study questions for chapter 13 Microeconomics

220:301:01

Instructor: S. Kadambe

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) SECTION 13.1 MONOPOLY AND HOW IT ARISES

patent grants

1) _______

A) an exclusive right to an inventor of a product.

B) a guarantee of quality to consumers.
C) control over a unique source or supply of raw materials.
D) the right to practice a profession.
2) Which of the following is NOT a characteristic of a monopoly? 2) _______
A) barriers to entry
B) a single firm
C) no close substitutes for the product produced
D) easy entry and exit
3) A natural monopoly is defined as
3) _______
A) an industry in which economies of scale allow one firm to supply the entire market at the lowest possible cost.
B) a market in which competition and entry are restricted by the granting of a government license.
C) a market in which competition and entry are restricted by the granting of a patent.
D) any market where one firm constitutes the entire industry.
4) The existence of economies of scale can create ________.
A) a legal monopoly
B) a market in which many firms make identical products
C) a natural monopoly
D) a government monopoly

4) _______

5) A market in which competition and entry are restricted by the granting of a public franchise, government license,
patent, or copyright is called a 5) _______
A) legal monopoly.
B) price-discriminating monopoly.
C) single-price monopoly.
D) natural monopoly.
6) All of the following are examples of price discrimination EXCEPT
A) "early bird specials" at a restaurant.
B) lower ticket prices for matinee performances.
C) "buy now, pay later" payment options.
D) buy-one-get-one-free offers.

6) _______

7) Firms that can price discriminate between customers do so to ________.

7) _______

A) increase employment
B) increase consumer surplus
C) increase their profit
D) decrease the quantity they produce
SECTION 13.2 SINGLE-PRICE MONOPOLY'S OUTPUT AND PRICE

8) The figure above shows the demand curve. for a monopoly's product. If the price and quantity of haircuts move from
point t to point r, the monopoly's
8) _______
A) marginal revenue will decrease.
B) marginal revenue will be higher at r compared to at point t.
C) total revenue will rise.
D) total revenue will remain the same.
9) If a monopolist is maximizing profits, then it is producing an amount of output so that 9) _______
A) MC = AVC. B) MR = MC. C) MR = ATC. D) MR = TC.

10) The figure above shows the demand and cost curves for a single-price monopoly. The firm's economic profit equals
10) ______
A) $300.
B) $0.
C) $50.
D) $100. = 10 units *($30 Average revenue - $20 average cost)
11) Monopolies can make an economic profit in the long run because there
A) is inelastic demand from consumers. B) is a barrier to entry.
C) is free entry and exit. D) are close substitutes for the product.

11) ______

12) Suppose that a monopoly is currently producing the quantity at which marginal revenue is less than marginal cost.
The monopoly can increase its profit by ________.
12) ______
A) lowering its price and increasing its output
B) lowering its price and decreasing its output
C) shutting down
D) raising its price and decreasing its output
13) Sue's Surfboards is the sole renter of surfboards on Big Wave Island. Sue does not price discriminate. For Sue's
Surfboards, the change in total revenue from each additional surfboard rented is her
13) ______
A) marginal cost and is greater than the rental price of a surfboard.
B) marginal revenue and is equal to the rental price of a surfboard.
C) marginal revenue and is less than the rental price of a surfboard.
D) marginal cost and is constant regardless of how many surfboards are rented.
14) An unregulated monopoly will
14) ______
A) produce only where marginal revenue is zero.
B) produce in the inelastic range of its demand curve.
C) produce in the elastic range of its demand curve. NOTE: AT MIDPOINT OF A LINEAR DEMAND, ELASTICITY IS
UNIT. BELOW THAT POINT (THAT IS AT LARGER QUANTITY), DEMAND IS RELATIVELY ELASTIC. AND AT
QUANTITIES LESS THAN THAT AT MID POINT (THAT IS LEFT OF MIDPOINT), THE DEMAND IS RELATIVELY

INELASTIC.
D) flood the market with goods to deter entry.
SECTION 13.3 SINGLE PRICE MONOPOLY AND COMPETITION
15) A major difference between a single-price monopolist and a perfectly competitive firm is that the
A) monopolist can maximize profit by setting the price of the output where demand is inelastic.
B) monopolist's marginal revenue is less than price.
C) monopolist can always increase its profits by increasing the price of its output.
D) monopolist is guaranteed to earn an economic profit.

