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1. An industry consists of 100 small firms, and the largest firm accounts for only 2 percent of sales. Brand names are
considered a signal of quality. The industry described is best classified as
(A) monopoly
(B) perfectly competitive
(C) monopolistically competitive
(D) oligopolistic
(E) monopsonistic

2. If the three largest widget producers control 85 percent of the total widget market, then these producers are
operating in

(A) an oligopoly
(B) monopolistic competition
(C) perfect competition
(D) a monopoly
(E) a cartel

3. A cartel is difficult to maintain for which of the following reasons?

(A) Consumers substitute away from the good when the price increases.
(B) Individual cartel members are tempted to cheat on the agreement.
Although the total gain to cartel members is positive, all members lose when everyone sticks to the
(C)
agreement.
(D) Some firms will reduce output in an effort to lower costs of production.
(E) Oligopolistic behavior is generally predictable.

4. A collusive agreement to fix prices among firms in an oligopolistic industry is most likely to be broken under which
of the following conditions?

(A) It is easy for new firms to enter into the industry.

(B) All of the firms have identical costs.
(C) The number of firms is few.
(D) Firms’ sales are widely reported.
(E) The market demand is stable.

5. A monopolistically competitive firm advertises in order to

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(A) shift the demand curve for its product to the left.
(B) make the demand for its product less price elastic
(C) make its product more similar to its competitors'
(D) increase its positive externalities
(E) reduce the industry's barriers to entry

6. In monopolistic competition, a goal of advertising is to

(A) reduce a firm’s short-run average total cost
(B) minimize a firm’s long-run average total cost
(C) make a firm’s demand curve more elastic
(D) make a firm’s demand curve less elastic
(E) shift a firm’s demand curve to the left

7. A firm with market power engages in price discrimination to

(A) earn a higher profit

(B) increase consumer surplus
(C) decrease deadweight loss
(D) make its demand more elastic
(E) make its demand more inelastic

8. Assume that Alpha and Beta are the only sellers of a product and they do not cooperate. Each firm has to decide
whether to raise the product price. The payoff matrix below gives the profits, in dollars, associated with each pair of
pricing strategies. The first entry in each cell shows the profits to Alpha, and the second, the profits to Beta.

Assuming both firms know the information in the matrix, which of the following correctly describes the dominant
strategy of each firm?

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Alpha Beta
(A)
Do not raise price Do not raise price

Alpha Beta
(B)
Do not raise price Raise price

Alpha Beta

(C)
Raise price No dominant strategy

Alpha Beta
(D)
Raise price Do not raise price

Alpha Beta
(E)
No dominant Strategy Raise price

9. A monopolistically competitive profit-maximizing firm is currently producing and selling 2,000 units of output. At
this output level, marginal revenue is $9, average revenue is $10, and the average variable cost is $8. The product
price is
(A) $8
(B) $9
(C) $10
(D) greater than $10
(E) less than $8

10. A monopolist is inefficient from society’s point of view because

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(A) it overproduces output and charges a price above marginal cost

(B) it underproduces output and charges a price above marginal cost
(C) it sometimes colludes with other firms to obtain higher prices
(D) the price the monopolist charges is too low and it does not advertise
(E) consumers must pay whatever price the monopolist charges

11. A monopolist’s demand curve is necessarily

(A) the same as the market demand curve

(B) the same as its marginal revenue curve
(C) upward sloping
(D) perfectly elastic
(E) perfectly inelastic

12. A single-price monopolist’s marginal revenue is

(A) equal to its price
(B) less than its price
(C) greater than its price
(D) negative when it maximizes revenues
(E) zero when it maximizes profit

13.

The payoff matrix above shows the profits associated with the strategic decisions of two oligopoly firms, Bright
Company and Sparkle Company. The first entries in each cell show the profits to Bright and the second the profits
to Sparkle. What are the dominant strategies for Bright and Sparkle, respectively?

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Bright Sparkle
(A)
Strategy 1 Strategy 1

Bright Sparkle
(B)
Strategy 1 Strategy 2

Bright Sparkle
(C)
Strategy 2 Strategy 1

Bright Sparkle
(D)
Strategy 2 No dominant strategy

Bright Sparkle
(E)
No dominant strategy Strategy 1

14. A well-known fast-food franchise substantially increases the price of its hamburgers, and loses only some of its
customers. Which of the following best explains why the franchise has not lost all of its customers
(A) Its hamburgers are a perfect substitute for other types of fast food.
(B) Its hamburgers are differentiated.
(C) The demand for its hamburgers is perfectly elastic.
(D) The other competitive fast-food restaurants decrease the price for their hamburgers.
(E) The barriers to entry are very low for entrepreneurs trying to enter the fast-food business.

15. Which of the following is more likely to occur when there are high barriers to entry in an industry?

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(A) The firm(s) in the industry earn economic profits in the long run.
(B) The industry will be characterized by diseconomies of scale.
(C) The firm(s) in the industry are price takers.
(D) The firm(s) in the industry will charge a price equal to average total cost.
(E) The firm(s) will charge a price on the inelastic portion of the demand curve.

16. Which of the following is a source of monopoly power?

(A) Scarcity
(B) Elasticity of demand
(C) Barriers to entry
(D) Low profits
(E) Free markets

Question refer to the table below.

The two firms in an industry are deciding whether to advertise. The profit to each firm depends on the other firm’s
decision. The first entries in the matrix below indicate the profit earned, in millions of dollars, by Firm A; and the second
entries indicate the profits earned, in millions of dollars, by Firm B.

17. Based on the payoff matrix, which of the following is correct?

(A) Firm A always gets a smaller share of the industry profits.
(B) Firm A’s dominant strategy is to advertise.
(C) Firm B’s dominant strategy is not to advertise.
(D) The dominant strategy for both firms is not to advertise.
(E) Neither firm has a dominant strategy.

18. The combination where Firm A advertises and Firm B does not advertise is Nash equilibrium because

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(A) it is best for each firm given what the other firm has chosen
(B) the total industry profits are maximized
(C) Firm A has an incentive to change its strategy and chooses not to advertise
(D) It is the best outcome for Firm B regardless of what firm A does
(E) advertising is always the best strategy for Firm A

19. Suppose that the two biggest producers of gold, Bmine and Gmine, form a cartel to set price. However, each has the
option to cheat or to not cheat on the agreement. The table below shows the payoffs from these strategies, with the
first entry in each cell representing the payoff to Bmine and the second representing the payoff to Gmine.

