Chapter 6.

Monopoly
Features of Monopoly

1. The supply curve for monopolist is always

(A) more elastic that the supply curve for a perfect competitor
(B) less elastic than the supply curve for a perfect competitor
(C) more elastic that the market supply curve for a perfectly competitive industry
(D) steeper that the monopolist's average cost curve in the relevant region
(E) undefined because price-output decision of a monopolist depends on market demand

2. Which of the following is typically true for a monopoly?

(A) Its price is above marginal revenue.

(B) It is producing the output level at which average total cost is a minimum.
(C) It is producing the output level at which average total cost is equal to price.
(D) Its marginal cost curve is above its supply curve.
(E) Its marginal curve is the same as its supply curve

3. Which one of the following statements is NOT true of a monopoly?

(A) A single firm produces the entire market supply of a commodity.

(B) A monopoly has a horizontal demand curve.
(C) Marginal revenue is always less than price.
(D) Profit is maximized where marginal revenue is equal to marginal cost.
(E) Monopolies have the power to alter market prices.

4. All of the following can contribute to the development of a firm's monopoly power
EXCEPT that firm's

(A) exclusive control over important inputs

(B) economies of scale
(C) patents and copyrights
(D) inefficient production processes
(E) government licenses or franchises

5. Monopoly results because of:

(A) barriers to entry into the industry.

(B) greed by the seller.
(C) lack of interest by potential competitors.
(D) inadequate regulation by government.
(E) all of the above.

6. What makes cable television a natural monopoly?

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(A) Even though it is excludable, additional users do not diminish its enjoyment by
others.
(B) By law each cable company has an exclusive franchise.
(C) There are no close substitutes for cable television.
(D) No one else is willing to compete with a successful cable company.
(E) The long-run average cost is falling over a large range of output.

7. Certain monopolies are allowed to exist with some regulation because

(A) the existence of more firms would produce greater economies of scale.
(B) the industry benefits from a natural monopoly.
(C) the existence of more firms would enhance price competition.
(D) the existence of more firms would result in insufficient capacity.
(E) the industry is one which serves a large population.

8. The profit-maximizing output level produced by an unregulated monopoly is

(A) the socially optimal output level, since the firm's marginal revenue equals its
marginal cost
(B) greater than the socially optimal level, since the firm's marginal cost exceeds its
marginal revenue
(C) greater than the socially optimal level, since the firm makes economic profits
(D) less than the socially optimal level, since the price paid by consumers exceeds the
firm's marginal cost
(E) less than the socially optimal level, since the price of the product is less than the
firm's marginal revenue

9. A profit-maximizing monopoly produces less than the socially optimal level of output
because it produces where

(A) marginal cost is less than the price

(B) marginal cost is less than marginal revenue
(C) marginal cost is equal to long-run average total cost
(D) marginal cost is rising
(E) marginal revenue is rising

10. The inefficiency from monopoly results because:

(A) there is no competition to force down cost.

(B) high monopoly prices are not equitable.
(C) monopolies tend to be too big and unwieldy for efficient operation.
(D) monopolists underproduce relative to the ideal, at which society's MC = MB.
(E) all of the above.

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Profit-maximization decision under monopoly

11. According to the diagram, the monopolist will produce ___ and the price will be ___

P
$13
MC
$10

$7
$5

MR D

5 10 20 Q

(A) 20 units; less than $7

(B) 5 units; $10
(C) 10 units; $5
(D) 10 units; $7
(E) 5 units; $5

12. According to the diagram, the loss of consumer surplus from being a monopoly
market rather than a competitive market is

(A) 22.5;
(B) 12.5;
(C) 15;
(D) 7.5;
(E) 10.

13. Because the monopolist’s demand curve is downsloping:

(A) MR always will be less than price with positive output.

(B) Price will be constant at all levels of output.
(C) The price elasticity of demand will be the same at all levels of output.
(D) The marginal cost curve will coincide with the marginal revenue curve.
(E) All of the above will hold true.

14. The profit maximizing output for a monopolist with positive marginal cost is always

(A) greater that the revenue maximizing output

(B) equal to the revenue maximizing output

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(C) less than the revenue maximizing output
(D) greater than the competitive output
(E) equal to the competitive output unless fixed costs are positive as well

15. Which of the following is true of a monopoly that is producing a level of output such
that marginal revenue is negative?

