A city's water system has such large economies of scale relative to demand that one supplier can serve every household at a lower average cost than two or more competing suppliers could. Which barrier to entry does this describe?
Natural monopoly
✓
Legal monopoly
Control of a physical resource
Predatory pricing
Correct Answer
Natural monopoly
When economies of scale are large compared with the size of the market, a single firm can supply the whole market at the lowest average cost, which is a natural monopoly. A legal monopoly comes from a government rule that prohibits competition, not from cost conditions. Control of a physical resource means owning a scarce input. Predatory pricing is a deliberate price-cutting tactic aimed at rivals.
Category: Natural Monopoly
Question 2
When one firm can supply an entire market at the lowest possible average cost, where does the market demand curve cross that firm's long-run average cost curve?
At its lowest point
On its downward-sloping portion
✓
On its upward-sloping portion
Nowhere, because the curves never meet
Correct Answer
On its downward-sloping portion
In this situation the quantity demanded is smaller than the output needed to reach the bottom of the long-run average cost curve, so demand meets the curve while average cost is still falling. At its lowest point would mean demand is large enough for a firm to use up all of its economies of scale. On its upward-sloping portion would mean demand is large enough that the firm has used up all of its economies of scale and its average cost is already rising, so one firm is no longer clearly the lowest-cost way to supply the market. Nowhere, because the curves never meet, is wrong because a firm covering its costs operates where demand reaches its average cost curve.
Category: Natural Monopoly
Question 3
A firm owns nearly all of the known deposits of a mineral that is essential for making its product, so rivals cannot obtain the input. Which barrier to entry is this?
Economies of scale
Trademark protection
Control of a physical resource
✓
Predatory pricing
Correct Answer
Control of a physical resource
Owning a scarce input that every producer needs keeps competitors out, which is control of a physical resource; ALCOA's hold on bauxite and DeBeers's hold on rough diamonds are textbook examples. Economies of scale are falling average costs as output grows, not ownership of an input. Trademark protection covers a name or symbol. Predatory pricing is a temporary price cut used to drive out entrants.
Category: Barriers to Entry
Question 4
When a government rule gives one firm the exclusive right to provide a service, such as delivering first-class mail, what kind of barrier to entry results?
Natural monopoly
Cartel
Trade secret
Legal monopoly
✓
Correct Answer
Legal monopoly
A legal monopoly exists when the law prohibits or limits competition, as with the U.S. Postal Service's exclusive right to deliver first-class mail. A natural monopoly comes from cost conditions, not from a legal ban on rivals. A cartel is a group of firms that agree to act together. A trade secret is a confidential production method.
Category: Barriers to Entry
Question 5
In the United States, for how long does a patent normally protect an invention?
20 years
✓
10 years
50 years
70 years
Correct Answer
20 years
A U.S. patent normally lasts 20 years, which gives the inventor time to recover research and development costs before others can copy the product. 10 years is too short. 50 years is too long. 70 years is the number attached to copyrights, which generally last for the author's life plus 70 years.
Category: Intellectual Property
Question 6
Which form of legal protection covers original creative works such as novels and songs, generally lasting for the author's life plus 70 years?
Patent
Copyright
✓
Trademark
Trade secret
Correct Answer
Copyright
Copyright protects original works of authorship from unauthorized reproduction or performance, generally for the author's lifetime plus 70 years. A patent protects an invention, normally for 20 years. A trademark protects an identifying name or symbol. A trade secret is a production method a firm keeps confidential.
Category: Intellectual Property
Question 7
A soft drink company protects its recipe by keeping it confidential instead of filing for a patent. What is this kind of protection called?
Copyright
Trademark
Trade secret
✓
Legal monopoly
Correct Answer
Trade secret
A trade secret is a method of production that a firm protects by keeping it secret, and the law protects it from theft even without a patent. Copyright covers creative works such as books and music. A trademark covers an identifying name or symbol. A legal monopoly is a government ban on competition, not a confidential formula.
Category: Intellectual Property
Question 8
An established firm sharply but temporarily cuts its prices when a new rival enters, intending to raise them again once the rival leaves. What is this practice called?
Price discrimination
Collusion
Deregulation
Predatory pricing
✓
Correct Answer
Predatory pricing
Predatory pricing is the use of sharp, temporary price cuts to discourage or drive out new competition; it violates U.S. antitrust law but is hard to prove. Price discrimination means charging different customers different prices for the same good. Collusion is firms acting together to raise prices. Deregulation is the removal of government controls over prices and quantities.
Category: Barriers to Entry
Question 9
Which description fits the demand curve that a monopolist faces?
The downward-sloping market demand curve
✓
A horizontal line at the market price
A vertical line at its chosen output
An upward-sloping curve
Correct Answer
The downward-sloping market demand curve
Because a monopolist is the only seller, the demand curve it faces is the whole market demand curve, which slopes downward. A horizontal line at the market price is the demand curve of a perfectly competitive firm. A vertical line at its chosen output would mean buyers ignore price. An upward-sloping curve describes supply, not demand.
Category: Monopoly Revenue
Question 10
A monopolist can sell 4 units at a price of $10 each or 5 units at a price of $9 each. What is the marginal revenue of the fifth unit?
$9
$5
✓
$45
$1
Correct Answer
$5
Total revenue rises from 4 x $10 = $40 to 5 x $9 = $45, so marginal revenue is $45 - $40 = $5. $9 is the price of the fifth unit, which ignores the $1 price cut on the first four units. $45 is total revenue, not the change in it. $1 is only the price reduction per unit.
Category: Monopoly Revenue
Question 11
Why is a single-price monopolist's marginal revenue from an additional unit less than the price of that unit?