Which of the following correctly describes the dominant strategy of each firm?
(A) Neither Gmine nor Bmine has a dominant strategy.
(B) Gmine's dominant strategy is to not cheat; Bmine does not have a dominant strategy.
(C) Gmine's dominant strategy is to cheat; Bmine does not have a dominant strategy.
(D) Gmine's dominant strategy is to cheat; Bmine's dominant strategy is to not cheat.
(E) Gmine's dominant strategy is to not cheat; Bmine's dominant strategy is to cheat.

20. Which of the following best describes firms in an industry if all the firms are in a cartel?
(A) They produce the allocatively efficient quantity.
(B) They face a perfectly elastic demand curve.
(C) They have identical cost curves.
(D) They coordinate their production decisions.
(E) They agree to remove barriers to entry.

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Answer D

Correct. Cartels occur when firms that previously competed against each other collude by forming a
cartel to coordinate their production decisions.

21. Which of the following is true for a price-discriminating firm?

(A) The firm charges different prices to different consumers for the same product.
(B) The firm charges different prices for different products.
(C) The firm pays more per unit of labor than it pays per unit of capital.
(D) The firm pays more per unit of capital than it pays per unit of labor.
(E) The firm sells different quantities to its consumers but charges each of them the same price.

Answer A

Correct. Price discrimination occurs when the firm charges different prices to different consumers for the
same product provided that there is no difference in cost exists for charging different prices to different
consumers.

22. If the only two firms in an industry successfully collude to maximize their joint profit, the price for the product will
be
(A) equal to the marginal cost of production
(B) equal to the average total cost of production
(C) above the marginal cost of production
(D) above the monopoly price
(E) below the average variable cost of production

23. Collusion, price leadership, and price wars are usually observed in which of the following market structures?
(A) Perfect competition
(B) Monopolistic competition
(C) Oligopoly
(D) Monopoly
(E) Natural monopoly

24. In a market with two firms, a firm that has a dominant strategy will do which of the following?

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(A) Maintain that strategy independent of the strategies chosen by its competitor.
(B) Adjust its strategies based on the strategies chosen by its competitor.
(C) Make the first move, and wait to see whether its competitor responds to the move.
(D) Keep its competitor guessing about its next move.
(E) Collude with its competitor to reduce uncertainty.

25. If a firm engages in perfect price discrimination, it charges

(A) each customer the highest price the customer is willing to pay
(B) each customer the average cost of the product
(C) each customer the lowest price the customer is willing to pay
(D) different prices to customers based on how old they are
(E) different prices to customers based on how many units of output they buy

Answer A

Correct. Under perfect price discrimination, a firm charges each consumer the maximum price the
consumer is willing to pay. By doing so, the firm can increase its profit more than it can by selling the
good for a single price.

26.
Zeb’s
Lower Prices Same Prices
Lower Prices
Art’s
Same Prices

The above payoff matrix illustrates the daily profits for two restaurants. Each restaurant has the choice to lower
prices for early bird customers or keep prices the same. The first entry in each cell indicates the profits for Art’s,
and the second entry in each cell indicates the profits for Zeb’s. Each restaurant independently and simultaneously
chooses its action and has complete information of the payoff matrix. Based on the information, does either firm
have a dominant strategy?
(A) The dominant strategy for Art’s is to lower prices.
(B) The dominant strategy for Art’s is to charge the same prices.
(C) The dominant strategy for Zeb’s is to lower prices.
(D) The dominant strategy for Zeb’s is to charge the same prices.
(E) Neither restaurant has a dominant strategy.

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Answer D

Correct. Independent of Art’s choice, the profit for Zeb’s is always greatest when Zeb’s charges the same
price.

Beta
Price High Price Low
Price High
Alpha
Price Low

The payoff matrix above shows the profits of two firms, Alpha and Beta, that compete against each other. Each firm must
decide to set a high or low price. The first numeric entry shows Alpha’s profits; the second entry shows Beta’s profits.
Each firm is aware of the information in this payoff matrix.

27. Given that each firm is aware of the information in the payoff matrix, which of the following is true?
(A) Neither Alpha nor Beta has a dominant strategy.
(B) Both Alpha and Beta have a dominant strategy to price high.
(C) Both Alpha and Beta have a dominant strategy to price low.
(D) Alpha has a dominant strategy to price low, whereas Beta has a dominant strategy to price high.
(E) Alpha has a dominant strategy to price high, whereas Beta has no dominant strategy.

Answer C

Correct. Each firm has a dominant strategy to price low. If Beta priced high, Alpha would earn $150 if it
priced high but would earn more, $180, if it priced low. So, Alpha would price low when Beta prices
high. If Beta priced low, Alpha would earn $120 if it priced high and $125 if it priced low. So, Alpha
would price low when Beta prices low. Therefore, Alpha would price low regardless of what Beta
charges. Beta also has a dominant strategy to price low. Beta would earn more profits charging a low
price regardless of the price Alpha charges.

28. Nash equilibrium occurs with which combination of strategies?

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(A) Both firms charging a low price

(B) Both firms charging a high price
(C) Alpha charging a low price and Beta charging a high price
(D) Alpha charging a high price and Beta charging a low price
(E) There is no equilibrium in this game

Answer A

Correct. Nash equilibrium occurs when both firms follow their dominant strategy to charge a low price;
each firm will earn $125. It is a Nash equilibrium because neither firm has an incentive to change its
strategy since if they do so they each will end up earning lower profits. Nash equilibrium is a
noncooperative outcome.

29. A player’s dominant strategy is

(A) independent of the other player’s choice

(B) dependent on the other player’s choice
(C) the strategy that results in the maximum combined payoff for both players
(D) the strategy that always delivers the other player’s best outcome of the game
(E) the strategy that always delivers the other player’s worst outcome of the game

Answer A

Correct. A player’s dominant strategy is defined as the strategy that maximizes a player’s payoff
regardless (independent) of the other player’s choice.

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Town Herald
Do Not Change Subscription Increase Subscription
Price Price
Do Not Change Subscription
Daily Price
Voice
Increase Subscription Price

The two major newspapers in a city, Daily Voice and Town Herald, are considering whether to raise the subscription
price. The first entries in the matrix above show the profits to Daily Voice, and the second entries show the profits to
Town Herald.

30. Which of the following is consistent with the payoff matrix?

(A) Do Not Change Subscription Price is a dominant strategy for Daily Voice.
(B) Do Not Change Subscription Price is a dominant strategy for Town Herald.
(C) Increase Subscription Price is a dominant strategy for Daily Voice.
(D) Increase Subscription Price is a dominant strategy for Town Herald.
(E) There are no dominant strategies in the above payoff matrix.

