CHAPTER 11 PRICE-SEARCHER MARKETS WITH HIGH ENTRY BARRIERS

QUESTIONS 1 THROUGH 10 ARE A SUGGESTED CHAPTER QUIZ.

1. When economists talk about a barrier to entry, they are referring to a. a factor that makes it difficult for potential competitors to enter a market. b. the opportunity cost of equity capital that is incurred by a firm producing at minimum total cost. c. the downward-sloping portion of the long-run average total cost curve. d. the declining output experienced as additional units of a variable input are used with a given amount of a fixed input. A monopolist will maximize profits by a. setting the price at the level that will maximize per-unit profit. b. producing the output where marginal revenue equals total cost and charging a price along the demand curve. c. selling at the price on the demand curve at the output rate where marginal revenue equals marginal cost. d. producing at the output rate where price equals marginal cost. Which one of the following is the best description of a monopolist? a. a firm that produces a single product b. a firm that is the sole producer of a narrowly defined product class, such as yellow, grade-A butter produced in Jackson County, Wisconsin c. a firm that is the sole producer of a product for which there are no good substitutes in a market with high barriers to entry d. a firm that is large relative to its competitors Assuming that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency? a. The output of the monopolist will be too large and its price too high. b. The output of the monopolist will be too large and its price too low. c. The output of the monopolist will be too small and its price too high. d. The output of the monopolist will be too small and its price too low. An oligopolistic market a. has a small number of rival firms, and each is large relative to the size of the market. b. is characterized by firms that merely take the price that is determined by the forces of supply and demand in the market. c. has low entry barriers facing firms that may be interested in entering the market. d. has a large number of firms that are small relative to the size of the market.

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165yChapter 11/Price-Searcher Markets with High Entry Barriers 6. Oligopolistic agreements on price tend to be unstable because a. although the monopoly price is the best price for all firms, oligopolists are unaware of this and thus charge prices that are lower than the price that could be charged by a monopolists, therefore, decreasing social welfare. b. although the monopoly price maximizes the joint profits of the firms, a secret price cut by any individual firm will increase the profits of that firm; hence, collusive agreements tend to break down. c. the demand for the products of oligopolistic industries is inherently unstable relative to the demand for the products of non-oligopolistic industries because demand for products in oligopolistic industries are dependent on changes in consumer tastes and preferences. d. firms in oligopolistic industries have more concern for consumers than do firms in competitive industries. The price charged by oligopolists will a. equal the equilibrium price in a price-takers market if the oligopolists collude. b. equal the monopoly price if the oligopolists do not collude. c. generally fall between the monopoly and competitive market equilibrium prices. d. be the same whether the oligopolists cooperate with one another or not; only profit is affected. When firms use resources in an attempt to secure and maintain grants of market protection from the government, it is called a. rent-seeking. b. collusion. c. franchising. d. resource investment. A monopolist has less to gain from cost-saving measures in the production process when a. the monopoly is unregulated. b. regulators use average cost pricing to set the monopolists price. c. the demand for the product of the monopolist is inelastic. d. changes in the regulated price occur only after considerable delay. When natural monopoly is present in an industry, the per-unit costs of production will be a. lowest when there are a large number of producers in the industry. b. lowest when a single firm generates the entire output of the industry. c. lower for small firms than for large firms. d. minimized at the output that maximizes the industrys profitability.

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ANSWER KEY 1 THROUGH 10

1. (a), 2. (c), 3. (c), 4. (c), 5. (a), 6. (b), 7. (c), 8. (a), 9. (b), 10. (b)

WHY ARE ENTRY BARRIERS SOMETIMES HIGH?

11. * Which of the following factors is least likely to be a barrier limiting the entry of potential competitors into a market? a. legally enforced patent rights b. an inelastic demand for a product c. licensing d. control over an essential resource

Chapter 11/Price-Searcher Markets with High Entry Barriersy166 12. A law that requires hairdressers to undergo many hours of training and acquire a license before they can offer haircuts to the public, is an example of a a. positive externality. b. natural monopoly. c. barrier to entry. d. public good. New York City limits the number of taxi cabs that can legally operate in the city. The most likely result of this practice is that a. cab fares will be lower. b. cab fares will be higher. c. the cost of operating a taxicab will be lower. d. subway fares will decrease. Which of the following is most likely to contribute to the presence of monopoly in an industry? a. economies of scale b. an elastic market demand for the product produced by the industry c. inefficiency due to bureaucratic decision-making procedures in the industry d. controlling over 50 percent of the market A monopoly is most likely to emerge in a market when a. the producers in the market have U-shaped average total cost curves. b. the price elasticity of demand for the product is high. c. the cost of entry and exit into the market is low. d. economies of scale are large relative to market demand. Which of the following factors is most likely to restrict the entry of potential competitors into a market? a. economies of scale b. elastic market demand curve for the product c. a lack of patent protection for the new entrant d. all of the above In some industries where firms experience declining average total costs over the full range of output that consumers are willing to buy, a. a smaller firm will always have lower per-unit costs. b. many firms will tend to emerge from the competitive process. c. a single large firm will develop, and it will have cost advantages that protect it from potential rivals. d. a single large firm will develop, and it will buy out any smaller rival firms to avoid the small firms production at a lower per-unit cost. Which of the following provides the most secure protection for a firm with monopoly power? a. quality advertising b. legal barriers restricting entry into the market of the monopolist c. predatory pricing d. limited economies of scale The U.S. Postal Service has a monopoly on the delivery of first-class mail due to a. economies of scale. b. a lack of initiative on the part of competing firms. c. legal barriers limiting entry. d. control over an essential resource.

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167yChapter 11/Price-Searcher Markets with High Entry Barriers 20. * In essence, patents grant their owners a. a property right to new products and production processes that they have developed. b. the exclusive right to use a newly developed process or product forever. c. the right to use resources owned by their competitors. d. an exemption from laws that prohibit price discrimination. Economic analysis suggests that patent laws that can often be used to limit the entry of potential competitors into an industry a. redistribute income from consumers to business decision makers without affecting the allocation of resources. b. may be a source of business monopoly power, but they may also encourage innovation in the long run. c. encourage product development and the adoption of cost-reducing technologies in the short run but in the long run generally lead to business monopoly. d. help inventors at the expense of consumers in the long run. Since patent laws create monopoly power in the short run and thus provide a strong incentive for firms to undertake the risk and effort involved in the development of a technological improvement, we can expect that patent laws a. are inefficient. b. are damaging to consumer welfare in the long run. c. reflect the power of special interests and the impact that they exert on the regulatory policy. d. may lead to improved products at a lower cost in the long run. One of the effects of patents is to a. reduce incentives for innovation. b. give firms incentives to worry less about minimizing production costs. c. temporarily provide the patent owner with monopoly power. d. reduce the degree of monopoly power in the short run. When a single firm has control over the market supply of a resource that is essential to the production of a good, a. economies of scale are usually important. b. monopoly is frequently the result. c. diseconomies of scale are the usual cause. d. competition for the resource makes monopoly almost impossible If a local ready-mix cement company is the only producer of cement in the local market, the monopoly power of the firm will a. be small if entry barriers into the local market are high. b. depend on how many other sellers of similar products there are in the national market. c. be total since there are not any other sellers of the same product in the local market. d. be minimal if the entry barriers restricting competition from other firms are low. Which of the following constitutes a barrier limiting the entry of potential competitors into a market? a. diseconomies of scale b. an elastic market demand for the product produced by the industry c. control over an essential resource d. a perfectly elastic demand curve

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Chapter 11/Price-Searcher Markets with High Entry Barriersy168

THE CASE OF MONOPOLY

27. * Which of the following statements accurately describes a difference between a firm that is a monopolist and one that is a competitive price taker? a. Marginal revenue and market price are equal for the competitive price taker but not for the monopolist. b. The monopolist does not always produce the output that equates marginal cost and marginal revenue; the competitive price taker does. c. The monopolist charges the highest price possible; the competitive price taker charges a price equal to its per-unit costs. d. A monopolist can earn economic profit in the short run; a competitive price taker cannot. Which of the following accurately describes a major difference between a monopolist and firms in competitive markets? a. The monopolist maximizes profit; firms in competitive markets maximize sales. b. The monopolist may earn long-run economic profit; firms in competitive markets cannot. c. The monopolist is a price searcher; firms in other markets are price takers. d. The monopolist is a price taker; firms in other markets are price searchers. Which of the following accurately describes a major difference between a monopolist and firms in competitive price-searcher markets? a. A monopolist will maximize profit, while firms in competitive price-searcher markets will maximize sales. b. A monopolist may be able to earn long-run economic profit, but firms in competitive pricesearcher markets will not be able to do so. c. A monopolist will charge a price that is greater than its marginal cost, but competitive price searchers will charge prices that are just equal to their marginal cost. d. A monopolist will charge a price that is just equal to its marginal cost, but competitive price searchers will charge prices that are greater than their marginal cost. Which of the following indicates the major difference between monopolists and competitive price searchers? a. Monopolists will always be able to make economic profit; competitive price searchers will not. b. Barriers to entry are high under monopoly but low in competitive price-searcher markets. c. Monopolists will face a downward-sloping demand curve; competitive price searchers will not. d. Unregulated monopolists will charge prices that exceed marginal cost; competitive price searchers will not. A firm that is a pure monopoly is a. a seller of a highly advertised and differentiated product in a market with low barriers to entry in the long run. b. the only seller of a good for which there are no good substitutes in a market with high barriers to entry. c. the only buyer of a unique raw material. d. the producer of a product subsidized by the government. In the hypothetical model of monopoly, a. new competitors will quickly eliminate positive economic profits. b. the market demand curve is the horizontal sum of the demand curves of the many firms in the monopolistic industry. c. the monopolist is assured of an economic profit. d. the firm produces efficiently, even though its output is less than the social ideal.

