ECO 405 Week 7 Quiz Solution – New

ECO 405 Week 7 Quiz – Strayer

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Chapter 08

The Economics Of Monopoly Power: Can Markets Be Controlled?

Multiple Choice Questions

1. Imperfect Competition Can Best Be Described As A Situation In Which
A. A Few Large Firms Produce And Sell A Particular Product
B. Many Firms Produce And Sell A Product
C. Only One Firm Produces And Sells A Product
D. Firms Exercise Some Monopoly Power
E. Both (A) And (D)

2. The Monopoly Power Of A Firm Can Be Measured By The Firm’s
A. Profits Relative To Other Firms In The Industry
B. Control Over The Demand For Its Product
C. Revenues As A Percent Of Industry Revenues
D. Prices Compared To Average Prices In The Industry
E. Control Over The Market Supply Of Its Product

3. Which Of The Following Is Likely To Have The Most Monopoly Power?
A. Ford Motor Corporation
B. Your Local Water Company
C. Mobil Oil Corporation
D. Avon Products (Cosmetics)
E. A Fast Food Restaurant

4. Concentration Ratios Are Used To Measure The
A. Potential Monopoly Power Within An Industry
B. Strength Of The Demand For An Industry’s Product
C. Potential Monopoly Power Of A Firm
D. Degree Of Competition Between Firms In Different Markets
E. Level Of Perfection In A Competitive Market

5. Suppose The U.S. Auto Industry Sells 1,000 Autos Per Year. Of This, Gm Sells 400, Ford 300, And Dodge 250. Given This Information, The Four-Firm Concentration Ratio Of The Industry Must Be At Least
A. 95%
B. 5%
C. 50%
D. 100%
E. Cannot Tell Without Further Information

Questions 06 – 08 Refer To The Table Below.

6. The 4-Firm Concentration Ratio In This Industry Is
A. 0.5
B. 0.6
C. 0.7
D. 0.8
E. 0.9

7. The 6-Firm Concentration Ratio In This Industry Is
A. 0.6
B. 0.7
C. 0.8
D. 0.9
E. 1.0

8. Assume That No Firm In This Industry Accounts For Less Than 5% Of Industry Sales. What Is The Largest Number Of Firms That Could Be In This Industry?
A. 6
B. 7
C. 8
D. 9
E. 10

9. Which Of The Following Would Cause An Industry’s Concentration Ratio To Make It Appear Less Competitive Than It Really Is?
A. Firms In The Industry Are Located In One Area Of The Country
B. Transporting The Industry’s Output Is Very Easy
C. Foreign Firms Export The Industry’s Product To The United States
D. High Barriers To Entry
E. All Of The Above

10. A Pure Monopoly Industry Has A 4-Firm Concentration Ratio Equal To
A. 0
B. 0.25
C. 050
D. 0.9
E. 1.0

11. To Maximize Profits, A Monopolist Produces The Output Level At Which
A. Its Total Receipts Are Greatest
B. Its Total Costs Are Minimum
C. Its Marginal Cost Equals Its Marginal Revenue
D. Its Total Costs Equal Its Total Receipts
E. None Of The Above

12. To Maximize Profits, A Competitive Firm Produces The Output Level At Which
A. Its Total Receipts Are Greatest
B. Its Total Costs Are Minimum
C. Its Marginal Cost Equals Its Marginal Revenue
D. Its Total Costs Equal Its Total Receipts
E. None Of The Above

13. One Difference Between A Competitive Seller And A Monopolistic Seller Is That The
A. Competitive Firm Faces A Horizontal Supply Curve
B. Monopolist Tries To Maximize Profit
C. Monopolist Has Some Price Setting Ability
D. Competitive Firm Is Free To Vary Output
E. Market Demand Curve Is Positively Sloped For A Monopoly

14. Monopoly Refers To
A. A Large Firm
B. A Firm That Is One Of A Few Firms In An Industry
C. A Single Seller Of A Product For Which There Are No Good Substitutes
D. A Firm That Refuses To Lower Its Price
E. All Of The Above

15. In A Competitive Market, The Single Firm
A. Competes With Other Firms For Its Share Of The Market
B. Is Unable To Raise The Price Of The Product
C. Can Increase Its Sales By Advertising
D. Can Increase Its Sales By Lowering Its Price
E. Is All Of The Above

16. A Major Objective Of Firms In All Types Of Market Structures Is
A. Output Restriction
B. Output Maximization
C. To Raise Prices
D. Profit Maximization
E. To Maximize Revenues

17. A Firm’s Total Revenue Equals Its
A. Income Minus Expenses
B. Pre-Tax Net Income
C. Income For Tax Purposes
D. Quantity Times Price
E. Quantity Times Costs

18. Profit Equals
A. Total Revenue Minus Total Cost
B. Marginal Revenue Minus Marginal Cost
C. Quantity Times Price
D. Marginal Cost Minus Marginal Revenue
E. Income Minus Opportunity Cost

19. Profits And Losses In A Private Enterprise Economic System
A. Contribute Toward A Breakdown Of The System
B. Lead To A Monopolization Of The Industries In Which They Occur
C. Show Where Productive Capacity Should Be Expanded And Where It Should Be Contracted
D. Do All Of The Above
E. Do Both (A) And (B)

20. For A Firm, At The Output Level At Which Marginal Revenue Equals Marginal Cost,
A. Profits Are Highest
B. There Is Neither Unemployment Nor Inflation
C. Output Is Maximized
D. Revenues Are Maximized
E. Costs Are Minimized

21. The Most Common Forms Of Nonprice Competition Are
A. Profit Maximization And Loss Minimization
B. Monopolization And Output Restriction
C. Advertising And Changes In Product Quality And Design
D. Inflation And Unemployment
E. None Of The Above

Questions 22-26 Refer To The Following Graph. For Each Question, Disregard Any Irrelevant Lines.

