chunty

Which of the following is least accurate regarding the relationship between price (P), marginal revenue (MR), average total cost (ATC), and marginal cost (MC) at the profit maximizing output under monopoly?

A) MR < ATC.

B) P = MR.

C) MR = MC.

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To maximize profit, all firms expand output until marginal revenue equals marginal cost. Price is determined from the demand curve, which is above the marginal revenue curve since a monopoly faces a downward sloping demand curve.

chunty

Consider the following statements:
Statement 1: “A natural monopoly exists when economies of scale are so pronounced that all of an industry’s demand should be supplied by one firm.”
Statement 2: “Monopoly is characterized by a single seller of a distinct product for which no good substitutes exist.”
Statement 3: “Average cost pricing is a form of regulation that is intended to force monopolists to reduce output to the point where the monopolist’s average total cost curve intersects its marginal cost curve.”
Which of the following best describes the accuracy of these statements?

Statement 1

Statement 2

Statement 3

A) Correct Correct Incorrect

B) Correct Incorrect Correct

C) Incorrect Correct Incorrect

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Statement 3 is incorrect because average cost pricing attempts to force the monopolist to produce where the average total cost curve intersects the demand curve and to charge a price equal to ATC.

chunty

Which of the following is least relevant when explaining why monopoly firms can earn positive economic profits over the long term?

A) Control over production input resources.

B) The existence of economies of scale.

C) The ability to use price discrimination.

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High entry barriers due to economies of scale, government licensing, resource controls, and patents prevent new firms from entering the market to exploit positive economic profit opportunities.

chunty

What is the relationship between price and marginal revenue for a price searcher?

A) Marginal revenue > price.

B) Marginal revenue = price.

C) Marginal revenue < price.

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For a price searcher, demand is downward sloping, marginal revenue is less than price since price must be reduced to sell additional units of output.

chunty

A monopolist will continue expanding output as long as:

A) marginal revenue is positive.

B) economic profit is greater than zero.

C) marginal revenue is greater than marginal cost.

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The optimum behavior of all firms is to produce until the point where MR = MC. So, the monopolist can increase total profit by increasing production as long as marginal revenue is greater than marginal costs.

chunty

In a natural monopoly:

A) the price charged by a monopolist is determined by the intersection of the demand curve with the marginal cost curve.

B) the average total cost of production continually declines with increased output.

C) one firm controls all natural resources.

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A monopoly situation in which the average total cost of production continually declines with increased output is called a natural monopoly.

chunty

Which of the following describes the regulatory practice of setting prices at a level where the monopoly firm’s average total cost curve intersects the demand curve?

A) Marginal cost pricing.

B) Average cost pricing.

C) Cost-of-service pricing.

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Under average cost pricing, regulators attempt to force monopolies to reduce prices to where a firm’s average total cost curve intersects the market demand curve. This will increase output and decrease price, increase allocative efficiency, and ensure zero economic profit.

chunty

Which of the following is least likely to be considered a reason why regulation of monopolies is not effective?

A) Regulation reduces the incentive for firms to reduce costs.

B) Regulation shifts industry demand and increases prices.

C) Regulators do not know the firm’s cost structure.

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Regulation is not associated with a shift in industry demand.

chunty

Which of the following statements about a monopolist is least accurate?

A) A monopolist will always be able to earn economic profit.

B) A profit-maximizing monopolist will expand output until marginal revenue equals marginal cost.

C) A profit-maximizing monopolist will supply less of his product than the amount consistent with the conditions of ideal static efficiency for an economy.

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Monopolists maximize profit when MR = MC. If the ATC curve lies above the demand curve, monopolists will lose money.

chunty

When a regulatory agency requires a monopolist to use average cost pricing, the intent is to produce the quantity where the:

A) marginal revenue curve intersects the marginal cost curve.

B) average total cost curve intersects the marginal revenue curve.

C) the market demand curve intersects the average total cost curve.

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When a regulatory agency requires a monopolist to use average cost pricing, the intent is to price the product where the average total cost curve intersects the market demand curve. There are problems in using this method, e.g., determining exactly what the average total cost really is.