EC 200

Practice problems for MT3

MONOPOLY
Practice Problems
Answer Key

1. True, false or uncertain? Explain your answer.

a. A decrease in the firms fixed cost will change its profits, but will not influence the firms
decision about how much good to produce.
True. A one-time change in the size of the fixed cost does not affect any part of the profit
maximization condition (MR=MC). Therefore, the optimal output will remain the same.
On the other hand, Total Profit = TR TC = P Q TC. An increase in fixed cost will
increase total cost, so the profit will decrease.
b. When the fixed cost of a firm increases, the best thing the firm can do is to increase its price in
order to compensate for the cost increase.
False. The change in the fixed cost doesnt change our profit maximization point (we
should keep producing and selling the same amount as before). So our price shouldnt
change as well, because otherwise we wont be able to sell the same amount.
2. If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
a) earn greater profits than if MR = MC.
b) increase output.
c) decrease output.
d) shut down.
3. Suppose you have found out that the good your firm produces and sells has unit price elasticity
of demand in a wide range of prices. Given that, can you increase your profits by changing the
price of this good? If yes, explain carefully what that change should be. If not, explain why it is
not possible.
Profit = TR - TC.
Since the price elasticity of demand is equal to one, total revenue will not change as a result
of a change in price (and therefore quantity produced). However, we can decrease our total
cost by producing less (and therefore charging higher price according to the law of
demand).
So, if we increase our price, we can produce less. Our TR will stay the same, but TC will
decrease. As a result, profit will increase.

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Practice problems for MT3

4. Two tables below contain information about the total cost of the firm and the demand it is facing.
Cost Data
Output Total Cost, $
100
200
300
400
500

Demand Data
Price, $
Quantity
demanded
6
100
5.50
200
5
300
4.50
400
4
500

1500
1550
1650
1800
2250

a. Can you tell whether this firm operates in a perfectly competitive industry? Explain your answer.
Yes, we can, and no, this market is not perfectly competitive. In perfect competition the firm would
be able to sell its entire output at the same price regardless of the number of units it produces (the
demand curve is horizontal). In this case, the demand curve is clearly downward sloping in order
to sell more the firm has to lower the price.
b. Create and fill marginal revenue and marginal cost columns.
The marginal cost is the difference between the two successive entries in the total cost column. The
marginal revenue is the difference between the two successive entries in the total revenue column.
We need to make one extra step and calculate total revenue, which is equal to the product of
quantity and price.
Cost Data
Output Total Cost, $
100
200
300
400
500

1500
1550
1650
1800
2250

MC, $

Price, $

???
50
100
150
450

6
5.50
5
4.50
4

Demand Data
Quantity
demanded
100
200
300
400
500

TR, $

MR, $

600
1100
1500
1800
2000

600
500
400
300
200

Find the output quantity that is optimal for the firm.

Method 1. The MR-MC approach. The last positive difference between MR and MC is at 400 units
of output.
Method 2. The aggregate approach. Since we now have both TR and TC, we can just subtract TC
from TR to determine the profit. The only output quantity for which the profit does not come out
negative is 400 units. Hence this is the best output quantity.
c. State the size of economic profit the firm earns at this quantity of output.
Profit = TR TC = 1800 1800 = 0
d. Can you tell whether the firm earns accounting profit? Explain.
Probably yes. The economic profit takes into account the opportunity cost of running this business,
which has to be positive due to scarcity of resources. If economic profit is zero, this means the firm
is earning normal accounting profit (does as well as the other firms of a similar size).

EC 200

Practice problems for MT3

Monopoly -- Practice Quiz

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1Which of the following is true?

. A) Patents reduce a firm's incentive to develop new products.
B) Patents are given for new works of art or literature.
C) Patents give a permanent exclusive right to produce a new good.
D) Patents give a temporary exclusive right to produce a new good.
E) Patents guarantee economic profits.
ANSWER: D

2Patent laws promote technical progress in all of the following ways except one. Which is
. the exception?
A) They allow other firms to copy successful products as soon as they are
marketed.
B) They prevent duplication of inventions.
C) They provide a stimulus to innovation.
D) They provide the inventor with a temporary monopoly.
E) They increase a firm's incentive to incur the up-front costs of
developing new products.
ANSWER: A

3Which of the following could not bar entry into an industry?