22. Suppose The Market Is Competitive. Equilibrium Market Price And Output Will Be
A. P1, X2
B. P2, X3
C. P3, X1
D. P1, X4
E. P3, X2

23. Now Suppose The Same Market Is Monopolized. Equilibrium Market Price And Output Would Be
A. P3, X1
B. P3, X2
C. P2, X3
D. P1, X2
E. P1, X4

24. The Area Of The Triangle Abc Reflects The
A. Dead-Weight Welfare Loss Due To Monopoly
B. Increase In Production Costs Due To Monopoly
C. Increase Price To The Consumer Due To Monopoly
D. Impact Of Barriers To Entry On The Market
E. Effect Of Monopoly On Income Distribution

25. If This Industry Changes From Pure Competition To Monopoly, Output Changes From
A. X4 To X1
B. X4 To X2
C. X2 To X4
D. X3 To X2
E. X2 To X3

26. If This Industry Changes From Pure Competition To Monopoly, Price Changes From
A. P3 To P2
B. B. P3 To P1
C. C. P2 To P1
D. D. P1 To P3
E. E. P2 To P3

27. If The Demand Curve Faced By A Firm Is Downward Sloping And The Market Price Of The Product Is Above Marginal Cost Of Production, Which Of The Following Is Correct?
A. Not Enough Of The Economy’s Resources Are Being Allocated To Producing The Good
B. Too Much Of The Economy’s Resources Are Being Allocated To Producing The Good
C. The Firm Is In A Competitive Market
D. The Firm Is Making Profits
E. The Firm Is Losing Money

28. A Monopoly Is Not Efficient Because
A. Price Exceeds Marginal Cost
B. Entry Into The Market Is Blocked
C. Output Is Too Large
D. Monopoly Is Illegal
E. Price Is Too Low

29. The Dead-Weight Welfare Loss Due To Monopoly Is
A. Too Small To Be Important
B. About 10% Of Gdp Per Year
C. Unable To Be Determined In A Complex Economy Such As Our Own
D. About 1% Of Gdp Per Year
E. About .01% Of Gdp Per Year

30. The Dead-Weight Welfare Loss Due To Monopoly
A. Results From The Monopolist’s Tendency To Reduce Output Below The Competitive Level
B. Is A Measure Of The Cost To Society From The Monopolistic Misallocation Of Resources
C. Is Estimated To Be About 1% Of Gdp Per Year
D. Is A Loss To Consumers Not Offset By Anyone Else’s Gain
E. All Of The Above

31. Monopolization Of A Previously Competitive Market Leads To
A. Reduced Production And Product Quality And Increased Costs And Prices
B. Increased Production And Higher Prices
C. Increased Production, Product Quality And Prices
D. Government Regulation
E. None Of The Above

32. Patents And Copyright Laws
A. Are Governmental Barriers To Market Entry
B. Encourage Orderly Market Entry
C. Discourage Research And Development
D. Reduce Monopoly Power
E. Do All Of The Above

33. When Firms Earn Profits,
A. They Will Likely Expand
B. New Firms Will Have An Incentive To Enter The Market
C. They Are Providing A Good Or Service That Consumers Want More Of
D. The Market Is Signaling More Firms To Enter
E. All Of The Above

34. In A Competitive Market In The Short Run, Firms
A. May Earn Profits Or Losses
B. Always Break Even
C. Earn Neither Profits Nor Losses
D. Must Be Free To Enter Or Exit The Market
E. Charge A High Price And Produce A Low Quantity

Questions 35 – 39 Refer To The Graph Below, Which Is For A Firm In A Competitive Market.

35. Since This Is A Competitive Market, The Firm’s Marginal Revenue Is
A. $5
B. $7
C. $20
D. $100
E. $150

36. The Profit-Maximizing Price And Quantity For This Competitive Firm Are
A. $5 And 100
B. $5 And 150
C. $7 And 100
D. $7 And 150
E. $7 And More Than 150

37. Equilibrium Price And Quantity In The Market Are
A. $5 And 100
B. $5 And 150
C. $7 And 150
D. $7 And More Than 150
E. None Of The Above

38. The Firm’s Total Revenue Is
A. $5
B. $7
C. $100
D. $150
E. $500

39. If The Firm Has A Total Cost Of $400, It Is Earning A
A. Profit Of $0
B. Profit Of $100
C. Loss Of $100
D. Loss Of $200
E. Loss Of $500

Questions 40 – 44 Refer To The Graph Below, Showing A Monopoly Market.

40. For The Firm Shown On The Graph, Profit Maximization Occurs At What Price And Quantity?
A. $20 And 50
B. $15 And 70
C. $15 And 50
D. $10 And 50
E. $10 And 70

41. At The Profit Maximizing Quantity, The Firm’s Total Revenue Equals
A. $10
B. $15
C. $20
D. $1,000
E. $1,400

42. If The Firm Has Total Costs Of $1,200 At The Profit Maximizing Output, Then It Is Earning A
A. Profit Of $0
B. Profit Of $100
C. Profit Of $200
D. Loss Of $100
E. Loss Of $200

43. If This Were A Perfectly Competitive Market, Equilibrium Price And Quantity Would Be
A. $20 And 50
B. $15 And 70
C. $15 And 50
D. $10 And 50
E. $10 And 70

44. Monopolization Of This Market Leads To A Deadweight Loss Equal To
A. $0
B. $50
C. $100
D. $150
E. Cannot Be Determined

45. If A Firm Sells 100 Units Of Output At A Price Of $5 And Each Unit Costs $3 To Produce, The Firm Is Earning A
A. Profit Of $200
B. Loss Of $2 Per Unit
C. Loss Of $200
D. Profit Of $500
E. Loss Of $300

46. Which Of The Following Is Of A Firm’s Total Costs? They
A. Do Not Include Opportunity Costs
B. Become Lower As More Is Produced
C. Are Greater Than Total Revenue When The Firm Is Earning A Profit
D. Are Equal To The Cost Per Unit Times The Number Of Units Produced
E. All Of The Above

47. If A Firm Sells 100 Units Of Output At A Price Of $5 And Each Unit Costs $3 To Produce, The Firm’s Total Revenue Equals
A. $3
B. $5
C. $200
D. $300
E. $500

48. A Perfectly Competitive Firm’s Supply Curve Is Its
A. Demand Curve
B. Marginal Revenue Curve
C. Total Revenue Curve
D. Marginal Cost Curve
E. Total Cost Curve

49. The Supply Curve For A Monopoly
A. Is Its Marginal Revenue Curve
B. Is Its Total Revenue Curve
C. Is Its Marginal Cost Curve
D. Is Its Total Cost Curve
E. Does Not Exist

50. The Demand Curve For A
A. Monopoly Firm Is Downward Sloping
B. Monopoly Industry Is Downward Sloping
C. Perfectly Competitive Firm Is Horizontal
D. Perfectly Competitive Industry Is Downward Sloping
E. All Of The Above

51. If A Firm Sells 100 Units At A Price Of $5 And Each Unit Costs $3 To Produce, Its Total Cost Equals
A. $3
B. $5
C. $200
D. $300
E. $500

Questions 52 – 56 Refer To The Graph Below.

