EC 200
Practice problems for MT3
MONOPOLY
Practice Problems
1. True, false or uncertain? Explain your answer.
a. A decrease in the firm’s fixed cost will change its profits, but will not influence the firm’s
decision about how much good to produce.
b. When the fixed cost of a firm increases, the best thing the firm can do is to increase its price in
order to compensate for the cost increase.
2. If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
a) earn greater profits than if MR = MC.
b) increase output.
c) decrease output.
d) shut down.
3. Suppose you have found out that the good your firm produces and sells has unit price elasticity
of demand in a wide range of prices. Given that, can you increase your profits by changing the
price of this good? If yes, explain carefully what that change should be. If not, explain why it is
not possible.
4. Two tables below contain information about the total cost of the firm and the demand it is
facing.
Cost Data
Demand Data
Output
Total Cost, $
Price, $
100
200
300
400
500
1500
1550
1650
1800
2250
6
5.50
5
4.50
4
Quantity
demanded
100
200
300
400
500
a. Can you tell whether this firm operates in a perfectly competitive industry? Explain your
answer.
b. Create and fill marginal revenue and marginal cost columns.
c. Find the output quantity that is optimal for the firm.
d. State the size of economic profit the firm earns at this quantity of output.
e. Can you tell whether the firm earns accounting profit? Explain.
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