. A) economies of scale
B) diseconomies of scale
C) patents
D) licenses
E) one firm's control of essential resources
ANSWER: B

4For a nondiscriminating monopolist, marginal revenue is

. A) equal to price
B) greater than price
C) less than price
D) represented by a horizontal curve
E) equal to average revenue
ANSWER: C

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Practice problems for MT3

5For the nondiscriminating monopolist,

. A) P = MR = AR
B) P = MR > AR
C) P > MR = AR
D) P = MR < AR
E) P = AR > MR
ANSWER: E

6A nondiscriminating monopolist's demand curve

. A) is horizontal at the market price
B) lies above its marginal revenue curve
C) is the same as its marginal cost curve
D) indicates that the firm must raise price to sell additional units
E) lies above the marginal cost curve at all levels of output
ANSWER: B

7A profit-maximizing monopoly will always produce at the minimum point of its average
. total cost (ATC) curve.
A) True
B) False
ANSWER: B

8A monopolist maximizes profit at the quantity where the slope of its total revenue curve
. equals the slope of its total cost curve.
A) True
B) False
ANSWER: A

9Which of the following is not true of monopolists?

. A) The entry of new firms is not a major concern.
B) Monopolists seek to maximize profits.
C) Monopolists can charge any price they want and make a profit.
D) Monopolists can choose any point on the market demand curve.
E) Monopolists can raise price more than 10 percent.
ANSWER: C

1A monopolist earning short-run economic profit determines that at its present level of
0. output, marginal revenue is $23 and marginal cost is $30. Which of the following should
the firm do to increase profit?
A) Raise price and lower output.

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Practice problems for MT3

B)
C)
D)
E)

Lower price and lower output.

Raise price and raise output.
Lower price and raise output.
Lower output but leave price unchanged.

ANSWER: A

1Consider Exhibit 0145. What is the profit-maximizing output for a monopolist that does
1. not price discriminate?
A) 1 unit
B) 2 units
C) 3 units
D) 4 units
E) 5 units
ANSWER: C

1In the short run, a monopolist will shut down when

2. A) average total cost is greater than price at all output levels
B) average variable cost is greater than average fixed cost at all output
levels
C) price is greater than average variable cost at all output levels
D) average fixed cost is greater than price at all output levels
E) average variable cost is greater than price at all output levels
ANSWER: E

1For a nondiscriminating monopolist, which of the following statements is true?

3. A) Unlike a firm in perfect competition, a monopolist produces where
MR > MC.
B) The monopolist's marginal revenue curve is the same as its demand
curve.
C) The monopolist will always produce in the inelastic range of its
demand curve.
D) The monopolist does not have a supply curve.
E) The monopolist produces where MR < MC.
ANSWER: D
5

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Practice problems for MT3

1The profit-maximizing (or loss-minimizing) price the monopoly will charge in Exhibit 94. 1 is
A) irrelevant since the firm should shut down
B) $11
C) $16
D) $18
E) $22
ANSWER: C

1Which of the following would not bar entry into a market?

5. A) control by a single firm of an essential resource
B) the necessity of taking risks when starting a firm
C) patents
D) economies of scale
E) government regulations limiting the number of firms in an industry
ANSWER: B

1Firms can earn economic profits even in the long run if

6. A) they charge the highest price possible
B) there is a cost-reducing technological change
C) there are significant barriers to entry
D) marginal revenue equals marginal cost
E) price is less than average variable cost at all rates of output
ANSWER: C
1In the long run, which of the following is not a problem for a monopolist earning

EC 200
A

Practice problems for MT3

7. economic profit?
A) other firms have an incentive to create substitutes for the monopolist's
product
B) technological change tends to break down barriers to entry
C) patents expire, licenses must be renewed, and new sources of essential
resources may be discovered
D) government often decides to regulate monopolies
E) all profit will gradually be converted to consumer surplus
ANSWER: E

1In Exhibit 0150, the level of output that would achieve allocative efficiency is
8. A) 700 units
B) 810 units
C) 884 units
D) 976 units
E) 1,000 units
ANSWER: C

1Compared to the productive efficiency of a perfectly competitive firm, a monopolist

9. tends to be
A) very efficient because it charges higher prices
B) more efficient because it produces greater output
C) inefficient
D) equally efficient, as it also produces where MR = MC
E) very efficient because it conserves resources by producing less output

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Practice problems for MT3

ANSWER: C

2Total deadweight loss in society is reduced through rent seeking by monopolists.