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169yChapter 11/Price-Searcher Markets with High Entry Barriers 33. Which of the following is true of a monopolists demand curve? a. It is perfectly elastic. b. It is perfectly inelastic. c. It indicates that the monopolist will be able to sell more units at a higher price. d. It is identical with the industry demand curve for the product. A monopolist faces a downward-sloping demand curve because a. the demand for its product is inelastic. b. the industry demand curve is horizontal. c. resource prices increase as the monopolist expands output. d. the market demand curve is downward sloping. The demand curve of a monopolist is a. identical to the marginal cost curve. b. downward sloping and above the marginal revenue curve. c. downward sloping and below the marginal revenue. d. elastic because of a recognized interdependence with other firms. Which of the following best fits the definition of a monopoly? a. the local cable company b. IBM, the worlds largest manufacturer of certain types of computers c. Panasonic, the only company that sells Technics brand of stereos d. General Motors Which of the following firms best fits the definition of a monopoly? a. General Motors, the largest automobile manufacturer in the world b. ExxonMobile, the largest oil company in the world c. local electric utility d. AT&T Which of the following best explains why the monopolists marginal revenue is less than the sales price? a. To sell more units, the monopolist must reduce price on all units sold. b. As the monopolist expands output, the average total cost will decline. c. The monopolist charges each consumer the highest possible price. d. When a firm has a monopoly, consumers have no choice other than to pay the price set by the monopolist. Graphically, the marginal revenue curve of a monopolist a. will sometimes lie below the demand curve of the monopolist. b. will always lie below the demand curve of the monopolist. c. is the same as the demand curve of the monopolist. d. will equal 1 when the elasticity of demand is unitary. A profit-maximizing monopolist will continue expanding output as long as a. marginal revenue exceeds marginal cost. b. marginal revenue is positive. c. the cost of producing an additional unit exceeds the marginal revenue derived from the unit. d. economic profit is more than zero. At the long-run equilibrium level of output, the monopolists marginal cost will a. exceed price. b. equal price. c. be less than price. d. be less than marginal revenue.

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Chapter 11/Price-Searcher Markets with High Entry Barriersy170 42. * When a monopolist is producing at the profit-maximizing output level, the value to consumers of one additional unit of output will a. exceed the monopolists marginal cost. b. equal the monopolists marginal cost. c. be less than the monopolists marginal cost. d. exceed the price of the additional unit. If marginal cost exceeds marginal revenue, a profit-maximizing monopolist will a. restrict output to increase the price even higher. b. raise price and expand output to increase profit. c. lower price and expand output to increase profit. d. attempt to maintain this position because it is consistent with profit maximization. If marginal revenue exceeds marginal cost, a profit-maximizing monopolist will a. raise price and decrease output. b. lower price and increase output. c. reduce both output and price. d. hold output constant and raise price. A monopolist will earn economic profits as long as his price exceeds a. marginal revenue. b. average fixed cost. c. average variable cost. d. average total cost. If the average total cost curve is always above the demand curve of a monopolist, a. the profits of the monopolist will be large. b. the monopolist must be producing inefficiently. c. even a monopolist will suffer economic losses. d. entry will occur, forcing the monopolist to reduce price and expand output. When a monopolist is maximizing profit, which of the following conditions will always be satisfied? a. P = MC b. MR = AVC c. P = ATC d. MR = MC A monopolist will maximize profits by a. setting his price as high as possible. b. setting his price at the level that will maximize per-unit profit. c. producing the output where marginal revenue equals marginal cost. d. producing the output where price equals marginal cost. If a monopolist wants to maximize profit, what price should he charge? a. the highest possible price b. the price where marginal revenue equals average variable cost c. the price where average total cost crosses the demand curve d. the price on the demand curve associated with the MC = MR output

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171yChapter 11/Price-Searcher Markets with High Entry Barriers 50. * If a monopolist is concerned about the development of substitute products eroding its monopoly power, it may choose to a. raise its price to discourage the introduction of substitute products. b. produce a larger output and charge a lower price than the short-run profit maximization rule. c. maintain its current price but produce a larger output in order to create a long-run surplus of the product. d. raise price in order to make high enough profits to drive other competitors out of business. A profit-maximizing firm with a secure monopoly in its market and no fear of regulation or new entrants will always charge a price on the inelastic portion of its demand curve. Economic theory suggests that this statement is a. correct because a monopolist could always gain by raising its price if it was operating on the inelastic portion of its demand curve. b. incorrect because a monopolist could always gain by raising its price if it was operating on the inelastic portion of its demand curve. c. incorrect, except when the demand for the firms product is declining. d. correct, except when the demand for the firms product is increasing. Monopolies will always make profits since they can charge anything they like for their good and people still have to buy it. This statement a. is essentially correct. b. has one error: Monopolies do not always make profits. c. has one error: People will not buy from monopolies if their price is too high. d. is incorrect: Monopolies do not necessarily make profits, and people will not buy as much when prices are increased. Monopolists do not worry about efficient production and cost saving since they can just pass along any increase in costs to their consumers. Which of the following is true about this? a. The statement is false; price increases will mean fewer sales, and lower costs will mean higher profits (or smaller losses). b. The statement is true, and this is the primary reason why economists believe that monopolies result in economic inefficiency. c. This statement is false because the monopolist is a price taker. d. Monopolists will worry about keeping costs down only if they are motivated by social considerations rather than profit. Assuming that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency? a. The output of the monopolist will be too large and the price too high. b. The output of the monopolist will be too small and the price too low. c. The output of the monopolist will be too small and the price too high. d. The price will be too high, but the impact of monopoly on the output is indeterminate. Which of the following best explains why economists are generally critical of unregulated monopolists? a. Monopolists do not try to minimize their costs of production. b. Monopolists produce where marginal revenue is greater than marginal costs. c. Monopolists attempt to produce too many products, and as a result, their prices are high, and consumers waste time trying to choose between too many options. d. Monopolists restrict output, and as a result, they fail to produce units that are valued more than the marginal cost of producing them.

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Chapter 11/Price-Searcher Markets with High Entry Barriersy172 56. * Because monopolists are protected by high barriers to entry, they a. may be able to earn long-run economic profits. b. will not minimize the per-unit cost of producing their output. c. will price their product at the highest possible price. d. seek economic profit; however, they are not able to earn it in the long run. When entry barriers into a market are high, a. a monopolist will always be able to make an economic profit. b. rival firms will enter and drive price down to the level of per-unit costs if the firms in the market are making economic profit. c. entry into the market will not take place, at least not quickly, even if the firms currently in the market are making economic profits. d. the producers in the market will have little or no incentive to produce efficiently (at a low cost). Use the table to answer the following question. Price Units of Output Total Cost (dollars) (quantity demanded) (dollars) 10 200 2,000 9 260 2,275 8 325 2,550 7 405 2,825 6 480 3,100 58. * The demand and total cost schedules of a monopolist are presented in the table above. What price should a profit-maximizing monopolist charge? a. $10 b. $ 9 c. $ 8 d. $ 7 Use the table to answer the following question. Price Units of Output Total Cost (dollars) (quantity demanded) (dollars) 10 200 2,000 9 250 2,275 8 325 2,550 7 405 2,825 6 480 3,100 59. The demand and total cost schedules of a monopolist are presented in the table above. What price should a profit-maximizing monopolist charge? a. $10 b. $ 9 c. $ 8 d. $ 7

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173yChapter 11/Price-Searcher Markets with High Entry Barriers Use the table to answer the following question. Price Units of Output Total Cost (dollars) (quantity demanded) (dollars) 25 800 20,000 24 875 20,550 23 930 21,100 22 995 21,650 21 1,060 22,200 60. * The demand and total cost schedules of a monopolist are presented in the table above. What price should a profit-maximizing monopolist charge? a. $24 b. $23 c. $22 d. $21 Use the table to answer the following question. Price Units of Output Total Cost (dollars) (quantity demanded) (dollars) 10 200 2,000 9 250 2,200 8 330 2,400 7 405 2,600 6 480 2,800 61. The demand and cost schedules of a monopolist are presented in the table above. What price should a profit-maximizing monopolist charge? a. $10 b. $ 9 c. $ 8 d. $ 7 Use the table to answer the following question. Price Units of Output Total Cost (dollars) (quantity demanded) (dollars) 15 450 7,000 14 600 7,500 13 670 7,800 12 740 8,500 11 830 9,000 62. * The demand and cost schedules of a monopolist are presented in the table above. What price should a profit-maximizing monopolist charge? a. $14 b. $13 c. $12 d. $11 A monopolist finds out that if he lowers his price from $10 to $8, sales rise from 100 units to 115 units. Therefore, in this price range, a. marginal revenue is positive. b. marginal revenue is negative. c. the price elasticity of demand is greater than one. d. both a and c are correct.

