Chapter 15 Monopoly

MULTIPLE CHOICE

1. Which of the following statements is correct?

a. Both a competitive firm and a monopolist are price takers.
b. Both a competitive firm and a monopolist are price makers.
c. A competitive firm is a price taker, whereas a monopolist is a price maker.
d. A competitive firm is a price maker, whereas a monopolist is a price taker.

1
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2 ❖ Chapter 15/Monopoly

2. One difference between a perfectly competitive firm and a monopoly is that a perfectly competitive
firm produces where
a. marginal cost equals price, while a monopolist produces where price exceeds marginal cost.
b. marginal cost equals price, while a monopolist produces where marginal cost exceeds price.
c. price exceeds marginal cost, while a monopolist produces where marginal cost equals price.
d. marginal cost exceeds price, while a monopolist produces where marginal cost equals price.

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 Chapter 15/Monopoly ❖ 3

3. A monopoly
a. can set the price it charges for its output and earn unlimited profits.
b. takes the market price as given and earns small but positive profits.
c. can set the price it charges for its output but faces a downward-sloping demand curve so it cannot
earn unlimited profits.
d. can set the price it charges for its output but faces a horizontal demand curve so it can earn
unlimited profits.

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4 ❖ Chapter 15/Monopoly

4. A perfectly competitive market

a. may not be in the best interests of society, whereas a monopoly market promotes general economic
well-being
b. promotes general economic well-being, whereas a monopoly market may not be in the best interests
of society.
c. and a monopoly market are equally likely to promote general economic well-being.
d. is less likely to promote general economic well-being than a monopoly market.

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 Chapter 15/Monopoly ❖ 5

5. Because monopoly firms do not have to compete with other firms, the outcome in a market with a
monopoly is often
a. not in the best interest of society.
b. one that fails to maximize total economic well-being.
c. inefficient.
d. All of the above are correct.

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6 ❖ Chapter 15/Monopoly

6. Because a monopolist does not face competition from other firms, the outcome in a market with a
monopoly
a. does not illustrate profit maximization.
b. is often not in the best interest of society.
c. is characterized by unlimited profits.
d. would be improved if the government produced the product rather than a private firm.

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 Chapter 15/Monopoly ❖ 7

7. Microsoft faces very little competition from other firms for its Windows software. Why isn’t the
price of the software $1,000 per copy?
a. because the government would not allow such a high price
b. because stockholders would not allow such a high price
c. because the company would sell so few copies that they would earn higher profits by selling at a
lower price
d. All of the above are correct.

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8 ❖ Chapter 15/Monopoly

8. The DeBeers company faces very little competition from other firms in the wholesale diamond mar-
ket. Why isn’t the price of the wholesale diamonds $10,000 per carat?
a. because the government would not allow such a high price
b. because stockholders would not allow such a high price
c. because the company would sell so few copies that they would earn higher profits by selling at a
lower price
d. All of the above are correct.
WHY MONOPOLIES ARISE

1. Which of the following is not a characteristic of a monopoly?

a. barriers to entry
b. one seller
c. one buyer
d. a product without close substitutes

2. Which of the following is a characteristic of a monopoly?

a. low fixed costs as a portion of total costs
b. free entry and exit
c. barriers to entry
d. declining marginal cost

3. The fundamental source of monopoly power is

a. barriers to entry.
b. profit.
c. decreasing average total cost.
d. a product without close substitutes.

4. A monopoly market is characterized by

a. many buyers and sellers.
b. “natural” products.
c. barriers to entry.
d. a Nash equilibrium.

5. A benefit of a monopoly is
a. lower prices.
b. a wide variety of similar products.
c. decreasing long-run average total costs.
d. greater creativity by authors who can copyright their novels.

6. A benefit of a monopoly is
a. efficient production.
b. decreasing long-run marginal costs.
c. profit that can be invested in research and development.
d. All of the above are correct.

7. Which of the following are necessary characteristics of a monopoly?

(i) The firm is the sole seller of its product.
(ii) The firm's product does not have close substitutes.
(iii) The firm generates a large economic profit.
(iv) The firm is located in a small geographic market.
a. (i) and (ii) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv)

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 Chapter 15/Monopoly ❖ 9

8. The simplest way for a monopoly to arise is for a single firm to

a. decrease its price below its competitors’ prices.
b. decrease production to increase demand for its product.
c. make pricing decisions jointly with other firms.
d. own a key resource.

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10 ❖ Chapter 15/Monopoly

9. Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds. Then
DeBeers, a large diamond company, has
a. less incentive to advertise than it would otherwise have.
b. less market power than it would otherwise have.
c. more control over the price of diamonds than it would otherwise have.
d. higher profits than it would otherwise have.

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 Chapter 15/Monopoly ❖ 11

10. Which of the following is not a reason for the existence of a monopoly?
a. sole ownership of a key resource
b. patents
c. copyrights
d. diseconomies of scale

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12 ❖ Chapter 15/Monopoly

11. Which of the following would be most likely to have monopoly power?
a. a long-distance telephone service provider
b. a local cable TV provider
c. a large department store
d. a gas station

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 Chapter 15/Monopoly ❖ 13

12. Which of the following would be most likely to have monopoly power?
a. a national florist
b. an online bookstore
c. a local restaurant
d. a local electrical cooperative

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14 ❖ Chapter 15/Monopoly

13. A firm that is the sole seller of a product without close substitutes is
a. perfectly competitive.
b. monopolistically competitive.
c. an oligopolist.
d. a monopolist.

14. Most markets are not monopolies in the real world because
a. firms usually face downward-sloping demand curves.
b. supply curves slope upward.
c. firms usually equate price with marginal cost.
d. there are reasonable substitutes for most goods.

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 Chapter 15/Monopoly ❖ 15

15. Which of the following statements is not correct?

a. Consumers will likely benefit in the form of lower prices from buying a product made by a natural
monopoly than if the market were served by several firms.
b. Monopolists typically charge higher prices than competitive firms.
c. Monopolists typically produce larger quantities of output than competitive firms.
d. Consumers may benefit from monopolies if the firms invest their higher profits into something that
benefits society such as medical research.

16. Which of the following is not an example of a barrier to entry?

a. Mighty Mitch’s Mining Company owns a unique plot of land in Tanzania, under which lies the
only large deposit of Tanzanite in the world.
b. A pharmaceutical company obtains a patent for a specific high blood pressure medication.
c. A musician obtains a copyright for her original song.
d. An entrepreneur opens a popular new restaurant.

17. Which of the following is not an example of a barrier to entry?

a. Mighty Mitch’s Mining Company owns a unique plot of land in Tanzania, under which lies the
only large deposit of Tanzanite in the world.
b. A college student starts a part-time tutoring business.
c. A novelist obtains a copyright for her new book.
d. A taxi cab driver in New York City obtains a license to legally provide transportation in New York
City.

18. Which of the following is not an example of a barrier to entry?

a. A soybean farmer is the first in her county to use a new brand of fertilizer.
b. Microsoft obtains a copyright for its Windows operating system.
c. A pharmaceutical company obtains a patent for a new medication to treat migraine headaches.
d. A taxi cab driver in New York City obtains a license to legally provide transportation in New York
City.

19. Which of the following is an example of a barrier to entry?

a. Tom charges a higher price than his competitors for his house-painting services.
b. Dick obtains a copyright for the new computer game that he invented.
c. Harry offers free concerts on Sunday afternoons as a form of advertising.
d. Larry charges a lower price than his competitors for his lawn-mowing services.

20. Which of the following is an example of a barrier to entry?

a. Dawn charges a higher price than her competitors for her landscape-architecture services.
b. Rhianna obtains a copyright for a short story that she wrote and published.
c. Debbie offers free samples of her chocolate chip cookies to attract new customers.
d. Bev charges a lower price than her competitors for her desktop-publishing services.

21. Which of the following is an example of a barrier to entry?

a. Matthew offers free samples of his latest flavored coffee drink to entice customers to buy a cup.
b. Mark charges a lower price to students than to faculty for his tattoo services.
c. Luke charges a higher hourly price to business students than to liberal arts students for his
economics tutoring.
d. John obtained a copyright for the song he wrote and recorded.

22. Which of the following is an example of a barrier to entry?

(i) A key resource is owned by a single firm.
(ii) The costs of production make a single producer more efficient than a large number of
producers.
(iii) The government has given the existing monopolist the exclusive right to produce the good.
a. (i) and (ii) only

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16 ❖ Chapter 15/Monopoly

b. (ii) and (iii) only

c. (i) only
d. (i), (ii), and (iii)

23. A fundamental source of monopoly market power arises from

a. perfectly elastic demand.
b. perfectly inelastic demand.
c. barriers to entry.
d. availability of "free" natural resources, such as water or air.

24. The fundamental cause of monopoly is

a. incompetent management in competitive firms.
b. the zero-profit feature of long-run equilibrium in competitive markets.
c. advertising.
d. barriers to entry.

25. Sizable economic profits can persist over time under monopoly if the monopolist
a. produces that output where average total cost is at a maximum.
b. is protected by barriers to entry.
c. operates as a price taker rather than a price maker.
d. earns revenues that exceed variable costs.

26. Which of the following is not an example of a barrier to entry?

a. Al owns the only parcel of lakeside property with a beach that is safe for swimming. He charges
admission to neighbors who want to use the beach.
b. Meredith owns the copyright to a popular song. She receives royalties every time a radio station
plays her song.
c. Matt sells computers to his state government for use in their legislative sessions. He has sold
computers for ten years.
d. Anne owns the patent for a new running shoe. She receives payments from the company who
manufactures the shoes.

27. Patents, copyrights, and trademarks

a. are examples of government-created monopolies.
b. are examples of barriers to entry.
c. allow their owners to charge higher prices.
d. All of the above are correct.

28. Patent and copyright laws are major sources of

a. natural monopolies.
b. government-created monopolies.
c. resource monopolies.
d. antitrust regulation.

29. Encouraging firms to invest in research and development and individuals to engage in creative en-
deavors such as writing novels is one justification for
a. resource monopolies.
b. natural monopolies.
c. government-created monopolies.
d. breaking up monopolies into smaller firms.

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 Chapter 15/Monopoly ❖ 17

30. A government-created monopoly arises when

a. government spending in a certain industry gives rise to monopoly power.
b. the government exercises its market control by encouraging competition among sellers.
c. the government gives a firm the exclusive right to sell some good or service.
d. Both a and c are correct.

31. Which of the following statements is true about patents and copyrights?
(i) They have benefits and costs.
(ii) They lead to higher prices.
(iii) They enhance the ability of monopolists to earn above-average profits.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (ii) only
d. (i), (ii), and (iii)

32. The laws governing patents and copyrights

a. promote monopolies.
b. are intended to serve private interests, not the public’s interest.
c. have costs but not benefits.
d. eliminate the need for firms to engage in research and development.

33. A benefit to society of the patent and copyright laws is that those laws
a. help to keep prices down.
b. help to prevent a single firm from acquiring ownership of a key resource.
c. encourage creative activity.
d. discourage the production of inefficient products.

34. Patent and copyright laws encourage

a. creative activity.
b. research and development.
c. competition among firms.
d. Both a and b are correct.

35. Patent and copyright laws encourage

a. creative activity.
b. lower prices due to decreasing average total costs.
c. competition among firms.
d. All of the above are correct.

36. Allowing an inventor to have the exclusive rights to market her new invention will lead to
(i) a product that is priced higher than it would be without the exclusive rights.
(ii) desirable behavior in the sense that inventors are encouraged to invent.
(iii) higher profits for the inventor.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)

37. Granting a pharmaceutical company a patent for a new medicine will lead to
(i) a product that is priced higher than it would be without the exclusive rights.
(ii) incentives for pharmaceutical companies to invest in research and development.
(iii) higher quantities of output than without the patent.
a. (i) and (ii) only
b. (ii) and (iii) only

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18 ❖ Chapter 15/Monopoly

c. (i) and (iii) only

d. (i), (ii), and (iii)

38. Drug companies are allowed to be monopolists in the drugs they discover in order to
a. allow drug companies to charge a price that is equal to their marginal cost.
b. discourage new firms from entering the drug market.
c. encourage research.
d. allow the government to earn patent revenue.

39. Authors are allowed to be monopolists in the sale of their books in order to
a. encourage authors to write more and better books.
b. correct for the negative externalities that the Internet and television impose.
c. satisfy literary advocacy groups that exercise their lobbying power.
d. promote a society in which people think for themselves and learn from whichever books they
please.
Figure 15-1
Costs

ATC

Quantity

40. Refer to Figure 15-1. The shape of the average total cost curve reveals information about the nature
of the barrier to entry that might exist in a monopoly market. Which of the following monopoly
types best coincides with the figure?
a. ownership of a key resource by a single firm
b. natural monopoly
c. government-created monopoly
d. a patent or copyright monopoly

41. Refer to Figure 15-1. The shape of the average total cost curve in the figure suggests an opportunity
for a profit-maximizing monopolist to take advantage of
a. economies of scale.
b. diseconomies of scale.
c. diminishing marginal product.
d. increasing marginal cost.

42. Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the
marginal cost curve for this firm
a. must lie entirely above the average total cost curve.
b. must lie entirely below the average total cost curve.
c. must be upward sloping.
d. does not exist.

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 Chapter 15/Monopoly ❖ 19

43. Refer to Figure 15-1. Considering the relationship between average total cost and marginal cost, the
marginal cost curve for this firm must
a. lie entirely above the average total cost curve.
b. lie entirely below the average total cost curve.
c. be U-shaped.
d. be horizontal.
Scenario 15-1
Consider a transportation corporation named C.R. Evans that has just completed the development of a new
subway system in a medium-sized town in the Northwest. Currently, there are plenty of seats on the subway,
and it is never crowded. Its capacity far exceeds the needs of the city. After just a few years of operation, the
shareholders of C.R. Evans experienced incredible rates of return on their investment due to the profitability of
the corporation.
44. Refer to Scenario 15-1. Which of the following statements is most likely to be true?
(i) New entrants to the market know they will have a smaller market share than C.R. Evans
currently has.
(ii) C.R. Evans is most likely experiencing increasing average total cost.
(iii) C.R. Evans is a natural monopoly.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)
45. Refer to Scenario 15-1. Which of the following statements is most likely to be true?
(i) New entrants to the market know they will have a smaller market share than C.R. Evans
currently has.
(ii) C.R. Evans is most likely experiencing decreasing average total cost.
(iii) C.R. Evans is a natural monopoly.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)
Scenario 15-2
Consider a local, privately-owned electrical cooperative named Minny County Megawatts (MCM, LLC).
MCM has just completed a natural-gas-burning electrical power plant in the Midwest. Currently, MCM can
meet the electricity needs of all residents in the county. In fact, its capacity far exceeds the needs of the
county. After just a few years of operation, the shareholders of MCM experienced incredible rates of return on
their investment due to the profitability of the corporation.
46. Refer to Scenario 15-2. Which of the following statements is most likely to be true?
(i) New entrants to the market know they will have a smaller market share than MCM currently
has.
(ii) MCM is most likely experiencing rising marginal cost.
(iii) MCM is most likely experiencing declining average total cost.
(iv) MCM is a natural monopoly.
a. (i) and (ii) only
b. (i) and (iii) only
c. (i), (iii) and (iv) only
d. (i), (ii), (iii), and (iv)

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20 ❖ Chapter 15/Monopoly

47. Refer to Scenario 15-2. Which of the following statements is most likely to be true?
(i) New entrants to the market know they will have a smaller market share than MCM currently
has.
(ii) MCM would experience higher profits if it were government-run.
(iii) MCM is a natural monopoly.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)
48. Refer to Scenario 15-2. MCM will continue to be a monopolist in the electricity industry only if
a. population growth leads to an increased demand for electricity.
b. there are no new entrants to the market.
c. the price of natural gas decreases.
d. All of the above are correct.

