Question;MULTIPLE CHOICE;1. Which of the following statements is;correct?;a. A competitive firm is a price maker and;a monopoly is a price taker.;b. A competitive firm is a price taker and;a monopoly is a price maker.;c. Both competitive firms and monopolies;are price takers.;d. Both competitive firms and monopolies;are price makers.;2. Assuming that Jerry?s Bicycle Shop;operates in a competitive market for bicycles, which of the following;statements is(are) true?;(i) He chooses the price at which he sells;his bicycles.;(ii) He chooses the quantity of bicycles;that he supplies.;(iii) His market is characterized by one or;more barriers to entry.;a. (i) only;b. (ii) only;c. (i) and (ii) only;d. (ii) and (iii) only;3. Angelo is a wholesale meatball;distributor. He sells his meatballs to all the finest Italian restaurants in;town. Nobody can make meatballs like Angelo. As a result, his is the only;business in town that sells meatballs to restaurants. Assuming that Angelo is;maximizing his profit, which of the following statements is true?;a. Meatball prices will be less than;marginal cost.;b. Meatball prices will equal marginal;cost.;c. Meatball prices will exceed marginal;cost.;d. Meatball prices will be a function of;supply and demand and will therefore oscillate around marginal costs.;4. A monopoly?s marginal cost will;a. be less than its average fixed cost.;b. be less than the price per unit of its;product.;c. exceed its marginal revenue.;d. equal its average total cost.;5. Which of the following statements is;(are) true of a monopoly?;(i) A monopoly has the ability to set the;price of its product at whatever level it desires.;(ii) A monopoly?s total revenue will always;increase when it increases the price of its product.;(iii) A monopoly can earn unlimited;profits.;a. (i) only;b. (ii) only;c. (i) and (ii);d. (ii) and (iii);6. Young Johnny inherited the only local;cable TV company in town after his father passed away. The company is;completely unregulated by the government and is therefore free to operate as it;wishes. Assuming that Johnny understands the true power of his new monopoly, he;is probably most excited about which of the following statements?;(i) He will be able to set the price of;cable TV service at whatever level he wishes.;(ii) The customers will be forced to;purchase cable TV service at whatever price he wants to set.;(iii) He will be able to achieve any profit;level that he desires.;a. (i) only;b. (ii) only;c. (i) and (iii);d. All of the above are correct.;7. Which of the following is an example of;a barrier to entry?;(i) A key resource is owned by a single;firm.;(ii) The costs of production make a single;producer more efficient than a large number of producers.;(iii) The government has given the existing;monopoly the exclusive right to produce the good.;a. (i) and (ii);b. (ii) and (iii);c. (i) only;d. All of the above are correct.;8. To define a monopoly, we cite the;following characteristics;(i) The firm is the sole seller of its;product.;(ii) The firm?s product does not have close;substitutes.;(iii) The firm generates a large economic;profit.;(iv) The firm is located in a small;geographic market.;a. (i) and (ii);b. (i) and (iii);c. (ii) and (iv);d. All of the above are correct.;9. A fundamental source of monopoly market;power arises from;a. perfectly elastic demand.;b. perfectly inelastic demand.;c. barriers to entry.;d. availability of "free" natural;resources, such as water or air.;10. Because monopoly firms do not have to;compete with other firms, the outcome in a market with a monopoly is often;a. not in the best interest of society.;b. one that fails to maximize total;economic well-being.;c. inefficient.;d. All of the above are correct.;11. A natural monopoly occurs when;a. the product is sold in its natural state;(such as water or diamonds).;b. there are economies of scale over the;relevant range of output.;c. the firm is characterized by a rising;marginal cost curve.;d. production requires the use of free;natural resources, such as water or air.;12. An industry is a natural monopoly when;(i) government assists the firm in;maintaining the monopoly.;(ii) a single firm owns a key resource.;(iii) a single firm can supply a fixed;number of goods or services at a smaller cost than could two or more firms.;a. (i) only;b. (iii) only;c. (i) and (ii);d. (ii) and (iii);13. When a natural monopoly exists, it is;a. always cost effective for;government-owned firms to produce the product.;b. never cost effective for one firm to;produce the product.;c. always cost effective for two or more;private firms to produce the product.;d. never cost effective for two or more;private firms to produce the product.;14. The defining characteristic of a;natural monopoly is;a. constant marginal cost over the relevant;range of output.;b. economies of scale over the relevant;range of output.;c. constant returns to scale over the;relevant range of output.;d. diseconomies of scale over the relevant;range of output.;15. Natural monopolies differ from other;forms of monopoly because they;a. are not subject to barriers to entry.;b. are not regulated by government.;c. generally don't make a profit.;d. are generally not worried about;competition eroding their monopoly position in the market.;16. Patent and copyright laws are major;sources of;a. natural monopolies.;b. government-created