Chapter 9
Monopoly
1. The monopolist faces
a. a perfectly inelastic demand curve.
b. a perfectly elastic demand curve.
c. the entire market demand curve.
d. all of the answers above are correct.
ANS
a. Incorrect. This is an extreme theoretical demand curve.
b. Incorrect. This is the demand curve for perfect competition.
c. Correct. The monopolist faces, with elastic, unit elastic, and inelastic segments.
d. Incorrect. Only answer c. is correct.
2. To maximize its profit, a monopoly should choose a price where demand is
a. elastic.
b. inelastic.
c. unitary elastic.
d. vertical.
ANS
a. Correct. To maximize its profit, a monopoly should choose a price where demand is
elastic.
b. Incorrect. To maximize its profit, a monopoly should choose a price where demand is
elastic.
c. Incorrect. To maximize its profit, a monopoly should choose a price where demand is
elastic.
d. Incorrect. To maximize its profit, a monopoly should choose a price where demand is
elastic.
3. When marginal revenue is zero for a monopolist facing a downward-sloping straight-line
demand curve, the price elasticity of demand is
a. greater than 1.
b. equal to 1.
c. less than 2.
d. equal to 0.
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ANS
a. Incorrect. The marginal revenue curve intersects the quantity line where the demand
curve is unit elastic, and price elasticity of demand is equal to 1.
b. Correct. When marginal revenue is zero for a monopolist facing a downward-sloping
straight-line demand curve, the price elasticity of demand is greater than 1.
c. Incorrect. The marginal revenue curve intersects the quantity line where the demand
curve is unit elastic, and price elasticity of demand is equal to 1.
d. Incorrect. The marginal revenue curve intersects the quantity line where the demand
curve is unit elastic, and price elasticity of demand is equal to 1.
4. Both a perfectly competitive firm and a monopolist
a. always earn an economic profit.
b. maximize profit by setting marginal cost equal to marginal revenue.
c. maximize profit by setting marginal cost equal to average total cost.
d. are price takers.
ANS
a. Incorrect. A perfectly competitive firm earns zero economic profit in the long run.
b. Correct. Both a perfectly competitive firm and a monopolist maximize profit by setting
marginal cost equal to marginal revenue.
c. Incorrect. Both market structures maximize profit by setting MR>MC.
d. Incorrect. A monopolist is a price maker not a price taker.
5. Suppose a monopolist's demand curve lies below its average variable cost curve. The firm
will
a. stay in operation in the short run.
b. earn an economic profit.
c. earn an economic profit in the long run.
d. shut down.
ANS
a. Incorrect. The monopolist shuts down because any price along the demand curve will
not cover the average variable cost of producing a good.
b. Incorrect. The monopolist shuts down because any price along the demand curve will
not cover the average variable cost of producing a good.
c. Incorrect. The monopolist shuts down because any price along the demand curve will
not cover the average variable cost of producing a good.
d. Correct. The monopolist shuts down because any price along the demand curve will
not cover the average variable cost of producing a good.
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6. Which of the following statements best describes the price, output, and profit conditions
of monopoly?
a. Price will equal marginal cost at the profit-maximizing level of output and
profits will be positive in the long-run.
b. Price will always equal average variable cost in the short-run and either
profits or losses may result in the long run.
c. In the long-run, positive economic profit will be earned.
d. All of the answers above are correct.
ANS
a. Incorrect. At the profit-maximizing or loss minimizing level of output, MR = MC
which corresponds to price on the demand curve.
b. Incorrect. At the profit-maximizing or loss minimizing level of output, MR = MC
which corresponds to price on the demand curve.
c. Correct. A monopolist always earns positive economic profit in the long run.
d. Incorrect. Answer c. is correct.
7. Which of the following is true for the monopolist?
a. Marginal revenue is less than the price charged.
b. Economic profit is possible in the long run.
c. Profit maximizing or loss minimizing occurs when marginal revenue equals marginal
cost.
d. All of the answers above are correct.
ANS
a. Incorrect. All of the answers are correct.
b. Incorrect. All of the answers are correct.
c. Incorrect. All of the answers are correct.
d. Correct. All of the answers are correct.
8. Although a monopoly can charge any price it wishes, it chooses
a. the highest price.
b. price equal to marginal cost.
c. the price that maximizes profit.
d. competitive prices.
e. a fair price.
ANS
a. Incorrect. The monopolist sets the price that corresponds to the output where MR =
MC, which does not correspond to the highest price, MC, or a fair price.
b. Incorrect. The monopolist sets the price that corresponds to the output where MR =
MC, which does not correspond to the highest price, MC, or a fair price.
c. Correct. The monopolist sets the price that corresponds to the output where MR = MC,
which does not correspond to the highest price, MC, or a fair price.
d. Incorrect. The monopolist sets the price that corresponds to the output where MR =
MC, which does not correspond to the highest price, MC, or a fair price.
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Exhibit 11 Profit maximizing for a monopolist
P5
MC
E
D
P4
P
P
Price
3
and
costs per 2
unit
(dollars)
1
P
ATC
C
D
B
A
MR
0
Q1
Q2 Q3
Quantity of output
(units per day)
9. As shown in Exhibit 11, the profit-maximizing price for the monopolist is
a. OP1.
b. OP2.
c. OP3.
d. OP4.
e. OP5.
ANS
a. Incorrect. OP1 does not equal the point on the demand curve where MR = MC.
b. Incorrect. OP2 does not equal the point on the demand curve where MR = MC.
c. Incorrect. OP3 does not equal the point on the demand curve where MR = MC.
d. Correct. At OP4 on the demand curve, MR = MC at point B.
