Figure: Computing Monopoly Profit

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1 Name: Date: 1. Compared to perfect competition: A) monopoly produces more at a lower price. B) monopoly produces where MR > MC, and a perfectly competitively firm produces where P = MC. C) monopoly may have economic profits in the long run, but in perfect competition in the long run economic profits are zero. D) perfect competition may have economic profits in the long run, but in monopoly the long run economic profits are zero. 2. The two theoretical extremes of the market structure spectrum are occupied on one end by perfect competition and on the other end by: A) monopoly. B) duopoly. C) oligopoly. D) monopolistic competition. 3. Most electric, gas, and water companies are examples of: A) unregulated monopolies. B) natural monopolies. C) restricted-input monopolies. D) sunk-cost monopolies. 4. Which of the following is true? A) Profit-maximizing behavior occurs only in perfectly competitive markets. B) Additional units of a good should be produced as long as MR < MC. C) The profit-maximizing solution occurs where MR = MC. D) The profit-maximizing solution occurs where MR > MC. 5. A monopoly responds to an increase in demand by price and output. A) increasing; decreasing B) increasing; increasing C) decreasing; increasing D) decreasing; decreasing Page 1

2 6. A monopoly responds to a decrease in demand by price and output. A) increasing; decreasing B) increasing; increasing C) decreasing, increasing D) decreasing; decreasing 7. A monopoly responds to an increase in marginal cost by price and output. A) increasing; decreasing B) increasing; increasing C) decreasing; increasing D) decreasing; decreasing Use the following to answer questions 8-11: Figure: Computing Monopoly Profit 8. (Figure: Computing Monopoly Profit) The profit-maximizing price is and will generate total economic profit of. A) P2; EF B) P3; the rectangle P1P2FG C) P3; the rectangle P2P3EF D) P3; EF Page 2

3 9. (Figure: Computing Monopoly Profit) Producing at point N would: A) result in MR = MC. B) result in positive economic profits. C) never be profit-maximizing, since at this output MR < 0 and MC > 0. D) result in the firm breaking even. 10. (Figure: Computing Monopoly Profit) At the profit-maximizing output, total cost is: A) P10Q1G B) P30Q1E C) P20Q1F D) FQ2 11. (Figure: Computing Monopoly Profit) In order to obtain maximum profits, the monopoly should produce the output determined by point. A) G B) N C) H D) K Use the following to answer questions 12-13: Figure: Monopoly Model Page 3

4 12. (Figure: Monopoly Model) The profit-maximizing quantity is the one indicated by the distance: A) W. B) J. C) K. D) L. 13. (Figure: Monopoly Model) The profit-maximizing price is the one indicated by: A) Z. B) P. C) E. D) F. 14. In the short run, a monopoly will stop producing if: A) P < ATC. B) P < AVC. C) P > MR. D) P > ATC. 15. One government policy for dealing with a natural monopoly is to: A) impose a price floor to eliminate the deadweight loss. B) impose a price ceiling to eliminate any economic profit. C) break it up into smaller firms. D) impose fines on the monopolist. 16. Compared to perfect competition: A) monopoly produces more at a lower price. B) monopoly produces where MR > MC, and a perfectly competitively firm produces where P = MC. C) monopoly may have economic profits in the long run, but in perfect competition, in the long run, economic profits are larger than in monopoly. D) monopoly produces less at a higher price. 17. is the practice of selling at different prices in different markets, without corresponding differences in costs. A) price discrimination; the same product B) privatizing; the same product C) monopolizing; similar products D) price fixing; different products Page 4

5 18. An oligopoly is characterized as an industry in which: A) there are few firms, each producing a differentiated or similar product. B) there are many firms, each producing a similar product. C) all market participants are price-takers. D) only one firm produces a very differentiated product. 19. A monopolistically competitive industry is made up of: A) a few firms, each producing a very differentiated good. B) one firm that produces a very standardized good. C) market participants who are all price-takers. D) many firms producing a differentiated product. 20. If a monopoly market structure was turned into a perfectly competitive one, one would find that price would and output would. A) fall; fall B) fall; increase C) increase; increase D) increase; fall 21. In an oligopoly: A) there are many sellers. B) there are no barriers to entry. C) firms recognize their interdependence. D) total surplus is maximized. 22. Oligopoly is a market structure characterized by: A) independence in decision making. B) a horizontal demand curve. C) a small number of interdependent firms. D) relatively easy entry and exit. 23. The sum of the squared market shares of each firm in an industry is the: A) concentration ratio. B) employment rate. C) Herfindahl-Hirschman Index. D) market number. Page 5