Answer C

Correct. If Town Herald selects Do Not Change Subscription Price, Daily Voice does best by selecting to
Increase Subscription Price . If Town Herald chooses to Increase Subscription Price,
Daily Voice does best by also selecting to Increase Subscription Price . Therefore,
Increase Subscription Price is a dominant strategy for Daily Voice.

31. Which of the following can give a firm market power?

(A) Having access to common information
(B) Producing a standardized or homogeneous product
(C) Lacking barriers to entry or exit
(D) Having a large number of competitors in the market
(E) Having economies of scale in production over the range of market output

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32. E Soda and R Soda are the only two firms in the soft-drink industry. The companies cannot cooperate. Each firm
can follow a high-price strategy or a low-price strategy for pricing its product. In the payoff matrix below, the first
entry in each cell shows the profits to E Soda and the second entry shows the profits to R Soda.

Given the information in the payoff matrix, it can be concluded that

(A) neither E Soda nor R Soda has a dominant strategy
(B) E Soda has a dominant strategy but R Soda does not
(C) R Soda has a dominant strategy but E Soda does not
(D) both firms will choose the high-price strategy
(E) both firms will choose the low-price strategy

The following questions are based on the following matrix.

The payoff matrix below gives the profits associated with the strategic choices of two firms in an oligopolistic industry.
The first entry in each cell is the profit to Firm A and the second to Firm B.

33. If the two firms collude, Firm A’s and Firm B’s profits would be which of the following?

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Firm A Firm B
(A)
$150 $ 50

Firm A Firm B
(B)
$100 $100

Firm A Firm B
(C)
$100 $150

Firm A Firm B
(D)
$ 50 $100

Firm A Firm B
(E)
$ 50 $ 50

34. If each firm simultaneously chooses its pricing strategy without collusion, Firm A’s and Firm B’s profits would be
which of the following?

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Firm A’s Profit Firm B’s Profit

(A)
$150 $ 50

Firm A’s Profit Firm B’s Profit

(B)
$100 $100

Firm A’s Profit Firm B’s Profit

(C)
$100 $150

Firm A’s Profit Firm B’s Profit

(D)
$ 50 $100

Firm A’s Profit Firm B’s Profit

(E)
$ 50 $ 50

35. In which of the following market structures do firms recognize their mutual interdependence?

(A) Oligopoly
(B) Monopoly
(C) Perfect competition
(D) Unregulated natural monopoly
(E) Monopsony

36. For an unregulated monopolist, the profit- maximizing quantity will always be

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(A) in the elastic region of the demand curve

(B) where marginal revenue equals price
(C) where price equals average total cost
(D) where price equals marginal cost
(E) where the marginal cost curve intersects the demand curve

37. If the four largest firms in a market produce 88 percent of total industry output, the market is
(A) perfectly competitive
(B) a pure monopoly
(C) a natural monopoly
(D) an oligopoly
(E) a monopsony

Answer D

Correct. In an oligopoly, there are few firms in the market, and they dominate the market. In the scenario
provided, the four largest firms produce 88 percent of total industry output, which is consistent with the
characteristics of an oligopoly.

38. From the point of view of economic efficiency, a monopolist produces

(A) too much of a good and charges too low a price
(B) too much of a good and charges too high a price
(C) too little of a good and charges too low a price
(D) too little of a good and charges too high a price
(E) the socially optimal amount of a good

39. The use of game theory to explain strategic behavior among firms is most associated with which of the following
market structures?
(A) Perfect competition
(B) Monopolistic competition
(C) Oligopoly
(D) Monopoly
(E) Monopsony

40. Game theory is a useful model to explain the behavior of firms in a market when the firms are

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(A) independent of one another

(B) price takers
(C) regulated by government
(D) altruistic
(E) interdependent

41. Game theory is used to explain

(A) why firms price discriminate
(B) how monopolies evolve into oligopolies
(C) strategic behavior of firms in oligopoly
(D) profit maximization in monopoly
(E) price leadership of monopolistic competition

42. Game theory is most commonly used for analyzing the pricing behavior of firms in which market structure?
(A) Perfect competition
(B) Monopolistic competition
(C) Oligopoly
(D) Monopoly
(E) Monopsony

43. Game theory is most useful in describing outcomes in markets where

(A) firms are price takers
(B) there is only one producer
(C) there are many small producers
(D) products are identical for all firms
(E) there are interdependent firms

44. Generally, monopolies are considered inefficient because they

(A) produce at a point where marginal cost is less than marginal revenue
(B) produce at a point where marginal cost exceeds price
(C) produce more output than does a competitive industry with similar cost conditions
(D) lead to an overallocation of resources in the affected market
(E) lead to an underallocation of resources in the affected market

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45. The table below shows the profits associated with the strategies of two oligopolistic firms, Lock and Star, that must
choose between a high price and a low price for their products. The first entry in each box is the profits received by
Lock, and the second entry is the profits received by Star.

If Lock chooses to charge the low price, the best course of action for Star would be to charge the

(A) low price and earn a profit of $40

(B) low price and earn a profit of $50
(C) high price and earn a profit of $50
(D) high price and earn a profit of $70
(E) high price and incur a loss of $20

46. The demand curve for a monopolistically competitive firm is downward sloping because
(A) there are a large number of firms
(B) the product is produced by using scarce resources
(C) the products produced by different firms are not identical
(D) it is easy for firms to enter or exit the market
(E) the marginal cost rises as output produced increases

47. The cartel model of oligopoly predicts that

(A) all the firms in the industry act in unison to set a monopoly price
(B) each producer acts independently of others
(C) firms follow the low-price firm in the industry
(D) differences in cost of production discourage individual firms from cheating
(E) the markup on marginal cost should be the same for all firms

48. In order for a firm to engage in price discrimi- nation, it must be

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(A) able to separate consumers into different groups based on demand elasticities
(B) producing in the inelastic portion of its demand curve to raise its price and increase total revenue
(C) a price taker
(D) experiencing economies of scale in the relevant range of production
(E) experiencing constant marginal cost

49. Interdependence among firms is a characteristic primarily associated with

(A) labor markets
(B) perfect competition
(C) monopsony
(D) oligopoly
(E) monopoly

50. In the long run, a monopolistically competitive firm is allocatively inefficient because the firm will
(A) produce only when marginal cost is greater than marginal revenue
(B) produce only when marginal revenue is greater than marginal cost
(C) charge a price greater than the marginal cost
(D) earn positive economic profits
(E) experience economic losses

51. In which of the following market structures is it sometimes assumed that rival firms will match price decreases but
not match price increases?
(A) Perfect competition
(B) Oligopoly
(C) Natural monopoly
(D) Monopolistic competition
(E) Monopoly

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52.

and are two competing firms that are considering which project to develop. will develop either
Project Alpha or Project Beta. will develop either Project or Project . The payoff matrix provided shows
the payoffs for each combination of strategies, and both players ( and ) have complete information. The
first value in each cell represents the payoff for , and the second value represents the payoff for . Each
firm independently and simultaneously chooses its strategy.