52. If This Industry Is Perfectly Competitive, Equilibrium Price And Output In The Market Will Be
A. $16 And 10
B. $12 And 10
C. $12 And 14
D. $8 And 14
E. $8 And 10

53. If This Industry Is A Monopoly, Equilibrium Price And Output In The Market Will Be
A. $16 And 10
B. $12 And 10
C. $12 And 14
D. $8 And 14
E. $8 And 10

54. If This Industry Starts As Perfectly Competitive And Then Becomes A Monopoly, Market Price Will Change From
A. $16 To $12
B. $16 To $8
C. $12 To $8
D. $8 To $16
E. $12 To $16

55. If This Industry Starts As Perfectly Competitive And Then Becomes A Monopoly, The Deadweight Loss To Society Is Equal To Area
A. Abc
B. Adc
C. Bdec
D. Adec
E. None Of The Above

56. Society’s Net Benefits Are Maximized When Price And Quantity In The Market Are
A. $16 And 10
B. $12 And 10
C. $12 And 14
D. $8 And 14
E. $8 And 10

57. Which Of The Following Is A Private Barrier To Entry?
A. An Occupational License
B. A Patent
C. Ownership Of Raw Materials
D. A Regulatory Commission
E. All Of The Above

58. Which Of The Following Is A Government Barrier To Entry?
A. An Occupational License
B. Ownership Of Raw Materials
C. Product Differentiation
D. Advertising
E. All Of The Above

59. Which Of The Following Is A Barrier To Entry?
A. Import Restrictions
B. Copyright Laws
C. Exclusive Franchises
D. Zoning Ordinances
E. All Of The Above

60. Firms May Advertise Their Products In Order To
A. Create A Barrier To Entry
B. Provide Consumers With Information
C. Increase Demand For Their Product
D. Differentiate Their Product
E. Do All Of The Above

61. A Telephone Is Much More Useful To A Consumer When Other People Also Have Telephones. This Illustrates Which Of The Following Concepts?
A. Economies Of Scale
B. Diseconomies Of Scale
C. Natural Monopoly
D. Network Economies
E. Constant Returns To Scale

62. Which Of The Following Is An Example Of Nonprice Competition?
A. Advertising
B. Changing The Design Of A Product
C. Incorporating New Technology In A Product
D. Improving The Quality Of A Product
E. All Of The Above

63. The Loss To Society Caused By Monopoly Power May Be Greater Than Simply The Losses Associated With Deadweight Losses Because It Also Includes Losses Due To
A. Private Barriers To Entry
B. Government Barriers To Entry
C. Extensive Product Differentiation
D. Occupational Licensing
E. All Of The Above

64. With A Natural Monopoly,
A. The Long-Run Average Cost Curve Of The Firm Declines Over The Range Of Production
B. Government Regulation Ensures That Consumer’s Interests Will Be Served
C. Government Regulation Will Fail
D. There Are No Significant Economies Of Scale In Producing The Good
E. None Of The Above

65. The Government’s Regulation Of Pollution
A. Is Justified Because Of Natural Monopoly
B. Is Justified By Poorly Defined Property Rights
C. Is Justified By Concentration Ratios
D. Is Not Likely To Improve On The Market Outcome
E. Cannot Be Defended On Economic Grounds

66. The Capture Theory Of Regulation Suggests
A. In The Absence Of Regulation, Consumer Welfare Is Often Captured By Firms In The Market
B. The Lost Consumer Welfare Due To Unfair Business Practices Can Be Offset Through Government Regulation
C. When Market Failure Exists, Regulation Is Appropriate
D. The Regulators Of An Industry Are Often “Captured” By The Firms In The Market
E. None Of The Above

67. Which Of The Following Is Likely To Reduce Monopoly Power In The United States The Most?
A. Placing An Absolute Limit On The Total Assets That Any One Company Can Have
B. Removing All Government-Imposed Entry Barriers To Industries And Occupations
C. Placing A Government Ban On Television Advertising
D. Placing A Special Tax On Monopolists’ Outputs
E. None Of The Above

68. Which Of The Following Provides The Strongest Economic Justification For Regulation?
A. Natural Monopoly
B. Excess Consumer Information
C. Shortages And High Prices
D. All Of The Above
E. None Of The Above

69. The Best Estimate Of The Dead-Weight Welfare Loss Due To Monopoly Is Biased Downward Because It Does Not Take Into Account
A. Reductions In Product Quality
B. Higher Costs Of Production
C. Decreases In Product Variety
D. All Of The Above
E. None Of The Above

Questions 70 – 73 Refer To The Graph Below.

70. At What Level Of Output Does The Firm Experience Economies Of Scale?
A. 0
B. 0 – Q0
C. Q0
D. Above Q0
E. This Firm Does Not Experience Economies Of Scale

71. Increasing Output Beyond Q0 Will Cause The Firm To Experience
A. Economies Of Scale
B. Diseconomies Of Scale
C. Constant Returns To Scale
D. Network Economies
E. Decreasing Total Costs

72. At What Level(S) Of Output Do Reductions In The Average Costs Of Production Cease?
A. 0
B. 0 – Q0
C. Q0
D. Above Q0
E. There Are No Reductions In The Average Costs Of Production

73. It Is Cheaper Per Unit To Produce Higher Quantities When Output Is
A. High
B. Between 0 And Q0
C. Q0
D. Above Q0
E. Decreasing

74. Which Of The Following Is A Negative Consequence Of Allowing Competition In An Industry That Is A Natural Monopoly?
A. Deadweight Welfare Loss
B. Lower Prices
C. Restricted Output
D. Higher Average Costs
E. All Of The Above

75. Which Of The Following Is A Negative Consequence Of Allowing An Unregulated Natural Monopoly?
A. Deadweight Welfare Loss
B. Higher Prices
C. Restricted Output
D. All Of The Above
E. None Of The Above

76. Corporations
A. Are Legal Entities Separate From Their Owners
B. Are Owned By Stockholders
C. Finance Their Operations Through Many Small Investors
D. Account For 20% Of All Businesses In The United States
E. All Of The Above

