ch11 PDF

Package: Test Bank
Title: Microeconomics: Theory and Application, 12e

Chapter Number: 11
Question Type: Multiple Choice
1. The monopolist's demand curve slopes downward because:
a. the good sold by a monopolist is easily substitutable.

b. the monopolist is a price maker in the market.
c. average revenue decreases with each unit sold.
d. the marginal product of labor is diminishing.
Answer: B
Difficulty Level: Easy

Section Reference: The Monopolist’s Demand and Marginal Revenue Curves
Learning Objective: Define monopoly and show what a monopolist’s demand and marginal
revenue curves look like.
2. Which of the following is true of the demand curve that a monopolist faces?
a. It is perfectly elastic at the equilibrium price level.

b. It is perfectly inelastic at the equilibrium output level.
c. It shows how much the monopolist can sell given the output of the other firms.
d. It is the same as the market demand curve.
Answer: D

3. Which of the following is true of a monopolist?
a. A monopolist takes the price of the product as given and produces as much output as possible.
b. A monopolist can price the product at any price, regardless of demand.
c. A monopolist can choose to produce at any price along the market demand curve.
d. A monopolist prices products at the highest point on the demand curve.
Answer: C
4. The shape of the monopolist’s demand curve indicates that:
a. profit per unit increases as more units are sold.

b. demand for the good produced by a monopoly firm is elastic.
c. the firm practices price discrimination.
d. price and output are inversely related for the firm.
Answer: D

5. The following table shows the quantity demanded of a good at various prices for a monopoly
firm.
Quantity Price
1 $90
2 $80
3 $70
4 $60
5 $50
6 $40
7 $30
8 $20
9 $10
Refer to Table 11-1. The firm earns the maximum total revenue when it produces _____ units.
a. 3
b. 4
c. 5
d. 6
Answer: C
Section Reference: Profit-Maximizing Output of a Monopoly
Learning Objective: Explain why a monopolist’s profit-maximizing output is where marginal
revenue equals marginal cost. Describe why the extent to which a monopolist’s price exceeds
marginal cost is larger the more inelastic the demand faced by the monopolist.
firm.
Quantity Price
1 $90
2 $80
3 $70
4 $60
5 $50
6 $40
7 $30
8 $20
9 $10
Refer to Table 11-1. What is the marginal revenue when 3 units are sold?
a. $20
b. $30
c. $50
d. $70
Answer: C

7. The marginal revenue curve of a monopolist:
a. is the same as the monopolist’s demand curve.

b. is downward-sloping.
c. is horizontal.
d. has a slope that is equal to half the slope of the demand curve.
Answer: B

8. The marginal revenue curve of a monopolist lies below the demand curve because:
a. the demand curve is unit elastic.

b. the monopolist must lower price on all units sold in order to sell additional units.
c. the monopolist is a price taker.
d. the marginal revenue curve coincides with the average revenue curve.
Answer: B
Difficulty Level: Medium

9. The demand curve for a firm operating in a monopoly market is the same as _____.
a. its average revenue curve

b. the industry supply curve
c. its marginal revenue curve
d. its marginal cost curve
Answer: A

10. The following table shows the total revenue and total cost for a monopolist at various levels of
output.
Output Total Revenue Total Cost

1 12 22
2 26 26
3 50 32
4 58 40
5 60 51
6 61 66
7 58 86
8 48 112
9 36 142
What is the marginal revenue associated with the sale of the fifth unit in Table 11-2?
a. $2
b. -$2
c. $10
d. -$10
Answer: A

11. Which of the following is true for a monopoly firm?
a. The marginal revenue curve is the same as the average revenue curve.
b. The demand curve is a declining average revenue curve.
c. The demand curve, average revenue curve, and marginal revenue curve are the same.
d. The total revenue curve is the same as the demand curve.
Answer: B

12. Which of the following is true for a monopoly firm?
a. The monopolist's demand curve is downward-sloping and the marginal revenue curve lies above
the demand curve.
b. The monopolist's demand curve is upward-sloping and is the same as the marginal revenue
curve.
c. The monopolist's demand curve is downward-sloping and the marginal revenue curve lies below
the average revenue curve.
d. The monopolist's demand curve is upward-sloping and is the same as the total revenue curve.
Answer: C

firm.
Quantity Price
1 $90
2 $80
3 $70
4 $60
5 $50
6 $40
7 $30
8 $20
9 $10
Refer to Table 11-1. If the marginal cost of producing each unit is $30, what is the firm’s profit-
maximizing level of output?
a. 3
b. 4
c. 5
d. 7
Answer: B

output.

1 12 22
2 26 26
3 50 32
4 58 40
5 60 51
6 61 66
7 58 86
8 48 112
9 36 142
Refer to Table 11-2. The economic profit earned by the firm by producing the profit-maximizing
level of output is _____.
a. $13
b. $9
c. $18
d. $4
Answer: C

15. Assume that Bost Incorporated sells game cartridges that can be used in a popular home video
system. The company currently sells 300 cartridges per week and earns $500 in profit. The
production manager calculates that the marginal cost of producing the next unit is $5, while
marginal revenue from one additional unit is $10. Based on this information we would conclude
that:
a. Bost should reduce their output to 295 cartridges to increase profit.

b. Bost's profit would fall to $495 by increasing output by 1 unit.
c. Bost's profit would rise to $505 by increasing output by 1 unit.
d. Bost’s profit-maximizing output is 300 cartridges.
Answer: C
Difficulty Level: Hard

16. A monopoly firm will maximize profits by producing the level of output where:
a. total cost is equal to total revenue.

b. total revenue is at its maximum.
c. the difference between marginal revenue and average revenue is maximized.
d. the difference between total cost and total revenue is maximized.
Answer: D

output.