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Chapter 11/Price-Searcher Markets with High Entry Barriersy174 64. Since patent laws create monopoly power in the short run and thus provide a strong incentive for firms to undertake the risk and effort involved in developing a technological improvement, it may be ascertained that patent laws a. are damaging to consumer welfare in the long run. b. reflect the power of special interests and their impact on regulatory policy. c. are unlikely to lead to improved products at a lower cost in the long run. d. may lead to lower production costs and better products in the long run. The temporary monopoly power granted to patent owners a. is inconsistent with both static and dynamic economic efficiency. b. provides entrepreneurs with an incentive to invent new products and develop cost-reducing production techniques. c. induces entrepreneurs to curtail their development of new products because they may end up competing with themselves. d. is consistent with static economic efficiency but conflicts with dynamic economic efficiency.

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CHARACTERISTICS OF OLIGOPOLY
66. A market situation where a small number of sellers compose the entire industry is called a. monopolistic competition. b. monopsony. c. monopoly. d. oligopoly. A basic characteristic of the firms in an oligopoly market structure is that they are a. large (relative to the total market) and interdependent. b. large (relative to the total market) and independent. c. small (relative to the total market) and interdependent. d. small (relative to the total market) and independent. Under which one of the following market structures are sellers most likely to consider the reaction of rival sellers when they set the price of their product? a. price-taker firms b. pure monopoly c. price searchers with low entry barriers d. oligopoly The demand curve faced by an oligopolistic producer tends to be a. dependent on the prices charged by rival firms. b. inelastic. c. inelastic for a price increase but elastic for a price reduction. d. dependent on the firms ability to achieve diseconomies of scale. Which of the following is a unique characteristic of the oligopolistic market structure? a. low barriers to entry b. a large number of firms producing highly differentiated products that are complements to each other c. product differentiation among the products produced by individual firms d. mutual interdependence among firms in demand, and thus, in price decisions

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175yChapter 11/Price-Searcher Markets with High Entry Barriers 71. * If mutual interdependence among firms is present, each profit-maximizing firm in the market a. produces a product that must be identical to the products of its rivals. b. must consider the reactions of its rivals when it determines its price policy. c. faces a perfectly elastic demand curve for its product. d. faces a perfectly inelastic demand curve for its product. One key characteristic that is distinctive of an oligopoly market is that a. the demand curve facing each firm is downward sloping, with a marginal revenue curve that lies below the firms demand curve. b. the decisions of one seller often influence the price of products, the output, and the profits of rival firms. c. there is only one firm that produces a product for which there are no good substitutes. d. there are many sellers in the market and each is small relative to the total market. Which of the following industries most closely approximates the conditions of the oligopoly model? a. restaurants b. retail clothing c. home construction d. airlines Which of the following industries most closely approximates the oligopoly model? a. automobile manufacturing b. retail clothing c. agricultural products d. dry cleaning Which of the following is the best example of a firm operating in an oligopolistic market? a. a Kansas wheat farmer b. TGI Fridays, a family restaurant c. ExxonMobil, a major refiner of gasoline d. Wal-Mart, a large retailing firm Which of the following is the best example of a firm operating in an oligopolistic market? a. Wal-Mart, a large retailing firm b. General Motors, a major automobile manufacturer that produces domestically c. The Wall Street Journal, one of the largest newspapers in the United States d. The U.S. Postal Service, one of a relatively small number of government-operated firms Why do oligopolists (or cartel members) have an incentive to cheat on collusive agreements designed to maximize the joint profits of the firms in the industry? a. Individual firms could gain if they charged a price greater than the industrys profitmaximizing price. b. The industry demand curve is more elastic than the demand curve confronting each of the firms in the industry. c. The firms would like to see the industry produce a larger output and charge a lower price. d. The demand curve confronting the individual firms is more elastic than the market demand curve for the product.

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Chapter 11/Price-Searcher Markets with High Entry Barriersy176 78. * Automobiles have thousands of parts, and each car is different in thousands of ways. Automobile production is also subject to large economies of scale, so that for the cars most people want to buy, there are only a few manufacturing firms. In this situation, the complexity of cars a. makes oligopolistic collusion more difficult. b. makes oligopolistic collusion more certain, in the absence of legal restrictions. c. makes actions to achieve oligopolistic collusion more attractive. d. is irrelevant to the possibility of oligopolistic collusion.

PRICE AND OUTPUT IN THE CASE OF OLIGOPOLY

79. * Why is it difficult for economists to predict the price and output policy that will emerge in oligopolistic markets? a. Economists cannot determine if barriers to entry exist in a market. b. Economists cannot predict the reactions that firms will have to the actions and decisions of other firms. c. The government prevents economists from acquiring the information that would lead to good predictions. d. Firms have a set price and output policy, but the policy is concealed to discourage competition. If the firms in an oligopolistic industry can collude effectively (from the firms viewpoints), the resulting price and output in the market will be most similar to that of a. a competitive price-searcher market. b. pure monopoly. c. bilateral monopoly. d. a competitive price-taker market. A profit-maximizing oligopolist will typically set price a. at the intersection of her marginal cost and demand curves. b. at the intersection of her average total cost and demand curves. c. higher than the competitive level but lower than the monopoly price. d. higher than her marginal cost but lower than her average total cost. The demand curve facing an individual oligopolistic firm will be a. considerably more inelastic than the industry demand curve. b. considerably more elastic than the industry demand curve. c. perfectly elastic at the market price. d. perfectly inelastic at the market price. An organization of sellers designed to coordinate their supply decisions to maximize joint profits is called a a. consumer cooperative. b. marketing association. c. regulatory agency. d. cartel. Collusion a. is exactly the same thing as competition. b. involves cooperative actions by sellers at the expense of buyers. c. requires competitive actions by sellers to win customers from rival firms. d. can only be achieved in price-taker markets.

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177yChapter 11/Price-Searcher Markets with High Entry Barriers 85. The two conflicting tendencies that a firm has in an oligopolistic industry are the incentive to a. cheat to maximize joint profits and the incentive to raise prices. b. cheat and avoid collusion and the incentive to raise price to maximize the firms share of profits. c. increase output in order to minimize per-unit costs and the incentive to reduce price in order to maximize joint profit. d. cooperate to maximize joint profits and the incentive to cheat on the agreement in order to increase the firms share of the profit. Under which one of the following market structures are firms most likely to enter into a price-fixing agreement designed to maximize their joint profit? a. price-taker markets with low entry barriers b. pure monopoly c. price-searcher markets with low entry barriers d. oligopoly When oligopolistic firms collude to maximize their joint profits, in comparison with the situation in competitive markets, their actions generally lead to a. a larger output and lower prices. b. a smaller output and higher prices. c. a smaller output and lower prices. d. the same output and higher prices. When barriers to entry are high, a monopolist (or cartel) will often be able to increase their profits by a. expanding their output so they can increase their price. b. reducing their output so they can raise their price. c. expanding their output so they can lower their price. d. reducing their output so they can lower their price. Which one of the following factors increases the likelihood that a cartel agreement will lead to higher profit for cartel members? a. free entry into the cartelized market b. a small number of sellers involved in the cartel agreement c. the cartel members produce a differentiated product d. highly unstable demand for the product produced by the cartel Which of the following conditions would increase the likelihood of successful collusion among American automobile producers? a. vigorous enforcement of antitrust laws b. strong quality competition that makes it difficult to monitor price cuts by rival firms c. imposition of tariffs or quotas on imported automobiles d. The market demand for automobiles fluctuates substantially. Which of the following will reduce the likelihood of effective collusion among oligopolistic producers? a. low entry barriers into the market b. a production of a homogenous product c. a stable market demand for the product d. a highly inelastic market demand for the product

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* 91. *

Chapter 11/Price-Searcher Markets with High Entry Barriersy178 92. * Which of the following will reduce the likelihood of effective collusion among oligopolistic producers? a. inability to keep new firms from entering the market b. a small number of firms in the market c. a stable market demand for the product d. a highly inelastic market demand for the product Collusion among sellers will be less attractive when a. it is difficult to determine if some firms are providing secret price cuts. b. there are a small number of firms in the industry that are easily monitored. c. the demand for the product is relatively stable. d. the demand for the product is highly inelastic. Collusive agreements among cartel members are difficult to maintain because a. each of the firms (cartel members) can gain from secret price cuts. b. the industry demand curve is more elastic than the demand curve of the individual firms. c. the firms would like to see the industry produce a larger output and charge a lower price. d. each of the firms would have lower per-unit costs if their were more firms in the industry. Cartel agreements are difficult to maintain because individual members a. can gain by raising their price above the price that is best for the cartel. b. are often unable to police the price and output policies of other members. c. can gain by secretly raising their price above the price that is best for the cartel. d. can enforce price arrangements vigorously in court. Which of the following increases the likelihood that a group of sellers can increase profits as the result of collusion? a. the presence of a large number of firms in the industry b. intense quality competition among firms c. low barriers to entry into the industry d. a stable demand for the product Which of the following is an obstacle that would reduce the likelihood of effective collusion among oligopolists? a. a highly inelastic market demand for the product b. a small number of firms in the market c. production of a homogeneous product d. highly unstable demand for the product Which of the following will be an obstacle to oligopolistic collusion in a market? a. government regulations restricting entry b. a relatively small number of oligopolistic firms c. unstable demand conditions d. uniform products Other things constant, production of an identical product in an oligopolistic industry a. makes it likely that a cartel will disintegrate. b. makes secret price cuts easier to detect. c. makes collusion more difficult. d. causes irrational pricing policies in the long run.

