Core Economics 3e

Market Power

Multiple Choice Questions

After watching the Market Power video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Market power enables businesses to:

set prices and reap profits.

be eligible for government subsidies.

evade taxes and minimize other ancillary expenditures.

produce products whose patent is owned by others.

Question

2. The National Football League (NFL) achieves market power through its ability to:

control inputs.

achieve economies of scale.

present its games in major cities.

gain government protection through patents or copyrights.

Question

3. Three barriers to entry that prevent firms from entering a market and competing in the market are control over inputs, economies of scale, and:

the ability to produce products similar to that of other firms.

the existence of an unlimited number of buyers.

government protection through patents and copyrights.

no restrictions on entry and exit from the market.

Question

4. The figure represents a monopoly in which all customers pay the same price for the output of the monopoly. To maximize profits, the monopolist produces at a level of output in which:

marginal revenue equals marginal cost, and then the monopolist charges the highest price for that output indicated by the demand curve.

marginal revenue equals average total cost, and then the monopolist charges the highest price for that output indicated by the demand curve.

the demand curve intersects the average total cost, and prices are set where the marginal cost curve intersects the demand curve.

the demand curve intersects the marginal cost curve, and prices are set where the average total cost curve intersects the demand curve.

Question

5. A monopoly harms consumers because:

prices are lower than that in perfect competition, and there is always a shortage in the market.

new firms are encouraged to enter the industry because of the profits earned by the monopolist.

a monopolist is more likely to invest in research and development in comparison to other firms.

prices are higher and output is lower than if the industry was perfectively competitive.

Question

6. When monopolies waste resources attempting to prevent other firms from competing with them, it is referred to as:

rent seeking.

price fixing.

cream skimming.

price discriminating.

Question

7. Price discrimination by a monopolist leads to the firm earning higher profits but it also delivers benefits to:

competitors, because the good produced by the monopolist becomes more expensive.

consumers, because consumer surplus increases because of the monopolist’s pricing actions.

consumers, because prices are lowered to potential consumers who otherwise might not have been able to buy the good.

competitors, because production techniques for the good produced are improved by the monopolist and the knowledge is shared.

True/False Questions

After watching the Market Power video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Market power reaches its maximum potential in a monopoly.

True

False

Question

2. A profit-maximizing monopolist can charge any price to consumers.

True

False

Question

3. All monopolies earn profits.

True

False

Short Answer/Discussion Questions

After watching the Market Power video lecture, consider the question(s) below. Then “submit” your response.

Question

1. How do barriers to entry benefit a monopoly?

Suggested solution: Barriers to entry include control over inputs, economies of scale and government protection in the form of patents and copyrights. Each of these deters new companies from competing with the monopolist. By avoiding potential competitors (who may undercut the monopoly’s prices), the monopoly can maintain its market power and earn economic profits. (Answers may vary.)

Question

2. What benefit does society derive by allowing some monopolies to be created?

Suggested solution: While a monopoly creates market power that typically results in higher prices and less output, likely yielding economic profits and reduced consumer surplus, there is still some possible benefit to society from a monopoly. Monopolies can be the drivers of innovation. Inventors and other creative people are incented to invest in products and services produced by monopolists because of the possibility of realizing large economic profits (Because a monopolist is the only producer of the product or service). (Answers may vary.)

Question

3. Why might an airline company (assuming it is a monopoly) charge different fares to different groups of customers?

Suggested solution: Airlines charge different fares to different groups of customers in order to maximize the revenue (and therefore profit) generated from a given flight. By imposing restrictions such as advance purchase and minimum stay, the airline can discriminate between business travelers (who have a higher willingness to pay) and nonbusiness travelers (who have a lower willingness to pay). Fares are set accordingly. This helps the company realize more revenue than would have been generated if all consumers paid the same price. (Answers may vary.)