1 12 22
2 26 26
3 50 32
4 58 40
5 60 51
6 61 66
7 58 86
8 48 112
9 36 142
What is the profit-maximizing level of output for the monopolist in Table 11-2?
a. 3
b. 4
c. 5
d. 1
Answer: B

18. The following figure shows the downward-sloping demand curve [D] and marginal revenue
[MR] curve and the upward-sloping marginal cost [MC] curve for a monopolist.
Refer to Figure 11-1. An unregulated monopolist will sell _____ units of output at a price of_____
to maximize profit.
a. OJ and OW
b. OK and OC
c. OJ and OB
d. OL and OZ
Answer: A

19. The following figure shows the marginal cost [MC], average cost [AC], marginal revenue
[MR], and demand curves for a profit-maximizing monopolist.
Refer to Figure 11-2. The quantity of output produced by the monopolist is _____.
a. OC
b. OE
c. OJ
d. OK
Answer: A

Refer to Figure 11-2. The equilibrium price in the monopoly market is _____.
a. OA
b. OB
c. OI
d. OM
Answer: A

21. The following figure shows the marginal revenue [MR], demand, and average cost [AC] curves
for a profit-maximizing monopolist in the long run.
Refer to Figure 11-3. A profit-maximizing monopoly firm will produce output equal to _____.
a. OC
b. OE
c. OJ
d. CJ
Answer: A

Section Reference: The Efficiency Effects of Monopoly
Learning Objective: Explore the efficiency effects of monopoly from static and dynamic
perspectives.
Refer to Figure 11-3. The equilibrium price charged by a profit-maximizing monopoly firm is
_____.
a. OA
b. OB
c. OI
d. OC
Answer: A

perspectives.
23. Which of the following conditions generally holds when a monopoly firm is producing its
profit-maximizing level of output?
a. Marginal cost [MC] = marginal revenue [MR] = average cost [AC] = average revenue [AR]
b. MC = MR > AC
c. MC = MR = price
d. MC = MR < AR
Answer: D

24. Which of the following is not necessarily true at the profit-maximizing quantity for a
monopolist?
a. The marginal revenue is equal to the marginal cost of production.

b. The slope of the marginal revenue curve equals the slope of the marginal cost curve.
c. The difference between total revenue and total cost is maximized.
d. The difference between price and average cost is maximized.
Answer: B

Refer to Figure 11-2. The profit earned by the monopolist is given by the area _____.
a. BHLM
b. IDN
c. AFLM
d. AFHB
Answer: D

Refer to Figure 11-2. If the government wishes to regulate the monopoly firm by setting the price at
OB in the market, the monopolist will:
a. produce the efficient quantity of output.

b. have to shut down to cut losses.
c. continue to earn economic profits.
d. earn a higher profit.
Answer: C
Refer to Figure 11-3. The profit of the monopolist is shown by the area _____.
a. AFCO
b. IHB
c. AFGB
d. AFHB
Answer: C

perspectives.
28. The following figure shows the marginal cost, average cost, marginal revenue, and the demand
curve for a profit-maximizing monopolist.
Refer to Figure 11-4. What is the firm’s economic profit?
a. $360
b. $540
c. $630
d. $900
Answer: B

29. At an output of 1,000 units, a monopoly firm’s average revenue is $40, its marginal revenue is
$30, its marginal cost is $30, its average variable cost is $35, and fixed costs are $5,000. Given this
information, we can conclude that the monopolist:
a. is earning zero economic profit.

b. is earning an economic profit equal to $5,000.
c. is making an economic loss and should shut down.
d. should increase output to maximize profit.
Answer: A

30. Acme Baseball Bats is a monopoly firm. If the marginal cost of producing a baseball bat is
$30, and the absolute value of price elasticity of demand for Acme Baseball Bat Company is
estimated to be 4, at what price should Acme set its price if it wants to maximize profits?
a. $30
b. $40
c. $50
d. $60
Answer: B

31. If P = price and MC = marginal cost, the price markup of a monopolist is expressed as _____.
a. (P – Mc./MC
b. (P – Mc./P
c. (MC – P)/MC
d. (MC – P)/P
Answer: B

32. For a profit-maximizing monopoly firm, the relationship between price [P], marginal revenue
[MR], and the absolute value of the price elasticity of demand [] is given by:
a. P = MR(1 – 1/)
b. P = MR( – 1)
c. MR = P( – 1)
d. MR = P[1 – (1/)]
Answer: D

33. Assume that a monopoly firm's price is $4, marginal cost is $3 and the absolute value of price
elasticity of demand is 4. Based on this information we can conclude that the firm:
a. is maximizing profit.
b. should increase output.
c. should reduce output.
d. should increase price but keep output constant.
Answer: A

34. For a monopoly firm to maximize profits, its price markup should:
a. be at its maximum possible point.

b. equal the price elasticity of demand.
c. equal the inverse of demand elasticity.
d. equal marginal revenue.
Answer: C

35. If the demand elasticity for the monopolist's product is equal to -2 and marginal revenue is 10,
what is the profit-maximizing price?
a. $20
b. $10
c. $0.50
d. $5
Answer: A

36. The markup of price over marginal cost for a monopolist is _____.
a. independent of the price elasticity of demand

b. inversely related to the price elasticity of demand
c. the same as the price elasticity of demand
d. the same as the price elasticity of supply
Answer: B

37. Suppose your pharmaceutical company, which operates as a monopoly, has a patent on a drug
with an estimated price elasticity of demand of 1.2. If the marginal cost of producing each pill is
$3, at what price should you sell your drug if profit maximization is your objective?
a. $3
b. $9
c. $16
d. $18
Answer: D