77. Approximately What Percent Of Sales In The United States Are Made By Corporations?
A. 40
B. 50
C. 60
D. 70
E. 90

78. The “Agency Problem” Is Caused By
A. Corporate Managers Pursuing Goals Different From Stockholder’s Goals
B. Stockholders Attempting To Micromanage Corporations
C. Regulatory Agencies Interfering With Corporate Operations
D. Sudden Declines In Stock Prices
E. Over-Investment In New Capital

79. A Guarantee That Allows The Purchase Of Shares Of Stock At A Fixed Price Is A(N)
A. Non-Pecuniary Benefit Of Employment
B. Stock Option
C. Disincentive To Expand A Corporation
D. Illegal Means To Compensate Ceos
E. Stock Split

80. Some Would Argue That One Of The Primary Benefits Of Possessing A Monopoly Is
A. The Chance To Erect Entry Barriers
B. The Opportunity To Live The Quiet Life
C. The Ability To Restrict Output
D. The Chance To Create Deadweight Losses
E. The Ability To Jack Up Prices To Consumers

81. There Is The Possibility That The Sheer Size Of Some Firms—Their “Bigness”—Is A Problem For An Economy Because
A. Big Firms Possess Larger Entry Barriers
B. Bigness Implies That The People Who Run Such Firms Are Unethical
C. Bigger Firms Are More Inefficient
D. The Effects That The Failure Of Large Firms Can Have On The Us Economy
E. The Number Of Shares Of Stock That Are Traded In Large Firms

82. The Us Government In 2008 Did Not Step Into The Market To Bail Out Which Firm?
A. Chrysler
B. General Motors
C. Ford
D. Aig
E. The Government Stepped In To Bail Out All Of These Firms

True / False Questions

83. Firms With Monopoly Power Yield Higher Than Average Returns To Investors.

84. The Monopoly Power Of A Firm In An Imperfectly Competitive Market Is Greater The Larger The Firm’s Output Relative To The Industry Output.

85. The More Sellers There Are In, The Less Control Any One Seller Has Over The Price It Can Charge.

86. Shortages Are Important Evidence That Firms Are Exercising Monopoly Power.

87. A Four-Firm Concentration Ratio Of 0.9 Indicates That The Four Largest Firms In The Industry Control 90% Of The Industry’s Sales.

88. In A Perfectly Competitive Industry The Four-Firm Concentration Ratio Is Close To Zero.

89. Concentration Ratios Provide A Good Measure Of A Firm’s Potential For Exercising Monopoly Power.

90. Ford Motors More Closely Resembles A Monopoly Than Does Your Local Electric Company.

91. Concentration Ratios Tend To Be Biased Downward Because They Do Not Account For International Competition.

92. Profit Maximization As An Objective Of A Firm Is A Logical Extension Of The General Principle That People Prefer More To Less.

93. Sellers In A Competitive Market Must Take Into Account What Buyers Will Do And Those In The Monopolized Market Do Not.

94. Generally Monopolists Will Be More Concerned With Profit Maximization And Competitive Firms Will Be More Concerned With Earning A Fair Rate Of Return On Investment.

95. To Maximize Profits A Firm Tends To Produce An Output Level At Which Its Marginal Revenue Equals Its Marginal Costs.

96. Marginal Revenue For A Monopolist Is Less Than The Price It Charges For Its Product.

97. Marginal Revenue For A Competitive Firm Is Equal To The Price It Charges For Its Product.

98. If Its Marginal Revenue Is Less Than Its Marginal Cost, A Firm Should Reduce Its Output Product.

99. Like Other Demand Curves, The Demand Curve Facing A Competitive Firm Slopes Downward.

100. A Firm That Sells In A Competitive Market Restricts Output And Charges Higher Prices Than It Would If It Were A Monopolist.

101. Profits Serve No Useful Purpose In A Private Enterprise Economy And Should Be Taxed Away By The Government.

102. A Firm In A Competitive Market Has No Price Setting Capability.

103. Some Monopolists Block Entry Into Their Markets Through Their Control Of The Raw Materials Needed To Produce The Product.

104. Licensing Of Barbers Insures That We Will Get Better Haircuts At The Same Prices Or The Same Quality Of Haircuts At Lower Prices.

105. Licensing Of M.D.’S Has Nothing To Do With The Fact That They Are Among The Economy’s Highest Paid Professionals.

106. Changes In The Design And Quality Of A Product Often Results In Greater Consumer Satisfaction From The Product.

107. Monopoly Power In The U.S. Does Not Pose A Significant Economic Problem.

108. Unlike In Competition, The Monopolist Is Driven By A Desire To Maximize Profit.

109. Any Firm, Whether Monopolistic Or Competitive, Must Produce Where Marginal Cost Equals Marginal Revenue In Order To Maximize Profit.

110. The Monopolization Of A Previously Competitive Industry Will Lead To Restricted Production And Higher Prices.

111. Without Barriers To Entry, A High-Profit Monopoly Is Unlikely To Be Able To Maintain Its Monopoly Status.

112. Monopoly Firms Typically Have Lower Costs Than Competitive Firms Because They Receive Bulk-Buying Discounts For Their Inputs.

113. In Addition To Reducing Production And Raising Prices, Monopoly Decreases Product Quality.

114. Monopolies Will Have Higher Production Costs Than Competitive Firms.

115. Monopoly Can Lead To A Perverse Redistribution Of Income If The Owners Of The Monopoly Are Wealthier Than Buyers.

116. Severe Competition In A Market Leads To A Dead Weight Welfare Loss To Society.

117. Extremely Large Firms Cause Dead Weight Loss To Increase.

118. Monopolies In The U.S. Economy Are Estimated To Reduce Gdp By About 1% Per Year.

119. With Natural Monopolies, Consumers May Be Better Off With A Monopoly Than Competition.

120. Market Failure, By Itself, Is Enough To Justify Government Regulation Of Business.

121. Government Regulation Is Appropriate When There Is Market Failure And Regulation Is Cost-Effective.

122. Consumers Rarely Have Complete Information About Products And This Lack Of Information Doesn’t Keep The Market From Maximizing Welfare.

123. The Capture Theory Suggests That Regulators May End Up Working For The Interests Of The Firms Being Regulated Rather Than The Consuming Public.