(A) It is experiencing economies of scale in production.

(B) It is maximizing total revenue.
(C) It is producing where demand is price elastic.
(D) It could lower price to increase profits.
(E) It could decrease output to increase profits.

16. Which of the following is necessarily true of the profit-maximizing equilibrium of a

monopolist who sets a single price?

(A) Price equals average total cost.

(B) Price is greater than marginal cost.
(C) Average total cost is at its minimum level.
(D) Marginal revenue is greater than marginal cost.
(E) Marginal cost is minimized.

17. A monopoly producer of electronics equipment is given the following data:

13. Marginal revenue = $18 per unit of output

Marginal cost = $10 per unit of output
Average cost = $20 per unit of output

To maximize profits, the monopoly should

(A) increase price and increase output

(B) increase price and decrease output
(C) increase price and hold output constant
(D) decrease price and increase output
(E) decrease price and decrease output

18. If a monopoly discovers that demand for its product is inelastic with respect to price,
in the price-and-output range in which it is selling, and if it seeks to maximize its
profit, it should:

(A) remain at its present position.

(B) always lower its price and seek to increase its sale.
(C) always raise its price, even at the cost of a sales reduction.
(D) raise its price, but only if that price change will not reduce its sales.
(E) raise its price to increase sales.

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19. U.S.S.R., Inc, a profit-maximizing monopolist, always chooses to produce at that
point where demand for its output is

(A) Inelastic or unit elastic.

(B) Elastic or unit elastic.
(C) Unit elastic.
(D) Perfectly elastic
(E) The monopolist does not care about the demand elasticity.

20. Kyrgyztelekom is a monopolist, and it faces a linear demand function qd=500-20p.

The Marginal Revenue function of this company is:

(A) MR=500-10p
(B) MR=500-40p
(C) MR = 25 – q/10
(D) MR = 25 – q/40
(E) MR = 50 + 2q.

21. The diagram above shows the demand curves for a monopoly that sells the same
product in two separate markets. There is no opportunity for trade or resale between
the two markets. Da is the demand curve in market A; Db is the demand curve in
market B. The average total cost curve and marginal cost curve are the same in both
markets. A profit- maximizing firm will

(A) charge the same price in both markets and set the price greater than marginal cost in
both markets
(B) charge the same price in both markets and set the price equal to marginal cost in both
markets
(C) set the price greater than marginal cost in market B but equal to marginal cost in
market A
(D) set the price greater than marginal cost in both markets but charge a higher price in
market A

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(E) set the price greater than marginal cost in both markets but charge a higher price in
market B

22. Which of the following will result when a government monopoly operating under
conditions of declining unit cost sells its output at a uniform price equal to marginal
cost?

(A) The monopoly will make unreasonable profits.

(B) The monopoly will have to be subsidized to continue operating.
(C) The monopoly will realize a rate of profit equal to that of a competitive return.
(D) The monopoly will hire inputs above the level at which the value of their marginal
product equals the marginal factor cost.
(E) The monopoly will hire inputs below the level at which the value of their marginal
product equals the marginal factor cost.

Price Discrimination by a monopolist

23. For a perfectly discriminating monopoly, the Marginal Revenue Curve

(A) lies below the demand curve

(B) lies above the demand curve
(C) coincides with the demand curve
(D) crosses the demand curve and is steeper than it
(E) crosses the demand curve and is flatter than it

24. Price discrimination by a monopolist tends to:

(A) reduce the deadweight loss.

(B) increase economic efficiency.
(C) lead to output closer to that of the competitive firm.
(D) reduce the gap between marginal revenue and price.
(E) all of the above.

25. Price discrimination

(A) occurs when different customers are charged different prices for the same product or
service
(B) occurs when your neighborhood movie house charges the same price for children
and for adults
(C) occurs when different customers are charged different prices for the different
products or services
(D) is aimed for tax evasion
(E) never occurs in real life

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Comparing monopoly with perfect competition

26. A monopolist has the same costs and the same market demand curve as a perfectly
competitive industry. Compared to a perfectly competitive industry, which of the
following will be true of the monopolist's price and output?

