Monopoly and Competition Economics Quiz

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Questions and Answers

What is a characteristic of a monopoly's demand curve?

It is constant over time.

It is perfectly elastic.

It is horizontal.

It is relatively steep. (correct)

What defines the long-run supply curve of a perfectly competitive firm?

It is the average revenue curve.

It is the marginal cost curve above the average total cost.

It is the marginal cost curve above the average variable cost. (correct)

It is the price level in the market.

Why does a natural monopoly achieve scale economies?

Because it sets prices below average costs.

Because the industry has many competitors.

Because its costs are mostly fixed.

Because most of its costs are variable. (correct)

Which type of market structure commonly allows firms to practice price discrimination?

Monopoly Signup and view all the answers

What is true regarding barriers in monopolistic competition?

There are barriers to entry but not to exit. Signup and view all the answers

When is average revenue equal to marginal revenue?

For perfectly competitive firms only. Signup and view all the answers

What does perfect price discrimination involve?

Charging each consumer their reservation price. Signup and view all the answers

Is price discrimination legal?

Yes, it is generally legal. Signup and view all the answers

What condition allows a monopolist to increase price and decrease output?

Marginal revenue is greater than marginal cost Signup and view all the answers

In a long-run equilibrium, where does a perfectly competitive firm operate in relation to price?

Price is equal to average cost and marginal cost Signup and view all the answers

Which of the following is considered a barrier to entry for new firms?

Economies of scale Signup and view all the answers

What is the marginal revenue of the sixth unit if the price drops from $11 to $10 and quantity demanded increases from 5 to 6?

$5 Signup and view all the answers

When a firm sells 5 units at $7 and 8 units at $5, what type of demand curve does it face?

Downward-sloping demand curve Signup and view all the answers

Which industry is most accurately described as a monopoly?

A single internet provider in a city Signup and view all the answers

Which of the following is an example of perfect competition?

A potato farm Signup and view all the answers

Which of the following is not typically considered monopolistic competition?

Internet service providers Signup and view all the answers

For a firm in a perfectly competitive market, what is the relationship between price and marginal cost?

Price equals marginal cost Signup and view all the answers

In a competitive market, what determines the long-run profitability of a firm?

Barriers to entry for new firms Signup and view all the answers

What is one characteristic of second-degree price discrimination?

It allows consumers to self-select how much of the good or service they want to consume. Signup and view all the answers

Which type of industry is best characterized as monopolistic competition?

Shoe production Signup and view all the answers

What is a primary reason firms in monopolistic competition use advertising?

To create brand loyalty and differentiate their products Signup and view all the answers

In the long run, what is expected to happen if a monopolistically competitive industry suffers losses?

Firms will exit the industry, shifting the supply curve left. Signup and view all the answers

Which feature of perfect competition can be viewed as detrimental to consumers?

It sacrifices product variety for efficiency. Signup and view all the answers

A key assumption of monopoly theory is that:

The firm can affect the price of the product it sells. Signup and view all the answers

What is likely to happen to the price and output of a monopolist if marginal cost increases dramatically?

Price increases while output falls. Signup and view all the answers

Why does a monopolist's marginal revenue lie below the average revenue curve?

The monopolist has market power and faces a downward-sloping demand curve. Signup and view all the answers

What is true for a perfectly competitive firm in the short run?

It will shut down if it cannot cover variable costs. Signup and view all the answers

What characteristic is true of firms with market power?

They can set prices above marginal cost to maximize profit. Signup and view all the answers

The more price-elastic the demand faced by a firm, the:

larger the difference between price and marginal revenue. Signup and view all the answers

Which of the following is a distinctive feature of perfect competition?

Firms are price takers and products are homogeneous. Signup and view all the answers

Study Notes

Monopoly Demand Curve

Monopoly demand curves are relatively steep, indicating a limited responsiveness of quantity demanded to price changes. This steepness arises from barriers to entry and exit in the industry.