0. A) True
B) False
ANSWER: B

2The U.S. Postal Service has found its monopoly eroded over time because
1. A) the demand for mail delivery has become more inelastic
B) Congress has taken away their monopoly over first-class mail
C) the U.S. Postal Service cannot handle the volume of transactions
D) the price of stamps has increased relative to other substitutes, such as
the telephone
E) of the decline in the use of fax machines
ANSWER: D

2Suppose that a price-discriminating monopolist divides its market into two segments. In
2. each market segment, price is determined by finding the level of output where that
market's
A) average revenue equals average total cost
B) average revenue equals average variable cost
C) marginal revenue equals average total cost
D) marginal revenue equals marginal cost
E) marginal cost equals average total cost
ANSWER: D

EC 200

Practice problems for MT3

2If the monopolist in Exhibit 0150 engages in perfect price discrimination, price would be
3. A) $120 for the 884th unit
B) $212 on all units
C) $120 on all units
D) $136 on all units
E) $104 on all units
ANSWER: A

2If the monopolist in Exhibit 0150 engages in perfect price discrimination, price would
4. A) vary between $212 and $120
B) vary between $212 and $104
C) be $136 on all units
D) be $110 on all units
E) be $104 on all units
ANSWER: A

EC 200

Practice problems for MT3

2In Exhibit 0153, which area represents the amount of consumer surplus received by
5. consumers under perfect price discrimination?
A) area a
B) area b
C) area a + b + c
D) area b + e
E) there is no consumer surplus
ANSWER: E

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

Which of the following is true?

1A) Patents reduce a firm's incentive to develop new products.
. B) Patents are given for new works of art or literature.
C) Patents give a permanent exclusive right to produce a new good.
D) Patents give a temporary exclusive right to produce a new good.
E) Patents guarantee economic profits.
D
ANSWER:

Patent laws promote technical progress in all of the following ways except one. Which is
2the exception?
. A) They allow other firms to copy successful products as soon as they are
marketed.
B) They prevent duplication of inventions.
C) They provide a stimulus to innovation.
D) They provide the inventor with a temporary monopoly.
E) They increase a firm's incentive to incur the up-front costs of
10

EC 200

Practice problems for MT3

developing new products.
A
ANSWER:

Which of the following could not bar entry into an industry?

3A) economies of scale
. B) diseconomies of scale
C) patents
D) licenses
E) one firm's control of essential resources
B
ANSWER:

For a nondiscriminating monopolist, marginal revenue is

4A) equal to price
. B) greater than price
C) less than price
D) represented by a horizontal curve
E) equal to average revenue
C
ANSWER:

For the nondiscriminating monopolist,

5A) P = MR = AR
. B) P = MR > AR
C) P > MR = AR
D) P = MR < AR
E) P = AR > MR
E
ANSWER:

A nondiscriminating monopolist's demand curve

6A) is horizontal at the market price
. B) lies above its marginal revenue curve
C) is the same as its marginal cost curve
D) indicates that the firm must raise price to sell additional units
E) lies above the marginal cost curve at all levels of output
B
ANSWER:

11

EC 200

Practice problems for MT3

A profit-maximizing monopoly will always produce at the minimum point of its average
7total cost (ATC) curve.
. A) True
B) False
B
ANSWER:

A monopolist maximizes profit at the quantity where the slope of its total revenue curve
8equals the slope of its total cost curve.
. A) True
B) False
A
ANSWER:

Which of the following is not true of monopolists?

9A) The entry of new firms is not a major concern.
. B) Monopolists seek to maximize profits.
C) Monopolists can charge any price they want and make a profit.
D) Monopolists can choose any point on the market demand curve.
E) Monopolists can raise price more than 10 percent.
C
ANSWER:

A monopolist earning short-run economic profit determines that at its present level of
1output, marginal revenue is $23 and marginal cost is $30. Which of the following should
0. the firm do to increase profit?
A) Raise price and lower output.
B) Lower price and lower output.
C) Raise price and raise output.
D) Lower price and raise output.
E) Lower output but leave price unchanged.
A
ANSWER:

12

EC 200

Practice problems for MT3

Consider Exhibit 0145. What is the profit-maximizing output for a monopolist that does
1not price discriminate?
1. A) 1 unit
B) 2 units
C) 3 units
D) 4 units
E) 5 units
C
ANSWER:

In the short run, a monopolist will shut down when

1A) average total cost is greater than price at all output levels
2. B) average variable cost is greater than average fixed cost at all output
levels
C) price is greater than average variable cost at all output levels
D) average fixed cost is greater than price at all output levels
E) average variable cost is greater than price at all output levels
E
ANSWER:

For a nondiscriminating monopolist, which of the following statements is true?

