Chapter 15

True/False
Indicate whether the statement is true or false.

____ 1. A price-maker can charge a price above marginal cost.

____ 2. The De Beers Diamond company advertises heavily to promote the sale of all diamonds, not just its own. This
is evidence that they have a monopoly position to some degree.

____ 3. Competitive firms maximise profit by setting MR = MC. This is not always true for monopoly firms.

____ 4. Airlines often separate their customers into business travellers and personal travellers by giving a discount to
those travellers who stay over a Saturday night.

____ 5. Another form of price discrimination is when a monopoly offers lower prices to customers who buy small
quantities.

____ 6. When a firm operates under conditions of a monopoly, its price is unconstrained.

____ 7. The key difference between a competitive firm and a monopoly firm is the ability to select the level of
production.

____ 8. Suppose demand for a monopoly’s product is perfectly elastic. In this case the monopoly should set P = MR =
MC and the monopoly market outcome will be identical to the competitive market outcome.

____ 9. When a firm operates under conditions of a monopoly, its price is constrained by demand.

____ 10. Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly
is often efficient, but not equitable.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. An industry is a natural monopoly when which of the following is(are) true?
(i) a single firm will supply a good or service at a socially optimal quantity
(ii) a single firm can supply a fixed number of goods or services at a smaller cost than could two or more
firms
(iii) a single firm can produce additional units at a smaller marginal cost
A. (i) and (ii)
B. (ii) only
C. (ii) and (iii)
D. (iii) only
____ 2. An appropriate way to measure the economic inefficiency of a monopoly is the:
A. number of consumers who are unable to purchase the product because of its high price
B. deadweight loss
C. low wages paid to the monopolist’s workers
D. poor quality of service offered by monopoly firms
____ 3. Choose the correct statement. The deadweight loss from monopoly pricing arises because:
i) monopolists profits are a transfer from consumers to producers
ii) the value some consumers place on the good is greater than the cost of providing it
iii) the market price is above marginal cost
A. (i) and (ii)
B. (ii) and (iii)
C. (iii) only
D. (i), (ii) and (iii)
____ 4. In the market for Jiggly Wigs, the profit-maximising monopolist is charging a price $2 higher than marginal
cost. Suppose instead of a monopoly this market was competitive, but the government placed a $2 tax on the
competitive price of the good. What can we say about the relative dead-weight losses in the long-run?
A. the dead-weight loss from monopoly pricing will always be higher
B. the dead-weight loss from the tax will always be higher
C. the dead-weight loss will be equal in both cases
D. we cannot say without more information about the marginal cost curve
____ 5. If a monopolist is able to perfectly price discriminate:
A. consumer surplus is increased and deadweight loss is transformed into monopoly profit
B. consumer surplus is decreased and deadweight loss is increased
C. consumer surplus is increased and deadweight loss is increased
D. consumer surplus and deadweight losses are transformed into monopoly profits
____ 6. Which of the following can eliminate the inefficiency inherent in monopoly pricing?
A. arbitrage
B. price discrimination
C. cost-plus pricing
D. regulation
____ 7. Suppose a monopolist lowers the price of its good, this would cause consumers to:
A. buy more
B. buy less
C. continue to buy the same amount
D. buy more or less, depending on elasticity of demand
____ 8. Which of the following curves can plausibly go negative?
A. marginal revenue
B. marginal cost
C. average variable cost
D. quantity supplied
____ 9. A firm’s supply curve in a competitive market dictates the amount it will supply whereas in a monopoly
market, the:
A. same is true
B. decision about how much to supply cannot be separated from the demand curve it faces
C. supply curve conceptually makes sense, but in practice is never used
D. supply curve will have limited predictive capacity
 Graph 15-3

This graph reflects the cost and revenue structure for a monopoly firm. Use the graph to answer the following
question(s).