Which of the following conclusions is supported by the information in the payoff matrix?
(A) There is no combination of project choices that results in a Nash equilibrium.
(B) There are multiple combinations of project choices that result in Nash equilibria.
(C) has a dominant strategy, but does not.
(D) has a dominant strategy, but does not.
(E) Neither firm has a dominant strategy.

Answer C

Correct. has a dominant strategy to pursue Project Beta, as the payoffs to that strategy, regardless
of actions taken by , are higher than if it pursues Project Alpha. does not have a dominant
strategy, as its payoff to Project X or Project Y is contingent on the strategy pursued by .

53. Let P = price, MR = marginal revenue, MC = marginal cost, and ATC = average total cost. In monopolistic
competition, which of the following most accurately describes the long-run equilibrium conditions for a firm?

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(A) P > ATC, MR = MC, and P > MC

(B) P > ATC, MR > MC, and P = MC
(C) P = ATC, MR = MC, and P > MC
(D) P = ATC, MR = MC, and P = MC
(E) P = ATC, MR > MC, and P > MC

54. Which of the following is true of a monopolistically competitive firm in long-run equilibrium?
(A) Price is greater than marginal cost, and marginal revenue is equal to average total cost.
(B) Price is greater than marginal revenue, and marginal cost is equal to average total cost.
(C) Price is greater than marginal revenue, and marginal cost is greater than average total cost.
(D) Marginal revenue is equal to marginal cost, and price is equal to average total cost.
(E) Marginal revenue is greater than marginal cost, and price is equal to average total cost.

55. Which of the following statements about a monopolistically competitivefirm in long-run equilibrium is true?
It has excess capacity, even though its long-run profit is zero and its output prices equals its marginal
(A)
cost.
It has excess capacity, and its long-run profit is positive, even though its marginal revenue equals its
(B)
marginal cost.
It has excess capacity and its output price exceeds its marginal cost, even though its long-run profit is
(C)
zero.
(D) It has no excess capacity and its long-run profit is zero.
(E) It has no excess capacity and its marginal revenue equals its marginal cost.

56. Monopolistically competitive firms are considered inefficient in allocating society’s resources for which of the
following reasons?
(A) In equilibrium, the marginal benefit exceeds the price charged by the firms.
(B) In equilibrium, the marginal benefit exceeds the marginal cost of production.
(C) In equilibrium, the marginal revenue of the firm is not equal to its marginal cost.
(D) In long-run equilibrium, the firm is earning economic profits.
Firms exhibit significant market power and therefore the number of firms in the industry is strictly
(E)
limited.

57. Which of the following is true for a monopolistically competitive firm that is in short-run equilibrium and earning a
positive economic profit?
(A) Accounting profits are less than economic profits.
(B) Marginal cost is greater than price.
(C) Marginal revenue is less than price.
(D) Average total cost is greater than price.
(E) Marginal revenue is less than marginal cost.

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Answer C

Correct. Firms in monopolistic competition must lower price on all units of output to sell one more unit;
marginal revenue must always be lower than price.

58. Which of the following is true of the marginal revenue curve for a monopolistically competitive firm?
(A) It is the same as the demand curve because there are many firms in the market.
(B) It is the same as the demand curve because marginal revenue is always equal to price.
(C) It is upward sloping because total revenue increases as the quantity sold increases.
It lies below the demand curve because the firm must lower its price for all units in order to increase
(D)
sales.
(E) It lies below the demand curve because marginal revenue increases when price decreases.

Answer D

Correct. A monopolistically competitive firm faces a downward sloping demand curve. For the firm to
sell more units of output, it must lower its price on all units. Thus, the extra revenue gained from selling
the last unit, or the marginal revenue, will be less than the price charged (from the demand curve) and the
marginal revenue curve will always lie below the demand curve.

59. Monopolistically competitive markets are characterized by

(A) a large number of firms

(B) economies of scale
(C) standardized products
(D) mutual interdependence
(E) positive economic profit in the long run

Answer A

Correct. A large number of firms is a common characteristic in both monopolistic competition and
perfect competition.

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60. Which of the following is true about price , marginal cost , marginal revenue , and economic profit
of a monopolistically competitive firm in long-run equilibrium?
(A) ; Marginal revenue is below demand; Economic profit is zero
(B) ; Marginal revenue is below demand; Economic profit is positive
(C) ; Marginal revenue is above demand; Economic profit is positive
(D) ; Marginal revenue is equal to demand; Economic profit is zero
(E) ; Marginal revenue is above demand; Economic profit is positive

Answer A

Correct. A monopolistically competitive firm is a price maker and always charges a price above its
marginal cost. Since the firm faces a downward sloping demand curve, it must lower its price on all units
of output to sell more units, and therefore its marginal revenue curve will always lie below the demand
curve. With low barriers to entry and exit in monopolistic competitive markets, firms earn zero economic
profit in the long run.

61. Which of the following is true of a monopolistically competitive firm in long-run equilibrium?
(A) Price exceeds marginal revenue, and the firm earns positive economic profits.
(B) Price equals marginal revenue, and the firm earns positive economic profits.
(C) Price equals marginal cost, and the firm earns zero economic profits.
(D) Price exceeds marginal cost, and the firm earns zero economic profits.
(E) Price exceeds marginal cost, and the firm earns positive economic profits.

62. Which of the following is true for a monopolistically competitive firm in long-run equilibrium?

(A) It earns a normal profit.

(B) It sets price equal to marginal cost.
(C) It is allocatively efficient.
(D) It is a price taker.
(E) It produces at minimum average total cost.

63. Which of the following is NOT a characteristic of monopolistically competitive markets?

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(A) Relatively easy market entry

(B) Differentiated products
(C) Substantial product advertising
(D) A large number of both buyers and sellers
(E) Long-run economic profits

64. Which of the following is necessarily true at a monopolist’s profit-maximizing level of output?
(A) Marginal revenue is equal to marginal cost, but greater than price.
(B) Marginal revenue is equal to marginal cost, but less than price.
(C) Marginal revenue is equal to both marginal cost and price.
(D) Average total cost is minimized.
(E) Average variable cost is minimized.