124. Barriers To Entry Are Often Created By Governments.

125. A Benefit Of Monopoly Is That Costs Are Lower.

126. The Capture Theory Of Regulation Suggests That Government Regulation Of Business Represents An Unfair Attack On Private Firms By Government.

127. Natural Monopolies Are Common In The Modern World Economy.

128. In Their Desire To Achieve The Quiet Life, Monopolists Tend To Allow Costs To Rise Above Competitive Levels.

129. When A Firm’s Average Costs Fall As Output Is Increased, The Firm Is Experiencing Economies Of Scale.

130. When The Value Of A Product To A Consumer Is Enhanced When Others Also Consume The Good, Economies Of Scale Exist.

Chapter 09

The Economics Of Professional Sports: What Is The Real Score?

Multiple Choice Questions

1. Professional Sports Clubs Differ From Most Other Business Firms In Their
A. Organizational Structure And Relationship With Employees
B. Location And Emphasis On The Competitive Spirit
C. Ownership And Profitability
D. Legal Status As Corporations And Limited Tax Liability
E. Ability To Operate In Both The Product And Resource Market

2. In A Product Market,
A. Producers Sell Goods And Services
B. Consumers Buy Goods And Services
C. Final Goods And Services Are Exchanged
D. All Of The Above
E. None Of The Above

3. In A Resource Market,
A. Buyers And Sellers Exchange Goods And Services
B. Resourceful Buyers Find Goods That Are Otherwise Unavailable
C. Buyers And Sellers Exchange Factors Of Production
D. Firm Managers Exchange Production Techniques And Ideas
E. Workers Exchange Their Labor For The Firm’s Output

4. Firms That Coordinate Their Actions To Maximize Joint Profits Are Said To Have Formed A(N)
A. Monopsony
B. Cartel
C. Product Market
D. Oligopoly
E. Economic Treaty

5. Which Of The Following Sports Leagues Can Be Considered A Cartel?
A. The National Football League (Nfl)
B. The National Hockey League (Nhl)
C. The National Basketball Association (Nba)
D. (A) And (B)
E. All Of The Above

6. Which Of The Following Is Not Necessary For A Successful Cartel? Members Must
A. Produce Most Of The Industry’s Output
B. Produce A Homogeneous Output
C. Produce Heterogeneous Outputs
D. Be Able To Divide The Market
E. Have A Way To Prevent Cheating

7. Which Of The Following Best Characterizes A Cartel Arrangement?
A. Open Competition
B. Shared Competition
C. Monopsony
D. Shared Monopoly
E. Oligopoly

8. To Maximize Joint Profits, A Cartel Will Set The Market Price And Output Such That
A. Each Firm’s Marginal Revenue Equals Its Marginal Cost
B. The Market’s Marginal Revenue Equals The Market’s Marginal Cost
C. Each Firm’s Demand Schedule Is Equal To The Market Marginal Cost
D. The Market’s Marginal Revenue Is Equal To Each Firm’s Marginal Cost
E. None Of The Above

9. In A Product Market With A Cartel, Prices Will Be _____ And Output Will Be _____ Than In A Competitive Market.
A. Higher; Lower
B. Lower; Higher
C. Higher; Higher
D. Lower; Lower
E. Both Price And Quantity Will Be The Same

10. Which Of The Following Statements Is ?
A. Anti-Trust Laws Make Most Cartels Illegal In The U.S
B. Formation Of A Cartel Ensures That Each Firm Will Earn Greater Profits Than Without A Cartel
C. Cartels Maximize Joint Profits Not Individual Firm Profits
D. Professional Sports Leagues Insure The Stability Of Teams By Cooperating Through Cartel Arrangements
E. Cartels Are Difficult To Maintain When Cheating Is Possible

11. A Resource Market With Only One Buyer Of A Factor Of Production Is Called A(N)
A. Imperfect Monopoly
B. Monopoly
C. Competitive Market
D. Monopsony
E. Cartel

12. A Monopsony Is A Market With Only One
A. Buyer
B. Employer
C. Product
D. All Of The Above
E. A) And B)

13. The Additional Cost Incurred As A Result Of Hiring An Additional Worker Is The Firm’s
A. Total Cost Of Labor
B. Marginal Cost Of Labor
C. Average Cost Of Labor
D. Labor Cost
E. Human Capital Cost Of Labor

14. Which Of The Following Conditions Can Give Rise To A Monopsony Employer?
A. Mobile Workers With Limited Skills
B. Legal Protection From Anti-Trust Laws And A Mobile Workforce
C. Immobile Workers With Highly Specialized Skills
D. A Cartel Agreement That Results In Raising Joint Profits
E. A Merger Between Two Unrelated Firms

15. Why Does A Monopsony’s Marginal Cost Of Labor (Mcl) Curve Lie Above The Market Supply Of Labor Curve? Because The Monopsony
A. Must Raise The Wage It Pays All Employees In Order To Attract And Hire Additional Workers
B. Must Pay Higher Wages To Only The Last Workers Hired In Order To Attract And Hire Additional Workers
C. Faces The Market Demand And Marginal Revenue Curves
D. Must Lower The Wage It Pays All Employees In Order To Maintain Profitability
E. Has Such High Labor Costs Relative To The Supply Of Labor

16. If A Firm’s Workers Add $1,000 To The Firm’s Receipts And Total Wages Equal $500, Then Monopsonistic Profit Equals
A. $500
B. $1,000
C. $1,500
D. $500,000
E. A Number Unable To Be Determined With The Information Given

17. Under Which Of The Following Conditions Will A Monopsony Hire An Additional Worker? When
A. Mcl > Mrp
B. Mcl < Mrp C. Mrp = D D. Mc = Mr E. D > S

18. To Maximize Profit, A Monopsony Will Hire Workers Up To The Point Where
A. Mc = Mr
B. D = S
C. Mcl = Mrp
D. Mcl = P
E. Mr = P

19. A Monopsony Will Hire ______ Workers At A _____ Wage Than An Employer In A Competitive Labor Market.
A. More; Lower
B. More; Higher
C. Fewer; Higher
D. Fewer; Lower
E. The Same Number Of; Higher

20. The Difference Between A Worker’s Contribution To The Firm’s Receipts And The Wage Is
A. Monopsony Profit
B. Monopoly Profit
C. Cartel Profit
D. Economic Profit
E. Marginal Revenue Profit

21. Which Of The Following Releases Professional Athletes From Some Of The Monopsony Powers Of The Sports Leagues?
A. Player Drafts
B. Long-Term Contracts
C. Free Agency
D. Expanded Playing Seasons
E. Minimum Wage Laws

22. Why Does The Average Professional Baseball Player Earn More Than The Average Doctor?
A. The Baseball Player Has A Lower Mcl
B. The Doctor Has A Higher Mrp
C. The Baseball Player Has A Higher Mrp
D. There Are More Professional Baseball Players Than Doctors
E. The Demand For Baseball Is Higher Than The Demand For Medical Care

Questions 23 – 27 Refer To The Graph Below.