93. *

94. *

95. *

96.

* 97.

* 98. * 99. *

179yChapter 11/Price-Searcher Markets with High Entry Barriers 100. When members of an oligopolistic industry agree to collude, raising their product price substantially above average cost, the passage of time (months and years) a. is usually needed for the members to solidify their cooperation. b. usually results in finer control of prices and markets by the group and larger profit margins. * c. is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price. d. seldom has any impact on the agreement, as long as the participants maintain high profit levels as a result of the agreement. 101. Which one of the following factors reduces the likelihood that a cartel agreement will lead to higher producer profit? a. significant barriers to entry into the cartelized market * b. the development of substitutes for the good produced by the cartel c. government restrictions that limit competition from new rivals d. a small number of sellers involved in the cartel agreement 102. If entry-restricting legal barriers effectively organized the funeral home industry of a large city into a monopoly cartel, economic theory indicates that, compared to the previously competitive situation, a. the price of funeral services would decline, and output would increase. b. both the price and output of funeral services would decline. * c. the price of funeral services would increase, and output would decline. d. both the price and output of funeral services would increase. 103. Suppose the airline industry is an oligopolistic market with significant barriers to entry. If this is true, we would expect that a. each airline will set its own price and output without considering how other airlines might respond. b. if the number of airlines declined (perhaps because of a merger between United Airlines and U.S. Air), then collusive behavior in the industry would be less likely. * c. the airfares being charged will be greater than what would be charged in a competitive pricetaker market but less than what would be charged by a pure monopolist. d. the firms in the industry will not attempt to maximize profit. 104. In an oligopolistic market, if rival sellers act independently, each will have a strong incentive to * a. reduce price in order to increase sales and gain a larger share of the total market. b. increase price in order to get a larger share of the market and make larger profits. c. restrict output and raise price in order to achieve higher profits. d. maintain agreements to lower price and decrease product quality in order to earn higher profits. 105. In a small, isolated town in a western state, there are only four dentists. In such a case, we can be confident that a. there are high profits in the dental business in this town. b. there are no profits in the dental business in this town. * c. the possibility of new dentists coming to town will limit the profits of the existing dentists. d. collusion cannot occur among the four dentists. 106. Market power is an expression used to indicate that a firm has a. no rivals. b. the power to sell a given output at whatever price it chooses. * c. some freedom from the rigors of intense competition. d. a monopoly over the product it produces.

Chapter 11/Price-Searcher Markets with High Entry Barriersy180 107. Market power is an expression used to indicate that a firm has a. the power to sell a given output at whatever price it chooses. b. no freedom from the rigors of intense competition. c. a monopoly over the product it produces. * d. enough market share to be somewhat insulated from competition. 108. The prisoners dilemma is used to illustrate the basic idea that * a. oligopolistic firms would be better off if they collude, but each has an incentive to cheat on the collusive agreement. b. oligopolistic firms are always worse off when they collude. c. oligopolistic firms never have an incentive to cheat on collusive agreements, unlike prisoners. d. students who cheat on economics exams end up in jail.

MARKET POWER AND PROFIT: THE EARLY BIRD CATCHES THE WORM
109. When a firm is a price searcher and is well-established in a market with high barriers to entry, which of the following will be true? a. Neither the firm nor its stockholders will be able to earn above-normal returns. b. The firm will be unable to earn profits, but purchasers of the stock will earn higher than normal returns. c. Both the firm and those who purchase the stock of the established firm will earn above-normal returns. * d. The firm will be able to earn profits, but purchasers of the firms stock will earn only normal returns. 110. Monopolists may be able to earn profit, even in the long run, as the result of a. consumer ignorance. b. an inelastic demand for its product. c. product differentiation. * d. high barriers to entry.

DEFECTS OF MARKETS WITH HIGH ENTRY BARRIERS

111. Which of the following is true of pure monopoly? a. Monopoly expands the options available to consumers. * b. Monopoly results in allocative inefficiency. c. Profits and losses induce firms to enter and exit from industries. d. Monopoly works well when governments regulate prices. 112. Which of the following is true under unregulated monopoly? a. Monopoly results in more output than under pure competition. b. Monopoly results in a more efficient allocation of resources than competition. c. Monopoly expands the choices available to consumers. * d. Monopoly results in lower output and higher prices than competition. 113. To increase his profits, a monopolist will a. overstock the market, using too many resources. b. understock the market without minimizing his costs. * c. understock the market and raise price above marginal cost. d. understock the market, producing at the level where average total cost equals price.

181yChapter 11/Price-Searcher Markets with High Entry Barriers 114. Which of the following is a valid criticism of unregulated monopoly? * a. Monopoly limits the options available to consumers. b. Relative to a competitive market, a monopolist generally will produce too great an output. c. Profit-maximizing monopolists will fail to produce at the lowest possible cost. d. A monopolys output will often be more than if the market were competitive. 115. From the viewpoint of allocative efficiency, monopoly is harmful because a. the monopolist will always be able to make economic profit. * b. some units of output that are valued more highly than their cost will not be produced. c. a profit-maximizing monopolist will produce an output that is too large. d. an unregulated monopolist will not use the resource combination necessary to minimize its average total cost of production. 116. Assuming that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with ideal market efficiency? a. The output of the monopolist will be too large and the price too high. b. The output of the monopolist will be too large and the price too low. * c. The output of the monopolist will be too small and the price too high. d. The output of the monopolist will be too small and the price too low. 117. Economists generally criticize high barriers to market entry because * a. the ability of consumers to discipline producers is weakened. b. unregulated monopolists and oligopolists can often gain by increasing output and raising price. c. legal barriers to entry will encourage firms to invest resources in developing highly desired products that consumers are willing to pay more for. d. entry barriers are popular with consumers but not businesses. 118. When the government imposes a barrier to entry in a market, * a. more resources will be wasted by firms attempting to secure and maintain market power. b. the options available to consumers will increase in the protected market. c. allocative efficiency will be improved by the reduction of wasteful competition. d. consumers will be better able to direct the smaller number of producers to serve their interests. 119. Which of the following is an important side effect of government licensing and other grants of monopoly power? a. The number of options available to consumers is increased. b. Competition is enhanced. c. Firms will produce more efficiently. * d. Rent-seeking is encouraged. 120. In the area of business, rent-seeking often involves a. the use of resources to construct high-priced rental housing. * b. the use of resources to secure and maintain a grant of monopoly power from the government. c. an agreement between firms to raise prices and limit entry. d. an agreement between a firm and a customer that makes both parties better off.

Chapter 11/Price-Searcher Markets with High Entry Barriersy182

POLICY ALTERNATIVES WHEN ENTRY BARRIERS ARE HIGH

121. A natural monopoly is a market where a. a single firm has control over a vital natural resource. b. many smaller firms can produce the entire market output at the same per-unit cost as could one large firm. * c. a single large firm can produce the entire market output at a lower per-unit cost than a group of smaller firms. d. many smaller firms can produce the entire market output at a lower per-unit cost than could one large firm. 122. An industry is said to be a natural monopoly when a. legal barriers limit entry into the market. b. diseconomies of scale are present in the market. c. the market demand for the product supplied by a firm is inelastic. * d. long-run ATC continues to decline as firm size increases. e. larger firms have higher per-unit costs than their smaller rivals. 123. A natural monopoly exists when a. a single firm has control over a natural resource, such as timber. * b. ATC in an industry will be at a minimum if output is produced by a single firm. c. a firm has an exclusive patent or license to produce a product granted by the government. d. entering the industry is barred by governmental authorities. 124. Which of the following is true under natural monopoly? a. The marginal cost curve will be above the average cost curve. b. The monopolist will set price equal to marginal cost and will earn economic profits. * c. Economies of scale will be present. d. Output is produced under conditions of constant cost. 125. A market situation in which the average total costs of production continually decline with increased output until the entire market is supplied is called a. a legal monopoly. * b. a natural monopoly. c. diminishing returns to scale. d. diminishing returns to a variable factor. 126. In the case where a natural monopoly exists in an industry, * a. a competitive market structure will be costly and difficult to maintain. b. a competitive market structure will be more efficient and more equitable. c. government regulations will always improve efficiency in this industry. d. economies of scale will not be a consideration when analyzing the proper structure of the industry. 127. If the inefficiency stemming from natural monopoly is to be reduced, which of the following policies does economic theory suggest should be chosen? a. Legislation prohibiting firms from earning profits in excess of the normal rate of return should be enacted. b. Regulation eliminating the producers contrived product scarcity should be enacted. c. The government should take over production in industries when economies of scale lead to only a single producer. * d. Economic theory indicates that no ideal solution exists to the problem of natural monopoly.