65. Which of the following is true in the inelastic region of a monopolist’s demand curve as output increases?
(A) Marginal revenue and total revenue are negative.
(B) Marginal revenue is increasing and total revenue is positive.
(C) Marginal revenue is decreasing and total revenue is negative.
(D) Marginal revenue is positive and total revenue is increasing.
(E) Marginal revenue is negative and total revenue is decreasing.

Answer E

Correct. Marginal revenue is zero when total revenue is maximized. This occurs at the point of unit
elasticity on the demand curve. Moving down the demand curve from the point of unit elasticity, the
region of inelastic demand begins, marginal revenue is negative, and total revenue decreases. The
monopolist will avoid producing along the inelastic portion of the demand curve by decreasing output
until marginal revenue is zero or positive.

66. The profit-maximizing output level produced by an unregulated monopoly is

(A) the socially optimal output level, since the firm's marginal revenue equals its marginal cost
(B) greater than the socially optimal level, since the firm's marginal cost exceeds its marginal revenue
(C) greater than the socially optimal level, since the firm makes economic profits
(D) less than the socially optimal level, since the price paid by consumers exceeds the firm's marginal cost
(E) less than the socially optimal level, since the price of the product is less than the firm's marginal revenue

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67. Most economists argue that a monopoly is inefficient because it

(A) has no incentive to minimize its costs
(B) produces too little output and sets a price above marginal cost
(C) earns too much profit by charging consumers any price it wants
(D) produces too much output and thus wastes scarce resources
(E) usually produces unsafe products if not regulated by government

68. The payoff matrix below shows the per-unit profits associated with the production strategies of two utility
companies, UA and UB. Each firm has two choices: to reduce production by 10 percent or by 20 percent. The first
entry in each cell indicates the profits to UA, and the second, the profits to UB.

Based on the information, and assuming no cooperation, which of the following statements is true?
(A) Neither company has a dominant strategy.
(B) Both companies have an incentive to reduce production by 10%.
(C) Both companies have an incentive to reduce production by 20%.
(D) Only UA has an incentive to reduce production by 20%.
(E) Only UB has an incentive to reduce production by 20%.

69. Within the range of market demand, which of the following is consistent with the conditions of a natural monopoly?
(A) Long-run total cost decreases as output increases.
(B) Long-run average total cost remains constant as output increases.
(C) Long-run average total cost decreases as output increases.
(D) Marginal cost exceeds average cost.
(E) Setting price equal to marginal cost will maximize profits.

70. Which of the following is true of a natural monopoly?

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(A) The average total cost is constant throughout the entire effective demand.
(B) Marginal cost decreases throughout the entire effective demand.
(C) The average total cost initially decreases and then increases throughout the entire effective demand.
(D) The marginal cost initially increases and then decreases throughout the entire effective demand.
(E) The average total cost decreases throughout the entire effective demand.

Answer E

Correct. For a natural monopoly, economies of scale exist throughout the effective demand so average
total cost must decrease throughout the effective demand.

71. Which of the following must be true for a firm that is a natural monopoly?
It can produce and supply its product to an entire market at a lower cost than could a number of smaller
(A)
firms.
(B) It produces at the minimum of its average total cost curve.
(C) It has a patent on its product.
(D) It will not be able to maximize profits unless subsidized by the government.
(E) It is productively efficient for the government to break up the monopoly into smaller firms.

72. A natural monopoly exists when a single firm

(A) produces a quantity of output that maximizes the total producer surplus
(B) produces the allocatively efficient quantity of output of a good
(C) has an upward-sloping marginal cost curve
(D) has a downward-sloping average total cost curve over the relevant range of output
(E) sets price equal to marginal cost in order to maximize profit

Answer D

Correct. A natural monopoly is when the entire demand within a relevant market can be satisfied at the
lowest cost by one firm rather than by two or more firms. As a result, the firm has a cost advantage and
its average total cost decreases as it produces more output, leading to a downward-sloping average total
cost curve throughout the relevant range of output.

73. In which of the following market structures is firm interdependence and strategic behavior most commonly
observed?

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(A) Monopoly protected by a patent

(B) Short-run perfect competition
(C) Monopsony
(D) Oligopoly
(E) Monopolistic competition

Answer D

Correct. In an oligopoly market there are a few firms whose individual actions are predicated on the
reaction of rival firms. Thus, interdependence and strategic decision making are prevalent.

74. Which of the following best represents the most distinctive characteristic of an oligopoly?
(A) A market with a single firm that faces no competition
(B) A market where a few firms have significant market share
(C) A market with low barriers to entry
(D) A market with many firms selling differentiated products
(E) A market with many firms earning zero economic profits in the long run

Answer B

Correct. An oligopoly market is characterized by the existence of only a few interdependent firms,
meaning that each firm will have a significant market share of industry revenues.

75. Which of the following best describes an oligopolistic market?

(A) Many sellers with identical products and no barriers to entry
(B) Many sellers, each with a clearly differentiated product, and no barriers to entry
(C) A few competing sellers with similar products and high barriers to entry
(D) A few competing sellers of identical products and no barriers to entry
(E) No competition among sellers and high barriers to entry

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76.
Nature View
Bids High Bids Low
Bids High
Evergreen
Bids Low

Evergreen and Nature View are bidding for a landscaping contract. The payoff matrix provided shows what each
firm’s total weekly profit will be for each combination of bids. The first entry in each cell shows the profits of
Evergreen, and the second entry shows the profits of Nature View. Evergreen and Nature View act independently
and simultaneously, and each firm knows all the information about the payoffs associated with the strategies. Which
of the following describes their dominant strategies?
(A) Evergreen does not have a dominant strategy. Nature View’s dominant strategy is to bid high.
(B) Evergreen’s dominant strategy is to bid high. Nature View does not have a dominant strategy.
(C) Evergreen’s dominant strategy is to bid low. Nature View’s dominant strategy is to bid high.
(D) Evergreen’s dominant strategy is to bid high. Nature View’s dominant strategy is to bid high.
(E) Evergreen’s dominant strategy is to bid low. Nature View’s dominant strategy is to bid low.

Answer E

Correct. Evergreen’s best response is to bid low regardless of Nature View’s action. When Nature View
bids high, Evergreen will bid low , and when Nature View bids low, Evergreen will also bid
low . Therefore, Evergreen’s dominant strategy is bid low. Nature View’s best response is to
bid low regardless of Evergreen’s action. When Evergreen bids high, Nature View will bid low
, and when Evergreen bids low, Nature View will also bid low . Therefore, Nature
View’s dominant strategy is bid low.