Its marginal cost rises as it produces more
Government regulation caps its total revenue
To sell one more unit it must lower the price on all units
✓
Each unit sold carries a sales tax
Correct Answer
To sell one more unit it must lower the price on all units
A downward-sloping demand curve means the monopolist must cut its price to sell one more unit, and the lower price applies to every unit sold, so the revenue gained is the new price minus the revenue lost on the earlier units. Its marginal cost rises as it produces more describes costs, which do not affect marginal revenue. Government regulation capping revenue is not part of the basic model. A sales tax would not explain the gap between price and marginal revenue.
Category: Monopoly Revenue
Question 12
A monopolist faces the demand curve P = 20 - Q, so its marginal revenue curve is MR = 20 - 2Q. At what quantity does marginal revenue equal zero?
20
5
40
10
✓
Correct Answer
10
Setting 20 - 2Q = 0 gives Q = 10, which is half of the quantity of 20 where the demand curve reaches the horizontal axis. 20 is where price falls to zero on the demand curve, not where marginal revenue does. 5 halves the quantity a second time. 40 doubles it instead of halving it.
Category: Monopoly Revenue
Question 13
Which condition holds at the quantity a profit-maximizing monopolist chooses?
Marginal revenue equals marginal cost
✓
Price equals marginal cost
Total revenue is as large as possible
Average total cost is at its minimum
Correct Answer
Marginal revenue equals marginal cost
Expanding output adds to profit as long as marginal revenue exceeds marginal cost, so profit is greatest where the two are equal. Price equals marginal cost is the perfectly competitive rule, and a monopolist's price is above its marginal revenue. Total revenue is as large as possible ignores costs. Average total cost is at its minimum describes the lowest-cost output, which is generally not the profit-maximizing one.
Category: Profit Maximization
Question 14
After a monopolist finds the quantity where MR = MC, how does it choose its price?
It sets price equal to marginal cost there
It reads up to the demand curve at that quantity
✓
It sets price equal to marginal revenue there
It charges the minimum of average total cost
Correct Answer
It reads up to the demand curve at that quantity
The demand curve shows the highest price buyers will pay for each quantity, so the monopolist goes straight up from the chosen quantity to the demand curve to find its price. Setting price equal to marginal cost would leave profit on the table. Setting price equal to marginal revenue would charge less than buyers are willing to pay. Charging the minimum of average total cost would eliminate economic profit.
Category: Profit Maximization
Question 15
For a monopolist, marginal revenue for units 1 through 5 is $9, $7, $5, $3 and $1, and marginal cost for the same units is $2, $3, $4, $7 and $9. How many units maximize profit?
2 units
4 units
3 units
✓
5 units
Correct Answer
3 units
The first three units each add more to revenue than to cost ($9 vs $2, $7 vs $3, $5 vs $4), but the fourth adds $3 of revenue and $7 of cost, so profit peaks at 3 units. 2 units stops while the third unit would still add $1 of profit. 4 units includes a unit that loses $4. 5 units includes two units that each lose money.
Category: Profit Maximization
Question 16
A monopolist maximizes profit at 50 units, where the demand curve shows a price of $12 and average total cost is $8. What is its profit?
$600
$400
$4
$200
✓
Correct Answer
$200
Profit equals (price - average total cost) x quantity = ($12 - $8) x 50 = $200. $600 is total revenue (50 x $12). $400 is total cost (50 x $8). $4 is the profit per unit, not total profit.
Category: Profit Maximization
Question 17
As a monopolist increases output along a straight-line demand curve, what happens to its total revenue?
It rises, reaches a peak, then falls
✓
It rises steadily without limit
It falls steadily from the first unit
It stays the same at every output
Correct Answer
It rises, reaches a peak, then falls
At first the extra units sold outweigh the lower price, so total revenue rises; past the midpoint of the demand curve the price cuts dominate and total revenue falls, giving a hill shape. It rises steadily without limit would require price to stay constant. It falls steadily from the first unit ignores the early gains from selling more. It stays the same at every output would require a very specific demand curve, not a straight line.
Category: Monopoly Revenue
Question 18
At its profit-maximizing output, how do a monopolist's price and marginal cost compare?
Price equals marginal cost
Price is greater than marginal cost
✓
Price is less than marginal cost
Price equals average fixed cost
Correct Answer
Price is greater than marginal cost
The monopolist produces where marginal revenue equals marginal cost, and because price lies above marginal revenue, price ends up above marginal cost. Price equals marginal cost is the perfectly competitive outcome. Price is less than marginal cost would mean the firm is producing too much to maximize profit. Price equals average fixed cost has no role in the profit-maximizing rule.
Category: Monopoly Efficiency
Question 19
Compared with a perfectly competitive industry with the same costs, what does the monopoly model predict about price and quantity?
A lower price and a higher quantity
A higher price and a higher quantity
A higher price and a lower quantity
✓
The same price and the same quantity
Correct Answer
A higher price and a lower quantity
A monopolist restricts output to where marginal revenue equals marginal cost and charges the higher price buyers will pay for that smaller quantity. A lower price and a higher quantity describes the competitive outcome relative to monopoly. A higher price and a higher quantity cannot both happen along a downward-sloping demand curve. The same price and the same quantity would require price to equal marginal cost, which a monopolist does not choose.
Category: Monopoly Efficiency
Question 20
How is marginal profit calculated?
Total revenue minus total cost
Price minus average total cost
Marginal cost minus average cost
Marginal revenue minus marginal cost
✓
Correct Answer
Marginal revenue minus marginal cost
Marginal profit is the profit from one more unit of output, equal to marginal revenue minus marginal cost; profit keeps rising while it is positive. Total revenue minus total cost is total profit. Price minus average total cost is profit per unit. Marginal cost minus average cost is not a profit measure.
Category: Profit Maximization