183yChapter 11/Price-Searcher Markets with High Entry Barriers 128. An exotic new metal, billium, is extremely useful in the manufacture of electrical motors. Its manufacture, however, is subject to economies of scale in the relevant range of its production. The larger the plant, the cheaper are per-unit costs of production. Economic thinking suggests that a. price regulation of billium would improve the efficiency of resource allocation. * b. there is likely to be the problem of natural monopoly, but over time, competing materials and competing technologies should erode that natural monopoly. c. the only problem of natural monopoly in this case would occur if the government stepped in to regulate. d. unregulated private production of billium would clearly be inferior to either price regulation or socialized production because of the natural monopoly. 129. Antitrust action restructures a previously monopolized industry into a competitive industry. If economies of scale are unimportant in the industry, the expected result of this movement from monopoly to competition is a(n) a. reduction in output and an increase in price in the industry. b. reduction in both price and output in the industry. c. increase in both price and output in the industry. * d. increase in output and a reduction in price in the industry. 130. Which of the following are illegal under the antitrust laws of the United States? a. charging prices that exceed average total costs b. charging some consumers different prices than others c. mergers that unnecessarily create excessively large firms * d. collusive behavior or other actions designed to create a monopoly or cartel 131. When economies of scale are important, imposing competition by splitting a monopolistic firm into many rival units will * a. lead to an increase in the per-unit cost of production in the industry. b. not affect per-unit costs but will affect demand conditions. c. generally increase the social efficiency of production. d. cause the industry demand curve to increase (shift to the right). 132. Breaking a monopoly firm into several rival firms will be unlikely to improve economic efficiency when economies of scale are important because * a. several smaller firms will have higher per-unit costs than a single larger firm. b. a single firm will have higher per-unit costs than several smaller firms. c. it is harder to regulate many smaller firms than it is one large firm. d. consumers will find it harder to choose among the products of many alternative sellers. 133. Regulating natural monopolies according to the rate of return criterion is likely to a. increase the monopolists incentive to minimize cost. * b. increase output compared to the situation where the firm is unregulated. c. completely eliminate the welfare loss due to monopoly. d. do all of the above 134. Regulating natural monopolies according to the rate of return criterion is likely to * a. reduce the incentive of firms to minimize cost. b. result in a smaller quantity of output than when the natural monopolist is unregulated. c. discourage the firms from investing resources in an effort to influence the decisions of the regulatory agency. d. increase the number of firms in the industry.

Chapter 11/Price-Searcher Markets with High Entry Barriersy184 135. A regulatory agency that imposes a price ceiling in order to limit monopoly profits to a fair rate of return is forcing the monopolist to sell at a price equal to a. average fixed cost. * b. average total cost. c. marginal cost. d. average variable cost. 136. Which of the following is a major shortcoming of government regulation of business monopoly? a. The regulators often estimate production costs incorrectly and thus force firms into loss positions. * b. The regulators often come to represent the interests of the established firms and use their power to limit competition. c. The regulators usually permit firms to make unusually high accounting profits. d. The regulators, acting in consumers interests, often force prices so low that even with efficient production techniques the regulated firms lose money. 137. When a regulatory agency uses marginal cost pricing to regulate a monopolist, a. price will exceed marginal cost. * b. production costs will probably exceed the total revenues of the monopolist. c. marginal cost will equal average total cost. d. social welfare could be improved if average cost pricing was used instead 138. Which of the following is a problem that arises when regulations force natural monopolies, like electric utilities, to charge a price that is equal to their marginal cost (MC)? * a. This price will force the firms out of business in the long run. b. The firms have an incentive to pad their fixed costs. c. When price is equal to MC, new firms will enter the industry and drive up the costs of production. d. Both b and c are correct. 139. What problem does the government have that makes price regulation less than an ideal solution? a. There is no effective way to enforce price regulation. b. The government cannot tell what price a firm is charging. * c. Regulators frequently will not have the information they need to set prices. d. Regulation often will lead to lower costs. 140. The managers of the Bonneville Power Administration, a federal agency, are in charge of marketing federally generated electric power in the Pacific Northwest. Economic thinking indicates that these managers a. are not likely to pursue political objectives at the expense of economic efficiency because Congress oversees their operation. b. are likely to possess the necessary information to pursue efficiency goals and have the incentive to do so, as long as all the managers actually live in the region and use the agencys services. * c. may cater to politically organized special interest groups at the expense of efficiency goals. d. will be immune from special-interest pressures since they are federal employees.

185yChapter 11/Price-Searcher Markets with High Entry Barriers 141. Government-operated firms with monopoly power a. will necessarily meet the criteria of economic efficiency, as long as price equals average total cost. b. will always be more efficient than private firms because they do not have to make a profit. * c. are likely to be inefficient since some of the monopoly power is likely to serve the interests of the governmental managers and employees. d. are highly responsive to changes in the preferences of individual consumers since consumers are also voters. 142. The incentive for managers of a government-operated firm (for example, a state university or the U.S. Post Office) to operate efficiently will be a. low because all government workers are lazy. * b. low because there are no residual claimants to monitor and institute cost-reducing measures. c. high because government employees and officials will be less concerned with personal gain. d. high because voters can easily detect those who are to blame for inefficiencies and replace them.

THE COMPETITIVE PROCESS IN THE REAL WORLD

143. Which of the following has tended to increase the competitiveness of markets in the United States during the last couple of decades? a. increases in transport costs * b. development of the Internet c. decreased competition from imports d. more government regulation of product quality 144. Which of the following is true? * a. Competitive forces are present even in markets with high barriers to entry. b. Quality competition is an unimportant element of the competitive process. c. Profitability and high prices discourage technological change and the development of substitute products. d. Government regulations have substantially increased the quality of American manufacturing products in recent years. 145. Which of the following is true? a. Competitive forces are stronger in markets with high entry barriers than in those where entry barriers are low. * b. Quality competition is an important element of the competitive process. c. If the production of a good is highly profitable, the development of substitute products will be discouraged. d. High barriers to entry are only the result of natural factors not artificial factors like government regulations. 146. Empirical studies show that the after-tax accounting profits of manufacturing corporations are approximately what percent of sales? a. 1 percent * b. 5 percent c. 15 percent d. 25 to 30 percent

Chapter 11/Price-Searcher Markets with High Entry Barriersy186 147. National surveys indicate that the typical adult believes the accounting profit of American corporations averages a. 5 cents on each dollar of sales; after taxes, the actual figure is approximately 20 cents. b. 17 cents on each dollar of sales; after taxes, the actual figure is 10 cents. * c. 29 cents on each dollar of sales; after taxes, the actual figure is approximately 5 cents. d. 10 cents on each dollar of sales, an estimate very close to the actual after-tax figure.

GRAPHIC QUESTIONS
Use the figure to answer the following questions. Figure 1

148. What price and output in Figure 1 would an unregulated profit-maximizing monopolist choose? a. price A and output T b. price B and output S c. price B and output R * d. price C and output R 149. If a regulatory agency were using the normal return (zero economic profit) criteria to impose a price on a monopolist with the cost and demand conditions depicted in Figure 1, what price would the regulators set, and what output would the monopolist produce? a. price A and output T * b. price B and output S c. price B and output R d. price C and output R

187yChapter 11/Price-Searcher Markets with High Entry Barriers Use the figure to answer the following questions. Figure 2

150. The cost and demand conditions for a monopolist are depicted in Figure 2. If the monopolist is maximizing profit, it will charge a price of a. $30 and produce an output of 4,000. b. $40 and produce an output of 4,000. * c. $40 and produce an output of 2,000. d. more than $40. 151. What is the maximum profit per month that the monopolist will be able to earn in Figure 2? a. zero * b. approximately $10,000 c. approximately $20,000 d. approximately $40,000

Chapter 11/Price-Searcher Markets with High Entry Barriersy188 Use the figure to answer the following questions. Figure 3

152. The cost and demand conditions for a monopolist are depicted in Figure 3. If the monopolist is maximizing profit, it will charge a price of a. $10 and produce an output of 20,000. * b. $20 and produce an output of 10,000. c. $20 and produce an output of 20,000. d. more than $20. 153. What is the maximum profit per month that the monopolist will be able to earn in Figure 3? a. zero * b. approximately $20,000 c. approximately $50,000 d. approximately $100,000 Figure 4

154. What output would a monopolist with the demand and cost conditions depicted in Figure 4 produce if ordered by regulators to serve the entire market at average cost? a. OR * b. OS c. OT d. OU

189yChapter 11/Price-Searcher Markets with High Entry Barriers Figure 5

155. Indicate the maximum profit (or minimum loss) a pure monopolist with the cost and demand conditions depicted in Figure 5 would be able to achieve. a. profit of AIHE b. profit of BKJC c. losses of BKJC * d. losses of EHGF Use the figure to answer the following questions. Figure 6