77. Which of the following statements is true for a monopolist at the profit-maximizing output level?

(A) Price exceeds marginal revenue.

(B) Marginal costs exceeds price.
(C) Demand is price inelastic.
(D) Price equals marginal cost, which equals average total cost.
(E) The demand curve intersects the supply curve.

78. Which of the following enables a seller to capture the entire consumer surplus in a market?

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(A) Perfect price discrimination

(B) Perfect competition
(C) An excise tax on buyers
(D) Effective price ceiling
(E) Effective price floor

79. Price discrimination occurs when

(A) the supply of the product is elastic
(B) a product’s average cost is greater than its average revenue
(C) a product’s average cost is less than its average revenue
(D) differences in a product’s price reflect differences in marginal costs
(E) differences in a product’s price do not reflect differences in costs of production

80. Which of the following characteristics is prevalent in oligopolies?

(A) Allocative efficiency
(B) Low barriers of entry
(C) Consideration of rivals’ reactions
(D) No deadweight loss
(E) Zero economic profit

81. Which of the following is a necessary condition for price discrimination?

(A) Resale of the product or service is possible.
(B) Buyers have identical elasticities of demand.
(C) The seller can separate consumers according to their elasticities of demand.
(D) The seller is a perfectly competitive firm.
(E) Buyers are aware of prices charged to other buyers.

82. Which of the following is true in imperfectly competitive markets?

(A) Firms produce standardized or identical products.
(B) Firms enjoy economies of scale in production.
(C) Firms produce output at constant marginal cost.
(D) Firms must lower their product prices to sell additional units.
(E) New firms can easily enter or exit the market.

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Answer D

Correct. Firms in an imperfectly competitive market face a downward-sloping demand curve. Therefore,
to sell a larger quantity, firms must reduce their prices on all the units they sell.

83. Which of the following is necessarily true of the profit-maximizing equilibrium of a monopolist who sets a single
price?
(A) Price equals average total cost.
(B) Price is greater than marginal cost.
(C) Average total cost is at its minimum level.
(D) Marginal revenue is greater than marginal cost.
(E) Marginal cost is minimized.

84. When two firms interact in an oligopolistic market, which of the following statements is true?
(A) If one firm has a dominant strategy, then the other firm does not have a dominant strategy.
(B) If one firm has a dominant strategy, then the other firm also has a dominant strategy.
(C) Both firms must have dominant strategies.
(D) If one firm has a dominant strategy, then there is no Nash equilibrium.
(E) If both firms have dominant strategies, then there is a Nash equilibrium.

Answer E

Correct. If both firms have a dominant strategy, there will necessarily be a Nash equilibrium.

85. Which of the following is true of both monopolistically competitive and perfectly competitive firms in long-run
equilibrium?
(A) Marginal revenue equals average total cost.
(B) Marginal cost equals average total cost.
(C) Price equals average total cost.
(D) Price is greater than marginal cost.
(E) Production occurs at minimum average total cost.

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86.

Which of the following statements about the firm whose cost and revenue curves are shown above is correct?
(A) Its profit-maximizing price is $5.
(B) Its profit-maximizing output level is 200 units.
(C) Its maximum profit is $4,000.
(D) If it produces 250 units, it will earn no economic profits.
(E) At the profit-maximizing level of output, its total cost is $1,000.

87.

The profit-maximizing firm depicted in the graph above should

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(A) exit if conditions do not improve in the long run

(B) produce the output that minimizes average total cost
(C) increase price to maximize profits
(D) increase output to maximize profits
(E) use less capital and more labor to reduce cost

88.

The graph above depicts cost and revenue curves for a typical firm in a monopolistically competitive industry.
Suppose that the firm is producing 0M units of output. To maximize profits, it should do which of the following to
output and price?

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Output Price
(A)
Increase Decrease

Output Price
(B)
Increase Increase

Output Price
(C)
Decrease Increase

Output Price
(D)
Not change Increase

Output Price
(E)
Not change Not change

89.

The graph above shows a firm's cost and revenue curves. This profit-maximizing firm will

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(A) produce where demand is inelastic

(B) charge a higher price than that necessary to maximize revenues
(C) have many profit-maximizing price and quantity combinations
(D) be unable to increase sales and total revenues by lowering its price
(E) never have a region of falling average total cost

90. The price of an airline ticket is typically lower if a traveler buys the ticket several weeks before the flight’s
departure date rather than on the day of departure. This pricing strategy is based on the assumption that
(A) travelers are not aware of how airline prices change across time
(B) travelers do not have alternative modes of transportation
(C) travelers will pay any price to travel as the departure date approaches
(D) the marginal cost of the last few seats on an airplane is higher than that for the first few seats
(E) travelers’ demand becomes less elastic as the departure date approaches

91. All of the following characterize both perfectly competitive and monopolistically competitive markets EXCEPT:
(A) Price is equal to average revenue.
(B) Individual firms produce output where marginal cost equals marginal revenue.
(C) Firms can affect the selling price of their product.
(D) The market has a large number of firms.
(E) Firms can easily enter or exit the market.

92. A monopolistically competitive firm’s demand curve will be highly elastic if which of the following exists?
(A) A high degree of product differentiation
(B) A highly elastic supply curve for the firm
(C) High barriers to entry in this industry
(D) A high degree of product substitutability
(E) A small number of competitors

93. A monopolist produces two unrelated goods, X and Y. The demand for X is currently price elastic and the demand
for Y is currently price inelastic. To increase its total revenue, the firm should change the price of X and Y in which
of the following ways?

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Price of X Price of Y
(A)
Increase No change

Price of X Price of Y
(B)
Increase Decrease

Price of X Price of Y
(C)
Increase Increase

Price of X Price of Y
(D)
Decrease Increase

Price of X Price of Y
(E)
Decrease Decrease

94. A monopoly is different from a perfectly competitive firm in that a monopoly

(A) does not have a U-shaped average total cost curve
(B) has an average fixed cost curve that is perfectly horizontal
(C) has a marginal revenue curve that lies below its demand curve
(D) always earns economic profits
(E) operates in the inelastic segment of its demand curve

95. The government of Annapolita has determined that the country’s power company, an unregulated natural
monopolist, should be required to produce the allocatively efficient quantity of electricity. Which of the following
actions will achieve the government’s goal?