monopolies.;c. resource monopolies.;d. None of the above are correct.;17. Encouraging firms to invest in research;and development and individuals to engage in creative endeavors such as writing;novels is one justification for;a. resource monopolies.;b. natural monopolies.;c. government-created monopolies.;d. breaking up monopolies into smaller;firms.;18. When a firm's average total cost curve;continually declines, the firm is a;a. government-created monopoly.;b. natural monopoly.;c. revenue monopoly.;d. All of the above are correct.;19. Which of the following scenarios best;represents a monopoly situation?;a. Bill and Tom work separately from one;another but both sell a very rare form of the same diamond. They are the only;sellers of this type of diamond in town.;b. Tom owns a fishing tackle shop in Miami;Florida, in which he sells the top-of-the-line fishing equipment.;c. Bill owns the only grocery store in a;small community that lies 200 miles from the nearest city.;d. None of the above adequately represents;a monopoly.;20. The simplest way for a monopoly to;arise is for a single firm to;a. decrease its prices without consulting;other firms.;b. decrease production to increase demand;for its product.;c. jointly make pricing decisions with;other firms.;d. own a key resource.;Use the following information to answer;question 21 through 23.;Consider the market for water in a small;town in the Old West. Assume that the only source of water is the underground;aquifer that lies directly below the town. Wells are used to supply water to;the entire town.;21. If dozens of residents have their own;wells, which of the following statements most adequately describes the behavior;of sellers of water?;a. Since water is a necessity of life;there will be no decline in the quantity of water consumed, regardless of how;high the price is raised.;b. Sellers will be able to charge a premium;for the water.;c. The price of a gallon of water will;exceed its marginal cost.;d. The price of a gallon of water will be;driven to equal its marginal cost.;22. Suppose only one resident owns all the;wells in town. Which of the following statements is most likely going to be;true of the market for water?;a. The price of a gallon of water will be;driven to equal its marginal cost.;b. The price of a gallon of water will;exceed its marginal cost.;c. Since water is a necessity of life;there will be no decline in the quantity of water consumed, regardless of how;high the price is raised.;d. The seller will be able to earn;unlimited profit.;23. Assume that Jack is the sole owner of;all the wells in town. He decides to move to a more suitable climate and sells;the wells to a couple of dozen different town residents.;a. The town residents will likely be better;off.;b. The price of water is likely to fall.;c. The individual water sellers will not;have as much pricing power as Jack had.;d. All of the above are correct.;24. In practice, monopolies rarely arise;from exclusive ownership of a resource because;a. actual economies are quite large.;b. the natural scope of many such markets;is often worldwide.;c. few firms own a resource for which there;are no close substitutes.;d. All of the above are correct.;25. A government-created monopoly arises;when;a. government spending in a certain;industry gives rise to monopoly power.;b. the government exercises its market;control by encouraging competition among sellers.;c. the government gives a firm the exclusive;right to sell some good or service.;d. All of the above could qualify as;government-created monopolies.;26. Allowing an inventor to have the;exclusive rights to market her new invention will lead to;(i) a product that is priced higher than it;would be without the exclusive rights.;(ii) desirablebehavior in the sense that;inventors are encouraged to invent.;(iii) higher profits for the inventor.;a. (i) and (ii);b. (ii) and (iii);c. (i) and (iii);d. All of the above are correct.;27. Drug companies are allowed to be;monopolists in the drugs they discover in order to;a. allow drug companies to charge a price;that is equal to their marginal cost.;b. discourage new firms from entering the;drug market.;c. encourage research.;d. All of the above are correct.;28. Authors are allowed to be monopolists;in the sale of their books in order to;a. encourage authors to write more and;better books.;b. correct for the negative externalities;that the internet and television impose.;c. satisfy literary advocacy groups that;exercise their lobbying power.;d. promote a society in which people think;for themselves and learn from whichever books they please.;29. Which of the following statements is;true about patents and copyrights?;(i) They both have benefits and costs.;(ii) They lead to higher prices.;(iii) They enhance the ability of;monopolists to earn above-average profits.;a. (i) and (ii);b. (ii) and (iii);c. (ii) only;d. All of the above are correct.;Use the figure to answer question 30 and 31;30. The shape of the average total cost;curve reveals information about the nature of the barrier to entry that might;exist in a monopoly market. Which of the following monopoly types best;coincides with the figure?;a. ownership of a key resource by a single;firm;b. natural monopoly;c. government-created monopoly;d. None of the above are correct.
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