Q1. Market power is the ability of a company to

a. push its costs down by getting bargains with distributors.

b. control the market supply and demand.

c. raise price without losing all consumers.

d. compel consumers to buy its product.

Q2. Why are market power and demand elasticity inversely related?

a. when companies lose the ability to set their own price, it causes demand elasticity to fall (become more inelastic).

b. companies have more market power for inferior goods than they do normal goods.

c. inelastic demand implies consumers are willing to continue purchasing even at higher prices.

d. increases in market power push demand to be more elastic.

Question 3

Antitrust authorities notice that the Lerner index for a particular firm increased after it merged with a competitor. This implies that

a. the demand elasticity for the firm's product has increased after the merger.

b. the amount of competitiveness in the industry has increased after the merger.

c. while the price stayed constant after the merger, the marginal cost has increased.

d. the merged firm has increased its market power.

Question 4

The concentration ratio tells you

a. how concentrated one industry is compared to another.

b. the difference between the top N firms' market share vs. output.

c. the proportion of total market share held by the smallest N firms.

d. the proportion of total market share, output, etc., held by the largest N firms.

Question 5

The concentration ratio has the potential to be misleading because

a. though it attempts to measure industry concentration, it does not actually reflect market power.

b. the same value for the ratio can result from very different sizes of the top N firms.

c. the top N firms in total sales may be near the bottom in terms of market share.

Question 6

Industry A's Herfindahl index is 1743; industry B's Herfindahl index is 2108. Which industry is more concentrated/less competitive?

a. B

b. A

Question 7

Which of the following does not describe a monopoly situation?

a. The single firm does not seek profit maximization.

b. There is only one seller of a product for which there are no good substitutes.

c. It is difficult or impossible for new firms to enter the market.

d. Because of mergers, an industry that used to have four firms now has only one with four different divisions within it.

Question 8

Why are barriers to entry necessary to maintain monopoly power?

a. They prevent competing firms from exiting the industry.

b. New entrants producing substitutes will eliminate the monopolist's power to control price.

c. They guarantee that monopolies will always be profitable.

Question 9

Why are economies of scale a potential entry barrier?

a. The law of diminishing marginal product implies that new firms will have lower costs than older firms.

b. They protect existing firms and allow them to have higher average costs than potential entrants.

c. A new entrant would have much higher costs than an established, large firm.

d. Since the rising portion of LR ATC is reached so quickly, it punishes small new firms while rewarding large existing firms.

Question 10

Which of the following organizations can be considered to promote a barrier to entry to its industry?

a. The American Medical Association (which certifies physicians).

b. Teachers' unions (which certifies teachers).

c. Iowa's Manure Applicator Certification Program (seriously: "State law requires most manure applicators in Iowa to be certified.")

d. All of these organizations promote barriers to entry (knowingly or unknowingly).

Question 11

Why might "switching costs" be an entry barrier that leads to market power?

a. Consumers bear additional costs in switching to a higher-priced brand.

b. Consumers lock in a low price which prevents new competition.

c. Consumers feel it is cheaper to pay a higher price than it is to switch brands.

d. When consumers are devoted to their brand, they do not accept price increases for it.

Question 12

Which would be an example of high switching costs?

a. Some early adopters always want to purchase the newest products.

b. Consumers are used to the "QWERTY" keyboard and do not use more efficient alternatives.

c. Consumers purchase cheaper store-brand versions of popular products.

Question 13

In a monopoly, demand for the firm's product is

a. equal to marginal revenue at the market equilibrium price.

b. equivalent to the market demand.

c. perfectly elastic (horizontal).

d. always associated with an inferior good (in terms of income elasticity).

Question 14

In monopoly, marginal revenue is

a. less than the current price charged.

b. greater than the current price charged.

c. equal to price.

Question 15

To maximize profits, the monopolist selects the quantity where

a. P=ATC.

b. D=MC.

c. ATC=MC.

d. MR=MC.

Question 16

Monopolists make profit

a. only if P>ATCP

b. only if they produce output where MR=MC.

c. all the time since there is no competition.

Question 17

At the profit-maximizing output, the monopolists'

a. total cost is less than average cost.

b. price is greater than MC.

c. Q is greater than P.

Question 18

Monopolies, because of their market power, earn positive economic profit in the short and long runs.

a. True

b. False

Question 19

If a monopoly's optimal price is below its ATC, such that it is earning a loss, then it should

a. shut down whenever a loss is incurred.

b. take the loss but stay open if its price is above its AVC.

c. increase its output to restore normal profitability.

Question 20

A product that is "differentiated" is

a. subject to different costs along the ATC curve.

b. capable of providing different levels of utility or satisfaction to different customers.

c. distinct from others in the market.

d. very similar to a lot of products produced by different companies in the market.

Question 21

In a monopolistically competitive market, there are

a. other competitors, but only one monopoly firm producing the product, which has no close substitutes.

b. a large number of firms.

c. a small number of firms.

Question 22

The monopolistically competitive firm sets output where

a. P=MC.

b. Q=MC.

c. P=AVC.

d. MR=MC or LMC.

Question 23

In the short run, the monopolistically competitive firm may _____, but in the long run will _______.

a. earn profit; earn losses.

b. earn losses; earn profit.

c. break even; earn profit.

d. earn profit or losses; break even.

Question 24

Compared to competitive firms, firms with market power are considered

a. unstable in the long run since they will always earn long-run losses even if they earn short-run profits.

b. inefficient since they have lower output and set a higher price.

c. technologically superior since they generate new inventions more efficiently than competitive firms.

d. inferior since they always earn losses.

Question 25

Society may choose to allow firms with market power because

a. their high profits can generate a large amount of tax revenue.

b. consumers may actually prefer their products.

c. the barriers to entry will always keep prices at the competitive level.