____ 10. Refer to Graph 15-3. A profit-maximising monopoly would have a total cost equal to:
A. P0  Q1
B. P0  Q2
C. P0  Q3
D. (P1 – P0)  Q2

____ 11. Refer to Graph 15-3. Profit on a typical unit sold for a profit-maximising monopoly would equal:
A. P3 – P2
B. P3 – P0
C. P2 – P1
D. P2 – P0
____ 12. The extra profit that a monopoly makes comes from a loss of which of the following?
(i) consumer surplus
(ii) total surplus
(iii) producer surplus
A. (i) and (ii)
B. (ii) and (iii)
C. (i) only
D. (ii) only
____ 13. Total economic loss due to monopoly pricing is equal to:
A. the deadweight loss
B. the loss to consumer and producer surplus combined
C. the loss to total surplus
D. all of the above
____ 14. Price discrimination is not possible if a firm:
A. is regulated by the government
B. operates in a competitive market
C. has perfect information about consumer demand
D. faces a downward-sloping demand curve
____ 15. Price discrimination explains why high-ranking universities often set rules that determine prices of admission
based on the students:
A. final high-school exam results
B. sex
C. age
D. financial resources
Chapter 16

True/False
Indicate whether the statement is true or false.

____ 1. For a profit-maximising firm in a monopolistically competitive market, when price is equal to average total
cost, price must lie above marginal cost.

____ 2. Like a competitive firm, a monopolistically competitive firm maximises profit by setting P=MC.

____ 3. Advertising only benefits suppliers of a good and has little value to consumers.

____ 4. Advertising may impede competition by fostering brand loyalty and allowing firms to increase their mark-up.

____ 5. When McDonald’s opens a store in Dhaka, Bangladesh, it will have an incentive to set product quality and
customer service consistent with local standards.

____ 6. The Pizza Hut in Agra, India has a very similar menu design, layout and content as the Pizza Hut in Bondi
Junction, Sydney. This is an example of a brand name enhancing market efficiency for Australian tourists
visiting India.

____ 7. Advertising during the Rugby World Cup is an example of providing information in the advertisement’s
content.

____ 8. In centrally planned economies the usefulness of brand names is demonstrated when brand names allow
consumers to identify producers.

____ 9. If firms in a monopolistically competitive market are making accounting profits, this will always encourage
more firms to enter the market.

____ 10. Firms that spend a large amount of money on advertising a particular product are likely to be providing
consumers with a signal of product quality.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Suppose that in the short run, a monopolistically competitive firm sells its product for $35 per unit. Its
average total cost at this level of output is $39. This means that:
A. the firm makes a short-run profit of $4 per unit
B. the firm makes a short-run loss of $4 per unit
C. the firm makes a short-run and long-run profit of $4 per unit
D. the firm makes a short-run and long-run loss of $4 per unit
____ 2. In the short run, a firm in a perfectly competitive market operates at:
A. efficient scale and a monopolistically competitive firm operates at excess capacity
B. efficient scale and a monopolistically competitive firm operates at efficient scale
C. excess capacity and a monopolistically competitive firm operates at excess capacity
D. we cannot say without more information
____ 3. In equilibrium, product differentiation in monopolistically competitive markets ensures that:
A. price will exceed marginal cost
B. price will equal marginal cost
C. average revenue will equal marginal revenue
D. average variable cost will be declining
____ 4. When advertising is deceptive, critics claim that it:
A. makes buyers less sensitive to price differences
B. lowers the quality of goods in the market
C. alters a firm’s supply curve
D. increases competition in the market
____ 5. When firms in a monopolistically competitive market engage in price-related advertising, defenders of
advertising argue that:
A. the quality of products sold in the market always increases
B. customers are less likely to be informed about other characteristics of the product
C. each firm has less market power
D. new firms are discouraged from entering the market
____ 6. Fill in the blank. Firms that sell ____ products are likely to spend the most on advertising.
A. homogenous
B. expensive
C. industrial
D. highly differentiated
____ 7. Critics of markets that are characterised by firms that sell brand-name products argue that brand names
encourage consumers to pay more for branded products that:
A. are indistinguishable from generic products
B. are very different from generic products
C. have elastic demand curves
D. consumer advocate groups have found to be inferior
____ 8. Movies that prominently display name-brand consumer products are most likely sending a message about:
A. subliminal satisfaction from consumption
B. psychological manipulation
C. product quality
D. product price
____ 9. According to the information provided, as a result of this new advertising strategy, economists would be
likely to predict that the Computer Hardware Manufacturers Association will:
A. vow to fight any restrictions on the right to advertise
B. seek to dismantle the ‘gentleman’s agreement’ through aggressive price competition
C. do nothing
D. encourage the Premier to ban billboard advertising of computer hardware
____ 10. Refer to the information provided. By its willingness to spend money on advertising, Firm B:
A. signals that it is not a profit maximiser
B. is detracting from the efficiency of markets
C. signals the value of its new product to consumers
D. does none of the above
____ 11. Brand names that existed in communist countries were typically associated with:
A. the name of the firm that manufactured the product
 B. very isolated products
C. products that were largely homogeneous
D. private manufacturers only
____ 12. When a new firm enters a monopolistically competitive market, the individual demand curves faced by all
existing firms in that market will:
A. shift in an unpredictable direction
B. shift to the right
C. shift to the left
D. remain unchanged; only the supply curve will shift
____ 13. When a firm exits a monopolistically competitive market, the individual demand curves faced by all existing
firms in that market will:
A. shift in an unpredictable direction
B. shift to the right
C. shift to the left
D. remain unchanged; only the supply curve will shift
____ 14. Fill in the blanks. A monopolistically competitive firm, unlike a ____, could increase the quantity it produces
and lower the ____:
A. perfectly competitive firm, average total cost
B. monopoly firm, average total cost
C. perfectly competitive firm, average fixed cost
D. monopoly firm, average fixed cost
____ 15. Which of the following markets impose deadweight losses on society?
(i) monopoly
(ii) monopolistic competition
(iii) oligopoly
A. (i) and (ii)
B. (ii) and (iii)
C. (i) and (iii)
D. (i) and (ii) and (iii)
Chapter 17

