory and Applications with Calculus, 4e, Global Edition (Perloff)

Chapter 11 Monopoly and Monopsony

11.1 Monopoly Profit Maximization

1) For a monopoly, marginal revenue is less than price because

A) the firm is a price taker.
B) the firm must lower price if it wishes to sell more output.
C) the firm can sell all of its output at any price.
D) the demand for the firm's output is perfectly elastic.
Answer: B

2) For a monopoly, marginal revenue is less than price because

A) the demand for the firm's output is downward sloping.
B) the firm has no supply curve.
C) the firm can sell all of its output at any price.
D) the demand for the firm's output is perfectly elastic.
Answer: A

3) Marginal Revenue is
A) the increase in total revenue from selling one more unit of output.
B) equal to P(1 + 1/e).
C) equal to P when the price elasticity of demand is infinite.
D) All of the above.
Answer: D

4) At the current level of output, a firm's marginal cost equals 16 and marginal revenue equals
10. The firm
A) is producing the profit-maximizing amount.
B) should produce more.
C) should produce less.
D) Not enough information.
Answer: C
5) At an output level of 100, a monopolist faces MC = 15 and MR = 17. At output level q = 101,
the monopolist faces MC = 16 and MR = 15. To maximize profits, the firm
A) should produce 100 units.
B) should produce 101 units.
C) The firm cannot maximize profits.
D) The firm is not a monopoly.
Answer: A

6) If a firm is able to set price,

A) it is a monopoly.
B) its marginal revenue is constant.
C) it sells its output at a constant price.
D) it faces a downward-sloping demand curve.
Answer: D
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7) One difference between a monopoly and a competitive firm is that
A) only a monopoly is a price taker.
B) only a monopoly maximizes profit by setting marginal revenue equal to marginal cost.
C) only a monopoly faces a downward-sloping demand curve.
D) None of the above.
Answer: C

8) If the inverse demand function for a monopoly's product is p = a - bQ, then the firm's marginal
revenue function is
A) a.
B) a - (1/2)bQ.
C) a - bQ.
D) a - 2bQ.
Answer: D

9) If the inverse demand function for a monopoly's product is p = 100 - 2Q, then the firm's
marginal revenue function is
A) -2.
B) 100 - 4Q.
C) 200 - 4Q.
D) 200 - 2Q.
Answer: B

10) If the inverse demand curve a monopoly faces is p = 100 - 2Q, then profit maximization
A) is achieved when 25 units are produced.
B) is achieved by setting price equal to 25.
C) is achieved only by shutting down in the short run.
D) cannot be determined solely from the information provided.
Answer: D

11) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then
profit maximization
A) is achieved when 21 units are produced.
B) is achieved by setting price equal to 21.
C) is achieved only by shutting down in the short run.
D) cannot be determined solely from the information provided.
Answer: A

12) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16,
then profit maximization is achieved when the monopoly sets price equal to
A) 16.
B) 21.
C) 25.
D) 58.
Answer: D

13) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16,
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then maximum profit
A) equals $336.
B) equals $882.
C) equals $1,218.
D) cannot be determined solely from the information provided.
Answer: D

14) The monopoly maximizes profit by setting

A) price equal to marginal cost.
B) price equal to marginal revenue.
C) marginal revenue equal to marginal cost.
D) marginal revenue equal to zero.
Answer: C

15) When a monopoly is maximizing its profits,

A) MR > MC.
B) MR < MC.
C) dMR/dQ > dMC/dQ.
D) dMR/dQ < dMC/dQ.
Answer: D

16) The above figure shows the demand and cost curves facing a monopoly. The monopoly
maximizes profit by selling
A) 0 units.
B) 25 units.
C) 50 units.
D) 75 units.
Answer: B
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17) The above figure shows the demand and cost curves facing a monopoly. The monopoly
maximizes profit by setting price equal to
A) $100.
B) $200.
C) $300.
D) $400.
Answer: C

18) The above figure shows the demand and cost curves facing a monopoly. Maximum profit
equals
A) $0.
B) $100.
C) $1,000.
D) $2,500.
Answer: D

19) A profit-maximizing monopolist will never operate in the portion of the demand curve with
price elasticity equal to
A) -3.
B) -1.
C) -1/3.
D) None of the above—the price elasticity does not matter.
Answer: C