15) ______

16) Which area in the above figure shows the consumer surplus at the price and quantity that would be set by a singleprice monopoly?
16) ______
A) A + B + C + D + E
B) C + D
C) A + B area above the monopoly price (which is circled on the demand curve) and below the demand curve)
D) C + D + E + F + G + H
17) Relative to a perfectly competitive market with the same cost and demand, a single-price monopolist produces
________ output and charges a ________ price. 17) ______
A) more; lower B) less; higher

C) less; lower

D) more; higher

18) When comparing perfect competition to a single-price monopoly with the same costs 18) ______
A) the sum of producer and consumer surplus is maximized under a monopoly.
B) the sum of producer and consumer surplus is minimized under perfect competition.
C) both market types use resources efficiently.
D) there is a deadweight loss associated with a monopoly.

19) The unregulated, single-price monopolist illustrated in the figure above will set a price of
19) ______
A) $6.00 per unit.
B) $10.00 per unit. NOTE: PROFIT IS MAXIMIZED AT THE QUANTITY, ASSOCIATED WITH MR=MC, SO THE
EQUILIBRIUM (SAME AS PROFIT MAXIMIZING) QUANTITY IS 4. DRAW VERTICAL LINE FROM 4 UNITS. ON
THAT LINE SEE WHAT THE PRICE IS RELEVANT (ON) THE DEMAND CURVE.
C) $8.00 per unit.
D) $2.00 per unit.

20) For the monopoly shown in the figure above, when it maximizes its profit the marginal cost is ________ per unit and
the price is ________ per unit. 20) ______
A) $30; $20.
B) $10; $30 EXPLANATION IS THE SAME AS IN THE LAST QUESTION.
C) $20; $20
D) $10; $20

21) Interlace, Inc. produces and a unique soda. The company cannot price discriminate. The figure above shows Interlace's
demand curve, marginal revenue curve, and marginal cost curve. Interlace's profit maximizing level of output is 21)
______
A) 100,000 bottles
B) 50,000 bottles
C) 0; that is, the firm shuts down.
D) 30,000 bottles.

22) In the above figure, if the single-price monopolist charges a price that maximizes its profits, producer surplus is
22) ______
A) area hacd.
B) area jae.
C) area jbce.
D) approximate area of the rectangle, bcdh.
NOTE: PRODUCER SURPLUS = AREA ABOVE THE SUPPLY CURVE BELOW THE RELEVANT PRICE. SO PART THAT

GOES BELOW THE LINE CORRESPONDING TO 'h' = 10 ON VERTICAL AXIS SHOULD HAVE BEEN INCLUDED.
THAT IS WHY THE CORRECT ANSWER IS APPROXIMATE AREA.

SECTION 13.4 PRICE DISCRIMINATION

23) What condition must exist for a monopolist to effectively price discriminate? 23) ______
A) The monopolist must produce a good or service that can be resold.
B) The monopolist must charge the highest price possible.
C) The monopolist must face consumers with identical willingness to pay.
D) The monopolist must produce a good that cannot be resold.
24) It is easier for a monopolist to price discriminate between groups for a service compared to a good / product because
24) ______
A) it is easier for consumers to resell goods than resell services.
B) it is easier to calculate average willingness to pay for services.
C) customers for goods usually do not differ with respect to their average willingness to pay.
D) it is easier to distinguish between groups of customers for services than customers for goods.
25) The more perfectly a monopoly can price discriminate, the 25) ______
A) larger its output and the lower its profits.
B) smaller its output and the lower its profits.
C) larger its output and the greater its profits. AND CLOSER TO EFFICIENT OUTPUT.
D) smaller its output and the greater its profits.

26) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then it would PRODUCE
AND sell
26) ______
A) 50 tickets.
B) 30 tickets.
C) 60 tickets. NOTE: PERFECT PRICE DISCRIMINATION IMPLIES DEMAND CURVE ITSELF IS MARGINAL
REVENUE. PROFIT MAXIMIZING OUTPUT IS THE ONE AT WHICH MR=MC

D) 100 tickets.
27) If a monopolist can perfectly price discriminate, then 27) ______
A) it will charge just two different prices in two different markets.
B) the deadweight loss is larger than if it cannot price discriminate.
C) it will not give a discount to those who buy in bulk.
D) there will be no consumer surplus. NOTE; EACH UNIT IS SOLD AT ITS MAXIMUM PRICE, SO CONSUMER DOES
NOT GET ANY EXTRA BENEFIT FROM THE PURCHASE THAN WHAT THEY PAID FOR.