True/False
Indicate whether the statement is true or false.

____ 1. Game theory is used to study oligopoly, but is not needed in the study of competitive and monopoly markets.

____ 2. The story of the prisoners’ dilemma contains a general lesson that applies to any group trying to maintain
cooperation among its members.

____ 3. In the prisoner’s dilemma game, the dominant strategy is for each player to not confess.

____ 4. An oligopoly is a market with a few sellers, each offering a similar or identical product.

____ 5. A collusive agreement over the quantity of output is difficult for firms to maintain because each firm has a
profit incentive to break the agreement and increase production.

____ 6. When an oligopolist decreases production, it is likely that the output effect is less than the price effect.

____ 7. In the prisoners’ dilemma game, each player always has a dominate strategy.

____ 8. In the long run, profits will be higher in a monopolistically competitive market than in an oligopoly.

____ 9. When an oligopoly market is in Nash equilibrium, firms will not act as profit maximisers.

____ 10. Insight from the prisoners’ dilemma suggests we will exploit common resources, even when it is in the best
interests of society to manage them.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Monopolistically competitive firms are typically characterised by:

A. many firms selling identical products
B. a few firms selling similar or identical products
C. a few firms selling highly different products
D. many firms selling similar, but not identical products
____ 2. Oligopoly markets are characterised by:
A. the universal existence of collusive agreements
B. a fall in collective profits if a cartel is organised
C. the pursuit of self-interest by profit-maximising firms always maximising collective
profits
D. a conflict between cooperation and self-interest
____ 3. Which of the following markets is most likely to be an oligopoly?
A. the distribution of electricity across the power grid
B. air travel between two cities on Australia’s east coast
C. lunchtime take-away coffee service in Melbourne’s CBD
D. pizza restaurants in Sydney’s CBD, where each restaurant has its own signature pizza
 Table 16-3

Imagine a small town in which only two residents, Robert and John, own wells that produce water for safe
drinking. Each Saturday, Robert and John work together to decide how many litres of water to pump, bring
the water to town, and sell it at whatever price the market will bear. To keep things simple, suppose that
Robert and John can pump as much water as they want without cost; therefore, the marginal cost of water
equals zero.