49. Which of the following is a characteristic of a natural monopoly?

a. Fixed costs are typically a small portion of total costs.
b. Average total cost declines over large regions of output.
c. The product sold is a natural resource such as diamonds or water.
d. All of the above are correct.

50. Which of the following is a characteristic of a natural monopoly?

a. Average cost exceeds marginal cost over large regions of output.
b. Increasing the number of firms increases each firm’s average total cost.
c. One firm can supply output at a lower cost than two firms.
d. All of the above are correct.

51. A natural monopoly occurs when

a. the product is sold in its natural state, such as water or diamonds.
b. there are economies of scale over the relevant range of output.
c. the firm is characterized by a rising marginal cost curve.
d. production requires the use of free natural resources, such as water or air.

52. An industry is a natural monopoly when

(i) the government assists the firm in maintaining the monopoly.
(ii) a single firm owns a key resource.
(iii) a single firm can supply a good or service to an entire market at a smaller cost than could two
or more firms.
a. (ii) only
b. (iii) only
c. (i) and (ii) only
d. (ii) and (iii) only

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 Chapter 15/Monopoly ❖ 21

53. When a natural monopoly exists, it is

a. always cost effective for government-owned firms to produce the product.
b. never cost effective for one firm to produce the product.
c. always cost effective for two or more private firms to produce the product.
d. never cost effective for two or more private firms to produce the product.

54. The defining characteristic of a natural monopoly is

a. constant marginal cost over the relevant range of output.
b. economies of scale over the relevant range of output.
c. constant returns to scale over the relevant range of output.
d. diseconomies of scale over the relevant range of output.

55. Natural monopolies differ from other forms of monopoly because they are
a. not subject to barriers to entry.
b. not regulated by government.
c. unable to sustain long-run profits.
d. are generally not worried about competition eroding their monopoly position in the market.

56. When a firm's average total cost curve continually declines, the firm is a
a. government-created monopoly.
b. natural monopoly.
c. revenue monopoly.
d. All of the above are correct.

57. A natural monopolist's ability to price its product is

a. constrained by the market demand curve.
b. constrained by market supply.
c. not affected by market demand.
d. enhanced by regulatory control of the government.

58. When an industry is a natural monopoly,

a. it is characterized by constant returns to scale.
b. it is characterized by diseconomies of scale.
c. a larger number of firms may lead to a lower average cost.
d. a larger number of firms will lead to a higher average cost.

59. If the distribution of water is a natural monopoly, then

(i) multiple firms would likely each have to pay large fixed costs to develop their own network
of pipes.
(ii) allowing for competition among different firms in the water-distribution industry is efficient.
(iii) a single firm can serve the market at the lowest possible average total cost.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (iii) only

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22 ❖ Chapter 15/Monopoly

60. A firm that is a natural monopoly

a. is not likely to be concerned about new entrants eroding its monopoly power.
b. is taking advantage of economies of scale.
c. would experience a higher average total cost if more firms entered the market.
d. All of the above are correct.

61. A firm that is a natural monopoly

a. is not likely to be concerned about new entrants eroding its monopoly power.
b. is taking advantage of diseconomies of scale.
c. would experience a lower average total cost if more firms entered the market.
d. All of the above are correct.

62. Additional firms often do not try to compete with a natural monopoly because
a. they fear retaliation in the form of pricing wars from the natural monopolist.
b. they are unsure of the size of the market in general.
c. they know they cannot achieve the same low costs that the natural monopolist enjoys.
d. the natural monopoly does not make a large profit.

63. When a single firm can supply a product to an entire market at a lower cost than could two or more
firms, the industry is called a
a. resource industry.
b. exclusive industry.
c. government monopoly.
d. natural monopoly.

64. A natural monopoly arises when

a. there are constant returns to scale over the relevant range of output.
b. there are economies of scale over the relevant range of output.
c. one firm owns a key natural resource.
d. the government gives a single firm the exclusive right to produce a particular good or service.

65. When a firm has a natural monopoly, the firm's

a. marginal cost always exceeds its average total cost.
b. total cost curve is horizontal.
c. average total cost curve is downward sloping.
d. marginal cost curve must lie above the firm’s average total cost curve.

66. If government officials break a natural monopoly up into several smaller firms, then
a. competition will force firms to attain economic profits rather than accounting profits.
b. competition will force firms to produce surplus output, which drives up price.
c. the average costs of production will increase.
d. the average costs of production will decrease.

67. When there are economies of scale over the relevant range of output for a monopoly, the monopoly
a. is a natural monopoly.
b. is a government-granted monopoly.
c. has monopoly power due to the ownership of a patent or copyright.
d. has monopoly power due to the ownership of a key production resource.

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 Chapter 15/Monopoly ❖ 23

68. When a firm experiences continually declining average total costs, the firm is a
a. natural monopoly.
b. price taker.
c. government-created monopoly.
d. All of the above are correct.

69. When a firm experiences continually declining average total costs,

a. the firm is a price taker.
b. society is better served by having one firm supply the product.
c. the firm will earn higher profits than if average total costs are increasing.
d. All of the above are correct.
HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS

1. Which of the following statements is (are) true of a monopoly?

(i) A monopoly has the ability to set the price of its product at whatever level it desires.
(ii) A monopoly's total revenue will always increase when it increases the price of its product.
(iii) A monopoly can earn unlimited profits.
a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (ii) and (iii) only

2. Amanda inherited the only local cable TV company in town after her father passed away. The com-
pany is completely unregulated by the government and is therefore free to operate as it wishes. As-
sume that Amanda understands the true power of her new monopoly. Which of the following state-
ments is (are) correct?
(i) She will be able to set the price of cable TV service at whatever level she wishes.
(ii) The customers will be forced to purchase cable TV service at whatever price she wants to
set.
(iii) She will be able to achieve any profit level that she desires.
a. (i) only
b. (ii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)

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24 ❖ Chapter 15/Monopoly

3. The market demand curve for a monopolist is typically

a. unit price elastic.
b. downward sloping.
c. horizontal.
d. vertical.

4. When a firm operates under conditions of monopoly, its price is

a. not constrained.
b. constrained by marginal cost.
c. constrained by demand.
d. constrained only by its social agenda.

5. In order to sell more of its product, a monopolist must

a. sell to the government.
b. sell in international markets.
c. lower its price.
d. use its market power to force up the price of complementary products.

6. In order to sell more of its product, a monopolist must

a. lobby the government for a subsidy.
b. lower its price.
c. advertise.
d. enact barriers to entry in related markets.

7. Economists assume that monopolists behave as

a. cost minimizers.
b. profit maximizers.
c. price maximizers.
d. maximizers of social welfare.

8. Because a monopolist is the sole producer in its market, it can necessarily alter the price of its good
(i) without affecting the quantity sold.
(ii) without affecting its average total cost.
(iii) by adjusting the quantity it supplies to the market.
a. (ii) only
b. (iii) only
c. (i) and (ii) only
d. (ii) and (iii) only

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 Chapter 15/Monopoly ❖ 25

9. When a monopolist decreases the price of its good, consumers

a. continue to buy the same amount.
b. buy more.
c. buy less.
d. may buy more or less, depending on the price elasticity of demand.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
26 ❖ Chapter 15/Monopoly

10. When a monopolist increases the amount of output that it produces and sells, the price of its output
a. stays the same.
b. increases.
c. decreases.
d. may increase or decrease depending on the price elasticity of demand.

11. A monopoly firm is a price

a. taker and has no supply curve.
b. maker and has no supply curve
c. taker and has an upward-sloping supply curve.
d. maker and has an upward-sloping supply curve.

12. Monopolies use their market power to

a. charge prices that equal minimum average total cost.
b. increase the quantity sold as they increase price.
c. charge a price that is higher than marginal cost.
d. dump excess supplies of their product on the market.

13. Monopoly firms have

a. downward-sloping demand curves, and they can sell as much output as they desire at the market
price.
b. downward-sloping demand curves, and they can sell only a limited quantity of output at each price.
c. horizontal demand curves, and they can sell as much output as they desire at the market price.
d. horizontal demand curves, and they can sell only a limited quantity of output at each price.

14. Which of the following is not correct?

a. The demand curve facing a competitive firm is perfectly elastic.
b. The demand curve facing a monopolist is the market demand curve.
c. A monopolist can charge any price and sell any quantity that it chooses.
d. A monopolist can alter the market price by adjusting the quantity that it produces.

15. Which of the following statements is correct?

a. The demand curve facing a competitive firm is horizontal, as is the demand curve facing a
monopolist.
b. The demand curve facing a competitive firm is downward sloping, whereas the demand curve
facing a monopolist is horizontal.
c. The demand curve facing a competitive firm is horizontal, whereas the demand curve facing a
monopolist is downward sloping.
d. The demand curve facing a competitive firm is downward sloping, as is the demand curve facing a
monopolist.

16. The profit-maximization problem for a monopolist differs from that of a competitive firm in which
of the following ways?
a. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a
monopolist maximizes profit at the point where marginal revenue exceeds marginal cost.
b. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a
monopolist maximizes profit at the point where average revenue exceeds marginal cost.
c. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to
marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profit-
maximizing level of output is smaller than it is for larger levels of output.
d. For a profit-maximizing competitive firm, thinking at the margin is much more important than it is
for a profit-maximizing monopolist.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 15/Monopoly ❖ 27

17. Competitive firms differ from monopolies in which of the following ways?
(i) Competitive firms do not have to worry about the price effect lowering their total revenue.
(ii) Marginal revenue for a competitive firm equals price, while marginal revenue for a
monopoly is less than the price it is able to charge.
(iii) Monopolies must lower their price in order to sell more of their product, while competitive
firms do not.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)

18. Competitive firms have

a. downward-sloping demand curves, and they can sell as much output as they desire at the market
price.
b. downward-sloping demand curves, and they can sell only a limited quantity of output at each price.
c. horizontal demand curves, and they can sell as much output as they desire at the market price.
d. horizontal demand curves, and they can sell only a limited quantity of output at each price.

19. Because many good substitutes exist for a competitive firm's product, the demand curve that it faces
is
a. unit-elastic.
b. perfectly inelastic.
c. perfectly elastic.
d. inelastic only over a certain region.

20. In a market characterized by monopoly, the market demand curve is

a. upward sloping.
b. horizontal.
c. downward sloping.
d. vertical.

21. As a monopolist increases the quantity of output it sells, the price consumers are willing to pay for
the good
a. is unaffected.
b. decreases.
c. increases.
d. There is not enough information given in answer the question.

22. Suppose a firm has a monopoly on the sale of widgets and faces a downward-sloping demand curve.
When selling the 100th widget, the firm will always receive
a. less marginal revenue on the 100th widget than it received on the 99th widget.
b. more average revenue on the 100th widget than it received on the 99th widget.
c. more total revenue on the 100 widgets than it received on the first 99 widgets.
d. a lower average cost per unit at 100 units output than at 99 units of output.

23. Suppose a firm has a monopoly on the sale of a computer game and faces a downward-sloping de-
mand curve. When selling the 50th game, the firm will always receive
a. less marginal revenue on the 50th game than it received on the 49th game.
b. more average revenue on the 50th game than it received on the 49th game.
c. more total revenue on the 50 game than it received on the first 49 game.
d. Both b) and c) are correct.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
28 ❖ Chapter 15/Monopoly

24. For a monopoly firm, the shape and position of the demand curve play a role in determining the
(i) profit-maximizing price.
(ii) shape and position of the marginal-cost curve.
(iii) shape and position of the marginal-revenue curve.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)

25. For a monopoly, the level of output at which marginal revenue equals zero is also the level of output
at which
a. average revenue is zero.
b. profit is maximized.
c. total revenue is maximized.
d. marginal cost is zero.

26. A monopolist's average revenue is always

a. equal to marginal revenue.
b. greater than the price of its product.
c. equal to the price of its product.
d. less than the price of its product.

27. If a profit-maximizing monopolist faces a downward-sloping market demand curve, its

a. average revenue is less than the price of the product.
b. average revenue is less than marginal revenue.
c. marginal revenue is less than the price of the product.
d. marginal revenue is greater than the price of the product.

28. When a monopolist increases the amount of output that it produces and sells, average revenue
a. increases, and marginal revenue increases.
b. increases, and marginal revenue decreases.
c. decreases, and marginal revenue increases.
d. decreases, and marginal revenue decreases.

29. For a monopoly firm, which of the following equalities is always true?
a. price = marginal revenue
b. price = average revenue
c. price = total revenue
d. marginal revenue = marginal cost

30. Which of the following statements is correct for a monopolist?

i) The firm maximizes profits by equating marginal revenue with marginal cost.
ii) The firm maximizes profits by equating price with marginal cost.
iii) Demand equals marginal revenue.
iv) Average revenue equals price.
a. i), iii), and iv) only
b. i) and iv) only
c. i), ii), and iv) only
d. i), ii), iii), and iv)

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 15/Monopoly ❖ 29

31. Which of the following statements is correct for both a monopolist and a perfectly competitive firm?
i) The firm maximizes profits by equating marginal revenue with marginal cost.
ii) The firm maximizes profits by equating price with marginal cost.
iii) Demand equals marginal revenue.
iv) Average revenue equals price.
a. i), iii), and iv) only
b. i) and iv) only
c. i), ii), and iv) only
d. i), ii), iii), and iv)

32. Which of the following statements is true?

(i) When a competitive firm sells an additional unit of output, its revenue increases by an
amount less than the price.
(ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount
less than the price.
(iii) Average revenue is the same as price for both competitive and monopoly firms.
a. (ii) only
b. (iii) only
c. (i) and (ii) only
d. (ii) and (iii) only

33. The marginal revenue curve for a monopoly firm starts at the same point on the vertical axis as the
(i) average revenue curve.
(ii) marginal cost curve.
(iii) demand curve.
a. (i) only
b. (i) and (ii) only
c. (i) and (iii) only
d. (iii) only

34. For a monopoly,

a. average revenue exceeds marginal revenue.
b. average revenue equals marginal revenue.
c. average revenue is less than marginal revenue.
d. price equals marginal revenue.