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The government imposes a per-unit tax on each unit of output the monopoly produces and imposes a
(A)
lump-sum tax on the monopolist to eliminate any remaining profit.
The government sets the price at the point where demand and average total cost curves intersect and
(B)
provides a lump-sum subsidy to the monopolist equal to the monopolist’s normal profit.
The government sets the price at the point where demand and average total cost curves intersect and
(C)
imposes a lump-sum tax on the monopolist to eliminate the monopolist’s normal profit.
The government sets the price at the point where demand and marginal cost curves intersect and imposes
(D)
a lump-sum tax on the monopolist to eliminate the monopolist’s normal profit.
The government sets the price at the point where demand and marginal cost curves intersect and
(E)
provides a lump-sum subsidy to the monopolist to earn normal profit.

Answer E

Correct. Since firms operating as a natural monopoly have falling average total cost over the relevant
range of output, their marginal cost will be below average total cost over this range as well. If the
government sets a price equal to marginal cost for such a firm to achieve allocative efficiency, the firm
will incur economic losses (since price is less than average total cost at the allocatively efficient
quantity); therefore, the government must provide a lump-sum subsidy in this case to allow the firm to
earn normal profit.

96. A profit-maximizing monopolist selects its output level in the

(A) inelastic region of its demand curve
(B) elastic region of its demand curve
(C) range of output where marginal revenue is rising
(D) range of output where total cost is falling
(E) range of output where marginal cost is falling

97. A single-price monopolist is currently producing in the inelastic portion of its market demand curve. In order to
maximize profits, the monopolist should change the price and output in which of the following ways?

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Price Output
(A)

Increase Increase

Price Output
(B)
Increase Descrease

Price Output

(C)
Increase Not change

Price Output
(D)
Descrease Increase

Price Output
(E)
Not change Increase

98. Assuming a linear downward-sloping demand curve, as a monopoly firm sells additional units of output, its
marginal revenue will
(A) increase at an increasing rate
(B) increase at first, then decrease
(C) decrease at first, then increase
(D) decrease continuously
(E) remain constant

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The question refers to the following diagram of a natural monopolist.

99. The firm shown in the diagram qualifies as a natural monopoly because
(A) the demand curve is downward sloping
(B) the demand curve lies above the marginal revenue curve
(C) the average total cost is decreasing in the relevant range of market demand
(D) the firm can maximize profit with any output level it chooses
(E) marginal revenue is positive at the profit-maximizing output level

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The following two questions refer to the cost and revenue conditions of a monopolistically competitive firm shown in the
graph below.

marginal cost, average total cost, average variable cost, and marginal revenue.

100. The firm’s profit-maximizing output in the short run is

(A) zero, because

(B) , because
(C) , because
(D) , because
(E) impossible to determine

Answer A

Correct. The monopolist’s profit-maximizing output is determined by equating marginal revenue to

marginal cost. In the graph provided, marginal revenue equals marginal cost at and the price is on the
demand curve at . However, at the profit-maximizing price is less than both the and the
. Therefore, the firm will minimize its losses by shutting down in the short run and exiting the
market in the long run if conditions do not change. Thus, the profit-maximizing output in the short run is

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zero since the firm will shut down.

101. Which of the following will the firm do in the long run if market conditions do not change?
(A) It will increase output to and lower price to to minimize losses.
(B) It will increase output to and raise price to to earn zero economic profit.
(C) It will produce and set price equal to marginal revenue.

(D) It will exit the industry.

(E) It will build a larger plant to achieve decreasing returns to scale.

Answer D

Correct. In the graph provided, marginal revenue equals marginal cost at and the price is on the
demand curve at . However, at the profit-maximizing price is less than both the and the
. Therefore, the firm will minimize its losses by shutting down in the short run and exiting the
market in the long run if conditions do not change.

102. Compared to a perfectly competitive industry with the same demand and cost curves, a monopoly’s price and output
will be which of the following?

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Price Output

(A)
The same Higher

Price Output
(B)
Higher The same

Price Output
(C)
Higher Lower

Price Output
(D)
Lower The same

Price Output
(E)

Lower Higher

103. Compared with a perfectly competitive market,a single-price monopoly with the same market demand and cost
curves will
(A) increase output and price
(B) increase output and decrease price
(C) decrease output and price
(D) decrease output and increase price
(E) produce the same level of output and increase price

104. Compared with firms in a perfectly competitive industry, firms in a monopolistically competitive industry are
inefficient because they

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(A) make economic profits in the long run

(B) do not lower the product price if input prices fall
(C) restrict their output level to maximize profits
(D) charge the highest price that consumers will pay
(E) waste resources by producing an excess amount of output

Assume that the market is a profit-maximizing monopoly.

105.
Which of the following areas shows the consumer surplus?
(A)
(B)
(C)
(D)
(E)

Answer B

Correct. The profit-maximizing monopolist would produce where and would set the
price at . The consumer surplus is the area that is under the demand curve and above the monopoly
price line at , which is .

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106. Which of the following areas shows the producer surplus and the deadweight loss?
(A) The producer surplus is area , and the deadweight loss is area .
(B) The producer surplus is area , and the deadweight loss is area .
(C) The producer surplus is area , and the deadweight loss is area .
(D) The producer surplus is area , and the deadweight loss is area .
(E) The producer surplus is area , and the deadweight loss is area .

Answer B

Correct. With monopoly, the firm restricts output and raises price. The producer captures surplus from
the consumer , so its total producer surplus would be . Additionally, there is a
deadweight loss equal to area .

107. Daily Tools is a typical firm in a monopolistically competitive market that produces tool kits for everyday use.
Which of the following explains why Daily Tools is inefficient in long-run equilibrium?
(A) The entry of more efficient firms is blocked.
(B) The firm produces the quantity at which marginal cost equals average total cost.
(C) The firm does not produce the quantity that results in minimum average total cost.
(D) The firm does not produce the quantity that minimizes total cost.
(E) The firm’s customers value the last unit of output at less than its cost.

Answer C

Correct. A monopolistically competitive firm is not efficient in the long run because it does not produce
at the minimum of its average cost curve. Because price is equal to average total cost for
monopolistically competitive firms in long-run equilibrium, such firms will produce their profit-
maximizing quantity on the downward-sloping portion of their average total cost curves. This results in a
lower level of output than would occur if the firm were to produce at the minimum average total cost.