38. Why do gas stations near airports have a higher price markup than gas stations at busy
intersections in the city?
a. Gas stations at busy intersections have to contend with more competition than gas stations within
the city.
b. Gas stations within the city are less convenient for consumers than gas stations at the airport.
c. Gas stations at airports face a smaller price elasticity of demand than gas stations in the city.
d. Gas stations at airports have higher fixed costs than gas stations in the city.
Answer: C

Section Reference: Further Implications of Monopoly Analysis
Learning Objective: Explain several important implications of monopoly analysis such as that the
shutdown condition applies to monopolies as well as to firms operating in perfectly competitive
environments.
39. In response to a rightward shift in the demand for a commodity, a monopoly firm that is
producing at the profit-maximizing level of output will:
a. decrease price and output.

b. decrease output and increase price.
c. increase price but maintain the level of output.
d. increase output and price.
Answer: D

environments.
40. A monopolist does not have a supply curve because:
a. price and quantity are determined by marginal cost and demand.

b. a monopoly firm’s marginal cost of production is constant.
c. supply is determined by average total cost and not price.
d. firms in monopoly markets are price takers.
Answer: A

environments.
41. An important difference between a monopoly and a competitive industry is that:
a. a monopoly earns zero profits while competitive firms earn positive economic profits in the long
run.
b. a profit-maximizing monopolist equates price and marginal cost while profit-maximizing firms
in competitive industries equate marginal revenue and marginal cost.
c. a monopoly is a price maker while a competitive industry faces a horizontal demand curve.
d. a monopoly has a vertical supply curve while a competitive firm’s marginal cost curve is the
supply curve.
Answer: C

environments.
42. If the monopolist is operating in the elastic portion of its demand curve, then an increase in
price will:
a. increase total revenue.

b. decrease total revenue.
c. increase marginal revenue.
d. leave total revenue unchanged.
Answer: B

environments.
43. A profit-maximizing monopoly firm will earn excess profits if it is able to produce a level of
output where:
a. average revenue is equal to marginal cost.

b. marginal revenue is greater than marginal cost.
c. price is equal to marginal cost.
d. average revenue is greater than average cost.
Answer: D

environments.
44. Monopoly power does not guarantee positive profits because _____.
a. demand elasticity in monopoly markets is relatively low

b. monopoly firms are price takers
c. sales and profits of monopoly firms are restricted by the demand curve
d. the monopolist’s demand curve is the same as the marginal revenue curve
Answer: C

environments.
45. Which of the following statements is true regarding a monopolist?
a. A monopolist's short-run supply curve is upward-sloping.

b. A decrease in demand will always cause a monopolist to reduce output.
c. A monopoly firm that operates at a point above average total cost should shut down.
d. Marginal revenue is greater than marginal cost for a profit-maximizing monopolist.
Answer: C

environments.
46. A monopoly firm will operate on the:
a. elastic portion of the demand curve where total revenue is maximum.

b. elastic portion of the demand curve where marginal revenue is positive.
c. inelastic portion of the demand curve where the profit earned per-unit is the highest.
d. the inelastic portion of the demand curve where marginal revenue is increasing.
Answer: B

environments.
47. The following figure shows the demand curve and the marginal revenue curve of a monopolist.
On the horizontal axis, OG = GF.
Refer to Figure 11-5. Between points E and A on the demand curve, the price elasticity of demand:
a. is equal to one.
b. exceeds one.
c. is equal to zero.
d. is less than one.
Answer: B

environments.
Refer to Figure 11-5. Between points A and F on the demand curve, the price elasticity of demand:
a. is equal to one.
b. exceeds one.
Answer: D

environments.
Refer to Figure 11-5. At quantity G, the price elasticity of demand:
a. is equal to one.
b. exceeds one.
Answer: A

environments.
Refer to Figure 11-5. A fall in price will increase total revenue _____.
a. between the points C and F

b. between the points E and A
c. between the points A and F
d. at point G
Answer: B

environments.
Refer to Figure 11-5. A fall in price will keep total revenue unchanged _____.
a. between the points E and F

d. at point A
Answer: D

environments.
52. A monopolist will never operate on the lower half of the demand curve because for this range
of output:
a. average revenue is negative.

b. marginal cost exceeds marginal revenue.
c. total revenue can be increased further.
d. marginal revenue is positive.
Answer: B

environments.
53. Which of the following statements correctly identifies the relationship between marginal
revenue and price elasticity of demand?
a. When price elasticity of demand is infinite, marginal revenue is greater than price.
b. When price elasticity of demand is equal to one, marginal revenue is zero.
c. When price elasticity of demand is more than one, marginal revenue is negative.
d. When price elasticity of demand is less than one, marginal revenue is positive.
Answer: B

environments.
54. If total revenue falls by $5 when a monopolist sells an additional unit, you can conclude that
the monopolist:
a. does not have pricing power.

b. is not maximizing profits.
c. is producing on the elastic portion of the demand curve.
d. faces a horizontal demand curve.
Answer: B

environments.
55. If marginal costs are zero, a monopolist will maximize profit by producing at the point where:
a. average revenue is zero.
b. price is maximum.
c. total revenue is maximum.
d. marginal revenue is maximum.
Answer: C

56. A profit-maximizing monopolist will maximize both total revenue and economic profit at the
same price when _____, given that there are no fixed costs.
a. the marginal cost curve is upward-sloping

b. demand is perfectly inelastic
c. marginal cost is zero
d. marginal revenue is an increasing function of quantity produced
Answer: C

output.

