EXERCISES FOR MONOPOLY – MONOPOLISTIC – OLIGOPOLY

1. In Walnut Creek, California, there are three very popular supermarkets: Safeway, Whole Foods, and
Lunardi's. While Safeway remains open twenty-four hours a day, Whole Foods and Lunardi's close at
9 pm. Which of the following statements is true?
A) Safeway is a monopoly all day because it produces a service that has no close substitutes.
B) Safeway has a monopoly at midnight but not during the day.
C) Safeway can ignore the pricing decisions of the other two supermarkets.
D) Safeway probably has a higher markup to compensate for its higher cost of production.

2. A monopoly is characterized by all the following except.

A) there are only a few sellers, each selling a unique product.
B) entry barriers are high.
C) there are no close substitutes for the firm's product.
D) the firm has market power.

3. Few firms in the United States are monopolies because.

A) few firms experience economies of scale.
B) monopolies are technically illegal in the United States.
C) when a firm earns profits, other firms will enter its market.
D) most firms produce products for which there are no close substitutes.

4. To maintain a monopoly, a firm must have.

A) a perfectly inelastic demand.
B) an insurmountable barrier to entry.
C) marginal revenue equal to demand.
D) few competitors.

5. A local electricity-generating company has a monopoly that is protected by an entry barrier that takes
the form of
A) control of key raw materials.
B) network externalities.
C) economies of scale.
D) a perfectly inelastic demand curve.

6. Governments grant patents to encourage.

A) research and development of new products.
B) competition.
C) low prices.
D) firms to form public enterprises.

7. In a natural monopoly, throughout the range of market demand,

A) the marginal cost is above the average total cost and pulls the average total cost upward.
B) average total cost is above the marginal cost and pulls the marginal cost upward.
C) the marginal cost is below the average total cost and pulls the average total cost downward.
D) there are diseconomies of scale.

8. Which one of the following is not a possible barrier to entry high enough to keep competing firms out
of a monopoly industry?
A) The monopoly firm has control of a key resource necessary to produce a good.
B) There are important network externalities in supplying a good or service.
C) large economies of scale that result in a natural monopoly
D) a high concentration ratio

9. When the government makes a firm the exclusive legal provider of a good or service, it grants the
firm.
A) copyright.
B) network externality.
C) a quota.
D) a public franchise.

10. A patent
A) grants the creator of a book, film, or piece of music the exclusive right to use the creation for 20 years.
B) grants the creator of a book, film, or piece of music the exclusive right to use the creation during the
creator's lifetime.
C) gives a firm the exclusive right to a new product for 20 years from the date the patent application is
filed with the government.
D) gives a firm the exclusive right to a new product during the product inventor's lifetime.

11. To be a natural monopoly, a firm must

A) control key resource input.
B) have economies of scale that are so large that they can supply the entire market at a lower cost than
two or more firms.
C) have significant network externalities.
D) be in a government-regulated market.

12. The demand curve for a monopoly's product is.

A) the market demand for the product.
B) more elastic than the market demand for the product.
C) more inelastic than the market demand for the product.
D) undefined.

13. A monopolist's profit-maximizing price and output correspond to the point on a graph.
A) where the average total cost is minimized.
B) where total costs are the smallest relative to price.
C) where marginal revenue equals marginal cost and charging the price on the market demand curve for
that output.
D) where the price is as high as possible.

14. Because a monopoly's demand curve is the same as the market demand curve for its product,
A) the monopoly's marginal revenue equals its price.
B) the monopoly is a price taker.
C) the monopoly must lower its price to sell more of its product.
D) the monopoly's average total cost always falls as it increases its output.

15. If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in
ticket revenue if it adds a sixth performance, the
A) marginal revenue of the sixth performance is $288,000.
B) marginal revenue of the sixth performance is $38,000.
C) the cost of staging the sixth performance is probably higher than the cost of staging the previous five.
D) company will be making a loss on the sixth performance because its ticket sales will be less than the
average revenue received from the previous five.
16. If a monopolist's marginal revenue is $25 a unit and its marginal cost is $25, then.
A) to maximize profit the firm should increase output.
B) to maximize profit the firm should decrease output.
C) to maximize profit the firm should continue to produce the output it is producing.
D) Not enough information is given to say what the firm should do to maximize profit.

Figure 15-2
Figure 15-2 above shows the demand and cost curves facing a
monopolist.
17. Refer to Figure 15-2. To maximize profit, the firm will produce
at an output level.
A) Q1.
B) Q2.
C) Q3.
D) Q4.

18. Refer to Figure 15-2. The firm's profit-maximizing price is.

A) P1.
B) P2.
C) P3.
D) P4.

19. Refer to Figure 15-2. If the firm's average total cost curve is ATC1, the firm will.
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.

20. Refer to Figure 15-2. If the firm's average total cost curve is ATC2, the firm will.
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.

21. Refer to Figure 15-2. If the firm's average total cost curve is ATC3, the firm will.
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.

