Q&A Hero

Q: Identify four reasons for high entry barriers. Briefly explain each reason.

Q: U.S. antitrust laws are designed to prohibit monopolization and encourage competition. Why, then, does the government erect barriers to entry and create monopoly power by granting firms patents?

Q: What is a public franchise? Are all public franchises natural monopolies?

Q: What gives rise to a natural monopoly? How do consumers benefit from a natural monopoly?

Q: How does a network externality serve as a barrier to entry? Is this barrier surmountable? Explain.

Q: Provide two examples of a government barrier to entry.

Q: A virtuous cycle refers to the development of new products that follows when a monopoly earns economic profits.

Q: A public franchise gives the exclusive right to produce a product for 20 years from the date the product is invented.

Q: Network externalities refer to the situation where the usefulness of a product increases with the number of consumers who use it.

Q: Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.

Q: The National Football League has long-term leases with the stadiums in major cities. Control of these stadiums is an entry barrier to a potential new football league.

Q: For a natural monopoly, the marginal cost of producing an additional unit of its product is relatively small.

Q: A natural monopoly is characterized by large fixed costs relative to variable costs.

Q: If a restaurant was a natural monopoly, dividing the restaurant equally into two separate restaurants would A) decrease marginal cost. B) raise average total cost. C) increase total revenue. D) make marginal revenue less elastic.

Q: If a restaurant was a natural monopoly, its A) marginal cost curve would still be declining when it crossed the demand curve. B) average total cost curve would still be declining when it crossed the demand curve. C) marginal revenue curve wold be the same as its demand curve. D) marginal revenue curve would be horizontal.

Q: A natural monopoly is most likely to occur in which of the following industries? A) the pharmaceutical industry because the development and approval of new drugs through the Food and Drug Administration can take more than 10 years B) the diamond mining and marketing industry because one firm can control a key resource C) the software industry because of the importance of network externalities D) an industry where fixed costs are very large relative to variable costs

Q: Figure 15-1 Refer to Figure 15-1. Which of the following statements about the firm depicted in the diagram is true? A) The fact that this firm is a natural monopoly is shown by the continually declining long-run average total cost as output rises. B) The fact that this firm is a natural monopoly is shown by the continually declining market demand curve as output rises. C) The fact that this firm is a natural monopoly is shown by the continually declining marginal revenue curve as output rises. D) The fact that this firm is a natural monopoly is shown by the fact that marginal cost lies below the long-run average total cost where the firm maximizes its profits.

Q: To be a natural monopoly a firm must A) control a key resource input. B) have economies of scale that are so large that it can supply the entire market at a lower cost than two or more firms. C) have significant network externalities. D) be very large relative to the total market.

Q: In discussions of barriers to entry, what is meant by the term "virtuous cycle"? A) A virtuous cycle refers to successful research and development that leads to information that is used to develop other new products. B) A virtuous cycle refers to a firm using the profits from a monopoly in one market to establish a monopoly in another market. C) A virtuous cycle refers to the situation where the pursuit of self-interest in establishing an entry barrier leads to an increase in social welfare (the "invisible hand"). D) A virtuous cycle refers to a situation where if a firm can attract enough customers initially, it can attract additional customers because its product's value has been increased by other customers using it, which attracts even more customers.

Q: Although some economists believe network externalities are important barriers to entry, other economists disagree because A) they believe that the dominant positions of firms that are supposedly due to network externalities are to a greater extent the result of the efficiency of firms in offering products that satisfy consumer preferences. B) they believe that most examples of network externalities are really barriers to entry caused by the control of a key resource. C) network externalities are really negative externalities. D) they believe that the dominant positions of firms that are supposedly due to network externalities are to a greater extent the result of economies of scale.

Q: Some economists argue that Microsoft become a monopoly in the market for computer software by developing MS-DOS, an operating system used for the first IBM personal computers. The more people who used MS-DOS-based programs, the greater the usefulness of a using a computer with an MS-DOS operating system. The explanation for Microsoft's monopoly is A) the development of new technology that other firms could not copy. B) control of a key resource which, in this case, is the MS-DOS operating system. C) network externalities. D) patents Microsoft obtained when it developed the MS-DOS operating system.