23. This Graph Represents The Labor Market For A(N)
A. Monopolist
B. Competitive Firm
C. Product Market Cartel
D. Monopsonist
E. Oligopoly

24. What Wage Will Maximize This Firm’s Economic Profit?
A. W1
B. W2
C. W3
D. W4
E. A Wage Above W4

25. How Many Workers Will This Firm Hire?
A. 0
B. L1
C. L2
D. L3
E. More Than L3

26. If This Labor Market Is Competitive, How Many Workers Will Be Hired?
A. 0
B. L1
C. L2
D. L3
E. More Than L3

27. If This Labor Market Is Competitive, What Wage Will Workers Be Paid?
A. W1
B. W2
C. W3
D. W4
E. A Wage Above W4

Questions 28 – 32 Refer To The Graph Below.

28. This Graph Represents The Labor Market For A(N)
A. Monopolist
B. Competitive Firm
C. Product Market Cartel
D. Monopsonist
E. Oligopoly

29. What Wage Will Maximize This Firm’s Economic Profit?
A. $500
B. $800
C. $1,000
D. Less Than $1,000 But Greater Than $0
E. $0

30. How Many Workers Will This Firm Hire?
A. 0
B. 10
C. 12
D. 15
E. More Than 15

31. If This Labor Market Is Competitive, How Many Workers Will Be Hired?
A. 0
B. 10
C. 12
D. 15
E. More Than 15

32. If This Labor Market Is Competitive, What Wage Will Workers Be Paid?
A. $0
B. $500
C. $800
D. $1,000
E. More Than $1,000

33. A Labor Union
A. Bargains On Behalf Of All Workers
B. Conducts Lock-Outs As A Bargaining Tool
C. Is Concerned With Salaries Rather Than Work Conditions
D. Does All Of The Above
E. Does None Of The Above

34. Which Of The Following Is A Work Stoppage Initiated By Workers?
A. Lockout
B. Strike
C. Mediation
D. Arbitration
E. Monopsony

35. Which Of The Following Is A Work Stoppage Initiated By Management?
A. Lockout
B. Strike
C. Mediation
D. Arbitration
E. Monopsony

36. One Way In Which Professional Sports Leagues Enforce The Monopsonistic Employment Of Players Is Through
A. Free Agency
B. Open Arbitration
C. League Expansion
D. Salary Caps
E. A Talent Agency

37. The Relatively High Salaries Paid To Professional Athletes Reflect
A. Their Contribution To Team Revenue
B. The Exploitation Of Fans
C. Their Contribution To Society’s General Well-Being
D. The Success Of Labor Union Representation
E. The Social Value Of Professional Sports

38. The Average Baseball Player Earns A Salary Greater Than The Average College Professor Because
A. Baseball Players Contribute More To Society’s General Well-Being
B. College Professors Contribute Less To Their Employer’s Revenues Than Baseball Players
C. Colleges Are Better Able To Enforce Their Monopsonistic Market Positions
D. The Market For Baseball Players Is More Competitive
E. Colleges Are Owned By The State

39. If A Worker Adds 20 Units To A Firm’s Total Output, The Output Is Sold For $2 Per Unit, And The Worker Is Paid $100, Then The Worker’s Marginal Revenue Product Is
A. 20
B. 40
C. 60
D. 100
E. 200

40. Which Of The Following Statements Is Not ?
A. Even Though The Essence Of Sports Is Competition, Professional Sports Clubs Cooperate With Each Other In The Marketplace
B. Professional Sports Leagues Are Economic Cartels
C. From An Economic Perspective, The Nfl, Nhl, Nba And Mlb Are Competitive Markets
D. Professional Sports Leagues Have Monopsony Power In The Resource Market
E. Owners Of Professional Sports Clubs Attempt To Maximize Their Joint Profits By Joining Leagues

41. Professional Baseball Enjoys An Exemption From ________ Laws That Make Cartels Illegal In Most Other Industries.
A. Minimum Wage
B. Antitrust
C. Common
D. Labor
E. Anti-Competition

42. A Cartel Is More Likely To Be Successful If
A. Cartel Members Produce Most Of The Output In The Market
B. Market Output Is Heterogeneous
C. Members Overlap In Their Control Of Market Territories
D. All Of The Above
E. None Of The Above

43. Which Of The Following Factors Is Not Necessary To Form A Successful Cartel?
A. Members Must Be Responsible For Most Of The Industry’s Output
B. Member Firms Should Produce Homogeneous Output
C. Members Must Be Located In Close Proximity To Each Other
D. The Cartel Must Be Able To Divide The Marketplace Between Member Firms
E. There Must Be A Mechanism To Prevent Cheating By Member Firms

44. Today, The Primary Source Of Revenue For Most Major League Clubs Is
A. Ticket Sales
B. Concession Sales
C. Merchandising
D. Broadcast Rights
E. Parking

45. To Maximize Joint Profits, A Cartel Will Produce Output Up To The Point Where
A. Mr = Mc
B. Tr = Tc
C. Mr = Tc
D. Tr = Mc
E. P = Mr

46. When A Professional Sports League Sells Broadcast Rights For The Entire League,
A. The Selling Price Will Be Higher Than The Price That Would Be Charged If Each Team Individually Sold Broadcast Rights
B. Fewer Games Will Be Broadcast Than Would Be If Each Team Individually Sold Broadcast Rights
C. Joint Profits Among All Teams In The League Can Be Maximized
D. (A) And (B)
E. All Of The Above

47. For A Cartel, The
A. Demand Curve Is Also The Marginal Revenue Curve
B. Marginal Revenue Curve Lies Above The Demand Curve
C. Marginal Revenue Curve Lies Below The Demand Curve
D. Marginal Cost Curve Lies Below The Demand Curve At All Points
E. Supply Curve Lies Above The Demand Curve At All Points