Table 15-1
Price per Unit Quantity Demanded Total Cost of Production
(units) (dollars)
$85 10 $530
80 11 540
75 12 550
 70 13 560
65 14 575
60 15 595
55 16 625
A monopoly producer of foreign language translation software faces a demand and cost structure as given
in Table 15-1.
22. Refer to Table 15-1. What is the marginal revenue from the sale of the 12th unit?
A) $75
B) $50
C) $20
D) -$5

23. Refer to Table 15-1. What is the firm's profit-maximizing output and what is the price charged to sell
this output?
A) P = $85; Q = 10
B) P = $80; Q = 11
C) P = $70; Q = 13
D) P = $65; Q = 14

24. Refer to Table 15-1. When producing the profit-maximizing output, what is the amount of the firm's
profit?
A) $335
B) $350
C) $880
D) $910

Figure 15-3
Figure 15-3 above shows the demand and cost curves facing a
monopolist.
25. Refer to Figure 15-3. Suppose the monopolist represented
in the diagram above produces positive output. What is the
profit-maximizing/loss-minimizing output level?
A) 630 units
B) 800 units
C) 850 units
D) 880 units

26. Refer to Figure 15-3. Suppose the monopolist represented in the diagram above produces positive
output. What is the price charged at the profit-maximizing/loss-minimizing output level?
A) $38
B) $54
C) $68
D) $75

27. Refer to Figure 15-3. Suppose the monopolist represented in

the diagram above produces positive output. What is the
profit/loss per unit?
A) loss of $7 per unit
B) profit of $30 per unit
C) loss of $21 per unit
D) profit of $14 per unit

Figure 15-10
28. Refer to Figure 15-10. What is the area that represents consumer surplus under a monopoly?
A) the triangle P0P1F
B) the triangle P0P2E
C) the area P1P2EF
D) the rectangle P1P3HF

29. Refer to Figure 15-10. Compared to a perfectly competitive market, consumer surplus is lower in a
monopoly by an amount equal to the
A) area FHE.
B) area FGE.
C) area P1P2EF.
D) area P1P2GF.

30. Refer to Figure 15-10. The deadweight loss due to a monopoly is represented by the area
A) FHE.
B) FGE.
C) GEH.
D) FQ1Q2E.

Figure 15-7
Refer to Figure 15-7. Use the figure above to answer the following questions.
a. What is the profit-maximizing quantity and what price will the monopolist charge?
b. What is the total revenue at the profit-maximizing output level?
c. What is the total cost at the profit-maximizing output
level?
d. What is the profit?
e. What is the profit per unit (average profit) at the profit-
maximizing output level?
f. If this industry was organized as a perfectly competitive
industry, what would be the profit-maximizing price and
quantity?

CHAPTER: MONOPOLISTIC
1. A major difference between monopolistic competition
and perfect competition is.
A) the number of sellers in the markets.
B) the degree to which the market demand curves slope
downwards.
C) that products are not standardized in a monopolistic competition unlike in perfect competition.
D) the barriers to entry in the two markets.

2. Which of the following is true for a firm with a downward-sloping demand curve for its product?
A) Price, average revenue, and marginal revenue are all equal.
B) Price, average revenue, and marginal revenue are all different.
C) Price equals average revenue but is greater than marginal revenue.
D) Price equals average revenue but is less than marginal revenue.
3. A monopolistically competitive firm will
A) charge the same price as its competitors do.
B) always produce at the minimum efficient scale of production.
C) have some control over its price because its product is differentiated.
D) produce an output level that is productive and allocative efficient.

4. When a monopolistically competitive firm cuts its price to increase its sales, it experiences a gain in
revenue due to the
A) substitution effect.
B) income effect.
C) price effect.
D) output effect.

5. When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in
revenue due to the
A) substitution effect.
B) income effect.
C) price effect.
D) output effect.

6. Which of the following is not a characteristic of monopolistic competition?

A) There are many buyers and sellers.
B) There are low barriers to entry.
C) Average revenue is equal to price.
D) The products sold by all firms are identical.

7. In San Francisco many restaurants specialize in a wide variety of cuisines. Patronage at these
restaurants is influenced by factors such as taste, price, and location. This market is.
A) perfectly competitive.
B) monopolistically competitive.
C) oligopolistic.
D) monopolistic.

Figure 13-3
8. Refer to Figure 13-3. The marginal revenue from one
additional unit sold is the sum of the gain in revenue from
selling the additional unit and the loss in revenue from
having to charge a lower price to sell the additional unit.
Based on the diagram in the figure,
A) X represents the gain (price effect) and Y the loss (output
effect).
B) X + Z represents the loss (output effect) and Y the gain
(price effect).
C) Y represents the gain (output effect) and X the loss (price effect).
D) X represents the loss (price effect) and Y + Z the gain (output effect).

9. Refer to Figure 13-3. What is the marginal revenue of the sixth unit of output?
A) $4
B) $5
C) $9
D) $54

10. For the monopolistically competitive firm,

A) Price (P) = Marginal Revenue (MR) = Average Revenue (AR).
B) P = MR > AR.
C) P = AR > MR.
D) P > MR = AR.