Q: After having a monopoly in the diamond market for many years, by 2000 the De Beers company faced competition from other companies. To maintain its market share, De Beers A) began buying so-called "blood diamonds" in order to keep these diamonds out of the control of other diamond companies. B) adopted a strategy of differentiating its diamonds. Each of its diamonds is now marked with a microscopic brand. C) bought diamond mines in Canada and Russia that had been its competitors. D) lowered the prices of its diamonds to make the market appear less profitable to potential competitors.

Q: BHP Billiton is a Canadian company that owns mines in Canada that A) produce nickel. After World War II, BHP Billiton began to compete with another Canadian firm, the International Nickel Company. This competition eventually ended International Nickel's monopoly in this market. B) produces bauxite, the mineral needed to produce aluminum. BHP Billiton began to mine bauxite after World War II. This competition eventually ended the Aluminum Company of America (ALCOA)'s monopoly in this market. C) produces coal. Until World War II, BHP Billiton had a monopoly on coal in Canada. D) produce diamonds.

Q: The De Beers diamond mining and marketing company of South Africa became one of the most profitable and longest-lived monopolies in history. Which of the following has always threatened De Beers' control of the diamond market? A) Since few diamonds are ever destroyed, De Beers has constantly faced possible competition from other firms reselling diamonds. B) Competition from imitation diamonds. Technology has made it possible to make fake diamonds look exactly like real diamonds. C) Competition from other gemstones, including rubies and emeralds, that have become more popular over time. D) At different times in the past some countries have banned the importation of diamonds from South Africa for political reasons.

Q: In the United States, barriers to entry in professional team sports (for example, football and baseball) result from A) the draft of college players, which grants teams exclusive signing rights to individual players. B) long-term leases teams sign for stadiums and ballparks in major cities. C) television contracts, which give networks the exclusive rights to broadcast games. D) the reserve clause, which is a provision in contracts of professional athletes that require them to play for specific teams over the length of their contracts.

Q: The International Nickel Company of Canada is often cited as an example of monopoly, but International Nickel eventually lost its monopoly. What event was responsible for this? A) New technology allowed other firms to achieve network externalities after World War II. B) The Canadian government, which had owned International Nickel, sold the company after World War II. The government no longer blocked entry into the market for nickel. C) Competition in the market for nickel increased after nickel fields were developed in Russia after World War II. D) Competition in the market for nickel increased after Canada signed the North American Free Trade Agreement with the United States and Mexico in 1994.

Q: The International Nickel Company of Canada is often cited as an example of monopoly. What was the source of the barrier to entry that gave this firm monopoly power? A) It was a public enterprise; therefore, the Canadian government blocked entry into the market for nickel. B) There were important network externalities in the production of nickel. C) Economies of scale resulted in the company becoming a natural monopoly. D) control of a key resource

Q: What type of protection does U.S. law grant the creator of a book, film or piece of music? A) A public franchise, which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 70 years after the author's death. B) A copyright, which grants exclusive rights to the creation's author for 20 years after the work is created. C) A patent, which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 70 years after the author's death. D) A copyright, which grants the exclusive right to use the creation during the author's lifetime and to his or her heirs for 70 years after the author's death.

Q: Network externalities A) can only exist when there are economies of scale. B) prevent the dominance of a market by one firm. C) exist when the usefulness of a product increases with the number of consumers who use it. D) are created when celebrity endorsements of products lead to a surge in the demand for those products.

Q: The 10-year protection period from generic competition for drug manufacturers is a form of A) copyright. B) trademark. C) hallmark. D) patent.

Q: Many biologic drug manufacturers are pushing for patent protection to be extended to 12 years before generics are allowed to be introduced to the market. This reflects which of the following barriers to entry? A) control of a key resource B) network externalities C) entry blocked by government action D) economies of scale creating a natural monopoly

Q: Experience with patents in the pharmaceutical industry shows that when patents on drugs expire A) most patients will continue to buy the drugs from the same firms because their doctors recommend they buy brand-name drugs. B) prices remain high without patent protection because of a lack of competition. Firms that are not granted patents cannot compete with firms that are granted patents. C) other firms are free to produce chemically identical drugs. Competition reduces the profits that had been earned by the firms that received patents. D) firms will find ways to obtain additional patent protection - often by making cosmetic changes in drugs that were patented - so that they can continue charging high prices.