20) A profit-maximizing monopoly will never operate in the portion of the demand curve with
MR equal to
A) 3.
B) 2.
C) 1.
D) -1.
Answer: D

21) If a monopoly is operating on the demand curve where price elasticity is equal to -3, and
price equals 3, then MR is equal to
A) -1.
B) 1.
C) -2.
D) 2.
Answer: D

22) If a monopoly is operating on the demand curve where price elasticity is equal to -3, and MR
equals 2, then price is equal to
A) 3.
B) 2.
C) 1.
D) 0.
Answer: A
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23) If the demand shifts, then for a profit maximizing monopolist,
A) price will change while quantity will remain constant.
B) price will change and quantity will change.
C) Both A and B.
D) Neither A nor B.
Answer: C

11.2 Market Power and Welfare

1) The above figure shows the demand and cost curves facing a monopoly. At the profit-
maximizing price, the elasticity of demand equals
A) -1.
B) zero.
C) infinity.
D) -3.
Answer: D

2) The ability of a monopoly to charge a price that exceeds marginal cost depends on
A) the price elasticity of supply.
B) price elasticity of demand.
C) slope of the demand curve.
D) shape of the marginal cost curve.
Answer: B
3) The Lerner Index is
A) the ratio of the difference between price and marginal to price.
B) equal to (Price - MC)/Price.
C) a measure of market power.
D) All of the above.
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Answer: D

4) The above figure shows the demand and cost curves facing a monopoly. If the firm is a profit
maximizer, its Lerner Index will equal
A) 1.
B) 1/3.
C) 1.5.
D) 3.
Answer: B

5) If the demand for a firm's output is perfectly elastic, then the firm's Lerner Index equals
A) zero.
B) one.
C) infinity.
D) one-half.
Answer: A

6) If the demand curve a monopolist faces is perfectly elastic, then the ratio of the firm's price to
the marginal cost is
A) 0.
B) 1.
C) 2.
D) None of the above—the answer cannot be determined.
Answer: B

7) The more elastic the demand curve, a monopoly

A) will have a larger Lerner Index.
B) will face a lower marginal cost.
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C) will earn more profit.
D) will lose more sales as it raises its price.
Answer: D

8) The introduction of satellite television systems would cause the Lerner Index for cable
television to
A) become smaller.
B) increase.
C) change in accordance to the increase in market power of cable TV providers.
D) be unchanged.
Answer: A

9) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then
the firm's Lerner Index equals
A) 58/16.
B) 16/42.
C) 58/42.
D) 42/58.
Answer: D

10) The introduction of satellite television systems would cause the demand curve for cable
television to be
A) more elastic.
B) less elastic.
C) perfectly inelastic.
D) unchanged.
Answer: A

11) Humana Hospital's price/marginal cost ratio of 2.3 is most likely to decline if
A) the number of nearby hospitals increases.
B) the number of nearby hospitals decreases.
C) the demand curve for hospital services shifts rightward.
D) the demand curve for hospital services becomes steeper.
Answer: A

12) As other firms enter a monopoly's market, the monopoly's market power
A) is unaffected.
B) declines.
C) increases.
D) increases according to the Lerner Index but decreases according to the price/marginal cost
ratio.
Answer: B

13) If a monopoly can produce a good at zero marginal cost, then its Lerner Index is
A) zero.
B) one.
C) infinity.
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D) undetermined.
Answer: B

14) A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10. Assuming
profit maximization, the implicit demand elasticity is
A) -0.2.
B) -0.8.
C) -1.25.
D) -5.0.
Answer: C

15) A monopoly incurs a marginal cost of $1 for each unit produced. If the price elasticity of
demand equals -2.0, the monopoly maximizes profit by charging a price of
A) $1.
B) $1.50.
C) $2.
D) $3.
Answer: C

16) If a monopoly's Lerner Index exceeds 1, then

A) it is earning maximum profit.
B) it has ultimate market power.
C) it must be pricing below marginal cost.
D) marginal revenue is negative.
Answer: D

17) If a monopoly discovers that the demand for its output has become more elastic at the
original output level, then it will respond by
A) producing more and setting a higher price.
B) setting a lower price.
C) setting a higher price.
D) producing more while leaving price unchanged.
Answer: B

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18) The above figure shows the demand and cost curves facing a monopoly. The deadweight loss
of this monopoly is
A) $100.
B) $250.
C) $1,250.
D) $2,500.
Answer: C