28) In the figure above, a single-price unregulated monopoly sets a price equal to 28) ______
A) a.
B) b.
C) c.
D) d.
29) Which of the following is TRUE for a perfect price-discriminating monopoly? 29) ______
A) P > MC for each unit sold
B) P = MC for each unit sold
C) P = ATC for each unit sold
D) P = MR for each unit sold

Demand Schedule Facing a

Perfectly Price Discriminating Firm
Price
(dollars)
Quantity Sold
8
0
7
1
6
2
5
3
4
4
3
5
2
6
1
7
30) Using the demand schedule in the above table, if the firm's marginal cost is constant at $3.00, output for a perfectly
price discriminating monopolist is
30) ______

A) 5 units. NOTE: MR=MC IS THE PROFIT MAXIMIZING CONDITION. WITH PERFECT PRICE DISCRIMINATION,
MR=AR (=PRICE). SO LOOK FOR THE QUANTITY ASSOCIATED WITH A PRICE OF $3 BECAUSE MC=$3.
B) 2 units.
C) 4 units.
D) 3 units.

SECTION 13.5 MONOPOLY REGULATION

31) In a regulated natural monopoly, a marginal cost pricing rule maximizes
A) producer surplus.
B) economic profit.
C) total costs. D) total surplus.

31) ______

32) Suppose a firm is a natural monopoly. Then, until the long-run average cost curve crosses the demand curve, as the
quantity increases the long-run average costs
32) ______
A) decrease and then increase. B) increase and then decrease.
C) decrease.
D) increase.

33) If the natural monopoly shown in the figure above is unregulated, then the deadweight loss will be
33) ______
A) $2 million.
B) $8 million.
C) $4 million. NOTE: OUTPUT IF IT WAS PERFECT COMPETITION IS 4 MILLION UNITS BECAUSE AT 4 MILLION,
MR (SAME AS PRICE) = MC. MONOPOLY OUTPUT IS 2 MILLION WHERE MC=MR OF MONOPOLY. SO THE
DEADWEIGHT LOSS = AREA OF THE TRAINGLE WITH HEIGHT (6 -2 ON THE VERTICAL AXIS) , AND BASE (4 - 2),
THE DIFFEERENCE BETWEEN COMPETITIVE OUTPUT AND MONOPOLY OUTPUT.
D) $0.

34) The figure above shows the demand curve (D) faced by Visual, Inc., a cable TV company, and the firm's marginal
revenue (MR), marginal cost (MC), and average cost (LRAC) curves. If Visual is regulated according to an average cost
pricing rule, it will serve ________ million households and set a price of ________ per household per month.
34)
______
A) 4; $12
B) 3; $24 NOTE: USE PRICE=AVERAGE COST AS THE QUANTITY DETERMINATION RULE.
C) 1; $48
D) 2; $36
35) A natural monopoly that is regulated to set its price according to the marginal cost pricing rule will
35) ______
A) produce a quantity of output such that marginal cost is above average total cost.
B) maximize its profit.
C) produce a quantity of output such that price is above average total cost.
D) incur an economic loss.
NOTE: SO THE REGULATOR OR THE GOVERNMENT MAY ALLOW THE MONOPOLY TO PRICE DISCRIMINATE TO
COVER THE LOSS. ONE FORM OF PRICE DISCRIMINATION IS TO CHARGE ONE PRICE FOR INSTALLATION AND
A DIFFERENT PRICE FOR PER UNIT SERVICE OR USEAGE FEE AS IN ELECTRICITY (UTILITIES) SERVICE.

CHAPTER 12 PERFECT COMPETITION

SECTION 12.1 WHAT IS PERFECT COMPETITION
Quantity sold
5
6
7

Price
$15
$15
$15

36) In the above table, if the quantity sold by the firm rises from 6 to 7, its marginal revenue is
A) $15. B) $90. C) $105.D) $30.
37) For a perfectly competitive firm, price is the same as 37) ______
A) marginal revenue. B) average variable cost.

36) ______

C) total revenue.

D) Both answers A and B are correct.