1 12 22
2 26 26
3 50 32
4 58 40
5 60 51
6 61 66
7 58 86
8 48 112
9 36 142
Refer to Table 11-2. At an output of 9 units, the price elasticity of demand _____.
a. is more than one.
b. is less than one.
c. is equal to one.
d. cannot be determined without more data.
Answer: B

environments.
output.

1 12 22
2 26 26
3 50 32
4 58 40
5 60 51
6 61 66
7 58 86
8 48 112
9 36 142
Refer to Table 11-2. At the profit-maximizing output, the price elasticity of demand _____.
a. is elastic
b. is inelastic
c. is unit elastic
d. cannot be determined without more information
Answer: A

environments.
59. If a monopolist's marginal cost is zero, in order to maximize profit the monopolist will:
a. set a price where demand is unit elastic.
b. produce where demand is elastic.
c. expand output to the limit of its physical capacity.
d. not impose an efficiency loss on the society, since P=MC.
Answer: A

environments.
60. For a monopoly firm, marginal revenue is negative when:
a. the demand curve is upward-sloping.

b. demand is elastic.
c. demand is inelastic.
d. demand is unit elastic.
Answer: C

environments.
Refer to Figure 11-5. Total revenue is highest at point _____ on the demand curve.
a. E
b. F
c. A
d. B
Answer: C

environments.
Refer to Figure 11-5. The absolute value of the slope of the marginal revenue curve equals:
a. twice the slope of the demand curve.

b. one.
c. half the slope of the demand curve.
d. zero.
Answer: A

environments.
Refer to Figure 11-5. Total revenue is equal to zero at point(s) _____.
a. E and F
b. A
c. A and F
d. G
Answer: A

environments.
Refer to Figure 11-5. A fall in price will decrease total revenue _____.
a. between the points E and F

d. at point G
Answer: C

environments.
65. A profit-maximizing monopolist will produce at a point on the _____ portion of the demand
curve where _____.
a. elastic; average revenue is negative

b. inelastic; marginal cost is falling
c. inelastic; total revenue is increasing
d. elastic; marginal revenue is positive
Answer: D

environments.
66. Which of the following statements about the long-run equilibrium of a monopoly firm is
incorrect?
a. A monopoly firm has no supply curve.

b. A monopoly firm will never sell where the demand is elastic.
c. A monopoly firm will not always make economic profits.
d. A monopoly firm's demand curve coincides with its average revenue curve.
Answer: B

Section Reference: The Measurement and Sources of Monopoly Power
Learning Objective: Outline the potential sources of monopoly power: absolute cost advantages,
economies of scale, product differentiation, and regulatory barriers.
67. The Lerner index shows monopoly power as the markup of _____, as a percentage of the
product’s price.
a. price over average cost

b. price over marginal cost
c. profits over price
d. total revenue over price
Answer: B

68. Magic Cigarette Company produces packs of cigarettes at a marginal cost of $2 per pack. If
they currently sell their product at $5 per pack, what is the value of the Lerner index of monopoly
power?
a. 0.4
b. 0.6
c. 2.5
d. 5
Answer: B

69. When the value of the Lerner index is zero for a firm:
a. its demand curve is steeply sloped.

b. its demand curve is non-linear.
c. the demand for its product is unit elastic.
d. the demand for its product is perfectly elastic.
Answer: D

70. The smaller the value of the Lerner index, _____.
a. the greater the firm’s monopoly power

b. the more price elastic the firm’s supply curve
c. the greater the difference between marginal cost and marginal revenue
d. the smaller the difference between marginal cost and price
Answer: D

71. The larger the value of the Lerner index for a firm, _____.
a. the greater the difference between marginal cost and marginal revenue
b. the smaller the difference between marginal cost and price
c. the more price elastic the firm’s demand curve
d. the greater the firm’s monopoly power
Answer: D

72. Which of the following would reduce the monopoly power of a single firm in a monopoly
market?
a. The acquisition of a patent for its production process

b. An increase in the demand for the firm’s product
c. An increase in the price of the firm’s product
d. A reduction in the number of rival firms
Answer: D

73. Monopoly power possessed by any one firm is _____.
a. higher, the greater the number of firms

b. reduced, as the elasticity of supply by rival firms as a group decreases
c. reduced, as the elasticity of demand increases
d. higher, the higher the number of buyers
Answer: C

74. All of the following are sources of monopoly power, except _____.
a. patents
b. unique access to an essential input
c. economies of scale
d. homogeneity of products
Answer: D

75. A firm that has monopoly power _____.
a. can profitably set price above marginal cost

b. sells goods at higher prices due to economies of scale
c. faces a horizontal demand curve
d. produces easily substitutable goods
Answer: A

76. Which of the following correctly describes a natural monopoly?
a. A natural monopoly is an industry in which products are differentiated from one another.
b. A natural monopoly exists if one large firm’s long-run average cost curve is upward-sloping.
c. A natural monopoly is defined as a firm that operates in an industry that has significant
regulatory barriers to entry.
d. A natural monopoly is an industry that exhibits economies of scale.
Answer: D

77. Which of the following does not constitute a barrier to entry into a market?
a. Homogenous product
b. Economies of scale
c. Control of a natural resource
d. Natural monopoly
Answer: A

78. _____ would not be considered a barrier to entry in a market.
a. An absolute cost advantage

b. A copyright
c. A low Lerner index
d. A high level of product differentiation
Answer: C