19) The loss associated with the fact that at the profit-maximizing quantity consumers value the
goods more than it cost to produce them is called
A) deadweight loss.
B) comparative loss.
C) Lerner Loss.
D) Consumer Value Loss.
Answer: A

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20) The above figure shows the demand and marginal cost curves for a monopoly. The
deadweight loss of this monopoly equals
A) h.
B) c.
C) c + f.
D) c + d + e + f.
Answer: C

21) The above figure shows the demand and marginal cost curves for a monopoly. Under
monopoly, consumer surplus equals
A) a + b.
B) a + b + c.
C) a + b + c + d + e + f.
D) None of the above.
Answer: D

22) The existence of a deadweight loss associated with a monopoly can be seen because
A) consumers are willing to pay more for the last unit of output than it cost to produce.
B) the cost of the last unit produced is more than consumers are willing to pay for it.
C) the producer surplus is larger than in a competitive market.
D) None of the above.
Answer: A

23) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16,
then the deadweight loss from monopoly equals
A) $21.
B) $441.
C) $882.
D) $1,764.
Answer: B
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24) For a profit maximizing monopolist, if the MC = 10 and price is set to be 20, then the
elasticity at this price is
A) -2.
B) -1.
C) -0.5.
D) 0.
Answer: A

25) For a monopoly market, if the Lerner Index is 2, then

A) the monopoly is maximizing its profit.
B) the price elasticity of demand is -2.
C) the price elasticity of demand is -0.5.
D) None of the above.
Answer: C

11.4 Causes of Monopolies

1) A flour mill holding exclusive contracts to 95% of the wheat in a large geographic area may
operate as a flour-producing monopoly locally because
A) the mill has a very inelastic supply curve.
B) the mill is a natural monopoly.
C) the mill controls a key input.
D) the government will declare it a monopoly.
Answer: C

2) Which of the following total cost functions suggests the presence of a natural monopoly?
A) TC = 2Q
B) TC = 100 + 2Q
C) TC = 100 + 2Q2
D) All of the above
Answer: B

3) Which of the following average cost functions suggests the presence of a natural monopoly?
A) AC = 2
B) AC = 100/Q + 2
C) TC = 100/Q + 2Q
D) All of the above
Answer: B

4) The situation in which one firm can produce the total output of the market at lower cost than
several firms is called
A) natural monopoly.
B) pure monopoly.
C) ruling monopoly.
D) cost monopoly.
Answer: A

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5) Empirical evidence from electric-power-producing firms suggests that
A) all electric-power-producing firms are natural monopolies.
B) no electric-power-producing firms are natural monopolies.
C) the largest electric-power-producing firms are natural monopolies.
D) the smallest electric-power-producing firms are natural monopolies.
Answer: D

6) Empirical evidence from electric-power-producing firms suggests that the largest electric-
power-producing firms are not natural monopolies because
A) the average cost curve for these firms is U-shaped.
B) no electric-power-producing firms are natural monopolies.
C) the largest firms enjoy economies of scale.
D) the designation of natural monopoly can only be bestowed by the government.
Answer: A

7) Limited government licenses that create a monopoly do so because

A) the license generates a marginal cost advantage.
B) the monopoly will become a natural monopoly.
C) a barrier to enter the market exists.
D) All of the above.
Answer: C

8) An exclusive right to sell a new and useful product, process, substance, or design for a fixed
period of time is called a
A) patent.
B) barrier to entry.
C) monopoly.
D) research disincentive.
Answer: A

9) A justification for patents is that without patents consumer surplus would be

A) larger than with the patent.
B) zero since the product would not be invented.
C) only slightly smaller than with the patent.
D) zero since the monopoly would be a revenue maximizer.
Answer: B

10) Patents
A) will create a profit incentive to do research.
B) might be welfare reducing if granted for too long a period.
C) serve as a barrier to entry.
D) All of the above.
Answer: D

11) Why do patents stimulate research?

