UNIVERSIDAD DE LIMA

MICROECONOMICS
DOCENTE: LUZ MARINA BRUCE MARTICORENA

TOPIC 7: MONOPOLY

1. To maximize profit, a monopolist will set a price:

a) Lower than marginal cost
b) Equal to marginal cost
c) Higher than marginal cost
d) There is not enough information to answer this question
ANSWER: C

2. If we compare a competitive industry with a single price monopoly (assume they have
the same demand and cost curves), then:
a) The competitive industry will have an efficient resource allocation, but the
monopoly will not.
b) The competitive industry will have an efficient resource allocation, and so will the
monopoly, but depending on its product demand.
c) The competitive industry will not have an efficient resource allocation, but the
monopoly will.
d) Both will have an efficient resource allocation.
ANSWER: A

3. A monopolist’s marginal revenue curve:

a) Has a positive slope
b) Has a negative slope
c) Is perfectly inelastic
d) Is perfectly elastic
ANSWER B

4. The monopoly theory assumes that the monopoly:

a) Has a supply curve which is equal to its marginal revenue curve, and they both
have a negative slope.
b) Has a horizontal demand curve equal to its average variable cost curve.
c) Produces more than a competitive industry.
d) None of the above
ANSWER: D

5. A monopoly can have positive economic profits because:

a) It produces a unique good.
b) It is the only firm that is willing to produce that good.
c) There are high barriers of entry to the market.
d) a and c
ANSWER: D

6. At the production level where the single price monopolist maximizes profit, the price
will be:
a) Equal to marginal cost
b) Equal to marginal revenue
c) Higher than marginal cost
 d) Lower than marginal cost
ANSWER: C

7. Competition is legally forbidden when:

a) There are franchises
b) There are economies of scale
c) A resource is an exclusive property.
d) All of the above
ANSWER: A

8. Fixing different prices for similar goods is known as:

a) Economies of scale
b) Price elasticity
c) Monopoly
d) Price discrimination
ANSWER: D

9. A monopolist is:
a) The only seller of a homogeneous good.
b) A price taker.
c) The only seller of a good with close substitutes.
d) The only seller of a good that has no close substitutes and a price maker.
ANSWER: D

10. A price maker:

a) Has no monopoly power.
b) Does not maximize profits.
c) Sets a price-quantity combination that maximizes profit.
d) Sets a quantity that maximizes profit.
ANSWER: C

11. It is hard to find examples of real-life monopolies because:

a) They are illegal.
b) They are inefficient.
c) They are price makers.
d) Most goods have substitutes.
ANSWER: D

12. The demand curve of a firm with monopoly power:

a) Is the market demand curve
b) Is lower than the market demand curve
c) Is underneath the marginal revenue curve
d) Does not exist.
ANSWER: A

13. Which of these choices is true for a monopolist?

a) MR < AR
b) MR = AR
c) MR = P
d) MR = AR = P
ANSWER: A
14. A monopolist’s supply curve:
a) Is the marginal cost curve.
b) Is horizontal.
c) Cannot be calculated.
d) Is vertical.
ANSWER: C

15. If a monopolist sets a price such that marginal revenue, marginal cost and average
total cost are equal, then economic profit must be:
a) Negative
b) Positive
c) Zero
d) The information provided is not enough to know.
ANSWER: B

MR=MC=ATC P>MC P>ATC positive profit

16. Marginal revenue for a good is MR = 2400 - 4Q. Marginal cost is 2Q. What is the
production level that maximizes profit?
a) 0
b) 400
c) 600
d) None of the above.
ANSWER: B

17. The most usual barriers to entry which help create monopolies are:
a) Exclusive property of important resources.
b) Government authorizations that allow a firm to produce a good or service, while
legally forbidding other firms to do so.
c) Economies of scale: a firm can produce a lot at very low average costs, which
makes it hard for small businesses to get into the market.
d) All of the above.
ANSWER: D

18. Profit maximization in perfect competition is different to profit maximization in

monopoly basically because:
a) For perfect competition: P = MR; for monopoly, P > MR.
b) For perfect competition: P = MR; for monopoly, P < MR.
c) For perfect competition: MR = MC; for monopoly, MR > MC.
d) For perfect competition: MR = MC; for monopoly, MR < MC.
ANSWER: A