Perfectly Competitive Firm's Long-Run Supply Curve

The long-run supply curve for a perfectly competitive firm is its marginal cost curve above the average variable cost.

Natural Monopoly & Economies of Scale

Natural monopolies achieve economies of scale because most of their costs are fixed rather than variable.

Price Discrimination by Monopolistically Competitive Firms

Monopolistically competitive firms can practice price discrimination.

Monopolistic Competition - Entry & Exit Barriers

Monopolistic competition has barriers to entry but not to exit.

Average Revenue and Marginal Revenue

Average revenue equals marginal revenue for every single firm.

Perfect Price Discrimination

Perfect price discrimination charges each customer their maximum willingness to pay (reservation price).

Price Discrimination Legality

Price discrimination is legal.

Price Discrimination Practices

Charging consumers based on price elasticity of demand is a form of price discrimination, and this is not the only form.
Charging different prices during different times of the day is examples of price discrimination.
Charging different prices for different quantities or units consumed (heavy versus light users) is a price discrimination technique.
Charging consumers their reservation price is another form of price discrimination.

Second-Degree Price Discrimination

Second-degree price discrimination allows consumers to self-select their desired quantity consumed.
This pricing strategy considers consumer's elasticity of demand.

Monopolistic Competition Industry Examples

Shoe production is a good example of an industry that closely approximates monopolistic competition.

Product Differentiation & Advertising

Monopolistically competitive firms often use advertising to differentiate their products.

Monopolistic Competition Losses in the Long Run

If a monopolistically competitive industry experiences losses, firms will likely exit the market in the long run, and the demand curve will shift left. This decrease in industry output leads to a decline in price and output.

Perfect Competition & Societal Benefits

The potential sacrifice of variety in perfect competition is a tradeoff to achieve cost efficiency. Other benefits include minimum cost production and lower advertising costs.

Monopoly Theory Assumptions

A crucial assumption of monopoly theory is that the individual firm can influence the price of the product.

Monopoly Cost Increase & Price/Output Effects

If a monopoly's marginal cost increases, the firm is likely to increase price while decreasing output.

Marginal Revenue & Average Revenue for Monopolists

The marginal revenue of a monopolist lies below its average revenue curve. This is because the monopolist must reduce the price on all units to sell an additional unit.

Short-Run Operation in Perfect Competition

In the short run, a perfectly competitive firm will continue to operate as long as the price is above average variable cost (so the firm at least covers variable costs).

Market Power Characteristics

Firms with market power can influence prices.

Perfectly Competitive Firm Characteristics

Perfectly competitive firms charge a price equal to their marginal cost.

Price Elasticity & Market Power

The more elastic the demand curve a firm faces, the lower its degree of market power. Less elastic demand curves mean a more competitive marketplace.

Perfect Competition Feature

A distinctive feature of perfect competition is that firms charge a price equal to their marginal cost.

Monopolist Price Increase/Output Reduction

A monopolist will only benefit from price increases and output decreases when marginal revenue is higher than marginal cost.

Perfect Competition Long-Run Equilibrium

In perfect competition, a long-run equilibrium is characterized by price equaling both average cost and marginal cost.

Barrier to Entry Examples

Economies of scale are a common barrier to entry in many industries.

Marginal Revenue Calculation

If price drops from $11 to $10 and quantity demanded increases from 5 to 6, the marginal revenue of the 6th unit is $10.

Firm's Demand Curve

A firm facing a downward-sloping demand curve indicates a non-perfectly competitive market structure.

Monopoly Industry Examples

A single internet provider in a town is a good example of a monopoly industry.

Perfect Competition Examples

A potato farm is a good example of an industry that nearly meets perfect competition criteria.

Monopolistic Competition Examples

Ethnic restaurants and shampoo production exemplify an industry that very often adheres to characteristics of monopolistic competition.

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Description

Test your understanding of monopoly and competitive markets with this quiz. Topics include demand curves, supply curves, price discrimination, and economic principles affecting monopolies and perfectly competitive firms. Assess your knowledge of these essential economic concepts.