A) Patents give firms time to do research.
B) Patents give firms the opportunity to recover research costs and thus a profit motive.
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C) Firms would research as much even without patents.
D) Patents don't stimulate research.
Answer: B

12) Government actions that create monopolies

A) spur product innovation by the monopoly.
B) create deadweight loss.
C) result in lower average costs of production.
D) ensure that firms price at marginal cost.
Answer: B

11.7 Monopsony

1) For a monopsonist, the labor supply curve is upward sloping because

A) the monopsonist must compete with other industries for that labor.
B) the monopsonist requires that the laborers are highly skilled.
C) the monopsonist is the only buyer in that labor market.
D) the monopsonist restricts the supply of labor.
Answer: C

2) Because the labor supply curve for a monopsonist is upward sloping, the monopsonist
A) hires zero units of labor.
B) chooses the perfectly competitive quantity of labor.
C) must increase the wage to attract more units of labor.
D) must take the wage as given by the market.
Answer: C

3) Under monopsony, the wage rate

A) equals the marginal product of labor.
B) equals the marginal revenue product of labor.
C) is less than the marginal revenue product of labor.
D) is greater than it would be under perfect competition.
Answer: C

4) If a firm buys some labor in a competitive market and some labor as a monopsonist, the firm
is most likely to
A) pay the same wage to both types of labor.
B) pay a lower wage to the labor purchased in the competitive market.
C) pay a higher wage to the labor purchased in the competitive market.
D) not exercise any of its monopsony power.
Answer: C

5) For the monopsonist, marginal expenditure is greater than the wage rate because the
monopsonist
A) pays a wage higher than that paid in a competitive market.
B) chooses the perfectly competitive quantity of labor.
C) must increase the wage to all units of labor to attract more units of labor.
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D) must take the wage as given by the market.
Answer: C

6) A monopsonist faces an upward-sloping labor supply curve. This means that his marginal
expenditures on labor are
A) greater than the wage.
B) equal to the wage plus the increase in the wage resulting from hiring one more unit of labor
hired.
C) greater than the wage because hiring more workers requires to pay all workers more.
D) All of the above.
Answer: D

7) The steeper the labor supply curve,

A) the higher the wage the monopsonist pays.
B) the lower the wage the monopsonist pays.
C) the smaller the difference between the wage and the marginal expenditure on labor.
D) the better off workers are.
Answer: B

8) If a firm takes the wage as given, then the supply curve of labor to that firm is
A) horizontal.
B) vertical.
C) upward sloping.
D) downward sloping.
Answer: A

9) If a firm takes the wage as given, then the firm's marginal expenditure on labor curve is
A) above the labor supply curve.
B) below the labor supply curve.
C) the same as the labor supply curve.
D) upward sloping.
Answer: C

10) If the supply of labor to a monopsonist is everywhere unit elastic, then the wage will equal
A) the marginal expenditure.
B) one-half of the marginal expenditure.
C) the marginal revenue product of labor.
D) one.
Answer: B

11) If the supply of labor to a monopsonist is everywhere unit elastic, and the marginal
expenditure equals $1, then the wage will equal
A) 50¢.
B) 75¢.
C) $1.
D) $2.
Answer: A
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12) Which of the following would be most able to act like a monopsonist?
A) a hospital in a small isolated town
B) a hospital in a very big city
C) a law firm in Washington, D.C.
D) a computer software firm in Silicon Valley
Answer: A

13) Universities are able to act as monopsonists in the market for professors because
A) a university usually does not consider hiring faculty members from another institution.
B) faculty members usually have to move to a different city when changing universities.
C) students like all of their professors.
D) senior faculty members are willing to move to a new university at any cost.
Answer: B

14) Relative to a competitive labor market, monopsony

A) is also efficient.
B) creates a deadweight loss because it pays an excessive wage.
C) creates a deadweight loss because the wage is below the marginal revenue product of labor.
D) creates a deadweight loss because the wage is above the marginal revenue product of labor.
Answer: C

15) The gap between the value a monopsony places on the last worker hired and the wage paid
will increase when
A) the supply curve becomes more elastic at the optimum.
B) the supply curve becomes less elastic at the optimum.
C) the supply curve becomes horizontal.
D) the value of the last unit of labor hired is greater than the cost.
Answer: B

16) A monopsonist purchaser of labor that could negotiate a different wage for each worker could
A) purchase less labor than a regular monopsonist.
B) purchase more labor than a regular monopsonist.
C) rotate the marginal expenditure curve to the left.
D) shift the marginal expenditure curve to the left.
Answer: B

17) The difference between the marginal expenditure and the wage is greater when the supply
curve of labor is
A) less elastic at the monopsony optimum.
B) more elastic at the monopsony optimum.
C) more elastic than the demand curve.
D) The difference does not depend on any elasticity.
Answer: B

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