79. When the marginal cost for a monopoly firm is constant, the average cost curve is _____.
a. U-shaped
b. horizontal
c. positively sloped
d. non-linear
Answer: B

perspectives.
80. When comparing a monopoly firm and a competitive firm in the long run, which of the
following statements is not correct?
a. A monopoly firm does not need to produce output at the lowest possible cost but a competitive
firm must.
b. A monopoly firm earns economic profit at its profit-maximizing level of output but a competitive
firm does not.
c. A monopoly firm operates at the minimum point on its average cost curve but a competitive firm
does not.
d. A monopoly firm will produce more than the efficient level of output but a competitive firm will
always produce the efficient level of output.
Answer: C

perspectives.
81. Which of the following statements about the effects of monopoly is incorrect?
a. A monopoly restricts output to maximize profits.

b. A monopoly raises price above the competitive level.
c. A monopoly causes input prices to rise.
d. A monopoly causes a redistribution of income.
Answer: C

perspectives.
Based on Figure 11-1, competitive firms will receive producer surplus equal to area:
a. ACFH.
b. EIF.
c. AVF.
d. AWEH.
Answer: A

perspectives.
Based on Figure 11-1, the unregulated monopolist will receive producer surplus equal to area:
a. ACF.
b. BCFH.
c. AVFH.
d. AWEH.
Answer: D

perspectives.
Refer to Figure 11-1. If the government wishes to regulate the monopoly firm by restricting the
price at OC in the market, the demand curve will be equal to _____.
a. VD
b. CIJ
c. CFD
d. FD
Answer: C

perspectives.
85. Compared to a competitive industry, ceteris paribus, a monopoly:
a. sells a higher quantity and charges a higher price.

b. sells the same quantity but charges a higher price.
c. sells a smaller quantity but charges the same price.
d. sells a smaller quantity but charges a higher price.
Answer: D

perspectives.
for a profit-maximizing monopolist.
Refer to Figure 11-3. The loss in welfare in the market due to the monopoly firm is _____.
a. IFA
b. FGH
c. AFGB
d. BGEO
Answer: B

perspectives.
87. The following figure shows the profit-maximizing output of a monopolist who faces constant
average and marginal costs.
P
A
P''
F
P'
C MC = AC
P B G
E
0 Q'' Q' Q H Q
MR
Refer to Figure 11-6. What is the deadweight loss as a result of the monopolist’s market power?
a. FGC
b. ABGF
c. PBAP’’
d. ABC
Answer: D

perspectives.
P
A
P''
F
P'
C MC = AC
P B G
E
0 Q'' Q' Q H Q
MR
Refer to Figure 11-6. If the firm were operating in a perfectly competitive market, the equilibrium
quantity would be _____.
a. OH
b. OQ’’
c. OQ
d. OQ’
Answer: C

perspectives.
P
A
P''
F
P'
C MC = AC
P B G
E
0 Q'' Q' Q H Q
MR
Refer to Figure 11-6. When the firm operates as a profit-maximizing monopolist as compared to a
perfectly competitive firm, consumer surplus changes by _____.
a. –ABC
b. AFBG
c. –P’’ACP
d. P’’ABP
Answer: C

perspectives.
P
A
P''
F
P'
C MC = AC
P B G
E
0 Q'' Q' Q H Q
MR
Refer to Figure 11-6. When the firm operates as a profit-maximizing monopolist as compared to a
perfectly competitive firm, producer surplus changes by _____.
a. –ABC
b. P’’ABP
c. –AFBG
d. P’’ACP
Answer: B

perspectives.
91. The deadweight loss of a monopoly arises from:
a. the loss of consumer surplus being greater than the gain in producer surplus.
b. the transfer of producer surplus to consumers.
c. the loss in producer surplus being greater than the gain in consumer surplus.
d. the combined loss of consumer and producer surplus.
Answer: A

perspectives.
92. Which of the following would take place if a competitive firm acquired monopoly power in the
market through economies of scale and became a natural monopoly?
a. Producer surplus will increase and consumer surplus will fall

b. Consumer surplus will be transferred to producers resulting in a deadweight loss
c. Consumer surplus will fall but will not affect producer surplus
d. A deadweight loss will arise in the market equal to the fall in producer surplus
Answer: B

perspectives.
93. Why is a monopoly considered to be an inefficient market?
a. In a monopoly market, consumers gain surplus at the cost of the producer.

b. A monopoly firm produces at the level where price is equal to marginal cost.
c. A monopoly market is characterized by a deadweight loss.
d. A monopoly firm profitably increases prices irrespective of demand.
Answer: C

perspectives.
94. Which of the following is true of a firm in a monopoly market?
a. The price charged by the monopolist is less than the marginal cost of production.
b. The equilibrium output in a monopoly market is smaller compared to a competitive market.
c. There is a deadweight loss in a monopoly market.
d. In a monopoly market long-run economic profits are zero.
Answer: C

perspectives.
95. For the same demand and cost conditions, which of the following is true?
a. Consumer surplus and producer surplus are both lesser in a monopoly market compared to
perfect competition.
b. Consumer surplus is lesser but producer surplus is greater in a monopoly market compared to
c. Consumer surplus is greater and producer surplus is lesser in a monopoly market compared to
d. Consumer surplus and producer surplus are both greater in perfect competition than in a
monopoly.
Answer: B

perspectives.
96. A deadweight loss arises in a monopoly market because _____ by the monopolist.
a. the marginal benefit [MB] is greater than marginal cost [MC], for the output that is not produced
b. the MB is greater than the MC, for the output that is produced
c. the MC is greater than MB, up to the profit-maximizing level of output produced
d. the MB is greater than MC, for output that is not produced
Answer: A

perspectives.
97. A dynamic analysis of a monopoly suggests that:
a. certain monopoly firms increase total surplus in the market.

b. monopoly power in markets should be restricted to induce innovation.
c. any form of monopoly is inefficient.
d. monopoly power should be restricted in order to ensure fair market prices.
Answer: A