35. For a monopolist, when does marginal revenue exceed average revenue?
a. never
b. when output is less than the profit-maximizing level of output
c. when output is greater than the profit-maximizing level of output
d. for all levels of output greater than zero

36. Because a monopolist must lower its price in order to sell another unit of output,
a. marginal revenue is less than price.
b. long-term economic profits will be zero.
c. total revenue increases as price increases.
d. average revenue is less than price.

37. What is the shape of the monopolist’s marginal revenue curve?

a. a downward-sloping line that is identical to the demand curve
b. a downward-sloping line that lies below the demand curve
c. a horizontal line that is identical to the demand curve
d. a horizontal line that lies below the demand curve

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
30 ❖ Chapter 15/Monopoly

38. For a monopolist, marginal revenue is

a. equal to price, as it is for a perfectly competitive firm.
b. less than price, as it is for a perfectly competitive firm.
c. equal to price, whereas marginal revenue is less than price for a perfectly competitive firm.
d. less than price, whereas marginal revenue is equal to price for a perfectly competitive firm.

39. When a monopolist increases the number of units it sells, there are two effects on revenue. They are
the
a. demand effect and the supply effect.
b. competition effect and the cost effect.
c. competitive effect and the monopoly effect.
d. output effect and the price effect.

40. For a monopolist, marginal revenue is

a. positive when the demand effect is greater than the supply effect.
b. positive when the monopoly effect is greater than the competitive effect.
c. negative when the price effect is greater than the output effect.
d. negative when the output effect is greater than the price effect.

41. For a monopolist, when the price effect is greater than the output effect, marginal revenue is
a. positive.
b. negative.
c. zero.
d. maximized.

42. For a monopolist, when the output effect is greater than the price effect, marginal revenue is
a. positive.
b. negative.
c. zero.
d. maximized.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 15/Monopoly ❖ 31

43. When a monopoly increases its output and sales,

a. both the output effect and the price effect work to increase total revenue.
b. the output effect works to increase total revenue, and the price effect works to decrease total
revenue.
c. the output effect works to decrease total revenue, and the price effect works to increase total
revenue.
d. both the output effect and the price effect work to decrease total revenue.

44. Marginal revenue for a monopolist is computed as

a. average revenue divided by quantity sold.
b. average revenue times quantity divided by price.
c. total revenue divided by quantity sold.
d. change in total revenue per one unit increase in quantity sold.

45. Marginal revenue can become negative for

a. both competitive and monopoly firms.
b. competitive firms but not for monopoly firms.
c. monopoly firms but not for competitive firms.
d. neither competitive nor monopoly firms.

46. For a monopolist,

a. average revenue is always greater than the price of the good.
b. marginal revenue is always less than the price of the good.
c. marginal cost is always greater than average total cost.
d. marginal revenue equals marginal cost at the point where total revenue is maximized.

47. If a monopoly lowers its price, its

a. total revenue must increase.
b. total revenue must decrease.
c. marginal revenue must increase.
d. marginal revenue must decrease.

48. With no price discrimination, the monopolist sells every unit at the same price. Therefore
a. marginal revenue is equal to price.
b. marginal revenue is equal to average revenue.
c. price is greater than marginal revenue.
d. Both a and b are correct.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
32 ❖ Chapter 15/Monopoly

49. A monopolist can sell 200 units of output for $36 per unit. Alternatively, it can sell 201 units of out-
put for $35.80 per unit. The marginal revenue of the 201st unit of output is
a. $-4.20.
b. $-0.20.
c. $4.20.
d. $35.80.

50. A monopoly firm can sell 150 units of output for $10 per unit. Alternatively, it can sell 151 units of
output for $9.95 per unit. The marginal revenue of the 151st unit of output is
a. $-2.45.
b. $-0.05.
c. $2.45.
d. $9.95.

51. When a certain monopoly sets its price at $8 it sells 64 units. When the monopoly sets its price at
$10 it sells 60 units. The marginal revenue for the firm over this range is
a. $11.
b. $22.
c. $33.
d. $44.

52. If a monopolist can sell 7 units when the price is $4 and 8 units when the price is $3, then marginal
revenue of selling the eighth unit is equal to
a. $3.
b. $4.
c. $24.
d. -$4.

53. If the monopolist’s linear demand curve intersects the quantity axis at Q = 30, then the monopolist’s
marginal revenue will be equal to zero at
a. Q = 10.
b. Q = 15.
c. Q = 20.
d. Q = 30.

54. Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants
in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that
sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, which of the follow-
ing statements is true?
a. Meatball prices will be less than marginal cost.
b. Meatball prices will equal marginal cost.
c. Meatball prices will exceed marginal cost.
d. Costs are irrelevant to Angelo because he is a monopolist.

55. If a monopolist's marginal costs increase by $1 for all levels of output, then the monopoly price will
a. rise by $1.
b. rise by more than $1.
c. rise by less than $1.
d. not change, but profits will decrease.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 15/Monopoly ❖ 33

56. If a monopolist has zero marginal costs, it will produce

a. the output at which total revenue is maximized.
b. in the range in which marginal revenue is still increasing.
c. at the point at which marginal revenue is at a maximum.
d. in the range in which marginal revenue is negative.
Figure 15-2
Price Panel A Price
Panel B
Price
Panel C
Price
Panel D
D D
D

D
Quantity Quantity Quantity Quantity

57. Refer to Figure 15-2. Which of the following statements is correct?

a. Panel C represents the typical demand curve for a perfectly competitive firm, and Panel B
represents the typical demand curve for a monopoly.
b. Panel B represents the typical demand curve for a perfectly competitive firm, and Panel C
represents the typical demand curve for a monopoly.
c. Panel A represents the typical demand curve for a perfectly competitive firm, and Panel B
represents the typical demand curve for a monopoly.
d. Panel C represents the typical demand curve for a perfectly competitive firm, and Panel D
represents the typical demand curve for a monopoly.

58. Refer to Figure 15-2. Which of the following statements is correct?

a. Panel C represents the typical demand curve for a perfectly competitive firm.
b. Panel B represents the typical demand curve for a monopoly.
c. Panel B represents the typical demand curve for a perfectly competitive industry.
d. All of the above are correct.

59. Refer to Figure 15-2. Which of the following statements is correct?

a. Panel C represents the typical demand curve for a perfectly competitive industry.
b. Panel B represents the typical demand curve for a monopoly.
c. Panel B represents the typical demand curve for a perfectly competitive firm.
d. All of the above are correct.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
34 ❖ Chapter 15/Monopoly

60. Refer to Figure 15-2. Which panel could represent the demand curve facing a soybean farmer?
a. Panel A
b. Panel B
c. Panel C
d. Panel D

61. Refer to Figure 15-2. Which panel could represent the demand curve facing the soybean industry?
a. Panel A
b. Panel B
c. Panel C
d. Panel D

62. Refer to Figure 15-2. Which panel could represent the demand curve facing a local cable television
provider if that firm in a monopolist?
a. Panel A
b. Panel B
c. Panel C
d. Panel D
Figure 15-3
Price

Curve C
Curve D

P4
P3

P2
P1
P0

Curve B Curve A

Q0 Q2 Q3 Q4 Quantity
Q1

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 15/Monopoly ❖ 35

63. Refer to Figure 15-3. The demand curve for a monopoly firm is depicted by curve
a. A.
b. B.
c. C.
d. D.

64. Refer to Figure 15-3. The marginal revenue curve for a monopoly firm is depicted by curve
a. A.
b. B.
c. C.
d. D.

65. Refer to Figure 15-3. The marginal cost curve for a monopoly firm is depicted by curve
a. A.
b. B.
c. C.
d. D.

66. Refer to Figure 15-3. The average total cost curve for a monopoly firm is depicted by curve
a. A.
b. B.
c. C.
d. D.

67. Refer to Figure 15-3. If the monopoly firm is currently producing Q3 units of output, then a de-
crease in output will necessarily cause profit to
a. remain unchanged.
b. decrease.
c. increase as long as the new level of output is at least Q2.
d. increase as long as the new level of output is at least Q1.

68. Refer to Figure 15-3. Profit can always be increased by increasing the level of output by one unit if
the monopolist is currently operating at
(i) Q0.
(ii) Q1.
(iii) Q2.
(iv) Q3.
a. (ii) only
b. (i) or (ii) only
c. (i) only
d. (i), (ii), or (iii) only

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36 ❖ Chapter 15/Monopoly

69. Refer to Figure 15-3. If the monopoly firm wants to maximize its profit, it should operate at a level
of output equal to
a. Q1.
b. Q2.
c. Q3.
d. Q4.

70. Refer to Figure 15-3. Profit will be maximized by charging a price equal to
a. P1.
b. P2.
c. P3.
d. P4.

71. Refer to Figure 15-3. A profit-maximizing monopoly's total revenue is equal to

a. P4 x Q2.
b. P3 x Q4.
c. (P4-P2) x Q2.
d. (P4-P3) x Q2.
Figure 15-4
Price
Curve C
Curve D

P5

P4
P3

P2

P1

P0

Curve B Curve A

Q1 Q2 Q3 Q4 Quantity

72. Refer to Figure 15-4. A profit-maximizing monopoly will produce an output level of
a. Q1.
b. Q2.
c. Q3.
d. Q4.

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 Chapter 15/Monopoly ❖ 37

73. Refer to Figure 15-4. A profit-maximizing monopoly will charge a price of

a. P5.
b. P4.
c. P3.
d. P2.

74. Refer to Figure 15-4. A profit-maximizing monopoly's total revenue is equal to

a. P4 x Q3.
b. P5 x Q1.
c. P3 x Q4.
d. (P4-P2) x Q3.

75. Refer to Figure 15-4. A profit-maximizing monopoly's total cost is equal to

a. P4 x Q3.
b. P2 x Q3.
c. P1 x Q3.
d. (P4-P1) x Q3.

76. Refer to Figure 15-4. A profit-maximizing monopoly's profit is equal to

a. P4 x Q3.
b. (P4-P2) x Q3.
c. (P4-P1) x Q3.
d. (P5-P0) x Q1.

77. Refer to Figure 15-4. Profit on a typical unit sold for a profit-maximizing monopoly would equal
a. P5-P0.
b. P4-P2.
c. P4-P1.
d. P4-P3.

78. Refer to Figure 15-4. At the profit-maximizing level of output,

a. marginal revenue is equal to P3.
b. marginal cost is equal to P3.
c. average revenue is equal to P4.
d. average total cost is equal to P0.
Figure 15-5
Price
P
MC

A
B

C ATC

F
G
H

D
O J K Quantity
L
MR

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38 ❖ Chapter 15/Monopoly

79. Refer to Figure 15-5. What price will the monopolist charge?
a. A
b. B
c. C
d. F

80. Refer to Figure 15-5. How much output will the monopolist produce?
a. O
b. J
c. K
d. L

81. Refer to Figure 15-5. What area measures the monopolist’s profit?
a. (B-F)*K
b. (A-H)*J
c. (B-G)*K
d. 0.5[(B-F)*(L-K)]
Figure 15-6
Price
30
MC

23
20

15 ATC

12
10
9

D
0 9 12 Quantity
15
MR

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 Chapter 15/Monopoly ❖ 39

82. Refer to Figure 15-6. In order to maximize profits, the monopolist should produce
a. 9 units.
b. 12 units.
c. 15 units.
d. more than 15 units.

83. Refer to Figure 15-6. In order to maximize profits, the monopolist should charge a price of
a. $9.
b. $12.
c. $20.
d. $23.

84. Refer to Figure 15-6. A profit-maximizing monopolist would earn total revenues of
a. $81.
b. $144.
c. $225.
d. $240.

85. Refer to Figure 15-6. A profit-maximizing monopolist would incur total costs of
a. $81.
b. $120.
c. $144.
d. $240.

86. Refer to Figure 15-6. A profit-maximizing monopolist would earn profits of

a. $96.
b. $117.
c. $120.
d. $126.

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40 ❖ Chapter 15/Monopoly

Table 15-1
Quantity Price Total Average Marginal
Revenue Revenue Revenue
1 $35 $35
2 $64 $32 $29
3 $29
4 $17
5 $23 $11
6 $120
7 $17 $-1
8 $-7
9 $99 $11 $-13
10 $80 $8
87. Refer to Table 15-1. If the monopolist sells 8 units of its product, how much total revenue will it re-
ceive from the sale?
a. $14
b. $40
c. $112
d. $164
88. Refer to Table 15-1. If the monopolist wants to maximize its revenue, how many units of its prod-
uct should it sell?
a. 4
b. 5
c. 6
d. 8
89. Refer to Table 15-1. When 4 units of output are produced and sold, what is average revenue?
a. $17
b. $21
c. $23
d. $26
90. Refer to Table 15-1. What is the marginal revenue for the monopolist for the sixth unit sold?
a. $3
b. $5
c. $11
d. $17

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 Chapter 15/Monopoly ❖ 41

91. Refer to Table 15-1. Assume this monopolist's marginal cost is constant at $12. What quantity of
output (Q) will it produce and what price (P) will it charge?
a. Q = 4, P = $29
b. Q = 4, P = $26
c. Q = 5, P = $23
d. Q = 7, P = $17
Table 15-2
Tanya has the following demand curve for selling taffy. Assume that Tanya has a marginal cost of
$3 per unit.
Price Quantity
$10 1
$8 2
$6 3
$4 4
$2 5
92. Refer to Table 15-2. What is Tanya's profit-maximizing level of output?
a. 1
b. 2
c. 3
d. 4
93. Refer to Table 15-2. What is Tanya's profit-maximizing price?
a. $2
b. $4
c. $6
d. $8

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42 ❖ Chapter 15/Monopoly

Table 15-3
Consider the following demand and cost information for a monopoly.
Quantity Price Total Cost
0 $30 $3
1 $25 $7
2 $20 $12
3 $15 $18
4 $10 $25

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 Chapter 15/Monopoly ❖ 43

94. Refer to Table 15-3. The marginal revenue of the 2nd unit is
a. $10.
b. $15.
c. $20.
d. $25.

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44 ❖ Chapter 15/Monopoly

95. Refer to Table 15-3. The marginal cost of the 4th unit is
a. $7.
b. $12.
c. $25.
d. $60.

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 Chapter 15/Monopoly ❖ 45

96. Refer to Table 15-3. The maximum profit this monopolist can earn is
a. $5.
b. $15.
c. $16.
d. $28.
97. Refer to Table 15-3. To maximize profit, the monopolist sets price at
a. $10.
b. $15.
c. $20.
d. $25.
Table 15-4
A monopolist faces the following demand curve:
Price Quantity
$30 0
$25 2.5
$20 5
$15 7.5
$10 10
$5 12.5
$0 15
98. Refer to Table 15-4. If the monopolist produces 10 units, what is its average revenue?
a. $100
b. $15
c. $10
d. $1
99. Refer to Table 15-4. If the monopolist produces 5 units, what is its average revenue?
a. $100
b. $20
c. $5
d. $4
100. Refer to Table 15-4. If the monopolist produces 10 units, what is its marginal revenue?
a. $12.50
b. $5
c. -$5
d. -$12.50
101. Refer to Table 15-4. If the monopolist produces 5 units, what is its marginal revenue?
a. $100
b. $37.5
c. $15
d. $2.50
102. Refer to Table 15-4. The monopolist will not produce
a. 5 units or fewer under any circumstances.
b. 7.5 units or fewer under any circumstances.
c. 7.5 units or more under any circumstances.
d. 10 units or more under any circumstances.
103. Refer to Table 15-4. In order to maximize total revenues, the monopolist should produce
a. 5 units.
b. 7.5 units.
c. 10 units.
d. 12.5 units.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
46 ❖ Chapter 15/Monopoly