48. A Monopsony Exists Whenever There
A. Are Many Buyers In A Market
B. Is Only One Buyer In A Market
C. Is Only One Seller In A Market
D. Are Many Sellers In A Market
E. Are No Barriers To Enter Or Leave A Market

49. In The Resource Market, Professional Sports Clubs Must Face The
A. Upward Sloping Market Supply Of Labor Curve
B. Downward Sloping Market Supply Of Labor Curve
C. Horizontal Marginal Cost Of Labor Curve
D. Industry-Level Demand For Labor Curve
E. Upward Sloping Marginal Revenue Product Of Labor Curve

50. A Profit Maximizing Sports Club Will Hire Players Up To The Point Where The
A. Demand Of Labor Equals Marginal Revenue Product Of Labor
B. Supply Of Labor Equals The Marginal Cost Of Labor
C. Marginal Revenue Product Of Labor Equals The Marginal Cost Of Labor
D. Marginal Cost Of Labor Equals The Wage Rate
E. Wage Equals The Quantity Of Labor Available

51. In A Monopsony, The Difference Between The Marginal Revenue Product Of Labor And The Wage Rate Is Known As
A. Joint Profit
B. Monopsonistic Profit
C. Monopsonistic Cost
D. Cartel Profit
E. Competitive Returns

52. The Additional Revenue That A Player Generates For His Employing Team Is Called
A. Total Player Revenue
B. Marginal Revenue Product
C. Marginal Product
D. Marginal Revenue
E. Monopsonistic Revenue Product

53. Over The Past Twenty Years, Free Agency In Professional Sports Has
A. Increased The Monopsonistic Power Of Leagues And Caused Salaries To Stagnate
B. Reduced The Bargaining Power Of Players And Raised Owner Profits
C. Reduced The Monopsonistic Power Of Leagues And Caused Salaries To Rise
D. Improved The Economic Position Of Owners By Increasing The Competition For Good Players
E. Had Little Effect On The Sports Industry

54. Which Of The Following Statements Is ?
A. From An Economic Perspective, Most Professional Athletes Do Not Earn Their Pay
B. Salaries In Any Industry Reflect Labor’s Contribution To The Overall Health And Well-Being Of Society
C. Professional Sports Clubs Operate In Highly Competitive Product And Resource Markets
D. The Cartel Behavior Of Professional Sports Leagues Keeps Ticket Prices Low
E. The Salary Of A Professional Athlete Reflects His Contribution To His Employing Club’s Revenue

55. From An Economic Perspective, Which Of The Following Is The Best Reason For A City To Attract A Professional Sports Team?
A. A Professional Sports Team Generates Publicity And Creates Public Relations Opportunities For Businesses Located In The City
B. A Professional Sports Team Generates A Significant Number Of New Jobs For The Community
C. Professional Sports Teams Pay Large Sums Of Money In City Taxes
D. A New Team Will Increase The Demand For Other Entertainment Related Activities Within The Local Community
E. Sports Enhance The Tax Base Of Large Cities By Generating Significant Numbers Of New Professional Jobs

56. Which Of The Following Statements Is ?
A. Even Though Professional Athletes May Earn Millions Of Dollars Each Year, It Is Possible For Them To Be Exploited By Their Employers
B. From An Economic Perspective, Professional Athletes Do Not Earn Their Pay
C. The Economic Impact Of A Professional Sports Team On Their Home Community Is Relatively Small
D. Free Agency Has Caused The Salaries Of Professional Athletes To Rise Over Time
E. By Limiting Expansion, Professional Sports Leagues Ensure Greater Profits For The Existing Teams

57. A Monopsony Will Continue To Hire Workers Up To The Point Where The
A. Marginal Cost Of Labor Is Equal To Total Revenue
B. Total Cost Of Labor Is Equal To The Marginal Revenue Product Of Labor
C. Marginal Cost Of Labor Is Equal To The Marginal Revenue Product Of Labor
D. Marginal Profit Of Production Equals The Total Cost Of Production
E. Marginal Revenue Product Of Labor Is Maximized

58. Which Of The Following Factors Helps Professional Sports Teams To Exercise Monopsony Power Over The Players That They Hire?
A. Player Drafts
B. Exclusive Contracts That Limit Free Agency
C. The Specialized Skills Of Players
D. All Of The Above
E. None Of The Above

59. Which Of The Following Factors Reduces The Monopsony Power Of Professional Sports Teams In The Employment Of Players?
A. Player Drafts
B. The Reserve Clause
C. The Long-Term Employment Contracts
D. Cartel Agreements Between Teams
E. Free Agency

60. A Professional Sports League Can Maximize The Revenue It Generates From Selling Broadcast Rights By Playing Enough Games Such That
A. Demand Equals Supply
B. Total Revenue Equals Total Costs
C. Marginal Revenue Equals Marginal Costs
D. Marginal Revenue Equals Total Costs
E. Total Revenue Equals Marginal Costs

61. If A Cartel Discovers That Its Marginal Revenue Is Greater Than Its Marginal Cost Of Production, The Cartel Should
A. Increase Production
B. Shut Down
C. Reduce Production
D. Hire Fewer Workers
E. Increase The Number Of Cartel Members

62. If A Cartel Discovers That Its Marginal Cost Is Greater Than Marginal Revenue, The Cartel Should
A. Increase Production
B. Shut Down
C. Reduce Production
D. Hire Fewer Workers
E. Increase The Number Of Cartel Members

63. Teams That Belong To Professional Sports Leagues Are
A. Cartel Members
B. In Business To Make A Profit
C. Monopsony Employers
D. All Of The Above
E. None Of The Above

64. Approximately What Percent Of Funding For Stadium Construction And Renovation Has Come From Public Sources In Recent Years?
A. 1
B. About 10
C. Less Than 20
D. Over 50
E. Nearly 100

65. According To Economist Andrew Zimbalist, The Jacksonville Jaguars Expansion Football Team Has An Economic Impact On The Local Area Comparable To A
A. New Department Store
B. Major Hurricane
C. Large Military Installation
D. State University
E. City Park

66. The Primary Benefits Of A Professional Sports Team Are
A. Massive Economic Development
B. Privately Funded
C. Salaries And Wages
D. Intangible
E. All Of The Above