156. The demand and cost conditions in an industry are as depicted in Figure 6. In the viewpoint of economic efficiency, what would the ideal price and output be? a. price, P1; quantity produced, Q1 * b. price, P2; quantity produced, Q2 c. price, P3; quantity produced, Q1 d. price, P1; quantity produced, Q2

Chapter 11/Price-Searcher Markets with High Entry Barriersy190 157. If the output in the industry is produced by a monopolist, at what price will the good sell and what quantity will be produced in Figure 6? a. price, P1; quantity produced, Q1 b. price, P2; quantity produced, Q2 * c. price, P3; quantity produced, Q1 d. price, P3; quantity produced, Q2 Use the figure to answer the following questions. Figure 7

158. The demand and cost conditions in an industry are as depicted in Figure 7. In the viewpoint of economic efficiency, what would the ideal price and output be? a. price, $7; quantity produced, 100 * b. price, $10; quantity produced, 170 c. price, $14; quantity produced, 100 d. price, $7; quantity produced, 200 159. If the output in the industry is produced by a monopolist, at what price will the good sell and what quantity will be produced in Figure 7? a. price, $7; quantity produced, 100 b. price, $10; quantity produced, 170 * c. price, $14; quantity produced, 100 d. price, $7; quantity produced, 200

191yChapter 11/Price-Searcher Markets with High Entry Barriers Use the figure to answer the following questions. Figure 8

160. The demand and cost conditions in an industry are as depicted in Figure 8. In the viewpoint of economic efficiency, what would the ideal price and output be? a. price, $10; quantity produced, 100 b. price, $15; quantity produced, 50 * c. price, $15; quantity produced, 75 d. price, $20; quantity produced, 50 161. If the output in the industry is produced by a monopolist, at what price will the good sell and what quantity will be produced in Figure 8? a. price, $10; quantity produced, 100 b. price, $15; quantity produced, 50 c. price, $15; quantity produced, 75 * d. price, $20; quantity produced, 50 Figure 9

162. From Figure 9, indicate the maximum profit a pure monopolist with the cost and demand conditions above would be able to achieve. * a. BFEC b. AGEC c. BHEC d. EFH

Chapter 11/Price-Searcher Markets with High Entry Barriersy192 Use the figure to answer the following questions. Figure 10

163. Given the cost and revenue curves illustrated in Figure 10, what price will a profit-maximizing monopolist charge? a. P1 b. P2 c. P3 * d. P4 164. If the monopolist is regulated by the marginal cost pricing technique, what price in Figure 10 will be charged? a. P1 b. P2 * c. P3 d. P4

193yChapter 11/Price-Searcher Markets with High Entry Barriers Figure 11

165. According to the graph of an oligopolistic industry in Figure 11 (points A and C lie on the MC curve), which of the following statements is correct? a. With perfect collusion, price and outputs are indicated by point A. b. Without collusion, price and outputs are indicated by point B. c. With perfect collusion, price and outputs are indicated by point C. * d. With perfect collusion, price and outputs are indicated by point B. Use the figure to answer the following questions. Figure 12

166. Figure 12 indicates the industry cost and demand conditions for a product produced in an oligopolistic industry. The price of this product is most likely to be a. greater than P2. b. P2. c. P1. * d. in the range between P1 and P2.

Chapter 11/Price-Searcher Markets with High Entry Barriersy194 167. If the firms in this oligopolistic industry depicted in Figure 12 can collude effectively and restrict the entry of potential competitors, the price of their product will tend to be a. greater than P2. * b. close to P2. c. approximately equal to P1. d. less than P1. Use the figure to answer the following questions. Figure 13

168. If the firms in the industry depicted in Figure 13 compete with each other, what would the industrys price and output be? * a. price, $10; output, 600 b. price, $15; output, 500 c. price, $20; output, 400 d. price, $25; output, 300 169. If the firms in the industry depicted in Figure 13 can effectively operate as a cartel, what would the industrys price and output be? a. price, $10; output, 600 b. price, $20; output, 400 * c. price, $25; output, 300 d. price, $30; output, 200 170. Using Figure 13, determine the maximum joint monthly profit of the firms if they operate as a cartel. a. zero b. $1,500 c. $3,000 * d. $4,500

195yChapter 11/Price-Searcher Markets with High Entry Barriers Use the figure to answer the following questions. Figure 14

171. What quantity would the industry depicted in Figure 14 produce if member firms were successfully colluding? a. Q1 * b. Q2 c. Q3 d. Q4 172. Using Figure 14, determine what quantity these firms would produce, in the short run, if the firms were engaging in vigorous competition. a. Q1 b. Q2 c. Q3 * d. Q4

COURSEBOOK: MULTIPLE CHOICE QUESTIONS

173. A monopoly is best defined as a. a single seller of a product that has characteristics very similar to the products produced in other industries. * b. a single seller of a well-defined product for which there are no good substitutes operating in a market with high barriers to entry. c. a market in which a small number of rival sellers produce the entire market output. d. any firm operating in a contestable market.

Chapter 11/Price-Searcher Markets with High Entry Barriersy196 174. Which of the following firms best fits the definition of a monopoly? a. McDonalds, because it is the only firm who produces the Big Mac * b. a local cable company who has been granted the only license to sell cable in a city by the town council c. Ford Motor Company, because there are significant economies of scale in the production of automobiles d. Harvard University, because it has a reputation as being one of the top universities in the country 175. Which of the following is not a barrier that limits the entry of potential competitors into a market? a. government licensing b. control over an essential resource * c. an elastic demand for a product d. patent rights 176. When significant economies of scale are present in the production process, an industry will tend naturally toward monopoly because * a. one firm will be able to produce the entire market output at a lower cost than several smaller firms. b. marginal revenue will be less than market price, giving firms the incentive to equate marginal cost with price instead of equating marginal cost and marginal revenue. c. economies of scale can only be present when firms produce identical products, and there is no reason to have more than one firm producing the same exact product. d. consumers will be unwilling to compare the prices charged by several different firms. 177. How will the price and output of an unregulated monopolist compare with the ideal levels that might be reached if the market was competitive? a. The output of the monopolist will be larger and the price lower. b. The output of the monopolist will be larger and the price higher. c. The output of the monopolist will be smaller and the price lower. * d. The output of the monopolist will be smaller and the price higher. 178. Allowing firms to receive patents on new inventions a. increases the price consumers pay for patented products. b. gives firms a greater incentive to conduct research and development to invent new products. c. results in much lower prices than would be present if other firms were allowed to compete. * d. does both a and b but not c. 179. Which of the following is true? a. A monopolist is always guaranteed to earn positive economic profits regardless of their cost of production or the price they charge. b. A monopolist will charge the highest price possible for their product because no matter what price they charge, people will still have to buy it. c. A monopolist has no incentive to find more cost-efficient methods of production because they are protected from competition from other sellers. * d. None of the above are correct. 180. Which of the following statements accurately describes a difference between a firm that is a monopolist and one that is in a competitive, open price-taker market? a. Marginal revenue and price are equal for a price taker but not a monopolist. b. Monopolists can earn economic profits in the long-run, price takers cannot. c. A price taker sells its output at a price equal to marginal cost, while a monopolist sells its output at a price higher than marginal cost. * d. All of the above are true.

197yChapter 11/Price-Searcher Markets with High Entry Barriers Figure 15

181. To maximize profit, the monopolist, whose cost and demand conditions are shown in Figure 15, should charge a price of a. $4. * b. $5. c. $6. d. $7. 182. Which of the following statements accurately describes a difference between a firm that is a monopolist and one that is in a competitive price-searcher market? a. A competitive price searcher produces at the output level where marginal cost equals marginal revenue, a monopolist does not. b. A monopolist faces a downward-sloping demand curve; a competitive price searcher does not. c. A monopolist charges a price higher than marginal cost; a competitive price searcher does not. * d. In the long run, a competitive price searcher will earn zero economic profit because of low entry barriers, while a monopolist may earn positive economic profits in the long run.

Chapter 11/Price-Searcher Markets with High Entry Barriersy198 Figure 16

183. To maximize profits, the monopolist shown in Figure 16 would produce output of a. Q1 and charge a price of P1. b. Q1 and charge a price of P2. c. Q2 and charge a price of P3. * d. Q1 and charge a price of P4.

199yChapter 11/Price-Searcher Markets with High Entry Barriers Figure 17

184. The profit-maximizing monopolist shown in Figure 17 would a. charge a price equal to C and earn an economic profit of AFDC. b. charge a price equal to C and earn an economic profit of AFEB. * c. charge a price equal to C and earn an economic profit of BEDC. d. charge a price equal to A and earn an economic profit of AFDC. 185. A market situation in which only a small number of mutually interdependent, rival sellers exists is known as a(n) * a. oligopoly market. b. monopoly market. c. open price-taker market. d. competitive price-searcher market. 186. In general, an organization of sellers designed to coordinate supply decisions so that the joint profits of the members is maximized is called a(n) ________. If they are successful, the total market output and price will most closely approximate the output and price in a(n) ________ market. a. cooperative; open price-taker * b. cartel; monopoly c. cartel; open price-taker d. OPEC; competitive price-searcher 187. To increase joint profits, a cartel will attempt to * a. restrict output in order to increase the market price of the good produced. b. restrict output in order to decrease the market price of the good produced. c. expand output in order to increase the market price of the good produced. d. expand output in order to decrease the market price of the good produced.