Section Reference: Public Policy toward Monopoly
Learning Objective: Provide an overview of public policy toward monopoly.
98. In the U.S., antitrust laws have been designed to _____.
a. increase producer surplus

b. reduce market capitalization of firms
c. restrict monopoly power
d. promote profitability of American firms
Answer: C

99. The use of antitrust statutes by the United States Federal Trade Commission and the Antitrust
Division of the U.S. Department of Justice has declined over the years. Which of the following
statements is the correct reason for this decrease in antitrust enforcement?
a. The increase in the number of firms over the years has reduced monopoly power in most
markets.
b. The prosecution of monopoly firms leads to a decrease in total surplus.
c. The dynamic view of monopoly is increasingly being used in the policymaking arena.
d. With the spread of globalization, it is difficult to prosecute companies that operate from many
different countries.
Answer: C

100. Which of the following is most likely to result from the imposition of a price ceiling on the
price charged by a monopolist?
a. The monopolist will increase output after the imposition of the price ceiling.
b. The monopolist will increase product quality in order to earn the same level of profit.
c. The monopolist’s profit will increase as a result of the price ceiling.
d. The monopolist’s demand curve will become horizontal for all levels of output.
Answer: A

101. When the government regulates the price in a monopoly market by setting price at the level
where demand equals marginal cost:
a. the monopolist reduces output resulting in a shortage in the market.

b. the monopolist’s marginal revenue curve becomes horizontal over all levels of output.
c. the monopolist’s profits are positive at the new price.
d. the monopolist produces output at the efficient level.
Answer: D

102. A price ceiling imposed by the government in a monopoly market can:
a. lead to a decrease in output.

b. increase the deadweight loss from a monopoly.
c. raise prices and lower output.
d. lead to a decline in product quality.
Answer: D

103. A price ceiling imposed by the government in a monopoly market can:
a. lead to a decrease in output.

b. increase the deadweight loss from a monopoly.
c. raise prices and lower output.
d. lead to a decline in product quality.
Answer: D

Section Reference: The Math Behind Monopoly*
Learning Objective: Describe the math behind monopoly.
104. A monopolist faces the following conditions: Q = 500 -.5 P and TC = 1000 + Q + Q2. What
is the monopolist’s profit maximizing output?
a. Q = 311
b. Q = 333
c. Q = 345
d. Q = 366
Answer: b
Difficulty: Hard
Section Reference: Borrowing, Lending, and the Interest Rate
Learning Objective: Explain how the interest rate is determined through the interplay of the supply
of and demand of capital.
105. A monopolist faces the following conditions: Q = 500 - .5P and TC = 1000 + Q + Q2. What
is the monopolist’s profit maximizing price?
a. P = $650
b. P = $667
c. P = $675
d. P = $688
Answer: b
Difficulty: Hard
Section Reference: Borrowing, Lending, and the Interest Rate
Learning Objective: Explain how the interest rate is determined through the interplay of the supply
of and demand of capital.
Question Type: Essay
106. A company is granted a patent on automobile technology which, when fitted in a car, will
park the car into a parking spot automatically.
a) Assume that demand for this automatic parking technology is positive and show the equilibrium
price and quantity in the market.
b) How will equilibrium price and quantity change when the patent expires in 17 years?
Answer:
a) A patent forms a regulatory barrier to entry in a market. Since the company has been granted a
patent, it follows that the same technology cannot be duplicated by another firm. In the market for
automatic parking technology, the firm with the patent is the only seller. The demand for this good
is inelastic due to the fact that there are no substitutes for the good.
As shown in the figure, the firm is in equilibrium at the point where marginal cost [MC] equals
marginal revenue [MR]. The firm makes a positive economic profit (equal to PQSR) in the short
run as well as in the long run.
b) During the life of the patent, the sole seller in the market was able to realize an economic profit
because other firms could not enter the market. With the expiry of the patent, the barrier to entry
into the market is relaxed. This induces new firms to enter the market and erode the monopolist’s
profit. Economic profit eventually reduces to zero. In the long run, the demand curve becomes
horizontal as the number of substitutes for the product increase. As a result, the quantity supplied in
the market increases and equilibrium price falls.
Section Reference 01: The Efficiency Effects of Monopoly
Section Reference 02: Profit-Maximizing Output of a Monopoly
Learning Objective 01: Explore the efficiency effects of monopoly from static and dynamic
perspectives.
Learning Objective 02: Explain why a monopolist’s profit-maximizing output is where marginal
107. A monopolist has the following short-run total cost, marginal cost, and demand functions:
Total Cost: TC  32  2Q  12 Q 2
Marginal Cost: MC  2  Q
Demand: Q  52  2 P
where P is the price per unit of output, and Q is the quantity of output.
a) What price and quantity combination maximizes the monopolist's total revenue?
b) What is the price range over which a price decrease would lead to an increase in the
monopolist’s total revenue?
c) What price will the profit-maximizing monopolist charge? What will profits equal?
d) What is the allocatively efficient price-quantity combination?
Answer:
a) Total revenue is maximized when marginal revenue is 0.
Rewriting the demand equation in “y = mx + b” form, we get P = 26 - ½Q. Thus, MR = 26 – Q
since MR is twice as steep as D for a linear demand curve. Thus, MR = 0 implies 26 – Q = 0 which
implies Q = 26 and P = $13.
b) Since price and total revenue (or equivalently, total expenditure) move in opposite directions
when demand is elastic, this is the upper half (or elastic portion) of a linear demand curve. Thus,
the price range is $26 to $13.
c) The monopolist maximizes profits at the point where MR = MC. Substituting,

26 – Q = Q + 2 so 2Q = 24 or Q = 12, thus P = 26 - ½(12) = $20.
Profits = (AR – Ac.Q = (20 – [32/12+2+ ½×12])×12 = (20 – 10.667)×12 = 111.996 = $112.
d) The efficient price-quantity combination occurs at the point where marginal benefit equals
marginal cost. The marginal benefit or marginal value is given by the height of the demand curve.
26 - ½Q = 2 + Q so 24 = 1.5Q or Q = 16 and P = 26 – 8 = $18.