104. Refer to Table 15-4. In order to maximize profits, the monopolist should produce
a. 7.5 units.
b. 10 units.
c. where marginal revenue equals marginal cost.
d. Both a) and c) are correct.
Table 15-5
A monopolist faces the following demand curve:
Price Quantity
$51 1
$47 2
$42 3
$36 4
$29 5
$21 6
$12 7
105. Refer to Table 15-5. The monopolist has total fixed costs of $60 and has a constant mar-
ginal cost of $15. What is the profit-maximizing level of production?
a. 2 units
b. 3 units
c. 4 units
d. 5 units
106. Refer to Table 15-5. The monopolist has total fixed costs of $60 and has a constant marginal cost
of $15. What is the profit-maximizing price?
a. $4
b. $39
c. $36
d. $42
Table 15-6
A monopolist faces the following demand curve:
Quantity Price
1 $15
2 $12
3 $9
4 $6
5 $3
107. Refer to Table 15-6. What is the marginal revenue from the sale of the 2nd unit?
a. $–3
b. $3
c. $9
d. $24
108. Refer to Table 15-6. What is the marginal revenue from the sale of the 3rd unit?
a. $–3
b. $3
c. $9
d. $24
109. Refer to Table 15-6. What is the marginal revenue from the sale of the 4th unit?
a. $–3
b. $3
c. $9
d. $24

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 Chapter 15/Monopoly ❖ 47

110. Refer to Table 15-6. If the monopolist has a constant marginal cost for her product equal to $7,
what is her profit-maximizing price?
a. $6
b. $9
c. $12
d. $15
111. Refer to Table 15-6. Suppose the monopolist has total fixed costs equal to $5 and a variable cost
equal to $4 per unit for all units produced. What is the profit-maximizing price?
a. $6
b. $9
c. $12
d. $15

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48 ❖ Chapter 15/Monopoly

112. Refer to Table 15-6. Suppose the monopolist has total fixed costs equal to $5 and a variable cost
equal to $4 per unit for all units produced. What is the total profit if she operates at her profit-maxi-
mizing price?
a. $1
b. $7
c. $9
d. $11
113. Refer to Table 15-6. Suppose the monopolist has total fixed costs equal to $5 and a variable cost
equal to $4 per unit for all units produced. What would the total profit be if she charged $6 per unit
for her product?
a. $1
b. $3
c. $8
d. $15
Table 15-7
Sally owns the only shoe store in town. She has the following cost and revenue information.
COSTS REVENUES
Quantity Total Cost Marginal Quantity Price Total Marginal
Produced ($) Cost Demanded ($/unit) Revenue Revenue
(pairs)
0 100 -- 0 170 --
1 140 1 160
2 184 2 150
3 230 3 140
4 280 4 130
5 335 5 120
6 395 6 110
7 475 7 100
8 565 8 90

114. Refer to Table 15-7. What is the marginal cost of the 6th pair of shoes?
a. $44
b. $46
c. $55
d. $60
115. Refer to Table 15-7. What is the marginal cost of the 8th pair of shoes?
a. $50
b. $60
c. $90
d. $110
116. Refer to Table 15-7. What is the total revenue from selling 6 pairs of shoes?
a. $100
b. $600
c. $625
d. $660
117. Refer to Table 15-7. What is the total revenue from selling 8 pairs of shoes?
a. $90
b. $695
c. $720
d. $800

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 Chapter 15/Monopoly ❖ 49

118. Refer to Table 15-7. What is the marginal revenue from selling the 2nd pair of shoes?
a. $140
b. $150
c. $160
d. $170
119. Refer to Table 15-7. What is the marginal revenue from selling the 8th pair of shoes?
a. $10
b. $20
c. $40
d. $90

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50 ❖ Chapter 15/Monopoly

120. Refer to Table 15-7. What is the average revenue when Sally sells 7 pairs of shoes?
a. $40
b. $90
c. $100
d. $700
121. Refer to Table 15-7. Sally will maximize her profits by selling
a. 3 pairs of shoes.
b. 4 pairs of shoes.
c. 6 pairs of shoes.
d. 7 pairs of shoes.
122. Refer to Table 15-7. What is total profit at the profit-maximizing quantity?
a. $100
b. $245
c. $265
d. $395
123. Refer to Table 15-7. What are Sally's fixed costs?
a. $0
b. $100
c. $600
d. $745
124. Refer to Table 15-7. What is the total variable cost of production when Sally produces six pairs of
shoes?
a. $100
b. $295
c. $600
d. $620
Table 15-8
The following table provides information on the price, quantity, and average total cost for a
monopoly.
Price Quantity Average Total
Cost
$24 0 ---
$18 5 $14.00
$12 10 $11.00
$6 15 $10.67
$0 20 $11.00
125. Refer to Table 15-8. How much extra revenue does the monopolist earn when he lowers
the price from $18 to $12?
a. $10
b. $12
c. $30
d. $41

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 Chapter 15/Monopoly ❖ 51

126. Refer to Table 15-8. What is the additional cost to the firm when the monopolist lowers the price
from $18 to $12?
a. The firm saves $15.
b. $15
c. $30
d. $40
127. Refer to Table 15-8. At what price will the monopolist maximize his profit?
a. $6
b. $12
c. $18
d. $24
128. Refer to Table 15-8. What is the maximum profit that the monopolist can earn?
a. $10
b. $20
c. $30
d. $40
Table 15-9
Consider the following demand and cost information for a monopoly.
Quantity Price Total Cost
0 $32 $6
1 $28 $20
2 $24 $34
3 $20 $48
4 $16 $62
5 $12 $76
129. Refer to Table 15-9. What is the marginal revenue of the 3rd unit?
a. $4
b. $12
c. $20
d. $28

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52 ❖ Chapter 15/Monopoly

130. Refer to Table 15-9. What is the marginal cost of the 4th unit?
a. $4
b. $14
c. $31
d. $62

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Chapter 15/Monopoly ❖ 53

131. Refer to Table 15-9. What price should the monopoly charge to maximize profit?
a. $16
b. $20
c. $24
d. $28

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54 ❖ Chapter 15/Monopoly

132. Refer to Table 15-9. At the profit-maximizing price, how much profit will the monopoly earn?
a. $8
b. $10
c. $12
d. $14

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 Chapter 15/Monopoly ❖ 55

133. Refer to Table 15-9. What is the monopolist’s average total cost of production at the profit-maxi-
mizing price?
a. $12
b. $14
c. $16
d. $17

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56 ❖ Chapter 15/Monopoly

Table 15-10
The monopolist faces the following demand curve:
Price Quantity
$10 5
$9 10
$8 16
$7 23
$6 31
$5 45
$4 52
$3 60

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 Chapter 15/Monopoly ❖ 57

134. Refer to Table 15-10. If the monopolist has total fixed costs of $40 and a constant mar-
ginal cost of $5, what is the profit-maximizing level of output?
a. 7 units
b. 16 units
c. 23 units
d. 31 units
135. Refer to Table 15-10. If the monopolist has total fixed costs of $40 and a constant marginal cost of
$5, how much profit can the firm earn at the profit-maximizing level of output?
a. $128
b. $120
c. $80
d. $8
Table 15-11
The following table shows quantity, price, and marginal cost information for a monopoly:
Output Price MC
0 $10 --
1 $9 $3
2 $8 $4
3 $7 $5
4 $6 $6
5 $5 $7
6 $4 $8

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58 ❖ Chapter 15/Monopoly

136. Refer to Table 15-11. What price should the firm charge to maximize its profit?
a. $4
b. $5
c. $6
d. $7
137. Refer to Table 15-11. What level of output should the firm produce to maximize its profit?
a. 2 units
b. 3 units
c. 4 units
d. 5 units
138. Refer to Table 15-11. What would be the firm’s marginal revenue at the profit-maximizing level of
output?
a. $7
b. $6
c. $5
d. $1
Table 15-12
The following table provides information on the price, quantity, and average total cost for a
monopoly.
Price Output ATC
$5 0 --
$4 4 $1.00
$3 8 $0.75
$2 12 $0.75
$1 16 $0.81
$0 20 $0.90
139. Refer to Table 15-12. At what price will the firm maximize its profit?
a. $1
b. $2
c. $3
d. $4
140. Refer to Table 15-12. In order to maximize profits, the firm should produce
a. 4 units of output.
b. 8 units of output.
c. 12 units of output.
d. 16 units of output.
141. Refer to Table 15-12. If the firm produces the profit-maximizing level of output, it will earn prof-
its of
a. $24.
b. $18.
c. $15.
d. $12.

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 Chapter 15/Monopoly ❖ 59

Table 15-13
The following table gives information on the price, quantity, and total cost of production for a
monopolist.
Price Output Total Costs
$5 0 $3
$4 5 $8
$3 10 $20
$2 15 $33
$1 20 $53
$0 25 $78

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60 ❖ Chapter 15/Monopoly

142. Refer to Table 15-13. If the monopolist maximizes profits, he will charge a price of
a. $4.
b. $3.
c. $2.
d. $1.

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 Chapter 15/Monopoly ❖ 61

143. Refer to Table 15-13. How much profit will the firm earn at the profit-maximizing price?
a. $9
b. $12
c. $15
d. $18

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62 ❖ Chapter 15/Monopoly

Table 15-14
The following table gives information on the price, quantity, and total cost of production for a
monopolist.
Price Output Total Costs
$5 0 $3
$4 5 $8
$3 10 $18
$2 15 $33
$1 20 $53
$0 25 $78

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 Chapter 15/Monopoly ❖ 63

144. Refer to Table 15-14. At what price does marginal revenue equal marginal cost?
a. $5
b. $4
c. $3
d. $2
Table 15-15
A monopolist faces the following demand curve:
Price Quantity
$10 5
$9 10
$8 16
$7 23
$6 31
$5 45
$4 52
$3 60
145. Refer to Table 15-15. The monopolist has total fixed costs of $40 and a constant marginal cost of
$5. At the profit-maximizing level of output, the monopolist's profit is
a. $88.
b. $8.
c. $6.
d. We do not have enough information to determine profit.

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64 ❖ Chapter 15/Monopoly

Table 15-16
A monopolist faces the following demand curve:
Price Quantity
$10 5
$9 10
$8 16
$7 23
$6 31
$5 45
$4 52
$3 60
146. Refer to Table 15-16. The monopolist has total fixed costs of $40 and a constant marginal cost of
$5. At the profit-maximizing level of output, the monopolist's average total cost is
a. $9.00.
b. $7.50.
c. $6.74.
d. $5.82.
Table 15-17
Quantity Price
0 $10
1 $9
2 $8
3 $7
4 $6
5 $5
6 $4
7 $3
8 $2
9 $1
10 $0
147. Refer to Table 15-17. If a monopolist faces a constant marginal cost of $5, how much output
should the firm produce?
a. 3 units
b. 4 units
c. 5 units
d. 6 units
148. Refer to Table 15-17. If a monopolist faces a constant marginal cost of $4, how much output
should the firm produce?
a. 3 units
b. 4 units
c. 5 units
d. 6 units
149. Refer to Table 15-17. If a monopolist faces a constant marginal cost of $3, how much output
should the firm produce in order to equate marginal revenue with marginal cost?
a. 3 units
b. 4 units
c. 5 units
d. 6 units

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 Chapter 15/Monopoly ❖ 65

150. Refer to Table 15-17. If a monopolist faces a constant marginal cost of $2, how much output
should the firm produce?
a. 3 units
b. 4 units
c. 5 units
d. 6 units
151. Refer to Table 15-17. If a monopolist faces a constant marginal cost of $1, how much output
should the firm produce in order to equate marginal revenue with marginal cost?
a. 3 units
b. 4 units
c. 5 units
d. 6 units
Scenario 15-3
A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its
marginal revenue is $30, its average revenue is $60, and its average total cost is $34.
152. Refer to Scenario 15-3. The firm's profit-maximizing price is
a. $30.
b. between $30 and $34.
c. between $34 and $60.
d. $60.
153. Refer to Scenario 15-3. At Q = 500, the firm's total revenue is
a. $13,000.
b. $15,000.
c. $17,000.
d. $30,000.
154. Refer to Scenario 15-3. At Q = 500, the firm's profit is
a. $13,000.
b. $15,000.
c. $17,000.
d. $30,000.
155. Refer to Scenario 15-3. At Q = 500, the firm's marginal cost is
a. less than $30.
b. $30.
c. $34.
d. greater than $34.

156. A monopolist maximizes profits by

a. producing an output level where marginal revenue equals marginal cost.
b. charging a price equal to marginal revenue and marginal cost.
c. charging a price where marginal cost equals average total cost.
d. Both a and b are correct.

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66 ❖ Chapter 15/Monopoly

157. A monopolist maximizes profits by

a. producing an output level where marginal revenue equals marginal cost.
b. charging a price that is greater than marginal revenue.
c. earning a profit of (P - MC) x Q.
d. Both a and b are correct.

158. A profit-maximizing monopolist will produce the level of output at which

a. average revenue is equal to average total cost.
b. average revenue is equal to marginal cost.
c. marginal revenue is equal to marginal cost.
d. total revenue is equal to opportunity cost.

159. For a profit-maximizing monopolist,

a. P > MR = MC.
b. P = MR = MC.
c. P > MR > MC.
d. MR < MC < P.

160. The monopolist's profit-maximizing quantity of output is determined by the intersection of which of
the following two curves?
a. marginal cost and demand
b. marginal cost and marginal revenue
c. average total cost and marginal revenue
d. average variable cost and average revenue

161. A monopolist will choose to increase output when

a. market price increases.
b. at all levels of output, marginal cost increases.
c. at the present level of output, marginal revenue exceeds marginal cost.
d. the demand curve shifts to the left.

162. Which of the following statements is not correct?

a. The competitive firm produces where P = MC.
b. The monopolist produces where P = MC.
c. The competitive firm produces where MR = MC.
d. The monopolist produces where MR = MC.

