9. Compared to a perfectly competitive industry in long-rum equilibrium, an indu
ID: 1212999 • Letter: 9
Question
9. Compared to a perfectly competitive industry in long-rum equilibrium, an industry under monopoly: a. may realize economic profits in the long run. b. may sustain losses indefinitely and still remain in business. c. will actively encourage competitors and thereby increase profits. d. will continue to expand until profits are reduced to zero. e. can sell at a price below AVC and earn economic profits.
10. If the product demand curve and cost functions of a perfectly competitive industry and of a monopolist are the same, then compared to the monopoly the perfectly competitive industry’s output and price tend to be respectively: a. larger, higher b. smaller, higher c. larger, lower d. smaller, lower e. the same, lower.
11. Perhaps the single greatest criticism economics have of monopolies is that monopolies tend to: a. oppose technological development. b. create misallocation of resources. c. make monopolist rich. d. produce goods and services that are questionable social benefit. e. require government regulation in order to be efficient.
12. The approach to natural monopolies in the U.S. is to: a. nationalize them b. break them up into small competitive businesses. c. give them franchises and subject them to regulation. d. require them to merge with existing perfectly competitive business firms. e. leave them alone.
13. Experience with public regulation of monopolies indicates that: a. on the average regulated prices have been clearly lower than unregulated prices of the same item. b. regulation has provided a stronger set of incentives than competitive markets for firms to increase efficiency. c. a decision to base a fair rate of return on either historical cost or replacement cost yields the same pricing result. d. most public utility regulation should be in the hands of federal rather than state commissions. e. if a firm is guaranteed a fixed amount of profit, it will be less efficient than if its profits depends on how efficiently it operates.
14. The patent system is based on the theory that: a. innovation is risky, and those who take risks deserve rewards. b. a monopoly’s lifespan should be controlled and limited. c. technological advances should be shared throughout an industry. d. monopoly is the most socially desirable market structure and should be supported. e. patents create incentives to keep prices at competitive levels.
15. If a natural monopoly is forced to break up into many smaller competitive firms, prices will most likely: a. fall dramatically b. fall somewhat c. stay the same. d. rise. e. may do any of the above.
16. An industry which contains a large number of firms selling goods which are similar, but not identical, and into which entry of new sellers is relatively easy, would be an example of: a. perfect competition. b. pure monopoly. c. regulated monopoly. d. oligopoly. e. monopolistic competition.
Explanation / Answer
9. a. may realize economic profits in the long run. (Explanation: A firm that has a monopoly doesn't face any price competition and can earn economic profits in the long run.)
10. c. larger, lower ( Explanation: In a perfectly competitive market, price equals MC and firms earn an economic profit of zero. In a monopoly, the price is set above marginal cost and the firm earns a positive economic profit. Perfect competition produces an equilibrium in which the price and quantity of a good is economically efficient. Monopolies produce an equilibrium at which the price of a good is higher, and the quantity lower, than is economically efficient.)
11. b. create misallocation of resources. (Explanation: Monopoly is a market situation in which there is only one firm producing and selling a product with barriers to entry of other firms. The monopoly product has no close substitutes which mean that no other firm produces a similar product. The monopoly firm is a price-maker which can set the price to its maximum advantage so as to maximise its profit. Thus, monopoly leads to malallocation of resources.)
12.
13. a. on the average regulated prices have been clearly lower than unregulated prices of the same item.
14. a. innovation is risky, and those who take risks deserve rewards.
15. d. rise. (Explanation: Because if regulators break up a natural monopoly into many smaller firms, the cost of production will rise which will lead to rise in price level)
16. e. monopolistic competition. ( Explanation: Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another.)
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