Practice 9

Multiple choice

1. 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.

2. 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.

3. 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)

4. 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.

5. 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.
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 d. An entrepreneur opens a popular new restaurant.

6. Patents, copyrights, and trademarks

a. are examples of government-created monopolies.
b. allow their owners to reduce the costs of what they produce.
c. generate more revenue for the government than they cost consumers in the form of higher
prices.
d. All of the above are correct.

7. 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)

Figure 1

8. Refer to Figure 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

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9. Refer to Figure 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.

10. 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.

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

multiple firms would likely each have to pay large fixed costs to develop their
(i)
own network of pipes.
allowing for competition among different firms in the water-distribution industry
(ii)
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

12. 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

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

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

14. 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.

15. 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 of output than at 99 units of output.

16. 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.

17. 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)

18. For a monopolist, marginal revenue is

a. equal to price, as it is for a perfectly competitive firm.

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 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.

19. 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.

20. 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.

21. A monopoly firm can sell 150 units of output for $10 per unit. Alternatively, it can sell 151 units of
output for $9.98 per unit. The marginal revenue of the 151st unit of output is
a. -$6.98.
b. -$0.02.
c. $2.45.
d. $6.98.

22. Bob’s Butcher Shop is the only place within 100 miles that sells bison burgers. Assuming that Bob
is maximizing his profit, which of the following statements is true?
a. The price of Bob’s bison burgers will be less than Bob’s marginal cost.
b. The price of Bob’s bison burgers will exceed Bob’s marginal cost.
c. The price of Bob’s bison burgers will equal Bob’s marginal cost.
d. Costs are irrelevant to Bob because he is a monopolist.

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Figure 2

23. Refer to Figure 2. If the monopoly firm is currently producing Q4 units of output, then a decrease
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. None of the above is correct. The monopolist currently maximizing profits at Q4.

24. Refer to Figure 2. If the monopoly firm is currently producing Q3 units of output, then a decrease
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.

25. Refer to Figure 2. Profit can always be increased by increasing the level of output by one unit if
the monopolist is currently operating at
(i) Q1.
(ii) Q2.
(iii) Q3.
(iv) Q4.
a. (ii) only
b. (i) or (ii) only
c. (i) only
d. (i), (ii), or (iii) only

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26. Refer to Figure 2. 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.

27. Refer to Figure 2. Profit will be maximized by charging a price equal to

a. P5.
b. P4.
c. P3.
d. P1.

28. Refer to Figure 2. A profit-maximizing monopoly's total revenue is equal to

a. P5 x Q3.
b. P4 x Q5.
c. (P5-P3) x Q3.
d. (P5-P4) x Q3.

Table 1
A monopolist faces the following demand curve:
Quantity Price
0 $30
1 $27
2 $24
3 $21
4 $18
5 $15
6 $12
7 $9
8 $6
9 $3
10 $0

29. Refer to Table 1. If a monopolist faces a constant marginal cost of $20, how much output should
the firm produce in order to maximize profit?
a. 2 units
b. 3 units
c. 4 units
d. 5 units

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30. Refer to Table 1. If a monopolist faces a constant marginal cost of $2, how much output should the
firm produce in order to maximize profit?
a. 2 units
b. 3 units
c. 4 units
d. 5 units

31. 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.

32. 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.

32. Suppose when a monopolist produces 50 units its average revenue is $8 per unit, its marginal
revenue 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.

33. 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

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

34. 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.

35. 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.

36. Consider a profit-maximizing monopoly pricing under the following conditions. The profit-
maximizing price charged for goods produced is $12.The intersection of the marginal revenue and
marginal 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

37. 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
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)

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38. 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.

39. 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.

40. 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.

41. 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.

Scenario 1
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.

42. Refer to Scenario 1. 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

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 d. $175,000

43. Refer to Scenario 1. 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

44. Refer to Scenario 1. 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

45. Refer to Scenario 1. 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

46. 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.

47. 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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48. 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.

49. 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.

50. 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.

Table 2
Total Average Marginal
Quantity Price 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

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51. Refer to Table 2. If the monopolist sells 8 units of its product, how much total revenue will it
receive from the sale?
a. $14
b. $40
c. $112
d. $164

52. Refer to Table 2. If the monopolist wants to maximize its revenue, how many units of its product
should it sell?
a. 4
b. 5
c. 6
d. 8

53. Refer to Table 2. When 4 units of output are produced and sold, what is average revenue?
a. $17
b. $21
c. $23
d. $26

54. Refer to Table 2. What is the marginal revenue for the monopolist for the sixth unit sold?
a. $3
b. $5
c. $11
d. $17

55. Refer to Table 2. 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

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