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 Chapter 15/Monopoly ❖ 67

163. Which of the following statements is correct?

a. If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase
profit by selling more units at a lower price per unit.
b. If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase
profit by selling fewer units at a higher price per unit.
c. When a monopolist produces where price equals the minimum of average total cost, it earns a
positive economic profit.
d. If the monopolist is earning a positive economic profit, it must be producing where MR = MC.

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68 ❖ Chapter 15/Monopoly

164. A reduction in a monopolist's fixed costs would

a. decrease the profit-maximizing price and increase the profit-maximizing quantity produced.
b. increase the profit-maximizing price and decrease the profit-maximizing quantity produced.
c. not effect the profit-maximizing price or quantity.
d. possibly increase, decrease or not effect profit-maximizing price and quantity, depending on the
elasticity of demand.

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 Chapter 15/Monopoly ❖ 69

165. Suppose when a monopolist produces 50 units its average revenue is $8 per unit, its marginal rev-
enue is $4 per unit, its marginal cost is $4 per unit, and its average total cost is $3 per unit. What can
we conclude about this monopolist?
a. The monopolist is currently maximizing profits, and its total profits are $200.
b. The monopolist is currently maximizing profits, and its total profits are $250.
c. The monopolist is not currently maximizing its profits; it should produce more units and charge a
lower price to maximize profit.
d. The monopolist is not currently maximizing its profits; it should produce fewer units and charger a
higher price to maximize profit.

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70 ❖ Chapter 15/Monopoly

166. Suppose when a monopolist produces 75 units its average revenue is $10 per unit, its marginal rev-
enue is $5 per unit, its marginal cost is $6 per unit, and its average total cost is $5 per unit. What can
we conclude about this monopolist?
a. The monopolist is currently maximizing profits, and its total profits are $375.
b. The monopolist is currently maximizing profits, and its total profits are $300.
c. The monopolist is not currently maximizing profits; it should produce more units and charge a
lower price to maximize profits.
d. The monopolist is not currently maximizing profits; it should produce fewer units and charge a
higher price to maximize profits.

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 Chapter 15/Monopoly ❖ 71

167. A profit-maximizing monopolist charges a price of $12. The intersection of the marginal revenue
and marginal cost curves occurs where output is 10 units and marginal cost is $6. Average total cost
for 10 units of output is $5. What is the monopolist’s profit?
a. $60
b. $70
c. $100
d. $120

168. A profit-maximizing monopolist charges a price of $14. The intersection of the marginal revenue
curve and the marginal cost curve occurs where output is 15 units and marginal cost is $7. What is
the monopolist’s profit?
a. $90
b. $105
c. $180
d. Not enough information is given to determine the answer.

169. If a monopolist sells 100 units at $8 per unit and realizes an average total cost of $6 per unit, what is
the monopolist's profit?
a. $200
b. $400
c. $600
d. $800

170. Suppose a monopolist charges a price of $27 for its product and sells 10 units at that price. At 10
units of production the firm has average fixed cost equal to $10 and average variable cost equal to
$12. How much total profit is the firm earning at this price?
a. $5
b. $25
c. $50
d. $140

171. Which of the following formulas would correctly calculate a monopolist’s profit?
a. profit = price – marginal cost
b. profit = price – average total cost
c. profit = (price – marginal cost)  quantity
d. profit = (price – average total cost)  quantity

172. A monopoly's marginal cost will

a. be less than its average fixed cost.
b. be less than the price per unit of its product.
c. exceed its marginal revenue.
d. equal its average total cost.

173. If a pharmaceutical company discovers a new drug and successfully patents it, patent law gives the
firm
a. partial ownership of the right to sell the drug for a limited number of years.
b. partial ownership of the right to sell the drug for an unlimited number of years.
c. sole ownership of the right to sell the drug for a limited number of years.
d. sole ownership of the right to sell the drug for an unlimited number of years.

174. Due to the nature of the patent laws on pharmaceuticals, the market for such drugs
a. always remains a competitive market.
b. always remains a monopolistic market.
c. switches from competitive to monopolistic once the firm's patent runs out.
d. switches from monopolistic to competitive once the firm's patent runs out.

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72 ❖ Chapter 15/Monopoly

175. What happens to the price and quantity sold of a drug when its patent runs out?
(i) The price will fall.
(ii) The quantity sold will fall.
(iii) The marginal cost of producing the drug will rise.
a. (i) only
b. (i) and (ii) only
c. (ii) and (iii) only
d. (i), (ii), and (iii)

176. Generic drugs enter the pharmaceutical drug market once

a. the ingredients to the name brand drug have been discovered.
b. 10 years have passed.
c. they are patented.
d. the patent on the name brand drug expires.

177. Name brand drugs are able to continue capitalizing on their market power even after generic drugs
enter the market because
(i) almost all people fear the generic drug companies are devoting too few resources to research
and development.
(ii) some people fear that generic drugs are inferior.
(iii) some people are loyal to the name brand.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)

178. After the patent runs out on a brand name drug, generic drugs enter the market. What happens next
in the market?
a. Price increases, and total surplus decreases.
b. Price decreases, and total surplus decreases.
c. Price decreases, and total surplus increases.
d. Price increases, and total surplus increases.

179. A monopolist
a. has a supply curve that is upward-sloping, just like a competitive firm.
b. does not have a supply curve because the monopolist sets its price at the same time it chooses the
quantity to supply.
c. has a horizontal supply curve, just like a competitive firm.
d. does not have a supply curve because marginal revenue exceeds the price it charges for its products.

180. The supply curve for the monopolist

a. is horizontal.
b. is vertical.
c. is upward sloping.
d. does not exist.

181. In a competitive market, a firm's supply curve dictates the amount it will supply. In a monopoly
market the
a. same is true.
b. supply curve conceptually makes sense, but in practice is never used.
c. supply curve will have limited predictive capacity.
d. decision about how much to supply is impossible to separate from the demand curve it faces.

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 Chapter 15/Monopoly ❖ 73

THE WELFARE COST OF MONOPOLY

1. Monopolies are inefficient because they

(i) eliminate barriers to entry.
(ii) price their product at a level where marginal revenue exceeds marginal cost.
(iii) restrict output below the socially efficient level of production.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (iii) only
d. (i), (ii), and (iii)

2. A monopolist produces
a. more than the socially efficient quantity of output but at a higher price than in a competitive market.
b. less than the socially efficient quantity of output but at a higher price than in a competitive market.
c. the socially efficient quantity of output but at a higher price than in a competitive market.
d. possibly more or possibly less than the socially efficient quantity of output, but definitely at a
higher price than in a competitive market.
3. "Monopolists do not worry about efficient production and minimizing costs since they
can just pass along any increase in costs to their consumers." This statement is
a. false; price increases will mean fewer sales, which may lower profits.
b. true; this is the primary reason why economists believe that monopolies result in economic
inefficiency.
c. false; the monopolist is a price taker.
d. true; consumers in a monopoly market have no substitutes to turn to when the monopolist raises
prices.

4. Deadweight loss
a. measures monopoly inefficiency.
b. exceeds monopoly profits.
c. equals monopoly profits.
d. equals monopoly revenues minus profits.

5. A monopoly is an inefficient way to produce a product because

a. it can earn both short-run and long-run profits.
b. it faces a downward-sloping demand curve.
c. the cost to the monopolist of producing one more unit exceeds the value of that unit to potential
buyers.
d. it produces a smaller level of output than would be produced in a competitive market.

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74 ❖ Chapter 15/Monopoly

6. The deadweight loss associated with a monopoly occurs because the monopolist
a. maximizes profits.
b. produces an output level less than the socially optimal level.
c. produces an output level greater than the socially optimal level.
d. equates marginal revenue with marginal cost.

7. The economic inefficiency of a monopolist can be measured by the

a. number of consumers who are unable to purchase the product because of its high price.
b. excess profit generated by monopoly firms.
c. poor quality of service offered by monopoly firms.
d. deadweight loss.

8. The economic inefficiency of a monopolist can be measured by the

a. deadweight loss.
b. value of the unrealized trades that could be made if the monopolist produced the socially-efficient
output.
c. area above marginal cost but beneath demand from the monopoly output to the socially-efficient
output.
d. All of the above are correct.

9. Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized,
mutually beneficial trades are
a. of little concern to society.
b. a deadweight loss to society.
c. a sunk cost to society.
d. also observed in competitive markets.

10. Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized,
mutually beneficial trades are
a. not a concern if a market is perfectly competitive.
b. a deadweight loss to society.
c. a function of the reduction in the quantity produced by a monopolist in comparison to a competitive
market.
d. All of the above are correct.

11. Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized,
mutually beneficial trades are
a. less of a concern for a monopoly than competitive market.
b. offset by the higher profits earned by a monopolist.
c. a function of the reduction in the quantity produced by a monopolist in comparison to a competitive
market.
d. All of the above are correct.

12. The deadweight loss that arises from a monopoly is a consequence of the fact that the monopoly
a. quantity is lower than the socially-optimal quantity.
b. price equals marginal revenue.
c. price is the same as average revenue.
d. earns positive profits.

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 Chapter 15/Monopoly ❖ 75

13. Which of the following statements is correct?

a. The benefits that accrue to a monopoly’s owners are equal to the costs that are incurred by
consumers of that firm's product.
b. The deadweight loss that arises in monopoly stems from the fact that the profit-maximizing
monopoly firm produces a quantity of output that exceeds the socially-efficient quantity.
c. The deadweight loss caused by monopoly is similar to the deadweight loss caused by a tax on a
product.
d. The primary social problem caused by monopoly is monopoly profit.

14. The social cost of a monopoly is equal to its

a. economic profit.
b. fixed cost.
c. dead weight loss.
d. variable cost.

15. Which of the following statements is not correct?

a. Part of the deadweight loss associated with monopoly is measured by the monopolist's economic
profit.
b. Marginal cost is always less than average total cost in a natural monopoly.
c. Discount coupons available free to the public are a type of price discrimination.
d. Anti-trust laws make it harder for firms to create synergies.

16. Monopolies are socially inefficient because the price they charge is
a. equal to marginal revenue.
b. above marginal cost.
c. equal to demand.
d. above demand.

17. Which of the following statements is correct? Monopolies are socially inefficient because they
(i) charge a price above marginal cost.
(ii) produce too little output.
(iii) earn profits at the expense of consumers.
(iv) maximize the market’s total surplus.
a. (iii) only
b. (iii) and (iv) only
c. (i) and (ii) only
d. (i), (ii), (iii), and (iv)

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76 ❖ Chapter 15/Monopoly

18. Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maxi-
mizing quantity is 40 units, the profit-maximizing price is $160, and the marginal cost of the 40th
unit is $120. If the good were produced in a perfectly competitive market, the equilibrium quantity
would be 50, and the equilibrium price would be $150. The demand curve and marginal cost curves
are linear. What is the value of the deadweight loss created by the monopolist?
a. $40
b. $100
c. $200
d. $400

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 Chapter 15/Monopoly ❖ 77

19. Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maxi-
mizing price charged for goods produced is $12.The intersection of the marginal revenue and mar-
ginal cost curves occurs where output is 10 units and marginal cost is $6. The socially efficient level
of production is 12 units. The demand curve and marginal cost curves are linear. What is the value
of the deadweight loss created by the monopolist?
a. $4
b. $6
c. $12
d. $16

20. When we compare economic welfare in a monopoly market to a competitive market, the profits
earned by the monopolist represent
a. a transfer of benefits from the consumer to the producer.
b. a loss in total welfare.
c. the higher marginal costs incurred by the monopolists in comparison to competitive firms.
d. the higher marginal revenues gained by the monopolists in comparison to competitive firms.

21. When we compare economic welfare in a monopoly market to a competitive market, the profits
earned by the monopolist represent
a. a loss in total welfare.
b. a transfer of benefits from the buyer to the seller.
c. the higher marginal costs incurred by the monopolists in comparison to competitive firms.
d. All of the above are correct.

22. A monopoly market

a. always maximizes total economic well-being.
b. always minimizes consumer surplus.
c. generally fails to maximize total economic well-being.
d. generally fails to maximize producer surplus.

23. Suppose a monopolist chooses the price and production level that maximizes its profit. From that
point, to increase society’s economic welfare, output would need to be increased as long as
a. average revenue exceeds marginal cost.
b. average revenue exceeds average total cost.
c. marginal revenue exceeds marginal cost.
d. marginal revenue exceeds average total cost.

24. The socially efficient level of production occurs where the marginal cost curve intersects
a. average variable cost.
b. average total cost.
c. demand.
d. marginal revenue.

25. Many economists criticize monopolists because they

a. charge a price that equals marginal cost rather than a price that equals average cost.
b. do not innovate.
c. produce a large quantity of waste.
d. produce less than the socially efficient level of output.

26. Selling a good at a price determined by the intersection of the demand curve and the marginal cost
curve is consistent with the
(i) socially-optimal level of output.
(ii) market solution for profit-maximizing competitive firms.
(iii) market solution for a profit-maximizing monopoly.
a. (i) and (ii) only

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78 ❖ Chapter 15/Monopoly

b. (ii) and (iii) only

c. (i) and (iii) only
d. (i), (ii), and (iii)

27. When the government creates a monopoly, the social loss may include
a. declining marginal costs.
b. the cost of lawyers and lobbyists hired to convince lawmakers to continue the monopoly.
c. excessive monopoly profits.
d. diminishing marginal revenue.

28. If a social planner were running a monopoly, that planner could achieve an efficient outcome by
charging the price that is determined by the
a. minimum point on the average total cost curve.
b. intersection of the average total cost curve and the demand curve.
c. intersection of the marginal cost curve and the demand curve.
d. intersection of the marginal cost curve and the marginal revenue curve.

29. For a monopoly, the socially efficient level of output occurs where
a. marginal revenue equals marginal cost.
b. average revenue equals marginal cost.
c. marginal revenue equals average total cost.
d. average revenue equals average total cost.

30. The difference in total surplus between the socially efficient level of production and the monopo-
list's level of production is
a. offset by regulatory revenues.
b. called a deadweight loss.
c. equal to the monopolist’s profit.
d. Both b and c are correct.

31. Economic welfare is generally measured by

(i) profit.
(ii) total surplus.
(iii) the price consumers pay for the product.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (ii) only
d. (i), (ii), and (iii)

32. For a monopoly market, total surplus can be defined as the value of the good to
a. producers minus the cost incurred by consumers.
b. producers plus the cost incurred by consumers.
c. consumers minus the costs of producing the good.
d. consumers plus the cost of producing the good.

33. To maximize total surplus with a monopoly firm, a benevolent social planner would choose the level
of output where
a. MR = MC.
b. MR intersects the demand curve.
c. MC intersects the demand curve.
d. MR exceeds MC by the greatest amount.

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 Chapter 15/Monopoly ❖ 79

34. Consumers' willingness to pay for a good minus the amount they actually pay for it equals
a. consumer surplus.
b. consumer benefit.
c. price discriminant.
d. deadweight loss.