19. When we compare perfect competition and single price monopoly and assume they
both have the same demand and cost curves:
a) Perfect competition will produce more at a lower price.
b) Perfect competition will produce more at the same price.
c) Perfect competition will produce more at a higher price.
d) Perfect competition will produce less at a higher price.
e) None of the above.
ANSWER: A
20. According to this graph:
a) The monopolist maximizes profit by charging the highest possible price.
b) The monopolist maximizes profit by producing OI which relates to the intersection
of demand with marginal cost (point H).
c) The monopolist maximizes profit by producing OG which relates to the
intersection of marginal revenue and marginal cost (point F).
d) The monopolist maximizes total revenue by producing OI which relates to the
intersection of demand and marginal cost.
ANSWER: C

Marginal
Cost

Demand

Marginal
Revenue

21. According to the previous graph, which of these statements is true?

a) The maximum profit the monopoly can get is BEFD.
b) The maximum profit the monopoly can get is ODFG.
c) The maximum profit the monopoly can get is OCHI.
d) The maximum profit the monopoly can get cannot be calculated with the
information provided on the graph.
ANSWER: D

22. Provided this table, how much will a profit-maximizing monopolist produce?
a) 3 units
b) 4 units
c) 5 units
d) 6 units
ANSWER: B

Revenue = Total cost = FC + VC Profit = Revenue –

PxQ Total cost
0 50 -50
 90 75 15
160 90 70
210 100 110
240 120 120
250 150 100
240 190
210 240
160 300

23. Using the information from the previous question, what is the maximum profit for a
profit-maximizing monopolist?
a) $100
b) $110
c) $120
d) $130
ANSWER: C

24. According to this graph, which is the correct choice?

a) If the firm maximized profits, its total revenue will be OBEG.
b) If the firm maximized profits, price elasticity of demand would be > 1 (absolute
value).
c) If the firm maximized profits, its total cost would be ODFG.
d) a and b.
ANSWER: D

Marginal
Cost

Average Cost

Demand

Marginal Revenue

25. According to the previous graph, which is the correct choice?

a) When profit is maximized, the firm produces OG.
b) When profit is maximized, the firm sets price OB=GE.
c) When profit is maximized, the firm’s total cost is OBEG.
d) All of the above are correct.
ANSWER: D
26. A monopolist’s demand curve is P = 200 – 10Q and his total cost curve is:
TC = 5 Q2 + 20Q +10
Calculate:

a) The optimal production level and the price he will charge at the market.

MR = MC

MC = 10Q + 20

TR = PxQ = (200 – 10Q) x Q = 200Q – 10Q2

MR = 200 – 20Q

10Q + 20 = 200 – 20Q Q=6

P = 200 – 10(6) = 140

MC

b) Total profit

PROFIT = TR – TC = PxQ – TC = 140x6 – (5 (6)2 + 20(6) +10) = 530

27. At Quitora, government authorizes only La Veloz to provide nationwide

transportation services. The firm´s demand is

P = 100 – ½ Q

where Q is the quantity of bus tickets. Also, its total cost function is:

TC = ½ Q2 + 10Q + 20

a) Calculate price and quantity where this monopoly maximizes its profit.

MR = MC
100 – Q = Q + 10 Q = 45
P = 100 – ½ x 45 = 77.5

b) Calculate this monopoly’s maximum profit.

PROFIT = TR – TC = 77.5 x 45 – [½ x 452 + 10 x 45 +20] = 2005

 c) Later, the Quintora government authorizes other transportation providers, and
so the market becomes a perfect competition. What are the new price and
quantity if La Veloz still wants to maximize its profit?

P = MC
100 – ½ Q = Q + 10 Q = 60
P = 100 - ½ 60 = 70

28. A monopolist has this demand curve:

P = 150 – ½ Q

Its total cost is TC = Q2 + 30Q + 20.

a) Calculate price and quantity that will maximize this monopoly’s profit.

MC = MR
2Q + 30 = 150 – Q Q = 40
P = 150 - ½ 40 = 130

b) Calculate this monopoly’s maximum profit.

PROFIT = TR – TC = 130 x 40 – [402 + 30 x 40 + 20] = 2380