67. When Professional Sports Leagues Seek To Achieve Parity, They Are Seeking
A. Fair Wages
B. Competitive Balance
C. Teams With An Athletic Advantage
D. Equal Marginal Revenue Product Across Teams
E. Homogeneous Views On League Policies

68. Which Of The Following Contributes To Monopsony Power In Professional Sports?
A. Player Mobility
B. Free Agency
C. Player Drafts
D. All Of The Above
E. None Of The Above

69. Which Of The Following Is The Best Economic Reason For Taxpayers To Support The Development Of Facilities For Professional Sports Teams?
A. The Intangible Spillover Benefits Of The Team, Such As Civic Pride
B. The Number Of Jobs That Will Be Created By The Team
C. The Economic Impact On The City Due To Ticket Sales
D. The New Taxes That Will Be Paid By The Players And Coaches
E. The Tourists That Will Visit Town While Attending Home Games

70. When Does A Firm Experience Monopsony Profits?
A. Only When The Marginal Cost Of Labor Is Greater Than The Marginal Revenue Product Of Labor
B. When The Total Revenue Exceeds The Marginal Cost Of Production
C. Only When The Marginal Revenue Product Of Labor Exceeds The Marginal Cost Of Labor
D. Only When The Firm Is A Member Of A Cartel
E. When The Firm Is A Monopoly In Its Product Market

True / False Questions

71. Professional Sports Clubs Are Businesses Operated For Profit.

72. Professional Sports Leagues, Like The Nfl, Were Formed By Teams In An Effort To Earn Greater Profits And To Ensure Survival.

73. All Professional Sports Clubs Must Operate Independently To Guarantee A Competitive Economic Environment.

74. Unlike Other Workers, It Is Difficult To Measure The Productivity Of A Professional Athlete.

75. When A Player Is Drafted By A Team, That Team Acquires The “Property Rights” To The Player’s Employment Contract.

76. In Football, New Players Can Sell Their Services To The Highest Bidding Nfl Team.

77. Tickets And Broadcast Rights To Baseball Games Are Bought And Sold In The Product Market.

78. A Cartel Exists When Firms Coordinate Their Actions In A Manner To Maximize Joint Profits.

79. Antitrust Laws Make Most Cartels Legal Forms Of Business In The United States.

80. The National Basketball Association Is A Cartel.

81. A Cartel Is A “Shared Monopoly.”

82. Prices And Output Are Greater With A Cartel Than Under Competition.

83. Profits Are More Equally Distributed In A Competitive Industry Than In An Industry Dominated By A Cartel.

84. Professional Sports Leagues Do Not Regulate The Employment Of Players By Member Teams.

85. A Monopsony Is A Single Buyer In A Resource Market.

86. The Immobility Of Players Between Teams And The Athletes’ Highly Specialized Skills Generate Monopsony Power For Professional Sports Clubs.

87. The Marginal Cost Of Labor Curve (Mcl) Represents The Change In A Firm’s Total Labor Cost Due To Selling An Additional Unit Of Output.

88. If A Player’s Mrp> Mcl, The Player Should Be Hired By The Team.

89. The Mcl Curve Lies Above The Supply Of Labor Curve And Is More Steeply Sloped.

90. A Monopsony Must Face The Market Supply Of Labor Schedule Because It Is The Only Employer In The Market.

91. A Firm Can Maximize Its Economic Position By Hiring Workers Up To The Point Where Mcl = Mrp.

92. A Monopoly Must Face The Market Supply Of Labor Schedule Because It Is The Only Employer In The Market.

93. Monopsony Profit Is The Difference Between A Worker’s Mrp And The Mcl.

94. Economic Analysis Suggests That A Free Agent Baseball Player Will Earn Less Than An Equally Talented Player Who Is Not A Free Agent.

95. Professional Athletes Do Not Earn Their Pay From An Economic Perspective.

96. A Strike Is A Work Stoppage Initiated By Management.

97. A Labor Union Bargains On Behalf Of Workers For Better Wages And Working Conditions.

98. Salary Caps Enforce Monopsonistic Employment Of Players Across Teams In A Professional Sports League.

99. A Recently Drafted Player Will Most Likely Command A Higher Salary Than A Free Agent.

100. Labor Disputes Are Rare In Professional Sports And Are Likely To Become Even Less Common.

101. Most Economists Argue That Professional Sports Teams Should Be Used As An Economic Development Tool For Local Communities.

102. The Public Relations Benefit Of A City’s Professional Sports Team Is Generally More Valuable Than The Number Of Jobs It Creates.

103. The Economic Impact Of A New Professional Sports Team On A City Is About The Same As A New Department Store.

104. Most New Stadiums And Arenas For Professional Sports Teams Are Privately Built, Without Support From Local Taxpayers.

105. Professional Sports Teams Tend To Relocate When There Is A Surplus Of Teams In Their League.

106. The Shortage Of Teams In Professional Sports Is The Primary Reason That Teams Relocate.

107. Economic Factors Cannot Explain Why Teams Relocate Between Cities.

108. As It Becomes Easier For Professional Football Players To Become Free Agents, Nfl Salaries Are Likely To Increase Over Time.

109. The Economic Factors That Cause Professional Sports Leagues To Expand Also Cause Some Existing Teams To Relocate.

110. The “Civic Pride” Enjoyed By A Major League City Has No Economic Value.

111. Free Agency Increases The Monopsony Power That Professional Sports Teams Exert Over The Players That They Hire.

112. If A Cartel’s Marginal Revenue Is Greater Than Its Marginal Cost, It Should Produce More.

113. By Belonging To A Cartel, A Firm Can Guarantee That Its Individual Profit Will Be Greater Than If It Engaged In Competition.

114. The Reserve Clause Helped To Raise The Salaries Of Professional Baseball Players.

115. For A Cartel, Joint Profit Is Maximized Where Marginal Revenue Equals Marginal Costs.

116. Professional Sports Leagues Are Both Cartels And Monopsonies.

117. College Athletes Who Enter The Major Leagues Are Always Hired By The Team That Is Willing To Pay The Highest Salary.

118. A Work Stoppage Initiated By Management Is Called A Lock-Out.

119. By Adding New Teams, Professional Sports Leagues Guarantee That Existing Member Teams Earn Greater Profits.

120. From An Economic Perspective, All Professional Athletes Are Overpaid.