Chapter 9 Practice Quiz Monopoly

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Chapter 9 Practice Quiz Monopoly
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• 1. A monopolist always faces a demand curve that
  is
• a. perfectly inelastic.
• b. perfectly elastic.
• c. unit elastic.
• d. the same as the market demand curve.

D. A monopoly is the only seller, so there is no
distinction between the market demand curve and
the individual demand curve.
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• 2. A monopoly sets the
• price at which marginal revenue equals zero.
• b. price that maximizes total revenue.
• c. highest possible price on its demand curve.
• d. price at which marginal revenue equals
• marginal cost.

D. As shown in the next slide, profits are
always maximized if the firm produces at the
point where MR MC.
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• 3. A monopolist sets
• a. the highest possible price.
• b. a price corresponding to the minimum
• average total cost.
• c. a price equal to marginal revenue.
• d. a price determined by the point on the
• demand curve corresponding to the level
• of output at which marginal revenue
• equals marginal cost.
• e. none of the above.

D. Demand determines price in all market forms.
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• 4. Which of the following is true for the
• monopolist?
• a. Economic profit is possible in the long-run.
• b. Marginal revenue is less than the price
• charged.
• c. Profit maximizing or loss minimizing
• occurs when marginal revenue equals
• marginal cost.
• d. All of the above are true.

D. As shown in the graph on the next slide, all
of the above are characteristics of a monopoly.
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.
Exhibit 11 Profit Maximizing for a Monopolist
40
MC
30
Price, costs and revenue (dollars)
ATC
20
AVC
10
D
MR
100
200
300
400
0
Quanitity of output (units per day)
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• 5. As shown in Exhibit 11, the profit-maximizing
  or loss-minimizing output for this monopolist is
• a. 100 units per day.
• b. 200 units per day.
• c. 300 units per day.
• d. 400 units per day.

B. 200 units is the point at which MR MC.
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• 6. As shown in Exhibit 11, this monopolist
• a. should shut down in the short-run.
• b. should shut down in the long-run.
• c. earns zero economic profit.
• d. earns positive economic profit.

D. At the point where MR MC (on the
vertical line), P is greater than ATC
therefore, total revenue is greater than total
cost and an economic profit is being made.
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• 7. To maximize profit or minimize loss, the
• monopolist in Exhibit 11 should set its
  price at
• a. 30 per unit.
• b. 25 per unit.
• c. 20 per unit.
• d. 10 per unit.
• e. 40 per unit.

B. Maximum profit or minimized losses are
found by drawing a vertical line where MR
MC. This line intersects the demand curve at
25.
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• 8. If the monopolist in Exhibit 11 operates at
  the profit-maximizing output, it will earn total
  revenue to pay about what portion of its total
  fixed cost?
• a. None.
• b. One-half.
• c. Two-thirds.
• d. All total fixed costs.

• Since the monopolist is making a profit, it can
  pay all of its fixed costs.

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• 9. For a monopolist to practice effective price
• discrimination, one necessary condition is
• identical demand curves among groups of buyers.
• b. differences in the price elasticity of demand
  among groups of buyers.
• c. a homogeneous product.
• d. none of the above.

B. Price discrimination takes place when a
monopolist is faced with buyers that are widely
different therefore, the buyers elasticity of
demand for the product will be different.
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• 10. What is the act of buying a commodity at a
• lower price and selling it at a higher
  price?
• a. Buying short.
• b. Discounting.
• c. Tariffing.
• d. Arbitrage.

D. The practice of earning a profit by
buying a good at a low price and reselling
the good at a higher price.
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• 11. Under both perfect competition and
• monopoly, a firm
• a. is a price taker.
• b. is a price maker.
• c. will shut down in the short run if price
  falls
• short of average total cost.
• d. always earns a pure economic profit.
• e. sets marginal cost equal to marginal
• revenue.

E. The profit maximizing output for any
firm is where MR MC.
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12. At any point where a monopolists
marginal revenue is positive, the
downward-sloping straight-line demand
curve is a. perfectly elastic. b.
elastic, but not perfectly elastic. c.
unitary elastic. d. inelastic.
B. When marginal revenue is zero, the demand
curve is unitary elastic, and it is inelastic
when marginal revenue is negative. Demand is
perfectly elastic in perfect competition.
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13. Suppose a monopolist charges a price
corresponding to the intersection of the
marginal cost and marginal revenue curves.
If this price is between its average variable
cost and average total cost curves, the
firm will a. earn an economic profit.
b. stay in operation in the short-run, but shut
down in the long run if demand remains
the same. c. shut down. d. none of
the above.
B. If the firm can cover its average variable
cost, it is paying for the cost of operating. In
the long run, demand could increase and the firm
earns economic profit.
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14. In contrast to a perfectly competitive firm,
a monopolist operates in the long run at a
quantity of output at which a. P
MC. b. MR MC. c. P ATC. d.
P gt MR.
D. The perfectly competitive firms demand curve
is perfectly elastic therefore, the firms
operates where P MR. For a monopolist, the MR
curve is downward sloping and below the price.
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15. The monopolist, unlike the perfectly
competitive firm, can continue to earn an
economic profit in the long run because of
a. collusive agreements with competitors.
b. price leadership. c. cartels. d. a
dominant firm. e. extremely high barriers
to entry.
E. Answers a. d. can increase a monopolists
profits, but a key characteristic that results in
long run economic profit is an extremely high
barrier to entry.