Q: Ordinarily, governments attempt to promote competition in markets. Why do governments use patents to block entry into some markets when this prohibits competition? A) Patents encourage firms to spend money on research necessary to create new products. B) Politicians sometimes succumb to pressure from lobbyists to grant favors to businesses for political reasons. C) Patents are an important source of government revenue. D) Patents are justified because they are an important means for creating network externalities.

Q: A patent A) grants the creator of a book, film, or piece of music the exclusive right to use the creation for 20 years. B) grants the creator of a book, film, or piece of music the exclusive right to use the creation during the creator's lifetime. C) gives a firm the exclusive right to a new product for 20 years from the date the product is invented. D) gives the firm the exclusive right to a new product during the product inventor's lifetime.

Q: When the government makes a firm the exclusive legal provider of a good or service, it grants the firm A) a copyright. B) a network externality. C) a quota. D) a public franchise.

Q: There are several types of barriers to entry that can create a monopoly. Which of the following barriers is the result of government action? A) network externalities B) public franchise C) economies of scale D) control of a key resource

Q: When the government wants to give an exclusive right to one firm to produce a product, it A) imposes a tariff on imports of the product. B) imposes a quota on imports of the product. C) grants a patent or copyright to an individual or firm. D) uses antitrust laws to keep other firms from entering the market.

Q: Which one of the following is not a possible barrier to entry high enough to keep competing firms out of a monopoly industry? A) The monopoly firm has control of a key resource necessary to produce a good. B) There are important network externalities in supplying a good or service. C) large economies of scale that result in a natural monopoly D) a high concentration ratio

Q: To have a monopoly in an industry there must be A) barriers to entry so high that no other firms can enter the industry. B) a patent or copyright giving the firm exclusive rights to sell a product for 20 years. C) an inelastic demand for the industry's product. D) a public franchise, making the monopoly the exclusive legal provider of a good or service.

Q: In a natural monopoly, throughout the range of market demand A) marginal cost is above average total cost and pulls average total cost upward. B) average total cost is above marginal cost and pulls marginal cost upward. C) marginal cost is below average total cost and pulls average total cost downward. D) there are diseconomies of scale.

Q: For a natural monopoly to exist A) a firm must continually buy up its rivals. B) a firm's long-run average cost curve must exhibit diseconomies of scale beyond the economically efficient output level. C) a firm's long-run average cost curve must exhibit economies of scale throughout the relevant range of market demand. D) a firm must have a government-imposed barrier.

Q: A virtuous cycle occurs A) when lobbyists petition members of Congress to grant a public franchise; the lobbyist then raise money for those Congress members who granted the franchise. B) when monopoly profits are used to create new products for additional monopoly profits. C) when a firm can attract enough buyers initially to increase a product's usefulness to attract even more buyers. D) when a firm's sales volume reaches a level where the firm can take advantage of economies of scale; thereby reducing the price of the product to further boost its sales.

Q: What is a network externality? A) It refers to having a network of suppliers and buyers for a good or service. B) It refers to lobbying to form a public enterprise. C) It refers to a situation in which a product's usefulness increases with the number of people using it. D) It refers to a product that requires connection to a network for it to be useful.

Q: The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds? A) because De Beers will not be able to guarantee the quality of previously owned diamonds and fears that its reputation might be harmed B) because the availability of previously owned diamonds would increase the market demand for diamonds and dilute De Beers' monopoly C) because previously owned diamonds would be a close substitute to newly mined diamonds and therefore reduce De Beers' market power D) because the availability of previously owned diamonds would make the market demand curve for diamonds more inelastic and force De Beers to lower its price

Q: In 1935, the U.S. Patent and Trademark Office issued Parker Brothers a trademark on the use of the name Monopoly for a board game. Hasbro bought Parker Brothers in 1991. Which of the following statements is true regarding the trademark on the name Monopoly for a board game? A) The original trademark expired well before Hasbro bought Parker Brothers, so they never had a trademark on Monopoly. B) Trademarks never expire, so Hasbro continues to have a trademark on the name Monopoly. C) The trademark expired in 2011, 20 years after Hasbro's purchase of Parker Brothers. D) The trademark expired in 1955, 20 years after the trademark was issued to Parker Brothers.

