Question 1

The De Beers Diamond company is not worried about differentiating its product from all other gemstones.

Accepted Answer

The De Beers Diamond company heavily markets the idea that diamonds are unique and superior to all other gemstones, so they are concerned with differentiating their product.

Question 2

When a monopolist increases the quantity that it sells, price decreases, which, all else equal, decreases total revenue; this is called the price effect.

Accepted Answer

When a monopolist increases the quantity sold, it must lower the price to sell additional units, leading to a decrease in total revenue per unit sold due to the price effect. This effect occurs because, in a monopoly, the firm faces a downward-sloping demand curve, meaning it can only sell more by reducing the price.

Question 3

Monopolists can achieve any level of profit they desire because they have unlimited market power.

Accepted Answer

Monopolists do have a significant degree of market power, but it is not unlimited. Their ability to set prices and achieve desired profit levels is limited by factors such as the elasticity of demand for their product and the potential for new competitors to enter the market.

Question 4

The amount of power that a monopoly has depends on whether there are close substitutes for its product.

Accepted Answer

This statement is true. If there are close substitutes for the product of a monopoly, then consumers have other options and the monopoly has less power in setting prices and controlling the market. However, if there are no close substitutes, then the monopoly has more power and can charge higher prices without fear of losing customers to competitors.

Question 5

A patent gives a single person or firm the exclusive right to sell some good or service for a specific period of time.

Accepted Answer

A patent is a legal document that gives the inventor or assignee the exclusive right to make, use, and sell an invention for a period of time, usually 20 years from the filing date of the patent application. This prevents others from making, using, or selling the same invention during that time period without the permission of the patent holder.

Question 6

Even with market power, monopolists cannot achieve any level of profit they desire because they will sell lower quantities at higher prices.

Accepted Answer

Monopolists are constrained by the demand curve for their product; as they raise prices to increase profits, the quantity demanded decreases, which limits the level of profit they can achieve.

Question 7

The three main sources of barriers to entry are monopoly resources, government regulation, and the firm's production process.

Accepted Answer

Monopoly resources refer to situations where a single firm controls access to a key input or raw material, making it difficult for new entrants to compete. Government regulation can be a barrier to entry if regulations favor incumbent firms, create high costs for new entrants or make it difficult to obtain required licenses or permits. A firm's production process can also be a barrier to entry if it is protected by patents or trade secrets, or requires significant investment to replicate.

Question 8

The fundamental cause of monopolies is barriers to entry.

Accepted Answer

Barriers to entry, such as high start-up costs or government regulations, prevent new competitors from entering the market and allow existing firms to maintain their dominant position, leading to monopolies.

Question 9

If a product can be produced by a natural monopoly, society will benefit in the form of lower prices if the monopolist is broken up into several smaller firms.

Accepted Answer

A natural monopoly occurs when a single firm can supply a product or service at a lower cost than any potential competitor, often due to economies of scale. Breaking up a natural monopoly into smaller firms would likely increase costs and prices, as these smaller firms would lose the efficiency gained from economies of scale.

Question 10

A natural monopoly has economies of scale for most if not all of its range of output.

Accepted Answer

A natural monopoly is a type of monopoly that exists due to economies of scale. Economies of scale mean that as the quantity of output increases, the cost per unit decreases. In a natural monopoly, the firm is able to produce the entire output required by the market at a lower cost than any potential competitor. This is because it has a large market share, which allows it to spread fixed costs (like the cost of building infrastructure) over a larger number of units of output. Therefore, a natural monopoly should have economies of scale for most, if not all, of its range of output.

Question 11

If the government deems a newly-invented drug to be truly original, the pharmaceutical company is given the exclusive right to manufacture and sell the drug for 50 years.

Accepted Answer

The exclusive right to manufacture and sell a newly-invented drug is granted for 20 years, not 50 years.

Question 12

Copyrights and patents are examples of barriers to entry that give firms monopoly pricing powers.

Accepted Answer

Copyrights and patents provide legal protection to the owner, allowing them exclusive rights to produce and sell their product or idea, thus preventing competitors from entering the market and giving them monopoly pricing powers.

Question 13

A patent gives a single person or firm the exclusive right to sell some good or service forever.

Accepted Answer

A patent gives the holder the exclusive right to sell their invention or product for a limited period of time, usually 20 years from the date of filing. After the patent expires, others can use or sell the invention without permission.

Question 14

Average revenue for a monopoly is the total revenue divided by the quantity produced.

Accepted Answer

The average revenue for a monopoly is the total revenue divided by the quantity produced.

Question 15

When a monopolist increases the quantity that it sells, all else equal, total revenue increases, which is called the output effect.

Accepted Answer

This is known as the output effect or quantity effect. As the monopolist increases the quantity it sells, the total revenue initially increases.

Question 16

The De Beers Diamond company advertises heavily to promote the sale of all diamonds, not just its own. This is evidence that it has a monopoly position to some degree.

Accepted Answer

The fact that De Beers advertises diamonds as a whole indicates that it has a significant influence over the diamond market, which is a characteristic of monopoly power.

Question 17

Declining average total cost with increased production is one of the defining characteristics of a natural monopoly.

Accepted Answer

A natural monopoly arises when a single firm can produce the entire output of a good or service at a lower cost than any potential competitor. This is often because of economies of scale, which means that as production increases, the average total cost of producing each unit decreases. Therefore, declining average total cost with increased production is a defining characteristic of a natural monopoly.

Question 18

If the ABC company owns the exclusive rights to mine land in Afghanistan for Lapis Lazuli, a rare stone used in jewelry which is found only in Afghanistan, the company benefits from a barrier to entry.

Accepted Answer

Since ABC company owns the exclusive rights to mine the land for Lapis Lazuli in Afghanistan, it creates a barrier to entry for other companies who want to mine for the same stone in the same location. This gives ABC company a competitive advantage and benefits from this barrier to entry.

Question 19

One characteristic of a monopoly market is that the product is virtually identical to products produced by competing firms.

Accepted Answer

In a monopoly market, there is only one firm that produces a unique product or service that has no close substitutes.

Question 20

For a monopoly, marginal revenue is often greater than the price it charges for its good.

Accepted Answer

In a monopoly, marginal revenue is typically less than the price because as a monopolist increases quantity sold, it must lower the price to sell additional units, which affects the revenue gained from selling units prior to the increase.

Quiz 15: Monopoly