Multiple Choice Questions

1. The extent to which a monopolist can exercise market power is
limited by

(a) the income elasticity of demand.
(b) the price elasticity of supply.
(c) the ease with which consumers can substitute other products for the     
    monopolist's product.
(d) the costs of producing the product and the technology that is
    available.


2.  Relative to a competitively organized industry, a monopoly 
	
(a) produces more output, charges higher prices and earns economic 
    profits. 
(b) produces less output, charges lower prices and earns economic profits. 
(c) produces less output, charges lower prices and earns only a normal
    profit. 
(d) produces less output, charges higher prices and earns economic
    profits. 
 

3. Firms have an incentive to collude because collusion would 

(a) shift their average cost curve down.
(b) lead to increased output levels.
(c) increase their profits.
(d) increase the price elasticity of demand for their product.


4. The Rare Bird Company has a monopoly in the sale of macaws in Iowa.
When the Rare Bird Company sells 3 macaws its marginal revenue is $30.
When the Rare Bird Company sells 4 macaws its marginal revenue will be
	
(a) less than $30.
(b) greater than $30.
(c) equal to $30.
(d) greater than $30 if demand is elastic and less than $30 if demand is     
    inelastic.
	 

5. Because of a patent, Alcoa is the only manufacturer of soda cans
with a stay-put tab. Alcoa can earn a profit on the sale of soda cans with
stay-put tabs
	
(a) in the short run but not in the long run because new firms will enter
    the industry in the long run.
(b) only in the long run because government regulations prevent 
    monopolists from earning profits in the short run.
(c) in the long run but not the short run because the monopolist will face     
    competition in the short run.
(d) in the long run because entry into the industry by new firms is
    blocked.

6. The feature that distinguishes monopolistic competition from perfect
competition is that monopolistically competitive firms are 

(a) large relative to the market. 
(b) price takers. 
(c) able to block the entry of other firms. 
(d) able to differentiate their product. 


7. Mr. Paul's Bakery, a monopolistically competitive firm, is incurring a
loss. This firm will produce as long as

(a) marginal revenue is greater than marginal cost.
(b) price is greater than or equal to average variable cost.
(c) price is greater than or equal to average fixed cost.
(d) marginal revenue is greater than or equal to average variable cost.

8. In the long run in monopolistic competition there can be

(a) economic profits, but not losses.
(b) economic profits or losses.
(c) no economic profits, but losses
(d) no economic profits or losses.

9. Assume that firms in an oligopoly are currently colluding to set price
and output to maximize total industry profit. If the oligopolists are
forced to stop colluding, the price charged by the oligopolists will
_______ and the total output produced will _________.

(a) increase; increase
(b) increase; decrease
(c) decrease; increase
(d) decrease; decrease

10. In which of the following circumstances would a cartel be most likely
to work?

(a) The coffee market, where the product is standardized and there are a
    large number of coffee growers. 
(b) The market for copper, where there are very few producers and the
    product is standardized. 
(c) The automobile industry, where there are few producers but there is
    great product differentiation. 
(d) The fast-food market, where there is a large number of producers but
    the demand for fast food is inelastic.

1) The following are the demand and total cost schedules for the Veneta
town Water Company, a local monopoly:

  OUTPUT		PRICE			  TOTAL COST
(gallons)         (dollars per gallon)             (dollars)
_____________________________________________________________

 50,000			 0.28			     6,000
100,000			 0.26			    13,000
150,000			 0.22			    22,000
200,000			 0.20			    32,000
250,000			 0.16			    46,000
300,000			 0.12			    64,000
_____________________________________________________________

a) How much output will the Veneta Water Company produce?

b) What price will it charge?

c) Will it earn a profit? How much?

d) Show that the marginal revenue (per 50,000 gallon unit) is always less
than the price.


2) Does a monopolist necessarily make a profit in the short-run or the
long-run. Can one graph out four cases [1) economic profit, 2) break even,
3) loss - no shutdown, 4) loss and shutdown] as we do with perfectly
competitive firms in the short-run.  If so, graph the four cases.