Chapter 11/Price-Searcher Markets with High Entry Barriersy200 188. The oil industry is dominated by a cartel known as OPEC, and the cocaine industry is dominated by the Columbian cocaine cartel. If these cartels are being successful, a. the price of oil is higher than if the cartel did not exist, but the price of cocaine is lower. b. the price of cocaine is higher than if the cartel did not exist, but the price of oil is lower. * c. both goods have higher prices than if the cartels did not exist, and both have lower levels of total output. d. both goods have higher prices than if the cartels did not exist, and both also have higher levels of total output. 189. Laws designed to prevent monopoly and promote competition are known as * a. antitrust laws. b. statutory amendments. c. fair-pricing legislation. d. breakup bills. 190. Which of the following would increase the likelihood that firms in an industry could successfully collude? a. a large number of firms in the industry b. unstable demand conditions in the industry * c. high barriers to entry in the industry d. product characteristics that make it difficult for firms to detect other firms who cheat on the agreement 191. (I) Oligopolistic firms have an incentive to collude to increase profits. (II) Oligopolistic firms have an incentive to cheat on collusive agreements to increase profits. a. I is true; II is false. b. I is false; II is true. c. Both I and II are false. * d. Both I and II are true. 192. If a local government began licensing funeral homes in the area, effectively making them into a cartel, we would expect the price of funeral services to * a. rise, and the number of funerals performed in the area to fall. b. rise, and the number of funerals performed in the area to increase as well. c. fall, and the number of funerals performed in the area to increase. d. fall, and the number of funerals performed in the area to fall as well. 193. A major problem with regulatory agencies is that they a. have no real legal power over the industries they are supposed to regulate. b. tend to be too tough on the firms they are regulating, forcing them into a loss position. c. often underestimate the firms cost of production and consequently force regulated firms into a loss position. * d. often come to represent the interests of established firms in the industry and use their power to limit competition.

201yChapter 11/Price-Searcher Markets with High Entry Barriers 194. An expansion in the number of plumbers in a local area has resulted in lower profits. The local plumbing contractors have called a meeting to discuss ways to improve their long-run profitability. Of the four plans being discussed seriously, which would most likely increase their long-run profits? * a. passage of legislation requiring new contractors to be licensed, which would require passing a stiff licensing exam and paying a $5,000 fee b. an off-the-record agreement that each plumbing contractor would increase his or her prices by an average of 7 percent c. passage of legislation requiring the local government to share the cost of installing all private sewage systems d. repeal of the current tax on installations of plumbing units 195. For which of the following reasons do regulatory agencies sometimes fail to bring the price and output of a natural monopoly to the ideal level? a. The regulatory agency does not have all the information concerning a firms true costs. b. Monopolists may conceal profits by inflating the costs of production by spending money to achieve personal objectives (a very nice office building, for example). c. Regulatory agencies often come to reflect the views of the industries they are supposed to regulate. * d. All of the above are reasons. 196. Economic theory suggests that government-operated monopolies will a. be highly efficient and follow policies that are in the consumers interest. b. be dominated by persons who, while seeking to serve the public interest, are not hard nosed enough to run a business efficiently. * c. be inefficient because of poor incentives for operational efficiency. d. favor the consumer at the expense of special-interest groups in and out of government.

ON-LINE PRACTICE QUESTIONS

197. Licensing is a process in which a firm wanting to enter a market must a. require all potential customers to obtain government permission to purchase the product. b. notify the government within a certain period after it has entered the market. c. pay all overdue taxes before entering the market. * d. obtain permission from the government to enter the market. 198. Patent laws that allow the inventor to maintain monopoly rights to an invention increase the price of the product and * a. increase the profitability of inventive activities, thereby speeding up technological developments. b. increase the profitability of inventive activities, thereby slowing down technological developments. c. decrease the profitability of inventive activities, thereby speeding up technological developments. d. decrease the profitability of inventive activities, thereby slowing down technological developments. 199. When government licensing is present in a market, it will create * a. an entry barrier into the market. b. economies of scale. c. greater market diversity. d. a more competitive market.

Chapter 11/Price-Searcher Markets with High Entry Barriersy202 200. Which of the following is true for a firm that is a monopolist? a. The firm will make an economic profit in the short run. * b. The firm will produce a smaller quantity of output than what would be best from the viewpoint of ideal economic efficiency. c. The additional revenue that can be generated from an increase in output will exceed the firms price. d. The firm can charge whatever it wants for its product since consumers have no alternatives. 201. Which of the following statements is true for a monopolist? a. A monopolist will charge the highest price for which he can sell units of his product. * b. Unregulated monopolists can gain by producing their chosen output at a low cost. c. If a firm has a monopoly, it will always be able to earn economic profit. d. None of the above statements are true. 202. A monopolist will expand output until * a. marginal revenue equals marginal cost. b. total revenue equals total cost. c. price equals marginal cost. d. price equals marginal revenue. 203. A monopolists profit-maximizing output rate can be sold at a. whatever price the monopolist (a price searcher) decides to charge. b. a price equal to marginal cost. c. a price that is usually 50 percent greater than the per-unit cost of the monopolist. * d. a price along the firms demand curve at the quantity where MR = MC. 204. Which one of the following is the most accurate description of a monopolist? a. a firm that produces a single product b. a firm that is the sole producer of a narrowly defined product class, such as yellow, grade-A butter produced in Jackson County, Wisconsin * c. a firm that is the sole producer of a product for which there are no good substitutes d. a firm that is large relative to its competitors 205. A monopoly is a market characterized by a. low barriers to entry and many sellers of a well-defined product for which there are no good substitutes. b. high barriers to entry and many sellers of a well-defined product for which there are no good substitutes. c. low barriers to entry and a single seller of a well-defined product for which there are many good substitutes. * d. high barriers to entry and a single seller of a well-defined product for which there are no good substitutes. 206. Which of the following explains why firms in competitive price-searcher and competitive pricetaker markets will both have zero economic profits in the long run but a monopoly will not? a. There is always more than one firm in competitive price-searcher and competitive price-taker markets. b. Both competitive price-searcher and competitive price-taker markets are characterized by firms producing identical goods, but a monopoly is not. * c. In both competitive price-searcher and competitive price-taker markets, the barriers to entry are low; this is not true under a monopoly. d. A monopoly firm has a downward-sloping demand curve; firms in the other types of markets do not.

203yChapter 11/Price-Searcher Markets with High Entry Barriers 207. Which of the following conditions is true in long-run equilibrium for both a competitive price searcher and a competitive price taker but not necessarily for a monopolist? a. P = MC * b. P = ATC c. MR = P d. MR < P 208. Which of the following is a characteristic of an oligopolistic industry? * a. interdependence of a firms price and output decisions b. low barriers to entry c. small output of individual firms relative to the total market d. a large number of competing firms 209. An oligopolistic firm that is deciding the price to charge, the output to produce, or the quality of product to offer must consider a. the regulatory price limits that are always present with oligopoly. * b. the potential reactions of rivals in the market. c. the fact that per-unit costs will usually increase as the scale of production increases. d. that entry barriers into oligopolistic markets are low. 210. Even though a cartel is often profitable for its members, cartel arrangements contain the seeds of their own disintegration because a. a price maintained above each cartel members marginal cost provides each member with an incentive to offer secret price reductions to attract additional customers. b. the profits earned by cartel members will induce others to enter the industry. c. cartel members will attempt to garner more of the total profit for themselves by cheating on their agreement with other members. * d. all of the above are true. 211. Suppose the Department of Agriculture organizes the orange growers of Florida and California into a monopoly cartel. Economic theory suggests that, compared to a competitive situation, the price of oranges would a. rise, and output would expand. b. rise if demand were inelastic and decline if demand were elastic. * c. rise, and output would decline. d. decline in the short run but increase with time. 212. In which of the following industries would we expect collusion to be most effective? a. retail gasoline, where most gas is sold by a large number of small dealers * b. crude oil production, where most oil is sold by a small number of large sellers c. housing construction, an industry dominated by local firms that produce unique products d. soybean production, where there are large numbers of farmers in many countries 213. The success of cartels tends to be short-lived because a. cartel actions encourage attempts to produce close substitutes. b. individual firms in the cartel can increase their profits by cutting prices. c. fixing price does not eliminate all forms of competition. * d. all of the above. 214. Which of the following will make it easier for a cartel to increase the profitability of its members? * a. a small number of interdependent firms in the industry b. low entry barriers into the industry c. Each firm produces a different quality of product. d. It is difficult to monitor the output of each cartel member.