11. The Jeans Store sells 7 pairs of jeans per day when it charges $100 per pair. It sells 8 pairs of jeans
per day at a price of $90 per pair. The marginal revenue of the eighth pair of jeans is
A) $20.
B) $90.
C) $100.
D) $700.

12. Which of the following describes a difference between the marginal revenue and demand curves of a
perfectly competitive firm and a monopolistically competitive firm?
A) The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal
revenue curve of a monopolistically competitive firm lies above its demand curve.
B) The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal
revenue curve of a monopolistically competitive firm lies below its demand curve.
C) The monopolistically competitive firm's marginal revenue and demand curves are the same; the
marginal revenue curve of a perfectly competitive firm lies below its demand curve.
D) The marginal revenue curve of a monopolistically competitive firm lies below its demand curve; the
marginal revenue curve of a perfectly competitive firm lies above its demand curve.

13. A monopolistically competitive firm maximizes profit where

A) price = marginal revenue.
B) price > marginal cost.
C) marginal revenue > average revenue.
D) total revenue > marginal cost.

14. Unlike a perfectly competitive firm, for a monopolistically competitive firm,

A) price ≠ marginal cost for all output levels.
B) price ≠ marginal revenue for all output levels.
C) price ≠ average revenue for all output levels.
D) marginal revenue = marginal cost at the profit-maximizing output.

Table 13-2
Quantity Price Total Revenue Total Cost
(cases) (dollars) (dollars) (dollars)
1 $75 $75 $60
2 70 140 85
3 65 195 105
4 60 240 115
5 55 275 130
6 50 300 155
7 45 315 190
8 40 320 230
9 35 315 280
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. Table 13-2
shows the firm's demand and cost schedules.
15. Refer to Table 13-2. What is the output (Q) that maximizes profit and what is the price (P) charged?
A) P = $55; Q = 5 cases
B) P = $50; Q = 6 cases
C) P = $45; Q = 7 cases
D) P = $40; Q = 8 cases

16. Refer to Table 13-2. What is Eco Energy's profit?

A) $125
B) $140
C) $145
D) $150

17. Refer to Table 13-2. How much additional profit will be made if the firm chooses to produce and sell
5 cases instead of 4 cases?
A) $275
B) $145
C) $35
D) $20

Figure 13-4
Figure 13-4 shows short-run cost and demand curves for
a monopolistically competitive firm in the market for
designer watches.
18. Refer to Figure 13-4. If the firm represented in the
diagram is currently producing and selling Qa units,
what is the price charged?
P
A) 0
B) P1
C) P2
D) P3

19. Refer to Figure 13-4. What is the area that represents the total revenue made by the firm?
A) 0P0aQa
B) 0P1bQa
C) 0P2cQa
D) 0P3dQa

20. Refer to Figure 13-4. What is the area that represents the total variable cost of production?
A) 0P0aQa
B) 0P1bQa
C) P0abP1
D) P1bdP3

21. Refer to Figure 13-4. What is the area that represents the total fixed cost of production?
A) 0P1aQa
B) P0adP3
C) P1bdP3
D) That information cannot be determined from the graph.

22. Refer to Figure 13-4. What is the area that represents the loss incurred by the firm?
A) the area P0adP3
B) the area P1bcP2
C) the area P0acP2
D) the area P2cdP3

23. Refer to Figure 13-4. Should the firm represented in the diagram continue to stay in business despite
its losses?
A) No, it should shut down.
B) Yes, its total revenue covers its variable cost.
C) No, it is not able to cover its fixed cost.
D) Yes, it should increase its revenue by raising its price.

24. A monopolistically competitive firm maximizes profit in the short run by producing where.
A) price is less than marginal cost.
B) price is less than marginal revenue.
C) price is less than average revenue.
D) price is greater than marginal cost.

25. A monopolistically competitive firm is producing an output level where marginal revenue is greater
than marginal cost. What should this firm do to increase its profit or reduce its losses?
A) The firm should raise its price.
B) The firm should decrease its fixed costs.
C) The firm should increase its implicit costs.
D) The firm should lower its price.

26. Suppose a monopolistically competitive firm's output where marginal revenue equals marginal cost is
66 units and the price corresponding to this quantity is $18. If the average total cost of this output is
$16.55, then its total profit is
A) $1,188.
B) $1,092.30.
C) $95.70.
D) $1.45.

Figure 13-8
Figure 13-8 shows cost and demand curves for a
monopolistically competitive producer of iced tea.
27. Refer to Figure 13-8. What is the profit-maximizing
output level?
A) 22 cases
B) 24 cases
C) 30 cases
D) 38 cases

28. Refer to Figure 13-8. What is the firm's profit-maximizing price?

A) $12
B) $13
C) $14
D) $16

29. Refer to Figure 13-8. At the profit-maximizing output level, the firm will
A) earn a profit of $176.
B) break even.
C) earn a profit of $88.
D) earn a profit of $60.

30. Refer to Figure 13-8. Based on the diagram, one can conclude that
A) some existing firms will exit the market.
B) new firms will enter the market.
C) the industry is in long-run equilibrium.
D) firms achieve productive efficiency

___THE END___