1A) Unlike a firm in perfect competition, a monopolist produces where
MR > MC.
3.
B) The monopolist's marginal revenue curve is the same as its demand
curve.
C) The monopolist will always produce in the inelastic range of its
demand curve.
D) The monopolist does not have a supply curve.
E) The monopolist produces where MR < MC.
D
ANSWER:

13

EC 200

Practice problems for MT3

The profit-maximizing (or loss-minimizing) price the monopoly will charge in Exhibit 911 is
4. A) irrelevant since the firm should shut down
B) $11
C) $16
D) $18
E) $22
C
ANSWER:

Which of the following would not bar entry into a market?

1A) control by a single firm of an essential resource
5. B) the necessity of taking risks when starting a firm
C) patents
D) economies of scale
E) government regulations limiting the number of firms in an industry
B
ANSWER:

Firms can earn economic profits even in the long run if

1A) they charge the highest price possible
6. B) there is a cost-reducing technological change
C) there are significant barriers to entry
D) marginal revenue equals marginal cost
E) price is less than average variable cost at all rates of output
C
ANSWER:

14

EC 200

Practice problems for MT3

In the long run, which of the following is not a problem for a monopolist earning
1economic profit?
7. A) other firms have an incentive to create substitutes for the monopolist's
product
B) technological change tends to break down barriers to entry
C) patents expire, licenses must be renewed, and new sources of essential
resources may be discovered
D) government often decides to regulate monopolies
E) all profit will gradually be converted to consumer surplus
E
ANSWER:

In Exhibit 0150, the level of output that would achieve allocative efficiency is
1A) 700 units
8. B) 810 units
C) 884 units
D) 976 units
E) 1,000 units
C
ANSWER:

Compared to the productive efficiency of a perfectly competitive firm, a monopolist

1tends to be
9. A) very efficient because it charges higher prices

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Practice problems for MT3

B)
C)
D)
E)

more efficient because it produces greater output

inefficient
equally efficient, as it also produces where MR = MC
very efficient because it conserves resources by producing less output
C

ANSWER:

Total deadweight loss in society is reduced through rent seeking by monopolists.

2A) True
0. B) False
B
ANSWER:

The U.S. Postal Service has found its monopoly eroded over time because
2A) the demand for mail delivery has become more inelastic
1. B) Congress has taken away their monopoly over first-class mail
C) the U.S. Postal Service cannot handle the volume of transactions
D) the price of stamps has increased relative to other substitutes, such as
the telephone
E) of the decline in the use of fax machines
D
ANSWER:

Suppose that a price-discriminating monopolist divides its market into two segments. In
2each market segment, price is determined by finding the level of output where that
2. market's
A) average revenue equals average total cost
B) average revenue equals average variable cost
C) marginal revenue equals average total cost
D) marginal revenue equals marginal cost
E) marginal cost equals average total cost
D
ANSWER:

16

EC 200

Practice problems for MT3

If the monopolist in Exhibit 0150 engages in perfect price discrimination, price would be
2A) $120 for the 884th unit
3. B) $212 on all units
C) $120 on all units
D) $136 on all units
E) $104 on all units
A
ANSWER:

If the monopolist in Exhibit 0150 engages in perfect price discrimination, price would
2A) vary between $212 and $120
4. B) vary between $212 and $104
C) be $136 on all units
D) be $110 on all units
E) be $104 on all units
A
ANSWER:

17

EC 200

Practice problems for MT3

In Exhibit 0153, which area represents the amount of consumer surplus received by
2consumers under perfect price discrimination?
5. A) area a
B) area b
C) area a + b + c
D) area b + e
E) there is no consumer surplus
E
ANSWER:

18