Q: Suppose a monopolist faces the following demand and cost curves: $$MC = MR at a $$quantity of 6 units and the price at this quantity is $$0.55. If $$the average total cost at this quantity is $$0.30$$, what is the monopolist's profit?

Profit = $$(0.55 - 0.30) \times 6 = 1.50$$

Q: Which formula is used to calculate the Herfindahl-Hirschman Index (HHI)?

$$HHI = \sum (\text{market share of each firm})^2$

Question 1

Which of the following is NOT a typical barrier to entry that can lead to monopoly power?

Accepted Answer

High consumer demand for the product

Question 2

Refer to the De Beers example. What type of barrier to entry did De Beers primarily rely on to maintain its monopoly in the diamond market?

Accepted Answer

Control of a key resource

Question 3

A natural monopoly occurs when:

Accepted Answer

Economies of scale are so large that one firm can supply the entire market at a lower average total cost than two or more firms

Question 4

Suppose a monopolist faces the following demand and cost curves: $$MC = MR at a $$quantity of 6 units and the price at this quantity is $$0.55. If $$the average total cost at this quantity is $$0.30$$, what is the monopolist's profit?

Accepted Answer

Profit = $$(0.55 - 0.30) 	imes 6 = 1.50$$

Question 5

Which equation correctly represents marginal revenue for a monopolist?

Accepted Answer

$$MR = \frac{\Delta TR}{\Delta Q}$$

Question 6

Why is marginal revenue always below the demand curve for a monopolist?

Accepted Answer

Because the monopolist must lower the price for all units sold to sell an additional unit

Question 7

Which of the following is a necessary condition for price discrimination?

Accepted Answer

Arbitrage of the product must not be possible

Question 8

Refer to the graphs showing afternoon and evening movie ticket pricing. Why does the profit-maximizing price differ between afternoon and evening showings?

Accepted Answer

Because demand is higher in the evening, allowing the theater to charge a higher price

Question 9

If a monopolist practices perfect price discrimination, what happens to consumer surplus?

Accepted Answer

Consumer surplus becomes zero

Question 10

Suppose a perfectly competitive industry becomes a monopoly. What happens to price, quantity, and deadweight loss?

Accepted Answer

Price increases, quantity decreases, and deadweight loss increases

Question 11

Which formula is used to calculate the Herfindahl-Hirschman Index (HHI)?

Accepted Answer

$$HHI = \sum (	ext{market share of each firm})^2$

Question 12

A government regulator sets the price for a natural monopoly at the level where the firm earns zero economic profit. What is the likely outcome?

Accepted Answer

The firm produces a quantity close to the efficient level, minimizing deadweight loss

Question 13

Which U.S. law was enacted to prohibit 'restraint of trade,' including price fixing and collusion, and to outlaw monopolization?

Accepted Answer

Sherman Act

Question 14

What is the main trade-off regulators face when considering horizontal mergers?

Accepted Answer

Balancing increased market power against potential efficiency gains

Question 15

Which of the following best describes the deadweight loss from monopoly?

Accepted Answer

It is the loss of economic surplus that occurs because the monopolist produces less than the efficient quantity

Question 16

If a monopolist sets output where $$MC = MR$$, but the price at this output is above average total cost, what is the result?

Accepted Answer

The monopolist earns a positive economic profit

Question 17

Which of the following is a real-world example of price discrimination based on time?

Accepted Answer

A book publisher releasing a hardcover version first, followed by a cheaper paperback

Question 18

According to Joseph Schumpeter, what is the long-term effect of market power on innovation?

Accepted Answer

Market power drives innovation, leading to a 'gale of creative destruction' that benefits consumers

Question 19

Which of the following statements about market power is TRUE?

Accepted Answer

Market power allows firms to charge a price greater than marginal cost

Question 20

Suppose the Herfindahl-Hirschman Index (HHI) in a market is 2,600 after a merger, and the merger increases the HHI by 150 points. What is the likely regulatory response?

Accepted Answer

The merger may be challenged by federal regulators

Monopoly: Market Structure, Behavior, and Regulation

Study Guide - Practice Questions

Study Guide - Flashcards