Q: The Aluminum Company of America (Alcoa) had a monopoly until the 1940s because A) it was a public enterprise. B) it had a patent on the manufacture of aluminum. C) the company had a secret technique for making aluminum from bauxite. D) it had control of almost all the available supply of bauxite.

Q: The United States Post Office A) faces no competition for its mail services. B) has a monopoly in the provision of first-class mail service. C) can safely ignore the prices for mail services charges by its rivals such as FedEx and UPS. D) is an example of a monopoly that results from the ownership of a key resource: first class mail service.

Q: What is the difference between a public franchise and a public enterprise? A) A public franchise grants a firm the right to be the sole legal provider of a good or service. A public enterprise refers to a service that is provided directly to consumers through the government. B) A public enterprise grants a firm the right to be the sole legal provider of a good or service. A public franchise refers to a service that is provided directly to consumers through the government. C) A public enterprise is owned by the public through its holdings of shares of stock in the enterprise. A public franchise is a firm owned by the government. D) Both refer to a service provided directly to consumers through the government, but "public franchise" is a term more commonly used in the United States while "public enterprise" is more commonly used in European countries.

Q: Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale. The main reason for the elimination of profits is A) after 20 years most people who have taken the drug have passed away or are cured of the illness the drug was intended to treat. B) firms sell their patent rights to other firms so that they can concentrate on finding drugs to treat new illnesses. C) the quantity demanded of the drug has increased enough that the demand becomes inelastic and revenue falls. D) after 20 years patent protection is ended and other firms can produce less expensive generic versions of the drug.

Q: One reason patent protection is vitally important to pharmaceutical firms is A) successful new drugs are not profitable. If firms are not granted patents many would go out of business and health care would be severely diminished. B) the approval process for new drugs through the Food and Drug Administration can take more than 10 years and is very costly. Patents enable firms to recover costs incurred during this process. C) that taxes on profits from drugs are very high; profits from patent protection enable firms to pay these taxes. D) the high salaries pharmaceutical firms pay to scientists and doctors make their labor costs higher than for any other business. Profits from patents are needed to pay these labor costs.

Q: For which of the following firms is patent protection of vital importance? A) furniture producers B) software firms C) pharmaceutical firms D) auto makers

Q: Governments grant patents to A) compensate firms for research and development costs. B) encourage competition. C) encourage low prices. D) encourage firms to reveal secret production techniques.

Q: Governments grant patents to encourage A) research and development on new products. B) competition. C) low prices. D) firms to form public enterprises.

Q: A United States government patent lasts A) forever. B) 50 years. C) 20 years. D) 7 years.

Q: An example of a monopoly based on control of a key resource is A) Major League Baseball. B) the Paul Ecke Ranch monopoly on poinsettias. C) Microsoft's Windows operating system. D) the U.S. Food and Drug Administration.

Q: A public franchise A) is a corporation that is owned by stockholders. B) results from ownership of a key raw material. C) is a government designation that a private firm is the only legal producer of a good or service. D) is an unregulated monopoly necessary for the public good.

Q: A patent or copyright is a barrier to entry based on A) ownership of a key necessary raw material. B) large economies of scale as output increases. C) government action to protect a producer. D) widespread network externalities.

Q: A local electricity-generating company has a monopoly that is protected by an entry barrier that takes the form of A) control of a key raw material. B) network externalities. C) economies of scale. D) perfectly inelastic demand curve.

Q: Which one of the following about a monopoly is false? A) A monopoly could make profits in the long run. B) A monopoly could break even in the long run. C) A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly. D) A monopoly status could be temporary.

Q: To maintain a monopoly, a firm must have A) a perfectly inelastic demand. B) an insurmountable barrier to entry. C) marginal revenue equal to demand. D) few competitors.

Q: If you own the only bookstore in a small town, do you have a monopoly?