Chapter 11/Price-Searcher Markets with High Entry Barriersy204 215. Collusion among sellers in a market is most likely to be successful (from the viewpoint of the sellers) if a. there are many sellers. * b. demand is stable. c. the product produced by each of the firms is differentiated. d. there are low entry barriers into the market. 216. Which of the following explains why cartel arrangements tend to be unstable? a. The payoff to individual members from cheating on a collusive agreement is high. b. It may be difficult to prevent entry into the industry. c. It is often difficult to determine if cartel members are cheating and cutting price. * d. All of the above are true. 217. An organization of sellers designed to coordinate their supply decisions in an effort to maximize the joint profits of the members is called a a. monopoly. * b. cartel. c. savings and loan association. d. regulatory agency. 218. It would be difficult to get rich buying the stock of firms known to be profitable because a. these types of firms generally do not pay dividends on their stocks. b. there is no strong relationship between the profitability of a firm and the value of its stock. * c. the value of the firms profits have already been incorporated into the value of the stock, thus raising its price. d. there is no reliable way of measuring whether a firm has been profitable or not. 219. From the viewpoint of allocative efficiency, which of the following is a defect of pure monopoly? * a. The monopolist undersupplies the market and charges too high a price. b. The monopolist is a revenue maximizer, not a profit maximizer. c. A monopolist has little incentive to produce efficiently (at a low cost). d. All of the above are true. 220. As Adam Smith indicated, the trouble with monopoly is that a. firms have no incentive to produce efficiently. b. regardless of what is produced, the firm will use too many resources. c. a producer has no incentive to keep his costs down. * d. the monopolist understocks the market and charges too high a price. 221. Which of the following is the best explanation of why lack of information is a problem when the government wants to impose price regulation on a monopolist? a. The government does not have information about which firms are monopolies. b. Firms that are monopolies do not have information about their level of profit or about potential competition. c. Consumers do not have information about which firms are competitive and which firms are monopolies. * d. Regulators do not have information about the demand and marginal costs of the firms that they regulate. 222. Which of the following is true under natural monopoly? a. The monopolist will ignore consumers desires. * b. The marginal cost curve will lie below the average total cost curve. c. The monopolist will set price equal to marginal cost and will earn economic profits. d. Output is produced under conditions of constant cost.

205yChapter 11/Price-Searcher Markets with High Entry Barriers 223. When economies of scale are unimportant, and a monopolistic firm is split into several competitive units, a. output will increase but so will price since the marginal cost curve is upward sloping. b. the monopolists profits will be divided among the newly competitive, rival firms. c. the competitive price will be less than the monopoly price only if altruism replaces profit maximization as the objective of the firms involved. * d. competition among firms will cause prices to fall to the level of production costs. 224. Under what conditions can a monopolist have potentially lower costs and possibly charge a lower price than would exist if the market were competitive? a. when the monopolist operates on the inelastic portion of the demand curve b. when the monopolist is a profit maximizer rather than a revenue maximizer c. when substantial diseconomies of scale are present * d. when substantial economies of scale are present 225. Competition is a. present when consumers can switch their purchases from any good to another. b. seldom perfect because there are few truly perfect substitutes. c. increasing in the United States and has done so over the past several decades. * d. all of the above. Figure 18

226. Figure 18 shows cost and revenue curves for a monopolistic firm. If a regulatory agency forced this firm to operate at a price equal to the firms minimum average total cost, a. the firm would still earn some economic profit. b. the firm would be minimizing its losses. * c. there would be excess demand for the product produced by the monopolist. d. output would be smaller than in the absence of regulation.

Chapter 11/Price-Searcher Markets with High Entry Barriersy206 Figure 19

227. Figure 19 indicates the cost and demand conditions of a pure monopoly. Which of the following is true. a. From the viewpoint of economic efficiency, the output implied by point A is best, but a profitmaximizing monopolist will choose the output associated with D. * b. From the viewpoint of economic efficiency, the output implied by point C is best, but a profitmaximizing monopolist will choose the output associated with A. c. From the viewpoint of economic efficiency, the output implied by point D is best, but a profitmaximizing monopolist will choose the output associated with A. d. From the viewpoint of economic efficiency, the output implied by point B is best, but a profitmaximizing monopolist will choose the output associated with A. 228. If a local community has only one doctor, the monopoly power of the physician will a. be small if entry barriers into the local market are high. b. depend on how many other physicians there are in the national market. c. be total since there are not any other providers of the same service in the local market. * d. be minimal if the entry barriers restricting competition from other physicians are low. 229. Which of the following best fits the definition of a monopoly? * a. the local water company b. Microsoft Computers c. McDonalds d. General Motors 230. Compared to a competitive market, the monopolist will a. overstock the market and charge a price that is too low. b. overstock the market and charge a price that is too high. * c. understock the market and charge a price that is too high. d. understock the market and charge a price that is too low. 231. Which of the following factors has substantially increased the competitiveness of markets in the United States during the last decade? a. the creation of the European Union and the introduction of the euro * b. the development of the Internet c. the reduction of imports from countries that use child labor d. significant efforts by the government to regulate product quality

207yChapter 11/Price-Searcher Markets with High Entry Barriers

CRITICAL THINKING QUESTIONS

232. Monopoly is a word derived from Greek origins that means, roughly, single seller. Why is the definition of monopoly as single seller inadequate in economic terms? Answer Single seller does not go far enough to describe the situation implied by the economic concept of monopoly. There are many single sellers. McDonalds is the single seller of Big Macs, General Motors is the single seller of Pontiacs, and Pentel is the single seller of the QE405 mechanical pencil. But none of these single sellers poses any unique problems for economic analysis because each has good substitutes. The notion of monopoly becomes significant only when it means the single seller of a product for which there are no good substitutes. 233. Mr. Stewart owns the only hardware store in a small Midwestern town. His nearest competition is more than 50 miles away, yet he does not earn any economic profit. Does someone need to explain the economic concept of monopoly to him? Answer Most likely, Mr. Stewart is aware of the potential for competition. Entry into the hardware market would be relatively inexpensive for a potential competitor. Economic profit would make entry into this market attractive. Because of this, he has an incentive to price competitively. 234. Suppose all automobile manufacturers have collusively agreed to sell their cars at a uniform price. If a firm wanted to break this agreement and not be detected, what would be one way to do this? Answer One answer might be secret price cuts to individuals, but these could be detected. The best way to effectively lower price would be to hold the price constant and improve the quality of the product. Better quality parts and accessories or more precise manufacturing methods to increase performance and reliability could be used, and extra options could be included to increase market share. A better product selling at the agreed-to price would be more difficult to detect. 235. Since its beginning, the cable television industry has been viewed as a natural monopoly. Typically, cities would grant individual firms local monopolies and then regulate them. Is this a valid approach from an economic perspective? What do you expect the future of the television-viewing market to hold? Answer Economies of scale would appear to be important in the cable television industry, so describing it as a natural monopoly would seem correct. During the 1980s, the industry was deregulated, but very few markets experienced entry. As prices rose, many people became sympathetic to the idea of regulation. In a world of rapid technological advance, the future of cable television appears uncertain. Competition from the phone companies, computer systems, and satellite technology may well eliminate the cable companys power as a monopoly.

Chapter 11/Price-Searcher Markets with High Entry Barriersy208

236. The Big River Power Company is a regulated monopolist with pricing structured such that the stockholders receive a fair rate of return based on the firms unit costs. Can economic thinking predict how the company executive offices are likely to be furnished? Given a choice between Hawaii and downtown Cleveland (20 miles away), where would we expect the Board of Directors to meet? Answer We would expect the firm to have little incentive to hold down costs. We would expect the executive offices to be lavishly furnished and the meeting to take place in Hawaii. 237. Why does the U.S. government maintain a monopoly in the delivery of first-class mail? Does the Postal Service nevertheless face other forms of competition? Answer The Postal Service is designed to provide services at a uniform price for all users. While it costs more to deliver mail to rural locations, these costs are offset by the relatively cheaper delivery of urban mail. The argument goes that any private-sector competition would focus on the more profitable urban areas and neglect the rural customers, or charge them much higher prices. The Postal Service does face competition in the delivery of packages (UPS) and express mail (FedEx and others). In addition, fax machines and electronic mail provide substitute services for those of the U.S. Postal Service. 238. The Redwood City Council has decided that there is an overallocation of resources in the lawn-care industry. Almost every homeowner owns a lawnmower, hose and sprinkler, seeder, spreader, etc., and these items are used, at most, once a week. The council will establish a legal monopoly and select a private firm that will be responsible for all lawn care in the city. What types of rent-seeking activities can be expected as a result of this action? Answer As firms vie for this contract, they will attempt to garner the support of the individual council members. Lobbyists and attorneys might be hired and other resources expended by firms seeking the contract. In the end, only one firm will win the contract, and the lobbying efforts of the other firms will have been in vain and an unproductive use of the resources. 239. One answer to the problem of natural monopoly is provision of the good by a government-owned and operated firm. Why is that option not used very often? Answer We cannot necessarily expect more efficient production from a government firm. There is little personal incentive for managers of such a firm to cut costs or to manage in the interest of the general public rather than for their own professional and personal interests. Rational voter ignorance reduces the ability of voters to understand, monitor, and control the firm. There is no small group of shareholders to gain by taking control and increasing efficiency. Consumers often have good substitutes available for the government monopoly production, so their desires may not be served.