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80 ❖ Chapter 15/Monopoly

35. The amount that producers receive for a good minus their costs of producing it equals
a. quantity supplied.
b. supply price.
c. deadweight loss.
d. producer surplus.

36. A monopoly chooses to supply the market with a quantity of a product that is determined by the in-
tersection of the
a. marginal cost and demand curves.
b. average total cost and demand curves.
c. marginal revenue and average total cost curves.
d. marginal revenue and marginal cost curves.
Figure 15-7
Price MC

MR D
A B C Quantity

37. Refer to Figure 15-7. What is the socially efficient price and quantity?
a. price = F; quantity = A
b. price = G; quantity = B
c. price = G; quantity = A
d. price = D; quantity = A

38. Refer to Figure 15-7. What is the monopoly price and quantity?
a. price = F; quantity = A
b. price = G; quantity = B
c. price = G; quantity = A
d. price = D; quantity = A

39. Refer to Figure 15-7. What is the area of deadweight loss?

a. the rectangle (F-D)xA
b. the triangle 1/2[(F-D)x(B-A)]
c. the triangle 1/2[(F-G)x(B-A)]
d. the rectangle (F-D)xA plus the triangle 1/2[(F-D)x(B-A)]

40. Refer to Figure 15-7. What area represents the total surplus lost due to monopoly pricing?
a. the rectangle (F-D)xA
b. the triangle 1/2[(F-D)x(B-A)]
c. the triangle 1/2[(F-G)x(B-A)]
d. the rectangle (F-D)xA plus the triangle 1/2[(F-D)x(B-A)]

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 Chapter 15/Monopoly ❖ 81

Figure 15-8
Price

M arginal Cost
20

15

10

Demand
100 150 200 Quantity
M arginal Revenue

41. Refer to Figure 15-8. To maximize total surplus, a benevolent social planner would choose which
of the following outcomes?
a. 100 units of output and a price of $10 per unit
b. 150 units of output and a price of $10 per unit
c. 150 units of output and a price of $15 per unit
d. 200 units of output and a price of $10 per unit

42. Refer to Figure 15-8. To maximize its profit, a monopolist would choose which of the following
outcomes?
a. 100 units of output and a price of $10 per unit
b. 100 units of output and a price of $20 per unit
c. 150 units of output and a price of $15 per unit
d. 200 units of output and a price of $20 per unit

43. Refer to Figure 15-8. The monopolist's maximum profit

a. is $800.
b. is $1,000.
c. is $1,250.
d. cannot be determined from the diagram.

44. Refer to Figure 15-8. The deadweight loss caused by a profit-maximizing monopoly amounts to
a. $150.
b. $200.
c. $250.
d. $500.

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82 ❖ Chapter 15/Monopoly

Figure 15-9
Price
P
MC

A
B

C ATC

F
G
H

D
O J K Quantity
L
MR

45. Refer to Figure 15-9. What area measures the deadweight loss?
a. (B-F)*K
b. 0.5[(P-O)*(L-O)]
c. 0.5[(A-H)*(L-J)]
d. 0.5[(B-F)*(L-K)]
Figure 15-10
Price
10

9 MC
8
A B
7

6 C D
J
5
I H
4 F
3

1
MR Demand
1 2 3 4 5 6 7 8 9 10 11 12 Quantity

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 Chapter 15/Monopoly ❖ 83

46. Refer to Figure 15-10. Which area represents the deadweight loss from monopoly?
a. J
b. H
c. A+B+C+D+F+I+J+H
d. J+H
Figure 15-11
Price
10

8 A B

7
C F
6 G

5 MC
4

1
MR Demand
1 2 3 4 5 6 7 8 9 10 11 12 Quantity

47. Refer to Figure 15-11. Which area represents the deadweight loss from monopoly?
a. A+B
b. C+F
c. G
d. A+B+C+F
Figure 15-12
Price
30
MC

23
20

15 ATC

12
10
9

D
0 9 12 Quantity
15
MR

48. Refer to Figure 15-12. A profit-maximizing monopolist would create a deadweight loss to society
valued at
a. $12.
b. $24.
c. $42.
d. $84.

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84 ❖ Chapter 15/Monopoly

Figure 15-13
Price

Marginal Cost

Demand
(value to buyers)

Q0 Quantity

49. Refer to Figure 15-13. A benevolent social planner would have the monopoly operate at an output
level
a. less than Q0.
b. greater than Q0.
c. equal to Q0.
d. equal to zero.

50. Refer to Figure 15-13. If the monopoly operates at an output level less than Q0, then an increase in
output toward (but not exceeding) Q0 would
a. raise the price and raise total surplus.
b. lower the price and raise total surplus.
c. raise the price and lower total surplus.
d. lower the price and lower total surplus.
Figure 15-14
Price

100

90

80
MC
70

60

50

40

30

20

10 Demand
MR

10 20 30 40 50 60 70 80 Quantity

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 Chapter 15/Monopoly ❖ 85

51. Refer to Figure 15-14. To maximize total surplus, a benevolent social planner would choose which
of the following outcomes?
a. Q = 30 and P = 30
b. Q = 30 and P = 60
c. Q = 45 and P = 45
d. Q = 60 and P = 30

52. Refer to Figure 15-14. To maximize its profit, a monopolist would choose which of the following
outcomes?
a. Q = 30 and P = 30
b. Q = 30 and P = 60
c. Q = 45 and P = 45
d. Q = 60 and P = 30
Scenario 15-4
Suppose a monopolist has a demand curve that can be expressed as P=90-Q. The monopolist’s marginal
revenue curve can be expressed as MR=90-2Q. The monopolist has constant marginal costs and average total
costs of $10.
53. Refer to Scenario 15-4. The profit-maximizing monopolist will produce an output level of
a. 80 units.
b. 40 units.
c. 20 units.
d. 10 units.

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86 ❖ Chapter 15/Monopoly

54. Refer to Scenario 15-4. The profit-maximizing monopolist will charge a price of
a. $50.
b. $40.
c. $20.
d. $10.
55. Refer to Scenario 15-4. The profit-maximizing monopolist will earn profits of
a. $6,400.
b. $3,200.
c. $1,600.
d. $800.
56. Refer to Scenario 15-4. The profit-maximizing monopolist will have a deadweight loss of
a. $6,400.
b. $3,200.
c. $1,600.
d. $800.
PRICE DISCRIMINATION

1. Price discrimination
a. is illegal in the United States and Europe.
b. can occur in both perfectly competitive and monopoly markets.
c. is illogical because it does not maximize profits.
d. can maximize profits if the seller can prevent the resale of goods between customers.

2. Price discrimination is the business practice of

a. bundling related products to increase total sales.
b. selling the same good at different prices to different customers.
c. pricing above marginal cost.
d. hiring marketing experts to increase consumers’ brand loyalty.

3. When a monopolist is able to sell its product at different prices, it is engaging in

a. distribution pricing.
b. quality-adjusted pricing.
c. arbitrage.
d. price discrimination.

4. The practice of selling the same goods to different customers at different prices, but with the same
marginal cost, is known as
a. price segregation.
b. price discrimination.
c. arbitrage.
d. monopoly pricing.

5. For a firm to price discriminate,

a. it must be a natural monopoly.
b. it must be regulated by the government.
c. it must have some market power.
d. consumers must tell the firm what they are willing to pay for the product.

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 Chapter 15/Monopoly ❖ 87

6. A rational pricing strategy for a profit-maximizing monopolist is

a. price discrimination.
b. price segregation.
c. synergy pricing.
d. average cost pricing.

7. Price discrimination requires the firm to

a. separate customers according to their willingnesses to pay.
b. differentiate between different units of its product.
c. engage in arbitrage.
d. use coupons.

8. Which of the following can eliminate the inefficiency inherent in monopoly pricing?
a. arbitrage
b. cost-plus pricing
c. price discrimination
d. regulations that force monopolies to reduce their levels of output

9. A firm cannot price discriminate if it

a. has perfect information about consumer demand.
b. operates in a competitive market.
c. faces a downward-sloping demand curve.
d. is regulated by the government.

10. A firm cannot price discriminate if

a. its has declining marginal revenue.
b. it operates in a competitive market.
c. buyers only reveal the price they are willing to pay for the product.
d. it has a constant marginal cost.

11. Price discrimination adds to social welfare in the form of

(i) increased total surplus.
(ii) reduced costs of production.
(iii) increased consumer surplus.
a. (i) only
b. (i) and (ii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)

12. Compared to the monopoly outcome with a single price, imperfect price discrimination
(i) sometimes raises total surplus.
(ii) sometimes lowers total surplus.
(iii) always leads to a lower quantity of output.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)

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88 ❖ Chapter 15/Monopoly

13. Price discrimination

a. forces monopolies to charge a lower price as a result of government regulation.
b. is an attempt by a monopoly to prevent some customers from purchasing its product by charging a
high price.
c. is an attempt by a monopoly to increases its profit by selling the same good to different customers
at different prices.
d. increases the consumer surplus associated with a monopolistic market.

14. What do economists call the business practice of selling the same good at difference prices to differ-
ent customers?
a. price discrimination
b. collusion
c. compensating differential
d. Both a and b are correct

15. A monopolist's profits with price discrimination will be

a. lower than if the firm charged a single, profit-maximizing price
b. the same as if the firm charged a single, profit-maximizing price.
c. higher than if the firm charged just one price because the firm will capture more consumer surplus.
d. higher than if the firm charged a single price because the costs of selling the good will be lower.

16. Which of the following is not an example of price discrimination?

a. A movie theater charges a lower price for a child’s ticket than for an adult’s ticket.
b. A university rebates part of the cost of tuition in the form of financial aid for needy students.
c. A local pizza chain offers a “buy three get one free” deal.
d. An ice cream parlor charges a higher price for ice cream than for sherbet.

17. A movie theater can increase its profits through price discrimination by charging a higher price to
adults and a lower price to children if it
a. can prevent children from buying the lower-priced tickets and selling them to adults.
b. has some degree of monopoly pricing power.
c. can easily distinguish between the two groups of customers.
d. All of the above are correct.

18. A movie theater can increase its profits through price discrimination by charging a higher price to
adults and a lower price to children if
a. adults buy more popcorn than children.
b. the cost of showing a movie to children is less than the cost of showing a movie to adults.
c. it has some degree of monopoly-pricing power.
d. All of the above are correct.

19. Financial aid to college students, quantity discounts, and senior citizen discounts are all examples of
a. consumer surplus.
b. deadweight loss.
c. price discrimination.
d. nonprofit pricing strategies.

20. When deciding what price to charge consumers, the monopolist may choose to charge them different
prices based on the customers'
a. geographical location.
b. age.
c. income.
d. All of the above are correct.

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 Chapter 15/Monopoly ❖ 89

21. Many movie theaters allow discount tickets to be sold to senior citizens because
a. senior-citizen laws mandate such discounts.
b. goodwill efforts earn community respect and win loyal patrons.
c. the theaters are profit maximizers.
d. senior citizens lobby city councils for lower prices.

22. Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you fly back.
What is the reason for this price discrepancy?
a. Airlines are practicing imperfect price discrimination to raise their profits.
b. Airlines charge a different rate based on the different nature of peoples' travel needs.
c. Airlines are attempting to charge people based on their willingness to pay.
d. All of the above are correct.

23. When a local grocery store offers discount coupons in the Sunday paper it is most likely trying to
a. reduce prices for all customers.
b. encourage literacy.
c. encourage arbitrage.
d. price discriminate.

24. Price discrimination explains why Ivy League universities often base tuition costs on students'
a. age.
b. financial resources.
c. high school GPA.
d. gender.

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90 ❖ Chapter 15/Monopoly

25. Some prescription drugs sell for more in the United States than they do in other countries. Which of
the following statements about this issue is most likely to be true?
a. Drug companies are engaging in price discrimination, and this practice certainly reduces global
social welfare.
b. Global social welfare could be improved if the price in the United States were reduced to the price
charged in other countries.
c. Global social welfare could be improved if the price in the other countries were increased to the
price charged in the United States.
d. Drug companies are engaging in price discrimination, but this might improve global social welfare
if it gives more people access to the drugs.

26. Which of the following is not an example of price discrimination by a firm?

a. children's meals at a restaurant
b. a natural gas company charging customers a higher rate in the winter than in the summer
c. a senior citizens' discount
d. coupons in the Sunday newspaper

27. Customers who purchase an audio CD from Sally’s Sounds are charged 20% more than customers
who purchase the audio CD from the Sally's Sounds website. This is an example of
a. perfect price discrimination.
b. price discrimination.
c. deadweight loss.
d. socially inefficient output.

28. During the holiday season, high-end retailers frequently place a high price on merchandise on week-
ends and discount the price during the week. They do this because they believe that two groups of
customers exist: shoppers with little free time and bargain hunters. Bargain hunters have time to
shop around and frequently shop during the week. What do economists call this price strategy used
by high-end retailers?
a. oligopoly
b. price discrimination
c. compensating differential
d. in-kind transfers

29. Which of the following is an example of price discrimination?

a. Nabisco provides cents-off coupons for its products.
b. Amtrak offers a lower price for weekend travel compared to weekday rates on the same routes.
c. Hotel rates for AAA members are lower than for nonmembers.
d. All of the above are correct.

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 Chapter 15/Monopoly ❖ 91

30. Which of the following statements comparing monopoly with competition is correct?
a. A monopolist produces a higher level of output and charges a lower price than a competitive firm
would.
b. With perfect price discrimination, the total surplus under monopoly can be the same as under
competition.
c. With or without price discrimination, the consumer surplus under monopoly is at least as large as it
would be under competition.
d. The deadweight loss associated with monopoly is caused by the positive economic profits of the
monopolist; competitive firms do not earn a positive economic profit so there is no deadweight loss
under competition.

31. Suppose a monopolist is able to charge each customer a price equal to that customer’s willingness-
to-pay for the product. Then the monopolist is engaging in
a. marginal cost pricing.
b. arbitrage pricing.
c. voodoo economics.
d. perfect price discrimination.