6 24. The Herfindahl-Hirschman Index is a measure of concentration found by: A) squaring the percentage share of each firm in the industry. B) squaring the percentage share of each firm in the industry and then summing the squared market shares. C) summing the percentage shares of each firm in the industry. D) squaring the sums of the concentrations ratios found in an industry survey of the largest four and largest eight firms. 25. The largest HHI possible is in the case of and the index is. A) monopoly; 10 B) monopoly; 10,000 C) monopoly; 100,000 D) oligopoly; 100, The HHI for where have (has) of the market is. A) monopolistic competition; four firms each; 25%; 10,000 B) oligopoly; three firms each; 50%; 5,000 C) oligopoly; two firms each; 50%; 5,000 D) monopoly; one firm; 100%; 100, Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary and Frank decide to form a cartel to raise the price of gasoline. The total industry profits are highest when and Gary's profits are highest when. A) neither firm cheats on the agreement; neither firm cheats on the agreement B) neither firm cheats on the agreement; Gary cheats on the agreement and Frank does not cheat C) both firms cheat on the agreement; Gary cheats on the agreement and Frank does not cheat D) both Gary and Frank cheat on the agreement; both Gary and Frank cheat on the agreement Page 6

7 Use the following to answer questions 28-29: Figure: Payoff Matrix I for Blue Spring and Purple Rain 28. (Figure: Payoff Matrix I for Blue Spring and Purple Rain) The figure shows the payoff matrix for two producers of bottled water, Blue Spring and Purple Rain. The Nash equilibrium in the figure is reached when: A) both firms charge a high price. B) both firms charge a low price. C) Blue Spring charges a high price and Purple Rain charges a low price. D) Purple Rain charges a high price and Blue Spring charges a low price. 29. (Figure: Payoff Matrix I for Blue Spring and Purple Rain) Each has two strategies available to it: a high price and a low price. The dominant strategy for Purple Rain is to: A) always charge a low price. B) always charge a high price. C) always adopt the same strategy as Blue Spring. D) Purple Rain does not have a dominant strategy. Page 7

8 Use the following to answer question 30: Figure: Pricing Strategy in Cable TV Market I 30. (Figure: Pricing Strategy in Cable TV Market I) In the figure, the dominant strategy for CableNorth: A) is to advertise. B) is to not advertise. C) is to do whatever CableSouth does. D) does not exist. 31. A well-known example of an international cartel is: A) Japan. B) OPEC. C) Exxon. D) General Motors. 32. If the Herfindahl-Hirschman Index (HHI) for an industry is 900, this market is considered: A) a strongly competitive market. B) a somewhat competitive market. C) oligopolistic. D) monopolistic. Page 8

9 33. Monopolistic competition is an industry characterized by a: A) small number of firms producing identical products, with barriers to entry for firms. B) small number of firms producing similar products, with relatively easy entry for firms. C) large number of firms producing similar products, with relatively easy entry for firms. D) large number of firms producing identical products, with relatively easy entry for firms. Use the following to answer questions 34-35: Figure: Monopolistic Competition I 34. (Figure: Monopolistic Competition I) Which of the panels in the figure shows a monopolistic competitor earning a loss in the short run? A) Panel a B) Panel b C) Panel c D) None of the panels show a loss in the short run. 35. (Figure: Monopolistic Competition I) Which of the panels in the figure shows a monopolistic competitor earning a profit in the short run? A) Panel a B) Panel b C) Panel c D) Panels a and c Page 9

10 Use the following to answer question 36: Figure: Monopolistic Competition II 36. (Figure: Monopolistic Competition II) The accompanying figure shows the demand, marginal revenue, marginal cost, and average total cost curves for Pat's Pizza Parlor, a monopolistic competitor in the food-to-go industry. The optimal level of output for Pat's Pizza Parlor is and the profit-maximizing price is. A) 350; $3.50 B) 350; $7.00 C) 590; $5.60 D) 500; $ The profit-maximizing rule or is adhered to by firms under. A) MC > MR; monopolistic competition, but not perfect competition B) MC = MR; both monopolistic competition and perfect competition C) MC > MR; perfect competition, but not monopolistic competition D) MC = MR; either monopolistic competition or perfect competition, depending on the costs of production 38. Monopolistic competition within an industry results in: A) overutilization of plants. B) chronic excess capacity. C) less advertising than in perfect competition. D) lower prices than in perfect competition. Page 10

11 39. The restaurant industry is characterized by excess capacity. This means that: A) restaurants are producing more than their profit-maximizing level. B) the profit-maximizing level is less than the level that minimizes average total costs. C) the restaurants are producing less than their profit-maximizing level. D) the quantity of restaurant meals supplied exceeds the quantity of restaurant meals demanded. 40. Critics of advertising argue that it: A) tends to make markets more perfect. B) leads to low-cost mass production. C) results in higher prices to consumers. D) encourages competition through new-product advertising. Page 11

12 Answer Key 1. C 2. A 3. B 4. C 5. B 6. D 7. A 8. C 9. C 10. C 11. A 12. B 13. B 14. B 15. B 16. D 17. A 18. A 19. D 20. B 21. C 22. C 23. C 24. B 25. B 26. C 27. B 28. B 29. A 30. D 31. B 32. A 33. C 34. B 35. A 36. B 37. B 38. B 39. B 40. C Page 12

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