Section Reference 01: Profit-Maximizing Output of a Monopoly
Section Reference 02: Further Implications of Monopoly Analysis
Section Reference 03: The Efficiency Effects of Monopoly
Learning Objective 01: Explain why a monopolist’s profit-maximizing output is where marginal
Learning Objective 02: Explain several important implications of monopoly analysis such as that
the shutdown condition applies to monopolies as well as to firms operating in perfectly competitive
environments.
Learning Objective 03: Explore the efficiency effects of monopoly from static and dynamic
perspectives.
108. Given the price [P], marginal cost [MC], and price elasticity of demand [η] for a monopolist,
derive the condition for the profit-maximizing price.
Answer: A monopolist faces a downward-sloping demand curve implying that a fall in price will
lead to an increase in total revenue. There are two simultaneous effects of a fall in price- more units
of the good will be sold and each unit will be sold at a lower price:
∆TR = P(∆Q) + Q(∆P)
Dividing the above equation by ∆Q,
∆TR/∆Q = P + Q(∆P)/∆Q
The left-hand side of the above equation represents marginal revenue [MR].
The price elasticity of demand η is represented by (∆Q/Q)/(∆P/P), therefore:
∆P/∆Q equals (–1/η)/(P/Q).
Substituting in the above equation:
MR = P + Q[(–1/η)/(P/Q)]
MR = P – (P/η) = P[1 – (1/η)]
At the profit-maximizing output of a monopolist, marginal cost [MC] equals MR. Therefore:
MC = P[1 – (1/η)]
Subtracting the above by P and multiplying by (–1/P):
P – MC/P = 1/η

109. Answer the following:
a) Define the market for Coca-Cola, that is, what would you include in the market for Coca-Cola?
Considering the market for Coca-Cola, how is the market power of Coca-Cola affected by what is
included as a part of the market?
(b) Explain how cross-price elasticity of demand is relevant to a firm being investigated for
antitrust violation. If you were the chief economist for this firm, would you want to show a high
cross-price elasticity or a low cross price elasticity of demand between your product and a rival
product? Why?
Answer:
a) The market for Coca-Cola will include Pepsi, RC Cola, generic colas, Dr. Pepper, Sprite, 7-UP,
orange soda, grape soda, bottled water, beer, wine, iced tea, iced specialty coffee drinks, milk, hot
tea, hot coffee, or any other beverage.
The market for Coca-Cola includes what are considered substitutes for Coca-Cola. The more
expansive the defined market, the lower the market power of Coca-Cola is assumed to have. In a
very real sense, everything is a substitute for everything else, since doing without is always an
option. In the U.S. Federal Trade Commission’s case against Coca-Cola acquiring Dr. Pepper
because the former was considered to control too large a share of the cola market, the FTC’s case
hinged on defining the market as “caramel-colored carbonated soda,” which limits the market to
Coca-Cola, Pepsi, RC Cola and generic and store brand colas, while Coca-Cola sought to define it
as all carbonated sodas, plus bottled waters and other iced drinks.
b) Cross-price elasticity of demand indicates how sensitive the good is to the changes in price of
another good. For substitutes, the cross-price elasticity is positive. A monopolist would want to
show a high cross-price elasticity of demand since it is proof that the firm does not have market
power since the demand for its product is highly responsive to the price of rival products.
110. The U.S. Postal Service [USPS] has a legal monopoly over first-class mail in the U.S.
However, it has been running losses over the recent years.
a) Is this fact consistent with the fact that USPS operates with significant monopoly power?
b) What are the factors that could possibly be leading to USPS’ losses?
Answer:
a) A monopoly can also run a loss because its pricing power is limited by the demand curve. The
fact that there is only one seller in the market does not guarantee profits for the monopolist. If the
long-run average cost curve lies above the monopoly demand curve, the monopoly will be running
losses and will have to shut down.
b) USPS operates as a monopoly in the market for first-class mail. The profits of a monopolist are
limited by the position of its demand curve as well as its average total cost curve.
We can reasonably expect that the demand curve for first class mail, with the onset of the Internet
and other first-class mail substitutes, has shifted downward and become more elastic. This reduces
monopolist’s market power. The legal barrier to entry in the first-class mail market provided by the
government prevents the entry of other firms even if USPS is making a positive economic profit.
The possibility of entry of other firms in the market provides an incentive for each firm to produce
at the lowest point of the average cost curve. However, since other firms cannot enter the market,
USPS does not have an incentive to produce at the lowest possible cost. An upward shift in the
average cost curve could also lead to economic losses.

environments.
111. Prove that the linear demand curve, Q  a  bP where a and b are positive constants, is unit
elastic at its mid-point.
Answer:
The absolute value of the price elasticity of demand is not used here.
1 a a
Re-writing the demand curve as P  Q  we see that the y-intercept is and the x-intercept
b b b
a  a  a
is a . If P  (that is, the mid-point) then Q  a  bP  a  b   . Therefore,
2b  2b  2
 1  P   1  2b 
a
1
     
     b    1
 slope  Q    1b  a 2  b
Alternatively, one could solve for the (P,Q) at which   1 .
(Q/P)*(P/Q) = –1
 (1/slope)(P/Q) = –1
 (1/-b)(P/Q) = –1
 (1/-b)*[(a-bQ)/Q] = –1
 (a-bQ)/Q = b
 (a-bQ) = bQ
 a = 2bQ
 Q = a/2b
Thus, P = a – b(a/2b) = a/2.
A linear demand curve is unit elastic at its mid-point, (P,Q) = (a/2, a/2b).