32. Suppose that a professional photographer takes a prize-winning digital photo. She can sell a 5"x7"
color print of the photo for $10. She can also sell the digital file for $20. There are 500 people will-
ing to buy the color print and 2,000 people willing to buy the digital file. Assume the costs to the
photographer are zero and that the people who purchase the digital file cannot resell the file itself or
any prints made from it. What should she do in order to maximize her profits?
a. earn $5,000 by selling only the color prints
b. earn $40,000 by selling only the digital files
c. earn $45,000 by selling both the color prints and the digital files at their respective prices
d. We do not have enough information with which to answer this question.
Scenario 15-5
An airline knows that there are two types of travelers: business travelers and vacationers. For a particular
flight, there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will
pay $300 for a ticket. There are 150 seats available on the plane. Suppose the cost to the airline of providing
the flight is $20,000, which includes the cost of the pilots, flight attendants, fuel, etc.
33. Refer to Scenario 15-5. How much profit will the airline earn if it sets the price of each ticket at
$600?
a. -$5,000
b. $15,000
c. $40,000
d. $60,000

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92 ❖ Chapter 15/Monopoly

34. Refer to Scenario 15-5. How much profit will the airline earn if it sets the price of each ticket at
$300?
a. -$15,000
b. -$5,000
c. $25,000
d. $45,000
35. Refer to Scenario 15-5. How much profit will the airline earn if it engages in price discrimination?
a. -$5,000
b. $40,000
c. $55,000
d. $75,000
36. Refer to Scenario 15-5. How much additional profit can the airline earn by charging each customer
their willingness to pay relative to charging a flat price of $600 per ticket?
a. $15,000
b. $25,000
c. $40,000
d. $70,000
37. Refer to Scenario 15-5. How much additional profit can the airline earn by charging each customer
their willingness to pay relative to charging a flat price of $300 per ticket?
a. $10,000
b. $15,000
c. $30,000
d. $45,000
Scenario 15-6
The concert promoters of a heavy-metal band, WeR2Loud, know that there are two types of concert-goers:
die-hard fans and casual fans. For a particular WeR2Loud concert, there are 1,000 die-hard fans who will pay
$150 for a ticket and 500 casual fans who will pay $50 for a ticket. There are 1,500 seats available at the
concert venue. Suppose the cost of putting on the concert is $50,000, which includes the cost of the band,
lighting, security, etc.

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 Chapter 15/Monopoly ❖ 93

38. Refer to Scenario 15-6. How much profit will the concert promoters earn if they set the price of
each ticket at $150?
a. $75,000
b. $100,000
c. $150,000
d. $175,000
39. Refer to Scenario 15-6. How much profit will the concert promoters earn if they set the price of
each ticket at $50?
a. $25,000
b. $75,000
c. $100,000
d. $150,000
40. Refer to Scenario 15-6. How much profit will the concert promoters earn if they engage in price
discrimination?
a. $100,000
b. $125,000
c. $150,000
d. $175,000
41. Refer to Scenario 15-6. How much additional profit can the concert promoters earn by charging
each customer their willingness to pay relative to charging a flat price of $150 per ticket?
a. $25,000
b. $50,000
c. $75,000
d. $100,000
42. Refer to Scenario 15-6. How much additional profit can the concert promoters earn by charging
each customer their willingness to pay relative to charging a flat price of $50 per ticket?
a. $25,000
b. $50,000
c. $75,000
d. $100,000
Scenario 15-7
Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its
market area. Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to
PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of
delivering PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the
PMC service to maximize her profit. Before setting price, she hires an economist to estimate demand for the
PMC service. The economist discovers that there are two types of subscribers who value premium movie
channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a year for the new PMC
premium channel. Second, the PMC channel will appeal to 20,000 occasional TV viewers who will pay as
much as $20 a year for a subscription to PMC.

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94 ❖ Chapter 15/Monopoly

43. Refer to Scenario 15-7. If Black Box Cable TV is unable to price discriminate, what price will it
choose to maximize its profit, and what is the amount of the profit?
a. price = $20; profit = $400,000
b. price = $20; profit = $330,000
c. price = $150; profit = $450,000
d. price = $150; profit = $600,000
44. Refer to Scenario 15-7. If Black Box Cable TV is able to price discriminate, what would be the
maximum amount of profit it could generate?
a. $500,000
b. $600,000
c. $850,000
d. $925,000
45. Refer to Scenario 15-7. What is the deadweight loss associated with the nondiscriminating pricing
policy compared to the price discriminating policy?
a. $375,000
b. $400,000
c. $475,000
d. It cannot be determined from the information provided.
Scenario 15-8
Mega Media Cable TV is able to purchase an exclusive right to sell a premium sports channel in its market
area. Let's assume that Mega Media pays $100,000 a year for the exclusive marketing rights to the sports
channel. Since Mega Media has already installed cable to all of the homes in its market area, the marginal cost
of delivering the sports channel to subscribers is zero. The manager of Mega Media needs to know what price
to charge for the sports channel service to maximize her profit. Before setting price, she hires an economist to
estimate demand for the sports channel. The economist discovers that there are two types of subscribers who
value premium sporting channels. First are the 3,000 die-hard sports fans who will pay as much as $150 a year
for the new channel. Second, the premium sports channel will appeal to 20,000 occasional sports viewers who
will pay as much as $25 a year for a subscription to it.
46. Refer to Scenario 15-8. How much profit will Mega Media Cable TV earn if it sets the price at
$25?
a. $350,000
b. $450,000
c. $475,000
d. $575,000
47. Refer to Scenario 15-8. How much profit will Mega Media Cable TV earn if it sets the price at
$150?
a. $350,000
b. $450,000
c. $475,000
d. $575,000
48. Refer to Scenario 15-8. If Mega Media Cable TV is unable to price discriminate, what price will it
choose to maximize its profit, and what is the amount of the profit?
a. price = $25; profit = $575,000
b. price = $25; profit = $475,000
c. price = $150; profit = $450,000
d. price = $150; profit = $350,000

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 Chapter 15/Monopoly ❖ 95

49. Refer to Scenario 15-8. If Mega Media Cable TV is able to price discriminate, what would be the
maximum amount of profit it could generate?
a. $950,000
b. $850,000
c. $400,000
d. $350,000
Figure 15-15
Price
50

45

40

35

30

25

20

15 M C=ATC
10

5 MR Demand

50 100 150 200 250 300 350 400 450 500 550 600 Quantity

50. Refer to Figure 15-15. If the monopoly firm is not allowed to price discriminate, then consumer
surplus amounts to
a. $0.
b. $500.
c. $1,000.
d. $2,000.

51. Refer to Figure 15-15. If the monopoly firm perfectly price discriminates, then consumer surplus
amounts to
a. $0.
b. $250.
c. $500.
d. $1,000.

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96 ❖ Chapter 15/Monopoly

52. Refer to Figure 15-15. If the monopoly firm is not allowed to price discriminate, then the dead-
weight loss amounts to
a. $50.
b. $100.
c. $500.
d. $1,000.

53. Refer to Figure 15-15. If the monopoly firm perfectly price discriminates, then the deadweight loss
amounts to
a. $0.
b. $100.
c. $200.
d. $500.

54. Refer to Figure 15-15. If there are no fixed costs of production, monopoly profit without price dis-
crimination equals
a. $500.
b. $1,000.
c. $2,000.
d. $4,000.

55. Refer to Figure 15-15. If there are no fixed costs of production, monopoly profit with perfect price
discrimination equals
a. $500.
b. $1,000.
c. $2,000.
d. $4,000.
Figure 15-16
Price
50

45

40

35

30

25
22.5
20

15

10 M C=ATC
5
MR Demand

50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 Quantity

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 Chapter 15/Monopoly ❖ 97

56. Refer to Figure 15-16. If the monopoly firm is not allowed to price discriminate, then consumer
surplus amounts to
a. $0.
b. $1,562.50.
c. $3,125.
d. $6,250.

57. Refer to Figure 15-16. If the monopoly firm perfectly price discriminates, then consumer surplus
amounts to
a. $0.
b. $1,562.50.
c. $3,125.
d. $6,250.

58. Refer to Figure 15-16. If the monopoly firm is not allowed to price discriminate, then the dead-
weight loss amounts to
a. $0.
b. $1,562.50.
c. $3,125.
d. $6,250.

59. Refer to Figure 15-16. If the monopoly firm perfectly price discriminates, then the deadweight loss
amounts to
a. $0.
b. $1,562.50.
c. $3,125.
d. $6,250.

60. Refer to Figure 15-16. If there are no fixed costs of production, monopoly profit without price dis-
crimination equals
a. $0.
b. $1,562.50.
c. $3,125.
d. $6,250.

61. Refer to Figure 15-16. If there are no fixed costs of production, monopoly profit with perfect price
discrimination equals
a. $1.
b. $1,562.5.
c. $3,125.
d. $6,250.

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98 ❖ Chapter 15/Monopoly

Figure 15-17
Price

100

90

80
MC
70

60

50

40

30

20

10 Demand
MR

10 20 30 40 50 60 70 80 Quantity

62. Refer to Figure 15-17. The consumer surplus at the monopolist’s profit-maximizing price is
a. $450.
b. $900.
c. $1,350.
d. $2,025.

63. Refer to Figure 15-17. The deadweight loss caused by a profit-maximizing monopoly amounts to
a. $225.
b. $450.
c. $900.
d. $1,350.

64. Which of the following can defeat the profit-maximizing strategy of price discrimination?
a. consumer surplus
b. deadweight loss
c. market power
d. arbitrage

65. Price discrimination is a rational strategy for a profit-maximizing monopolist when

a. the monopolist finds itself able to produce only limited quantities of output.
b. consumers are unable to be segmented into identifiable markets.
c. the monopolist wishes to increase the deadweight loss that results from profit-maximizing behavior.
d. there is no opportunity for arbitrage across market segments.

66. A market force that can prevent firms from price discriminating is
a. fluctuating resource prices.
b. arbitrage.
c. high fixed costs.
d. marginal-cost pricing.

67. The process of buying a good in one market at a low price and selling the good in another market for
a higher price in order to profit from the price difference is known as
a. sabotage.
b. conspiracy.
c. arbitrage.
d. collusion.

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 Chapter 15/Monopoly ❖ 99

68. If a monopolist can practice perfect price discrimination, the monopolist will
a. eliminate consumer surplus.
b. eliminate deadweight loss.
c. maximize profits.
d. All of the above are correct.

69. Perfect price discrimination

a. eliminates deadweight loss.
b. reduces profits to the monopolist.
c. decreases the total quantity sold by the monopolist.
d. requires arbitrage in order for the monopolist to maximize profits.

70. Perfect price discrimination

a. increases profits to the firm.
b. increases total surplus.
c. decreases consumer surplus.
d. All of the above are correct.

71. A perfectly price-discriminating monopolist is able to

a. maximize profit and produce a socially-optimal level of output.
b. maximize profit, but not produce a socially-optimal level of output.
c. produce a socially-optimal level of output, but not maximize profit.
d. exercise illegal preferences regarding the race and/or gender of its employees.

72. If a monopolist is able to perfectly price discriminate,

a. consumer surplus is always increased.
b. total surplus is always decreased.
c. consumer surplus and deadweight losses are transformed into monopoly profits.
d. the price effect dominates the output effect on monopoly revenue.

73. In theory, perfect price discrimination

a. decreases the monopolist's profits.
b. decreases consumer surplus.
c. increases deadweight loss.
d. reduces the number of consumers who purchase the monopoly’s product.

74. Perfect price discrimination describes a situation in which the monopolist

a. knows the exact willingness to pay of each of its customers.
b. charges exactly two different prices to exactly two different groups of customers.
c. maximizes consumer surplus.
d. experiences a zero economic profit.

75. In reality, perfect price discrimination is

a. used by about 75 percent of all monopolies.
b. used by about 50 percent of all monopolies.
c. seldom used by monopolies because it leads to lower profits.
d. rarely possible.

76. How does a competitive market compare to a monopoly that engages in perfect price discrimina-
tion?
a. In both cases, total social welfare is the same.
b. Total social welfare is higher in the competitive market than with the perfectly price discriminating
monopoly.
c. In both cases, some potentially mutually beneficial trades do not occur.
d. Consumer surplus is the same in both cases.

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100 ❖ Chapter 15/Monopoly

77. A monopolist that practices perfect price discrimination

a. creates no deadweight loss.
b. charges one group of buyers a higher price than another group, such as offering a student discount.
c. charges a higher price but produces the same monopoly level of output as when a single price is
charged.
d. charges some customers a price below marginal cost because costs are covered by the high-priced
buyers.

78. A monopolist faces the following demand curve:

Price Quantity
$8 300
$7 400
$6 500
$5 600
$4 700
$3 800
$2 900
$1 1,000
The monopolist has fixed costs of $1,000 and has a constant marginal cost of $2 per unit. If the
monopolist were able to perfectly price discriminate, how many units would it sell?
a. 400
b. 500
c. 900
d. 4,200

79. With perfect price discrimination the monopoly

a. eliminates all price discrimination by charging each customer the same price.
b. charges each customer an amount equal to the monopolist's marginal cost of production.
c. eliminates deadweight loss.
d. eliminates profits and increases consumer surplus.

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 Chapter 15/Monopoly ❖ 101

80. Which of the following is not one of the ways that antitrust laws promote competition?
a. Antitrust laws allow the government to prevent mergers.
b. Antitrust laws allow the government to break up companies into smaller ones.
c. Antitrust laws prevent companies from coordinating their activities in ways that make markets less
competitive.
d. Antitrust laws allow the government to shut down any firm the government believes has monopoly
power.
Table 15-18
Tommy’s Tie Company, a monopolist, has the following cost and revenue information. Assume that
Tommy’s is able to engage in perfect price discrimination.
COSTS REVENUES
Quantity Total Cost Marginal Quantity Price Total Marginal
Produced Cost Demanded Revenue Revenue
0 $100 -- 0 $170 --
1 $140 1 $160
2 $184 2 $150
3 $230 3 $140
4 $280 4 $130
5 $335 5 $120
6 $395 6 $110
7 $475 7 $100
8 $575 8 $95

81. Refer to Table 15-18. If the monopolist can engage in perfect price discrimination, what
is the marginal revenue from selling the 5th tie?
a. $80
b. $100
c. $110
d. $120
82. Refer to Table 15-18. If the monopolist can engage in perfect price discrimination, what is the mar-
ginal revenue from selling the 8th tie?
a. $45
b. $60
c. $80
d. $95

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102 ❖ Chapter 15/Monopoly

83. Refer to Table 15-18. If the monopolist can engage in perfect price discrimination, what is the total
revenue when 3 ties are sold?
a. $140
b. $420
c. $450
d. $620

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 Chapter 15/Monopoly ❖ 103

84. Refer to Table 15-18. If the monopolist can engage in perfect price discrimination, what is the total
revenue when 7 ties are sold?
a. $650
b. $700
c. $910
d. $1080

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104 ❖ Chapter 15/Monopoly

85. Refer to Table 15-18. If the monopolist can engage in perfect price discrimination, what is the aver-
age revenue when 7 ties are sold?
a. $90
b. $100
c. $110
d. $130

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 Chapter 15/Monopoly ❖ 105

86. Refer to Table 15-18. If the monopolist can engage in perfect price discrimination, what is the
quantity that maximizes economic profit?
a. 5 ties
b. 6 ties
c. 7 ties
d. 8 ties

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106 ❖ Chapter 15/Monopoly

87. Refer to Table 15-18. If the monopolist can engage in perfect price discrimination, what is total
profit at the profit-maximizing quantity?
a. $325
b. $435
c. $565
d. $1000

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 Chapter 15/Monopoly ❖ 107

88. Refer to Table 15-18. What are Tommy’s Ties Company's fixed costs?
a. $100
b. $150
c. $354
d. $654

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108 ❖ Chapter 15/Monopoly

PUBLIC POLICY TOWARD MONOPOLIES

1. Which of the following is the preferred strategy for the government to follow to remedy the ineffi-
cient allocation of resources associated with monopolies?
a. preventing mergers through antitrust laws
b. regulating the prices that monopolies can charge
c. doing nothing
d. None of the above strategies is preferred. Each is a viable strategy.