38) In perfect competition, a firm that maximizes its economic profit will sell its good at a price that is
38) ______
A) below the market price.
B) above the market price.
C) below the market price if its supply curve is inelastic and above the market price if its supply curve is elastic.
D) at the market price.
39) Which of the following is NOT an assumption of perfect competition? 39) ______
A) many firms B) restrictions on entry into the market
C) many buyers D) each firm sells an identical product
40) Price taking behavior exists in
40) ______
A) markets with a monopolist, where consumers have to take price as it is given to them by the monopolist.
B) perfectly competitive markets.
C) automobile markets where consumers have to take the price set by the dealer.
D) Both answers B and C are correct.
SECTION 12.2 FIRM'S OUTPUT DECISION
41) In the short run, a firm will 41) ______
A) produce and incur an economic loss if its total revenue covers its total variable cost but not its total cost.
B) produce and earn an economic profit if its total revenue is equal to its total cost.
C) produce and break even if its total revenue covers its total fixed cost but not its total variable cost.
D) not produce if its total revenue does not cover its total cost.

42) In the above figure, at any price between $8 per unit to $12 per unit, how many units will a profit-maximizing perfectly
competitive firm produce?
42) ______
A) Between 20 and 30, because variable costs are covered so the firm's losses will be minimized by producing rather than
shutting down.
B) None, because the producer will never choose to operate at a loss.
C) Less than 20 because this will reduce marginal cost.

D) More than 30, because variable costs are covered so that the producer can earn economic profits.
43) At a firm's break-even point, its
43) ______
A) marginal revenue equals its average fixed cost.
B) total revenue equals its total opportunity cost.
C) marginal revenue equals its average variable cost.
D) marginal revenue exceeds its marginal cost.

Quantity
(pounds of
cookies)
1
2
3
4
5

Total revenue
(dollars)

Total cost,
(dollars)

15
30
45
60
75

13
24
39
58
81

44) The table above gives the total revenue and total cost for a perfectly competitive firm producing chocolate chip cookies.
SUPPOSE the firm is CURRENTLY producing 1 pound of cookies. IF IT WISHES to maximize profit, THE FIRM WOULD
HAVE TO
44) ______
A) continue producing 1 pound of cookies.
B) shut down.
C) increase its output. NOTE: MAXIMUM PROFIT IS THE MAXIMUM DIFFERENCE BETWEEN TOTAL REVENUE
AND TOTAL COST. 30-24 =6 AND 45-39 =6 OCCUR AT QUANTITIES OF 2 AND 3 POUNDS, NOT 1 POUND.
D) decrease its output.

45) In the above figure, when the firm produces output corresponding to point c, the firm's marginal cost 45) ______
A) is less than its marginal revenue.
B) exceeds its marginal revenue.
C) equals its marginal revenue. NOTE; AT POINT C, PROFIT IS MAXIMUM AND THE CONDITION FOR PROFIT

MAXIMIZATION IN MARGINAL ANALYSIS IS MC=MR.

D) equals its average revenue.

46) The donut market is perfectly competitive. The figure shows the costs of a typical donut producer. In the short run, the
donut producer's supply curve is the curve running from point ________ to point E.
46) ______
A) A
B) B SUPPLY CURVE STARTS AT THE MINIMUM OF AVC ALONG A MC CURVE.
C) C
D) D

SECTION 12.3 OUTPUT, PRICE AND PROFIT IN THE SHORT RUN

47) In the above figure, at a price of $8, a perfectly competitive firm produces ________ and it ________.
A) some output; makes an economic profit
B) 0; incurs an economic loss

47) ______

C) some output; makes zero economic profit

D) 0; makes zero economic profit

48) The figure above shows the marginal revenue and costs of a perfectly competitive firm. The firm's profit is maximized
when the firm produces 48) ______
A) 210 units of output. B) 170 units of output.
C) 90 units of output. D) 130 units of output.

49) The figure above shows the costs for a grower in the perfectly competitive turnip market. If the price is $1,200 for a ton
of turnips, the firm is 49) ______
A) making an economic profit.
B) making zero economic profit.
C) incurring an economic loss.
D) More information is needed to determine if the firm is making a positive economic profit, zero economic profit, or

incurring an economic loss.

50) In the above figure, if the price is P1 and the firm produced Q3, the firm's economic profit is ________ than if it
produced Q1 and ________ than if it produced Q2.

50) ______

A) less; less NOTE: BOTH AT Q3 AND Q1, THE FIRM DOES NOT MAXIMIZE PROFIT; AND
B) more; more
C) less; more
D) more; less

51) The figure above shows a perfectly competitive firm. When the firm maximizes its profit, its total revenue is
______
A) $600.
B) $900.