Monopolist's Price Monopolist's Output

(A) Higher Higher
(B) Higher Lower
(C) Higher The same
(D) Lower Higher
(E) Lower Lower

27. Which of the following statements about cost is always true for both monopolies and
perfectly competitive firms?

(A) Average total cost equals marginal cost when average total cost is a minimum.
(B) Marginal cost decreases as production increases.
(C) Average fixed cost is equal to marginal cost when average fixed cost is a minimum.
(D) Average variable cost is equal to marginal cost when marginal cost is a minimum.
(E) Average variable cost decreases as production increases.

A
MC

B C

E F D

G H I
Demand

MR

J K L M N

28. The bicycle industry (shown on the graph above) which was initially perfectly
competitive, became monopolized. Which area on the graph illustrates the loss in
consumer surplus due to monopolization of this industry?

(A) BCDHG
(B) FCD

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(C) CDH
(D) BCFE
(E) BCDE

29. Pure monopoly means:

(A) Any market wherein the demand curve to the firm is downsloping
(B) A standardized product being produced by many firms
(C) A single firm producing a product for which there are no close substitutes
(D) A large number of firms producing a differentiated product
(E) No true answer

30. Which of the following is correct?

(A) Both purely competitive and monopolistic firms are price takers
(B) Both purely competitive and monopolistic firms are price makers
(C) A purely competitive firm is a price taker, while a monopolist is a price maker
(D) A purely competitive firm is a price maker, while a monopolist is a price taker
(E) No true answer

31. A purely monopolist can be defined as:

(A) Any firm which realizes all existing economies of scale

(B) Any firm whose demand curve is downsloping.
(C) Any firm which can engage in price discrimination.
(D) A one-firm industry
(E) All of the above

32. Pure monopolists may earn economic profits in the long run because:

(A) It is impossible
(B) Marginal revenue is constatnt as sales increase
(C) Of barriers to entry
(D) Of rising average fixed costs
(E) Of decreasing average fixed costs

33. The monopolistic firm’s demand curve:

(A) Is less elastic than a purely competitive firm’s demand curve

(B) Is perfectly elastic
(C) Coincides with its marginal revenue curve
(D) Is perfectly inelastic
(E) Is unitary elastic

34. If a monopolist is selling its 50th unit of output for $40, its marginal revenue:

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(A) May be either greater or less than $40
(B) Will also be $40
(C) Will be greater than $40
(D) Is zero
(E) Will be less than $40

35. Which of the following is a characteristic of a pure monopolist’s demand curve?

(A) It’s the same as the market demand curve.

(B) Average revenue is less than price
(C) Its elasticity is 1 at all levels of output.
(D) Price and marginal revenue are equal at all levels of output.
(E) All are true

Answer the next two questions on the basis of the demand schedule shown below:

Price, $ 7 6 5 4 3
Q 1 2 3 4 5

36. The marginal revenue obtained from selling the third unit of output is:

(A) $6; (B) $3; (C) $1; (D)$5; (E) $0

37. At the point where 3 units are being sold, the elasticity of demand:

(A) Cannot be estimated.

(B) Suggests that the market is purely competitive.
(C) Is less than unity.
(D) Is greater than unity.
(E) Is uncertain.

38. A monopolist has a sales schedule such that it can sell 10 units per week at $10,000
each, but if it restricts its output to 9 per week it can sell these at $11,000 each. The
marginal revenue of the tenth unit of sales per week is:

(A) -$1,000; (B) $0; (C)$9,000; (D) $10,000; (E) $1,000

39. The pure monopolist’s demand curve is relatively elastic:

(A) In the price range where total revenue is declining.

(B) In the price range where marginal revenue is positive.
(C) In the price range where marginal revenue is negative.
(D) At all points where the demand curve lies above the horizontal axis.
(E) Nowhere.

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40. Assume you are advising a pure monopolist which is currently operating at a price-
quantity combination on the inelastic segment of its demand curve. If the monopolist
is seeking maximum profits, you should advise it:

(A) Retain its current price-quantity combination.

(B) Increase both price and quantity sold
(C) Decrease both price and quantity sold
(D) Charge a lower price
(E) Charge a higher price

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