10. As shown in Exhibit 11, if the monopolist produces the profit-maximizing output,
total revenue is the rectangular area
a. OQ1AP1.
b. OQ2BP2.
c. OQ3CP3.
d. OQ2DP4.
ANS
a. Incorrect. Total revenue must be a rectangle formed from a point on the demand curve.
b. Incorrect. Total revenue must be a rectangle formed from a point on the demand curve.
c. Incorrect. Total revenue must be a rectangle formed from a point on the demand curve.
d. Correct. Total revenue at price OP4 is OQ2DP4.
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11. As shown in Exhibit 11, the monopolist's total cost is which of the following areas?
a. P1AEP5.
b. P2BDP4.
c. P3CDP5.
d. P4DEP5.
e. None of the answers above are correct.
ANS
a. Incorrect. This is a meaningless area.
b. Incorrect. This is a meaningless area.
c. Incorrect. This is a meaningless area.
d. Incorrect. This is a meaningless area.
e. Correct. Total cost points are not shown in the graph.
12. The profit-maximizing output for the monopolist in Exhibit 11 is
a. zero.
b. OQ1.
c. OQ2
d. OQ3.
ANS
a. Incorrect. This output does not correspond to point B where MR = MC.
b. Incorrect. This output does not correspond to point B where MR = MC.
c. Correct. OQ2 corresponds to point B where MR = MC.
d. Incorrect. This output does not correspond to point B where MR = MC.
13. As shown in Exhibit 11, if the monopolist produces the profit-maximizing output,
total revenue is the rectangular area
a. OQAP1.
b. OQ2BP2.
c. OQ3CP3.
d. OQ2DP4.
ANS
a. Incorrect. This is a meaningless area.
b. Incorrect. This area is profit at OQ2.
c. Incorrect. This is not total cost at the profit-making output of OQ2.
d. Correct. At OQ2, total revenue is OQ2DP4.
14. As shown in Exhibit 11, the monopolist's profit maximizing price-quantity point is
a. A.
b. B.
c. C.
d. D.
e. E.
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ANS
a. Incorrect. This is not a point on the demand curve.
b. Incorrect. This is not a point on the demand curve.
c. Incorrect. This is not a point on the demand curve.
d. Correct. Point D on the demand curve corresponds to point B where MR = MC.
e. Incorrect. Point E on the demand curve does not correspond to point B where MR =
MC.
15. Suppose a monopolist charges a price corresponding to the intersection of marginal
cost and marginal revenue. If the price is between its average variable cost and average
total cost curves, the firm will
a. earn an economic profit.
b. stay in operation in the short run, but shut down in the long run if demand
remains the same.
c. shut down.
d. none of the above answers is correct.
ANS
a. Incorrect. The monopolist’s price must exceed its average variable cost to earn an
economic profit.
b. Correct. Unless the monopolist’s price exceeds its average total cost it will not earn a
positive economic profit.
c. Incorrect. The monopolist will shut down if the price at MR = MC is less than its
average variable cost.
d. Incorrect. Answer b. is correct.
16. The act of buying a commodity in one market at a lower price and selling it in another
market at a higher price is known as
a. buying long.
b. selling short.
c. a tariff.
d. arbitrage.
ANS
a. Incorrect. This answer is meaningless.
b. Incorrect. This term refers to a stock transaction.
c. Incorrect. This term refers to a tax on imports.
d. Correct. The act of buying a commodity in one market at a lower price and selling it in
another market at a higher price is known as arbitrage.
17. One necessary condition for effective price discrimination is
a. identical tastes among buyers.
b. difference in the price elasticity of demand among buyers.
c. a single, homogeneous market.
d. two or more markets with easy resale of products between them.
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ANS
a. Incorrect. This is not a necessary condition for price discrimination.
b. Correct. One necessary condition for effective price discrimination is
difference in the price elasticity of demand among buyers.
c. Incorrect. This is not a necessary condition for price discrimination.
d. Incorrect. Easy resale of products would prevent price discrimination.
18. An example of price discrimination is the price charged for
a. an economics textbook at a campus bookstore.
b. gasoline.
c. theater tickets that offer lower prices for children.
d. a postage stamp.
ANS
a. Incorrect. Different prices are not charged for the same textbooks.
b. Incorrect. Different prices are not charged for the same type of gasoline.
c. Correct. Both children and adults see the same movie, but pay different prices.
d. Incorrect. Different prices are not charged for the same postage stamp.
19. Suppose a monopolist and a perfectly competitive firm have the same cost curves.
The monopolistic firm would
a. charge a lower price than the perfectly competitive firm.
b. charge a higher price than the perfectly competitive firm.
c. charge the same price as the perfectly competitive firm.
d. refuse to operate in the short run unless an economic profit could be made.
ANS
a. Incorrect. Since the monopolist faces a demand curve with greater elasticity, it will
charge the higher prices.
b. Correct. Since the monopolist faces a demand curve with greater elasticity, it will
charge the higher prices.
c. Incorrect. Since the monopolist faces a demand curve with greater elasticity, it will
charge the higher prices.
d. Incorrect. Both firms will not shut down if the price where MR = MC exceeds average
variable cost.
20. Suppose there are two markets for football games(1) rich alumni fully as committed
as the lower-income students to their alma mater and (2) students. Based on this
information, which market will have the lower price elasticity of demand and pay the
higher price if the university price discriminates?
a. The student market.
b. The alumni markets.
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ANS
a. Incorrect. Tickets are a bigger part of their budget, and so their elasticity will tend to be
higher.
b. Correct. Tickets are a smaller part of alumni budgets, and so their elasticity will tend to
be lower.
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