The weekly town demand schedule and total revenue schedule for water are shown in the table.

Weekly quantity (in litres) Price ($) per litre Weekly total revenue (and
total profit) ($)
0 12 $0
5 11 55
10 10 100
15 9 135
20 8 160
25 7 175
30 6 180
35 5 175
40 4 160
45 3 135
50 2 100
55 1 55
60 0 0

____ 4. Refer to Table 16-3. Since Robert and John operate as a profit-maximising monopoly in the market for water,
what price will they charge to sell 45 litres of water?
A. $12
B. $6
C. $3
D. none of the above; the price is arbitrary when dealing with a monopoly market
____ 5. Refer to Table 16-3. Suppose the town enacts new anti-trust laws that prohibit Robert and John from
operating as a monopolist. What will the new price of water end up being once the Nash equilibrium is
reached?
A. $7
B. $6
C. $5
D. $4

Table 16-4

In the following duopoly game, the two firms can either set the price of their product high or low. In this
market, customers are very price sensitive: when one firm sets a low price it steals the majority of customers
from its competitor. The game is represented in the table below.

Firm B

High Price Low Price

Firm A High Price Firm A gets $500 Firm A get $300

Firm B gets $500 Firm B gets $600

 Low Price Firm A gets $600 Firm A gets $400

Firm B gets $300 Firm B gets $400

____ 6. Refer to table 16-4. The Nash-equilibrium in this market is:

A. firm A gets $500, firm B gets $500
B. firm A gets $300, firm B gets $600
C. firm A gets $600, firm B gets $300
D. firm A gets $400, firm B gets $400
____ 7. To increase their profits further, members of a cartel have an incentive to:
A. collude
B. lower production
C. cheat
D. limit membership
____ 8. Suppose an opal-mining firm notices that the price of opals is above marginal cost. Selling one more unit of
opals at the going price also increases profit. This concept is known as the:
A. income effect
B. price effect
C. opal effect
D. output effect
____ 9. The typical firm in the economy:
A. is an oligopoly
B. is perfectly competitive
C. is a monopoly
D. has some degree of market power
____ 10. OPEC can be classified as which of the following?
(i) a group whose concern is to control production levels of oil
(ii) a group of oligopolists
(iii) a cartel
A. (i) and (ii)
B. (ii)and (iii)
C. (i) and (iii)
D. (i), (ii) and (iii)
____ 11. During the 1990s, the members of OPEC operated independently from one another, causing the world market
for crude oil to become close to a(n):
A. monopoly market
B. oligopoly market
C. competitive market
D. duopoly market
____ 12. Refer to the information provided. In a non-repetitive game, which of the following is the dominant strategy
of Irun when production levels are in accordance with the collusive agreement?
A. increase production only after Urun increases production
B. unilaterally increase production
C. decrease production only after Urun increases production
D. unilaterally decrease production
 Table 16-8

Consider two countries, Eudora and the Inhabit, that are engaged in an arms race. The question each country
must face is whether to build new weapons or to disarm existing weapons. Each country prefers to have more
arms than the other because a large arsenal gives it more influence in world affairs. But each country also
prefers to live in a world safe from the other country’s weapons. The table shows the possible outcomes for
each decision combination.

____ 13. Refer to Table 16-8. If both countries get together and agree on a certain level of arms, what will happen to
social welfare, assuming that both countries keep their end of the bargain?
A. social welfare will remain unchanged due to game theory
B. social welfare will remain unchanged due to dominant gaming strategies
C. social welfare will increase
D. social welfare will decrease
____ 14. Why is a lack of cooperation between criminal suspects desirable for society as a whole?
A. the police are able to convict more criminals
B. the suspects are able to choose optimal outcomes for themselves by acting on self-interest
C. the prisoners’ dilemma safeguards the criminals’ constitutional rights
D. all of the above are true
____ 15. Oligopolies would like to act like a:
A. monopoly but self-interest often drives them closer to duopoly
B. monopoly but self-interest often drives them closer to competition
C. duopoly but self-interest often drives them closer to competition
D. competitor but self-interest often drives them closer to duopoly