Q: What is a monopoly? Can a firm be a monopoly if close substitutes for its product exists?

Q: Unlike a perfect competitor, a monopolist faces the market demand curve.

Q: A monopoly is a firm that is the only seller of a good or service that does not have a close substitute.

Q: A snack shop inside a hotel in a busy city has a monopoly on food sales if it is the only food vendor in the hotel that is open 24 hours a day.

Q: Joe Santos owns the only pizza parlor in a small town that is also home to a McDonald's, a Taco Bell and a Kentucky Fried Chicken. Using a broad definition of a monopoly, Joe has a monopoly.

Q: The market demand curve facing a monopolist is more elastic than the market demand curve facing a monopolistic competitor.

Q: A monopoly is defined as a firm that has the largest market share in an industry.

Q: A firm that is the only seller of a good or service that does not have a close substitute is called A) a monopoly. B) an oligopolist. C) a market maker. D) a price maker.

Q: A monopoly firm is the only seller of a good or service that A) has a perfectly elastic demand. B) has no close complements. C) does not need to be advertised. D) does not have a close substitute.

Q: The Google search engine has a market share of ________ in the United States and ________ in Europe. A) 90 percent; 25 percent B) 50 percent; 50 percent C) 70 percent; 90 percent D) 45 percent; 15 percent

Q: Using a broad definition, a firm would have a monopoly if A) it produced a product that has no close substitutes. B) it does not have to collude with any other producer to earn an economic profit. C) there is no other firm selling a substitute for its product close enough that its economic profits are competed away in the long run. D) it can make decisions regarding price and output without violating antitrust laws.

Q: A narrow definition of monopoly is that a firm is a monopoly if it can ignore A) government antitrust laws. B) the pricing decisions of its suppliers. C) the pricing decisions of firms that produce complementary products. D) the actions of all other firms.

Q: A monopoly is a firm that is the only seller of a good or service that does not have A) a patent. B) a close complement. C) a barrier to entry. D) a close substitute.

Q: Figure 15-18 Refer to Figure 15-18 to answer the following questions. a. What quantity will this monopoly produce and what price will it charge? b. Suppose the monopoly is regulated. If the regulatory agency wants to achieve economic efficiency, what price should it require the monopoly to charge? c. To achieve economic efficiency, what quantity will the regulated monopoly produce? d. Will the regulated monopoly make a profit if it charges the price that will achieve economic efficiency? e. Suppose the government decides to regulate the monopoly by imposing a price ceiling of $35. What quantity will the monopoly produce and what price will the monopoly charge? f. With the price ceiling of $35, what profit will the monopoly earn?

Q: Few firms in the United States are monopolies because A) few firms experience economies of scale. B) of antitrust laws. C) when a firm earns profits, other firms will enter its market. D) most products that firms produce have substitutes.

Q: Consider two industries, industry Q and industry Z. In industry Q there are 10 companies, each with a market share of 10% of total sales. In industry Z, there are eight companies. One company has a 65% market share and each of the other seven firms has a market share of 5%. a. Calculate the four-firm concentration ratio for each industry. b. Calculate the Herfindahl-Hirschman Index (HHI) for each industry. c. What do the values of the two concentration measures imply about the degree of market power in the two industries?

Q: Consider the following characteristics: a. a market structure with barriers to entry b. demand curves that are easily identified c. firm cannot make zero profits in the long run d. firm can reap long run profits. Which of the characteristics in the list above is shared by an oligopolist and a monopolist? A) a, b, c, and d B) a, b, and d C) a, c, and d D) a and d

Q: Figure 15-17 Refer to Figure 15-17 to answer the following questions. a. What quantity will this monopoly produce and what price will it charge? b. Suppose the government decides to regulate this monopoly and imposes a price ceiling of $25. Now what quantity will the monopoly produce and what price will it charge? c. Will every consumer who is willing to pay the ceiling price of $25 be able to buy the product? Briefly explain.

Q: Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly? A) Each must lower its price to sell more output. B) Each sets a price for its product that will maximize its revenue. C) Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost. D) Each maximizes profits by producing a quantity for which price equals marginal cost.