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Practice Questions Chapters 15 & 17



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

 1. 

The Sherman Antitrust Act prohibits price-fixing in the sense that
a.
competing executives cannot even talk about fixing prices.
b.
competing executives can talk about fixing prices, but they cannot take action to fix prices.
c.
a price-fixing agreement can lead to prosecution provided the government can show that the public was not well-served by the agreement.
d.
None of the above is correct. The Sherman Act did not address the matter of price-fixing.
 
 
Figure 15-7

The figure below depicts the demand, marginal revenue, and marginal cost curves of a profit-maximizing monopolist.

chapters_15_-_16_pr_files/i0030000.jpg
 

 2. 

Refer to Figure 15-7. If the monopoly firm is NOT allowed to price discriminate, then the deadweight loss amounts to
a.
$50.
b.
$100.
c.
$500.
d.
$1,000.
 

 3. 

Which government entity is charged with investigating and enforcing antitrust laws?
a.
The U.S. Justice Department
b.
The U.S. Commerce Department
c.
The U.S. Treasury Department
d.
The Bureau of Alcohol, Tobacco, and Firearms
 

 4. 

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.
allow the government to earn patent revenue.
 

 5. 

Splitting up a monopoly is often justified on the grounds that
a.
consumers prefer dealing with small firms.
b.
small firms have lower costs.
c.
competition is inherently efficient.
d.
nationalization is a less-preferred option.
 

 6. 

Private ownership of a monopoly may benefit society because the monopoly will have an incentive to
a.
charge a price that is consistent with that of a benevolent social planner.
b.
charge a price that prevents some people from buying.
c.
price its good according to the intersection of marginal cost and average revenue.
d.
lower its costs to earn a higher profit.
 

 7. 

For a monopoly, the level of output at which marginal revenue equals zero is also the level of output at which
a.
average revenue is zero.
b.
profit is maximized.
c.
total revenue is maximized.
d.
marginal cost is zero.
 

 8. 

Because a monopolist is the sole producer in its market, it can necessarily alter the price of its good
(i)
without affecting the quantity sold.
(ii)
without affecting its average total cost.
(iii)
by adjusting the quantity it supplies to the market.
a.
(ii) only
b.
(iii) only
c.
(i) and (ii)
d.
(ii) and (iii)
 

 9. 

What happens to the price and quantity sold of a drug when its patent runs out?
(i)
The price will fall.
(ii)
The quantity sold will fall.
(iii)
The marginal cost of producing the drug will rise.
a.
(i) only
b.
(i) and (ii)
c.
(ii) and (iii)
d.
(i), (ii), and (iii)
 

 10. 

Which of the following events will definitely cause equilibrium quantity to fall?
a.
demand increases and supply decreases
b.
demand and supply both decrease
c.
demand decreases and supply increases
d.
demand and supply both increase
 

 11. 

If a monopolist sells 100 units at $8 per unit and realizes an average total cost of $6 per unit, what is the monopolist's profit?
a.
$200
b.
$400
c.
$600
d.
$800
 

 12. 

When a monopolist is able to sell its product at different prices, it is engaging in
a.
distribution pricing.
b.
quality-adjusted pricing.
c.
price differentiation.
d.
price discrimination.
 

 13. 

For a profit-maximizing monopolist,
a.
P > MR = MC.
b.
P = MR = MC.
c.
P > MR > MC.
d.
MR < MC < P.
 

 14. 

When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated monopoly
a.
will experience a loss.
b.
will experience a price below average total cost.
c.
may rely on a government subsidy to remain in business.
d.
All of the above are correct.
 

 15. 

The legislation passed by Congress in 1890 to reduce the market power of large and powerful "trusts" is called the
a.
Morgan Act.
b.
Sherman Act.
c.
Clayton Act.
d.
14th Amendment.
 

 16. 

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.
 

 17. 

The practice of tying is used to
a.
enhance the enforcement of antitrust laws.
b.
encourage the enforcement of collusive agreements.
c.
control the retail price of a collection of related products.
d.
package products to sell at a combined price closer to a buyer's total willingness to pay.
 

 18. 

Antitrust laws may
a.
enhance the ability of firms to capture profits from a concentration of market power.
b.
enhance the ability of firms to reduce economic losses.
c.
restrict the ability of firms to operate at the socially efficient level of production.
d.
restrict the ability of firms to merge.
 

 19. 

The key issue in determining the efficiency of public versus private ownership of a monopoly is
a.
the tendency for efficient management of publicly owned enterprises.
b.
the inability of private monopolies to get rid of managers that are doing a bad job.
c.
the propensity of private monopolies to generate excessive profits.
d.
how ownership of the firm affects the cost of production.
 
 
Table 16-19

Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The annual economic profit from each strategy is indicated in the table. The profits are shown as (Matt, Brian) in each cell.
  
Brian
  
Low Price
High Price
Matt
Low Price
(1500, 1500)
(5000, 200)
High Price
(200, 3000)
(4000, 4000)
 

 20. 

Refer to Table 16-19. Which of the following statements is correct if Brian and Matt will play this game only once?
a.
The Nash equilibrium is for players to choose the low price.
b.
A Nash equilibrium cannot be established unless Brian and Matt collude.
c.
A Nash equilibrium cannot be established without the players repeating the game.
d.
The Nash equilibrium price is the low price.
 

 21. 

Refer to Table 16-19. Which of the following statements is correct?
a.
Matt's dominant strategy is to charge a low price.
b.
Brian's dominant strategy is to charge a high price.
c.
The dominant strategy for both Brian and Matt is to charge a low price.
d.
Matt's dominant strategy is to charge a high price.
 

 22. 

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.
 

 23. 

A monopolist faces the following demand curve:

Price
Quantity Demanded
$10
5
$9
10
$8
16
$7
23
$6
31
$5
45
$4
52
$3
60

The monopolist has total fixed costs of $40 and a constant marginal cost of $5. At the profit-maximizing level of output, the monopolist's average total cost is
a.
$9.00
b.
$7.50
c.
$6.74
d.
$5.82
 

 24. 

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.
 

 25. 

In an oligopoly,
a.
the total output produced in the market is higher than the total output that would be produced if the market were a monopoly and higher than the total output that would be produced if the market were perfectly competitive.
b.
the total output produced in the market is higher than the total output that would be produced if the market were a monopoly but lower than the total output that would be produced if the market were perfectly competitive.
c.
the total output produced in the market is lower than the total output that would be produced if the market were a monopoly but higher than the total output that would be produced if the market were perfectly competitive.
d.
the total output produced in the market is lower than the total output that would be produced if the market were a monopoly and lower than the total output that would be produced if the market were perfectly competitive.
 

 26. 

Price discrimination requires the firm to
a.
separate customers according to their willingness to pay.
b.
differentiate between different units of its product.
c.
engage in arbitrage.
d.
use coupons.
 



 
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