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 Chapter 15/Monopoly ❖ 109

2. Which of the following statements is not correct?

a. The government may use antitrust laws to break up an existing company to improve competition.
b. The government may break up a natural monopoly to lower the price charged to customers.
c. Private ownership is typically preferred to public ownership.
d. Sometimes the best strategy is for the government to do nothing about monopoly inefficiency
because the “fix” may be worse than the problem.

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110 ❖ Chapter 15/Monopoly

3. Which of the following statements is not correct?

a. The government may use antitrust laws to prevent a merger if the government believes the merger
will reduce competition and increase prices.
b. By regulating a natural monopoly where price equals average total cost, the monopoly earns zero
profits.
c. An advantage of private ownership over public ownership is that private business owners tend to
fire inefficient managers.
d. The government should always intervene to improve monopoly inefficiency.

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 Chapter 15/Monopoly ❖ 111

4. Which of the following may eliminate some or all of the inefficiency that results from monopoly
pricing?
a. The government can regulate the monopoly.
b. The monopoly can be prohibited from price discriminating.
c. The monopoly can be forced to operate at a point where its marginal revenue is equal to its
marginal cost.
d. None of the above would eliminate any inefficiency associated with a monopoly.

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112 ❖ Chapter 15/Monopoly

5. Antitrust laws have economic benefits that outweigh the costs if they
a. prevent mergers that would decrease competition and lower the costs of production.
b. prevent mergers that would decrease competition and raise the costs of production.
c. allow mergers that would decrease competition and raise the costs of production.
d. None of the above is correct because antitrust laws never have economic benefits that outweigh the
costs.

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 Chapter 15/Monopoly ❖ 113

6. Which of the following statements is not correct?

a. Two examples of early antitrust laws are the Sherman and Clayton Antitrust Acts.
b. Antitrust laws automatically prevent mergers between companies that produce similar products.
c. Antitrust laws give the government power to increase competition.
d. Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through
more efficient joint production.

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114 ❖ Chapter 15/Monopoly

7. Which of the following statements is correct?

a. Two examples of early antitrust laws are the Clinton and Stigler Antitrust Acts.
b. Antitrust laws automatically prevent mergers between companies that produce similar products.
c. Antitrust laws reduce the government’s power to regulate private companies.
d. Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through
more efficient joint production.

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 Chapter 15/Monopoly ❖ 115

8. The first major piece of antitrust legislation was the

a. Clayton Act.
b. Reagan-Bush Act.
c. Sherman Act.
d. Clinton-Gore Act.

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116 ❖ Chapter 15/Monopoly

9. The legislation passed by Congress in 1890 to reduce the market power of large and powerful
"trusts" was the
a. Morgan Act.
b. Sherman Act.
c. Clayton Act.
d. 14th Amendment.

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 Chapter 15/Monopoly ❖ 117

10. The legislation passed by Congress in 1914 to strengthen the government’s powers and authorize
private lawsuits was the
a. Morgan Act.
b. Sherman Act.
c. Clayton Act.
d. 14th Amendment.

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118 ❖ Chapter 15/Monopoly

11. The collection of statutes aimed at curbing monopoly power is called

a. the 14th amendment.
b. the Clayton Act.
c. the Sherman Act.
d. antitrust law.

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 Chapter 15/Monopoly ❖ 119

12. In order for antitrust laws to raise social welfare, the government must
a. disallow synergy benefits from accruing to monopolists.
b. disallow any mergers from taking place.
c. be able to determine which mergers are desirable and which are not.
d. always attempt to keep markets in their most competitive form.

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120 ❖ Chapter 15/Monopoly

13. Reduced competition through merging of companies will raise social welfare
a. if the social cost from the synergies exceeds the benefit of increased market power.
b. if the benefit from the synergies exceeds the social cost of increased market power.
c. always.
d. never.

14. One method used to control the ability of firms to capture monopoly profit in the United States is
through
a. government purchase of products produced by monopolists.
b. government distribution of a monopolist's excess production.
c. enforcement of antitrust laws.
d. regulation of firms in highly competitive markets.

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 Chapter 15/Monopoly ❖ 121

15. Antitrust laws may

a. enhance the ability of firms to capture profits from a concentration of market power.
b. enhance the ability of firms to reduce economic losses.
c. restrict the ability of firms to operate at the socially efficient level of production.
d. restrict the ability of firms to merge.

16. Antitrust laws allow the government to

a. prevent mergers.
b. break up companies.
c. promote competition.
d. All of the above are correct.

17. Antitrust laws allow the government to

a. collect revenues through the antitrust tax.
b. break up companies.
c. purchase privately-held companies through eminent domain.
d. All of the above are correct.

18. Splitting up a monopoly is often justified on the grounds that

a. consumers prefer dealing with small firms.
b. small firms have lower costs.
c. competition is inherently efficient.
d. small firms produce higher quality products.

19. Antitrust laws

a. prevent firms from maximizing profits.
b. allow the government to prevent mergers, even ones that would benefit consumers.
c. require the government to measure both the benefits and costs of a potential merger.
d. All of the above are correct.

20. Which of the following statements is correct?

a. Public ownership is preferred to regulation in order to minimize the deadweight losses associated
with natural monopolies.
b. Antitrust laws are always the best way to limit monopoly power.
c. It is possible that the best approach to monopolies is for the government to do nothing.
d. Marginal-cost pricing requires a natural monopoly to earn zero economic profits.

21. Which of the following is not correct?

a. Antitrust laws may prevent mergers that would actually raise social welfare.
b. Public ownership is the most common public policy toward monopolies in the United States.
c. Regulation is a common strategy for a natural monopoly.
d. Sometimes the best public policy toward a monopoly may be to do nothing.

22. Which of the following statements is not correct?

a. Part of the deadweight loss associated with monopoly is measured by the monopolist's economic
profit.
b. Marginal cost is always less than average total cost in a natural monopoly.
c. Discount coupons available free to the public are a type of price discrimination.
d. Anti-trust laws make it harder for firms to create synergies.

23. One problem with government operation of monopolies is that

a. a benevolent government is likely to be interested in generating profits for political gain.
b. monopolies typically have rising average costs.
c. the government typically has little incentive to reduce costs.
d. a government-regulated outcome will increase the profitability of the monopoly.

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122 ❖ Chapter 15/Monopoly

24. One problem with regulating a monopolist on the basis of cost is that
a. by focusing on costs, the regulators ignore profits.
b. it does not provide an incentive for the monopolist to reduce its cost.
c. a monopolist's costs, by definition, are higher than costs of perfectly competitive firms.
d. a monopolist is still able to generate excessive economic profits.

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 Chapter 15/Monopoly ❖ 123

25. The task of economic regulation is to

a. protect monopoly profits.
b. approximate the results of the competitive market.
c. replace competition with government ownership.
d. increase competition within the market.

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124 ❖ Chapter 15/Monopoly

26. If government regulation sets the maximum price for a natural monopoly equal to its marginal cost,
then the natural monopolist will
a. earn economic losses.
b. earn economic profits.
c. earn zero economic profits.
d. produce a lower quantity of output than is socially optimal.

27. If the government regulates the price that a natural monopolist can charge to be equal to the firm’s
marginal cost, the firm will
a. earn zero profits.
b. earn positive profits, causing other firms to enter the industry.
c. earn negative profits, causing the firm to exit the industry.
d. minimize costs in order to lower the price that it charges.

28. If the government regulates the price that a natural monopolist can charge to be equal to the firm’s
average total cost, the firm will
a. earn zero profits.
b. earn positive profits, causing other firms to enter the industry.
c. earn negative profits, causing the firm to exit the industry.
d. minimize costs in order to lower the price that it charges.

29. When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated
monopoly
a. will experience a loss.
b. will experience a price below average total cost.
c. may rely on a government subsidy to remain in business.
d. All of the above are correct.

30. Since natural monopolies have a declining average cost curve, regulating natural monopolies by set-
ting price equal to marginal cost would
a. cause the monopolist to operate at a loss.
b. result in a less than optimal total surplus.
c. maximize producer surplus.
d. result in higher profits for the monopoly.

31. Policymakers are discussing various proposals regarding how to deal with natural monopolies. Sena-
tor Huff wants to regulate natural monopolies by equating price with average total cost. Huff con-
tends that such a policy will ensure that monopolies make every effort to reduce costs. Senator Puff
wants the government to own natural monopolies. Puff argues that government-owned monopolies
usually do a better job of holding down costs than privately owned monopolies. Which senator's ar-
gument is correct?
a. Senator Huff
b. Senator Puff
c. both senators
d. neither senator

32. Which type of public policy toward monopolies is much more common in Europe than in the United
States?
a. antitrust laws
b. regulation
c. public ownership
d. “do nothing”

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 Chapter 15/Monopoly ❖ 125

33. Which of the following is an example of public ownership of a monopoly?

a. DeBeers
b. Microsoft
c. U.S. Postal Service
d. AT&T

34. Private ownership of a monopoly may benefit society because the monopoly will have an incentive
to
a. charge a price that is consistent with that of a benevolent social planner.
b. charge a price that prevents some people from buying.
c. price its good according to the intersection of marginal cost and average revenue.
d. lower its costs to earn a higher profit.

35. The key issue in determining the efficiency of public versus private ownership of a monopoly is
a. the tendency for efficient management of publicly owned enterprises.
b. the inability of private monopolies to get rid of managers that are doing a bad job.
c. the propensity of private monopolies to generate excessive profits.
d. how ownership of the firm affects the cost of production.

36. For a typical natural monopoly, average total cost is

a. falling, and marginal cost is above average total cost.
b. falling, and marginal cost is below average total cost.
c. rising, and marginal cost is below average total cost.
d. rising, and marginal cost is above average total cost.

37. In the majority of cases where there is a natural monopoly in the United States, the government usu-
ally deals with the problem
a. by splitting the natural monopoly into smaller companies.
b. through regulation.
c. by turning the natural monopoly into a public enterprise.
d. by doing nothing.

38. In a natural monopoly,

a. society would be better off if antitrust laws were used to create many different firms in the market.
b. the marginal cost curve is positively sloped.
c. if the government requires marginal cost pricing, it will likely have to subsidize the firm.
d. the marginal revenue curve is horizontal.

39. For a long while, electricity producers were thought to be a classic example of a natural monopoly.
People held this view because
a. the average cost of producing units of electricity by one producer in a specific region was lower
than if the same quantity were produced by two or more producers in the same region.
b. the average cost of producing units of electricity by one producer in a specific region was higher
than if the same quantity were produced by two or more produced in the same region.
c. the marginal cost of producing units of electricity by one producer in a specific region was higher
than if the same quantity were produced by two or more producers in the same region.
d. electricity is a special non-excludable good that could never be sold in a competitive market.

40. The reason to regulate utilities instead of using antitrust laws to promote competition is that a utility
is usually a
a. profit-maximizing monopoly.
b. producer of externalities.
c. revenue-maximizing monopoly.
d. natural monopoly.

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126 ❖ Chapter 15/Monopoly

41. The assessment by George Stigler concerning the tradeoffs between "market failure" and "political
failure" in the American economy provides support for which of the following solutions to the prob-
lems of monopolies?
a. public ownership of monopolies
b. government regulation of monopolies
c. government incentives to promote competition in monopolized industries
d. doing nothing at all

42. The George Stigler quote, “...the degree of ‘market failure’ for the American economy is much
smaller than the ‘political failure’ arising from the imperfections of economic policies ...” illustrates
the advantage of which type of public policy toward monopolies?
a. antitrust laws
b. regulation
c. public ownership
d. “do nothing”
CONCLUSION: THE PREVALENCE OF MONOPOLY

1. Which of the following strategies is not an effective strategy to reduce monopoly inefficiency?
a. antitrust laws
b. price discrimination
c. doing nothing
d. breaking up a natural monopoly into more than one firm

2. Most firms have

a. no monopoly pricing power.
b. some monopoly pricing power.
c. absolute monopoly pricing power.
d. the ability to earn monopoly profits.

3. Which of the following statements is correct?

a. Firms with some degree of monopoly power are common, but firms with substantial monopoly
power are rare.
b. Firms with some degree of monopoly power are rare, as are firms with substantial monopoly
power.
c. Firms with some degree of monopoly power are common, as are firms with substantial monopoly
power.
d. Firms with some degree of monopoly power are rare, but firms with substantial monopoly power
are common.
SHORT ANSWER

1. Describe how government is involved in creating a monopoly. Why might the government create one? Give an
example.

2. What is the defining characteristic of a natural monopoly? Give an example of a natural monopoly.

3. In the market for "home heating" consumers typically have several options (e.g., electricity, heating fuel, natu-
ral gas, propane, etc.), yet we often think of firms in this industry as behaving like monopolists. Discuss the
context in which your electricity provider is a monopolist. Is this characterization universally applicable? Ex-
plain your answer.

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 Chapter 15/Monopoly ❖ 127

4. There has been much discussion of deregulating electricity and natural gas delivery companies in the United
States. Discuss the likely effect of deregulation on prices in these two industries.

5. Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods.

6. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight loss from
taxation?

7. What is the deadweight loss due to profit-maximizing monopoly pricing under the following conditions: The
price charged for goods produced is $10. The intersection of the marginal revenue and marginal cost curves
occurs where output is 100 units and marginal revenue is $5. The socially efficient level of production is 110
units. The demand curve is linear and downward sloping, and the marginal cost curve is constant.

8. Assume that a monopolist decides to maximize revenue rather than profit. How does this operating objective
change the size of the deadweight loss? If you are a "benevolent" manager of a monopoly firm and are inter-
ested in reducing the deadweight loss of monopoly, should you maximize profits or maximize revenue? Ex-
plain your answer.

9. One example of price discrimination occurs in the publishing industry when a publisher initially releases an
expensive hardcover edition of a popular novel and later releases a cheaper paperback edition. Use this exam-
ple to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy.

10. What are the four ways that government policymakers can respond to the problem of monopoly?

11. Give some examples of the benefits and costs of antitrust laws.

12. In many countries, the government chooses to "internalize" the monopoly by owning monopoly providers of
goods and services. (In some cases these firms are "nationalized," and the government actually buys or confis-
cates firms that operate in monopoly markets). What would be the advantages and disadvantages of such an
approach to ensure that the "best interest of society" is promoted in these markets? Explain your answer.

13. Why might economists prefer private ownership of monopolies over public ownership of monopolies?

14. One solution to the problems of marginal-cost pricing of a regulated natural monopolist is average cost pric-
ing. In this model, the monopolist is allowed to price its production at average total cost. How does average-
cost pricing differ from marginal-cost pricing? Does this solution maximize social well-being?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.