MONOPOLY

Multiple Choice

M1 A monopolist faces a demand curve that is

a. The same as the total market demand.
b. Horizontal.
c. Perfectly inelastic.
d. Very stable, not greatly affected by economic changes.
e. Relatively elastic.

M2 As a rule, the monopoly price will be

a. As high as the monopolist wants.
b. Greater than marginal cost.
c. Greater than average revenue.
d. Lower than marginal revenue.
e. Equal to long-run average cost.

M3 In the long run, a monopoly will earn positive economic profits due to
a. Free entry into the industry.
b. Downward sloping demand.
c. Its ability to raise price at will.
d. Barriers to entry.
e. Its horizontal LAC curve.

M4 Which of the following is not a barrier to entry?

a. Control of resources.
b. Economies of Scale.
c. Being first to market.
d. Patents and Copyrights.
e. Answers a, b, c and d all are entry barriers.

M5 Due to its market power, a monopolist can

a. Set both price and quantity for the product.
b. Select any price-quantity combination along the industry demand curve.
c. Maximize profit by setting price equal to long-run cost.
d. Pass along all cost increases to buyers.
e. Answers c and d are both correct.

M6 If the demand curve is downward sloping, the monopolist’s marginal revenue curve is
a. Above the demand curve.
b. Always above its average cost curve.
c. The same as the demand curve.
d. Always below the marginal cost curve.
e. Below the demand curve.

M7 A monopolist maximizes profits by producing at a price and output where

a. P = MC.
 Managerial Economics Study Guide

b. P = AC.
c. MR = MC.
d. AC is at a minimum.
e. Answers c and d are both correct.

M8 The monopoly market structure leads to

a. Price that equals average cost.
b. Quick responses to economic change.
c. Price that equals minimum long-run average cost.
d. Continuing economic profits.
e. Efficient levels of production.

M11 In the long run, an increase in fixed cost will cause total output to
a. Fall in both a monopoly and in a competitive industry.
b. Fall in a monopoly and to be unchanged in a competitive industry.
c. Increase in a monopoly and fall in a competitive industry.
d. Be unchanged in a monopoly and fall in a competitive industry.
e. Be unchanged in both a monopoly and in a competitive industry.

M14 A natural monopoly may occur if

a. Average cost falls throughout the relevant range of production.
b. Marginal cost falls throughout a large range of production.
c. Average fixed cost falls throughout a large range of production.
d. Industry demand is very inelastic.
e. Marginal revenue exceeds marginal cost for a large range of production.

M15 In a natural monopoly with AC = 100/Q + 25 and P = 50 – Q,

a. There is no need to regulate the price.
b. The usual regulated price is P = $45, implying Q = 5.
c. The usual regulated price is: P = $30, implying Q = 20
d. The usual regulated price is: P = $37.5, implying Q = 12.5
e. None of these answers is correct.

M16 In the long run, firms under monopolistic competition will tend to charge a price
a. Approximately as high as the pure monopoly price.
b. Equal to LAC but greater than LMC.
c. Identical to the perfectly competitive price.
d. Equal to the minimum value of LAC.
e. None of the answers above is correct.
M17 The major difference between monopolistic competition and perfect competition is the
a. Size of the typical firm.
b. Magnitude of long-run profits.
c. Cost structure of the typical firm.
d. Degree of product differentiation.
e. Number of firms in each industry.

M18 In general, the greater the degree of product differentiation

a. The less elastic is the demand curve.
 b. The more elastic is the demand curve.
c. The smaller is the firm’s profit.
d. The more intense is competition.
e. The greater the chance of customers switching suppliers.

M19 In most cities, there are a large number of qualified physicians. Physician services are
personalized – that is, people do not see all physicians as identical. Besides price, factors
such as age, sex, location, and personality influence the choice of physician. Thus, the
market for physician services is best described as
a. Perfectly competitive.
b. An oligopoly.
c. A regulated monopoly.
d. Monopolistically competitive.
e. A market marked by price discrimination.

M20 In a monopolistically competitive industry, firms

a. Earn zero economic profits in the short run and in the long run.
b. Can earn positive economic profits in the short run but zero profits in the long
run.
c. Can earn positive economic profits in the short run and in the long run.
d. Will always enter the market in the long run.
e. Answers b and d are both correct.

Short Problems and Questions

S1 Determine the profit maximizing output and price of a monopoly, if market demand is
given by P = 6,000 - 10Q, and total cost is C = 500 + 5Q2.

S2 List five types of barriers to entry that may lead to monopoly.

S3 In pure competition, there are no economic profits in the long run. In pure monopoly, the
dominant firm typically earns a positive economic profit. Explain this difference.

S6 Briefly discuss the characteristics of monopolistic competition that distinguish this type
of market structure from monopoly and perfect competition.

S7 If there are economic profits in monopolistic competition in the short run, what will
happen? Explain. Draw an appropriate diagram to illustrate your answer.

S8 A firm under monopolistic competition faces the demand curve: P = 500 - 12.5Q. The
firm’s marginal cost is MC = 200 + 5Q.
a. Find the firm’s profit-maximizing output and price.
b. Assuming that the firm is at its long-run equilibrium position, estimate total
revenue, total cost, and total profit.

S9 Explain why advertising may make sense in monopolistic competition but not in perfect
competition.