622 section 11 Market Structures: Perfect Competition and Monopoly
- True or false? Explain your answer.
a. Society’s welfare is lower under monopoly because some
consumer surplus is transformed into profit for the
monopolist.
b. A monopolist causes inefficiency because there are
consumers who are willing to pay a price greater than or
equal to marginal cost but less than the monopoly price.
3. Suppose a monopolist mistakenly believes that her or his
marginal revenue is always equal to the market price. Assuming
constant marginal cost and no fixed cost, draw a diagram
comparing the level of profit, consumer surplus, total surplus,
and deadweight loss for this misguided monopolist compared
to a smart monopolist.
Tackle the Test: Multiple-Choice Questions
- Which of the following statements is true of a monopoly as
compared to a perfectly competitive market with the same
costs?
I. Consumer surplus is smaller.
II. Profit is smaller.
III. Deadweight loss is smaller.
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III - Which of the following is true of a natural monopoly?
a. It experiences diseconomies of scale.
b.ATCis lower if there is a single firm in the market.
c. It occurs in a market that relies on natural resources for its
production.
d. There are decreasing returns to scale in the industry.
e. The government must provide the good or service to achieve
efficiency. - Which of the following government actions is the most
common for a natural monopoly in the United States?
a. prevent its formation
b. break it up using antitrust laws
c. use price regulation
d. public ownership
e. elimination of the market- Which of the following markets is an example of a regulated
natural monopoly?
a. local cable TV
b. gasoline
c. cell phone service
d. organic tomatoes
e. diamonds - Which of the following is most likely to be higher for a
regulated natural monopoly than for an unregulated natural
monopoly?
a. product variety
b. quantity
c. price
d. profit
e. deadweight loss
Tackle the Test: Free-Response Questions
- Draw a correctly labeled graph showing a profit-making natural
monopoly. On your graph, indicate each of the following:
a. the monopoly’s profit-maximizing output (QM)
b. the monopoly’s price (PM)
c. the monopoly’s profit
d. the regulated price that would maximize consumer surplus
without creating losses for the firm (PR)
Answer (9 points)QM QRPMDMCMRATCQuantityPrice, cost,
marginal
revenuePRProfit