51)

C) $1,200. MC=MR AT 30 UNITS PER DAY. Q=30 AND P=40 P*Q= 30*40=TOTAL REVENUE
D) unable to be determined without more information.
52) In the short run, an increase in demand for a good that is sold in a perfectly competitive market
52) ______
A) increases the number of firms in the market.
B) increases the economic profits of existing firms in the market. B/C INCREASE IN MARKET DEMAND LEADS TO
INCREASE IN MARKET PRICE AND EACH FIRM TAKES THAT PRICE AS GIVEN.
C) causes more firms to shut down.
D) has no effect on the price.

53) The figure above shows a perfectly competitive firm. The firm is operating; that is, it has not shut down. The firm
produces
53) ______
A) 10 units of output and makes zero economic profit.
B) 10 units of output and incurs an economic loss. B/C MR=MC AT 10 UNITS PER DAY. AT 10 ATC IS $40, MR= $20.
C) 20 units of output and incurs an economic loss.
D) 20 units of output and makes zero economic profit.
54) In the short run, a perfectly competitive firm will make an economic profit as long as 54) ______
A) P > AVC.
B) P > ATC.
C) it maximizes its profit.
D) P > AFC.
SECTION 12.4 OUTPUT, PRICE AND PROFIT IN THE LONG RUN
55) In the long run, the economic profit of a firm in a perfectly competitive market
A) will be above zero. B) can be above, below, or equal to zero.
C) will be below zero. D) will equal zero.

55) ______

56) Homer's Holesome Donuts has determined that its profit-maximizing quantity is 10,000 donuts per year. Homer's
earns $12,000 in revenue from the sale of those donuts. Homer's has two costs. First he pays $16,000 in annual rental
payments for its five-year lease on its store. Second Homer incurs an additional cost of $5,000 for ingredients. Should
Homer's exit the market in the long run?
56) ______

A) no, because all costs are variable in the long run

B) no, because he is making an economic profit
C) yes, because he is incurring an economic loss B/C TOTAL COST = 16000+5000 AND TR =$12000.
D) yes, because all costs are fixed in the long run
57) In the long run, perfectly competitive firms earn just enough revenue to
A) pay all opportunity costs.
B) attract entry.
C) pay all accounting costs.
D) pay all fixed costs.

57) ______

58) In the long-run equilibrium in a perfectly competitive market,

58) ______
A) the firms' owners make a normal profit.
B) marginal cost is at a minimum.
C) the average total cost is maximized. D) the firms make an economic profit.

59) The figure above shows the costs for the typical grower in the perfectly competitive turnip market. Currently, the price
of a ton of turnips is $1,200. The demand for turnips increases permanently. The turnip industry experiences neither
external economies nor external diseconomies. In the long run, the price of a ton of turnips ________.
59) ______
A) decreases so it is below $1,200, and turnip growers will make normal profit
B) decreases so it is below $1,200 and the turnip growers make an economic profit
C) is $1,200 and turnip growers will make normal profit
D) increases so it is above $1,200
60) If firms in a competitive market are ________ then there is ________ for firms to ________ the industry. 60) ______
A) incurring economic losses; no incentive; exit
B) incurring economic losses; an incentive; exit
C) making economic profits; no incentive; enter
D) making zero economic profit; an incentive; exit
SECTION 12.6 COMPETITION AND EFFICIENCY SECTION 12.5 IS SKIPPED.
61) In the long-run equilibrium in a perfectly competitive market, the firms produce at the ________ possible average total
cost and the price equals the ________ possible average total cost. 61) ______

A) lowest; highest

B) highest; lowest

C) highest; highest

D) lowest; lowest

62) Consumer surplus ________.62) ______

A) is maximized when the market outcome is efficient
B) equals total revenue minus marginal cost
C) equals total revenue minus opportunity cost
D) plus producer surplus is maximized when resources are used efficiently

1) A
2) D
3) A
4) C
5) A
6) C
7) C
8) B
9) B
10) D
11) B
12) D
13) C
14) C
15) B
16) C
17) B
18) D
19) B
20) B
21) D
22) D
23) D
24) A
25) C
26) C
27) D
28) B
29) D
30) A
31) D
32) C
33) C
34) B
35) D
36) A
37) A
38) D
39) B
40) B
41) A
42) A
43) B
44) C
45) C
46) B
47) C
48) B
49) B
50) A

51) C
52) B
53) B
54) B
55) D
56) C
57) A
58) A
59) C
60) B
61) D
62) D