environments.
112. Explain why a profit-maximizing monopolist will always sell at a price where demand is
elastic.
Answer: To maximize profits in a monopoly market, marginal revenue should be equal to marginal
cost. Marginal cost must be positive (even if it is very close to $0). Therefore, marginal revenue
must be positive as well at the profit-maximizing quantity. Positive marginal revenue implies that
demand is elastic since higher output will increase total revenue.
Alternatively, notice that if a monopoly is producing a level of output where demand is inelastic, it
can increase profits by producing less output and raising price. Lower output means lower cost and
higher revenue (when demand is inelastic), so profit has to rise. The firm will lower output and
increase profit as long as demand is inelastic, thus the profit-maximizing level of output will not be
reached until demand is elastic.

113. For the same demand and cost conditions, how do price and output of a monopoly compare to
those for a competitive firm and why is the deadweight loss of a monopoly a loss of welfare?
Answer: The figure shows the market demand curve ‘Demand’ and marginal revenue curve MR.
Let there be constant average and marginal cost.
For the same demand and cost conditions, price will be higher (Pm > Pc) and output lower (Qm <
Qc) under monopoly than under competition. All firms maximize profits where MR = MC, but the
MR curve for a monopolist lies below the D curve (because it must lower the price on all units sold
in order to sell more) while the demand curve coincides with the MR curve under competition. The
monopoly creates a decline in total surplus equal to triangle FGH, also called a deadweight loss.
This deadweight loss is a loss of welfare because for each unit between Qm and Qc, the marginal
value to consumers (as measured by the height of the demand curve) is above the marginal cost to
producers (as measured by the MC curve), but those units do not get produced (in the interest of
profit-maximization by the monopolist).

perspectives.
114. Assume that a firm faces a linear demand curve P = 170 – 4Q. Its cost function is given by C
= 40 + 10Q. Show how the equilibrium output varies when the firm operates as a monopoly and as
a perfectly competitive firm.
Answer: The monopolist’s profit-maximizing output is at the point where marginal cost and
marginal revenue are equal.
Total revenue = PQ = (170 – 4Q)Q = 170Q – 4Q2
Marginal revenue = 170 – 8Q
Total cost = 40 + 10Q
Marginal cost = 10
Setting marginal revenue equal to marginal cost,
170 – 8Q = 10
Q = 20 units and P = $90
A perfectly competitive firm would equate price and marginal cost to arrive at its profit-
maximizing output.
170 – 4Q = 10
Q = 40 units and P = $10
As shown, the monopolist produces a smaller quantity at a higher price and a perfectly competitive
firm produces a higher quantity for a lower price in equilibrium.

perspectives.
115. Given the profit function Π = R – C, derive a monopolist’s profit-maximizing price and
quantity.
Answer: The profit function is given by Π = R – C where R is total revenue, Π is profit, and C is
total cost. Since Π, R, and C are functions of the quantity of output, differentiating with respect to
Q:
  R C
 –
Q Q Q
The first-order condition for maximization of profit is that the first derivative of the profit function
with respect to Q should be equal to 0.
  R C
 – 0
Q Q Q
 R   C 
The above equation shows that marginal revenue   should be equal to marginal cost   for
 Q   Q 
output to be at the profit-maximizing level.

Section Reference: The Math behind Monopoly
Learning Objective: Explain the mathematics behind monopoly.

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Package: Test Bank

Title: Microeconomics: Theory and Application, 12e

Question Type: Multiple Choice

1. The monopolist's demand curve slopes downward because:

a. the good sold by a monopolist is easily substitutable.

Difficulty Level: Easy

a. It is perfectly elastic at the equilibrium price level.

Difficulty Level: Easy

3. Which of the following is true of a monopolist?

4. The shape of the monopolist’s demand curve indicates that:

a. profit per unit increases as more units are sold.

Difficulty Level: Easy

Difficulty Level: Easy

7. The marginal revenue curve of a monopolist:

a. is the same as the monopolist’s demand curve.

Difficulty Level: Easy

a. the demand curve is unit elastic.

Difficulty Level: Medium

a. its average revenue curve

Difficulty Level: Easy

Output Total Revenue Total Cost

Difficulty Level: Medium

11. Which of the following is true for a monopoly firm?

Difficulty Level: Medium

12. Which of the following is true for a monopoly firm?

Difficulty Level: Medium

Difficulty Level: Easy

Output Total Revenue Total Cost

Difficulty Level: Medium

a. Bost should reduce their output to 295 cartridges to increase profit.

Difficulty Level: Hard

a. total cost is equal to total revenue.

Difficulty Level: Medium

Output Total Revenue Total Cost

Difficulty Level: Hard

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Easy

a. The marginal revenue is equal to the marginal cost of production.

Difficulty Level: Medium

Difficulty Level: Medium

a. produce the efficient quantity of output.

Difficulty Level: Medium

Refer to Figure 11-4. What is the firm’s economic profit?

Difficulty Level: Medium

a. is earning zero economic profit.

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Easy

Difficulty Level: Easy

Difficulty Level: Medium

a. be at its maximum possible point.

Difficulty Level: Medium

Difficulty Level: Medium

a. independent of the price elasticity of demand

Difficulty Level: Medium

Difficulty Level: Hard

Difficulty Level: Medium

a. decrease price and output.

Difficulty Level: Easy