108. A monopolistically competitive firm’s demand curve will be least elastic if

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(A) the number of rival firms producing very similar products increases
(B) the number of rival firms producing more differentiated products increases
(C) the number of rival firms producing very similar products decreases
(D) the number of rival firms producing more differentiated products decreases
(E) a monopolistically competitive firm’s demand curve becomes perfectly elastic

109. One difference between oligopolies and monopolistically competitive markets is that
(A) there is no deadweight loss in monopolistically competitive markets, but there is in oligopolies
(B) the products sold in monopolistically competitive markets are identical
(C) oligopolies have fewer barriers to entry
(D) firms maximize profits in monopolistically competitive markets but not in oligopolies
(E) there are fewer firms in oligopolistic markets than in monopolistically competitive ones

The following questions refer to the monopoly graph below, where MC = marginal cost, ATC = average total cost,
D = demand, and MR = marginal revenue.

110. The profit-maximizing combination of output and price for a single-price monopoly is
(A) Q1 and P1
(B) Q1 and P2
(C) Q1 and P4
(D) Q2 and P3
(E) Q3 and P2

111. If the monopolist could engage in perfect price discrimination, the monopolist’s total output and the price charged
for the last unit of output sold would be

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(A) Q1 and P1
(B) Q1 and P2
(C) Q1 and P4
(D) Q2 and P3
(E) Q3 and P2

112. If SteveR Incorporated is a monopolistic producer of diamonds, the firm’s demand curve is down- ward sloping
because

(A) the number of diamonds SteveR Incorporated offers for sale affects the price of diamonds
(B) marginal revenue is negative throughout the range of the demand curve
(C) marginal revenue is positive throughout the range of the demand curve
(D) the diamond industry consists of a few firms selling similar diamonds
(E) the demand for diamonds is inelastic

The following questions refer to the diagram below, which shows the cost and revenue conditions of a monopolist.

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113. If the monopolist chooses to maximize total revenue rather than total profit, it will choose which combination of
price and output?

Price Output
(A)
P1 Q5

Price Output
(B)
P2 Q4

Price Output
(C)
P3 Q3

Price Output
(D)
P4 Q4

Price Output
(E)
P5 Q5

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114. In the diagram, the deadweight loss from a profit-maximizing monopolist is represented by area
(A) FGK
(B) FHI
(C) IJK
(D) GHIK
(E) 0HIQ

The following questions are based on the graph below, which shows the cost and revenue curves of a monopoly
firm.

115. The economic profit of the profit-maximizing monopolist is given by the area

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(A) RSJI
(B) R0Q1I
(C) RULI
(D) RVNI
(E) U0Q4M

116. If this were a perfectly competitive industry with the same costs as shown on the graph, the equilibrium price and
output would be which of the following?

Price Output
(A)
0R Q1

Price Output
(B)
0S Q2

Price Output
(C)
0T Q3

Price Output
(D)
0U Q1

Price Output
(E)
0U Q4

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The following questions refer to the graph of a profit- maximizing firm below.

117. The firm’s economic profit is equal to

(A) area 0P3 JQ1
(B) area 0P2 KQ1
(C) area P2 P3 JK
(D) area P1 P3 JL
(E) zero

118. The firm’s total revenue is equal to

(A) area P1P2KL
(B) area P1P3JL
(C) area 0P3JQ1
(D) area 0P2KQ1
(E) area JLM

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119. Which of the following combinations of output, price, and economic profit is consistent for the profit-maximizing
monopolist depicted in the graph?

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Output Price Economic Profit

(A)

Output Price Economic Profit

(B)

Output Price Economic Profit

(C)

Output Price Economic Profit

(D)

Output Price Economic Profit

(E)

Answer C

Correct. The profit-maximizing output occurs where , and the price is above on
the demand curve. Economic profit is given by the area .

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The Question refers to the following graph, which shows the cost and revenue curves for a profit-maximizing
monopolistically competitive firm.

120. What is the profit-maximizing price and quantity?

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Price Quantity
(A)
P1 Q1

Price Quantity
(B)
P2 Q4

Price Quantity
(C)
P3 Q3

Price Quantity
(D)
P4 Q2

Price Quantity
(E)
P5 Q1

121. Is the firm in short-run or long-run equilibrium?

(A) Short run, because price is greater than marginal cost
(B) Short run, because the firm is earning a positive economic profit
(C) Long run, because price is greater than average total cost
(D) Long run, because marginal revenue is not equal to zero
(E) Either short run or long run, because the firm is producing where marginal revenue equals marginal cost

122. Imperfectly competitive markets do not achieve allocative efficiency because profit maximization for each firm
occurs when which of the following is true?

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(A) Price equals average total cost.

(B) Price is greater than marginal cost.
(C) Price equals marginal revenue.
(D) Price is less than marginal benefit.
(E) Price is less than marginal revenue.

Answer B

Correct. Allocative efficiency requires that price equals marginal cost and profit maximization requires
that marginal revenue equals marginal cost. Since price is greater than marginal revenue and therefore
marginal cost at the profit-maximizing quantity in imperfectly competitive markets, such markets do not
achieve allocative efficiency.

123.

The graph shows the cost and revenue curves for a profit-maximizing firm. Which of the following is true about the
firm?
The firm operates in a perfectly competitive market, producing the allocatively efficient quantity and
(A)
charging .
(B) The firm is a monopolist, producing the allocatively efficient quantity and charging .
(C) The firm is a natural monopoly, producing and earning positive economic profit.
The firm operates in an imperfectly competitive market, producing and earning positive economic
(D)
profit.
The firm operates in a monopolistically competitive market, producing and earning negative
(E)
economic profit.

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Answer D

Correct. The firm operates in an imperfectly competitive market, as evidenced by the downward-sloping
demand curve it faces. The firm will maximize profit by producing where marginal revenue equals
marginal cost (at ) and charge price . The firm will earn positive economic profit of ( ) ,
since (where is ATC at ).

124. Which of the following explains why imperfectly competitive markets are inefficient?
(A) Total costs increase as output increases.
(B) Price is greater than marginal cost.
(C) Firms do not earn zero economic profit.
(D) Firms incur high start-up costs when setting up their factories.
(E) Firms use relatively more capital than labor to produce goods or services.

Answer B

Correct. Imperfectly competitive markets face a downward-sloping demand curve. Firms operating at the
profit-maximizing output charge a price that is greater than marginal cost, unlike efficient firms that
operate at the point where the marginal cost equals price. Any price other than where marginal cost
equals price prevents mutually beneficial transactions from taking place and results in a reduction in total
economic surplus relative to the competitive equilibrium.

125. Firms in monopolistic competition do not attain allocative efficiency because at the long-run equilibrium output,
which of the following is true?
(A) Price is greater than marginal cost.
(B) Marginal cost is greater than minimum average total cost.
(C) Marginal revenue is greater than marginal cost.
(D) There is an overallocation of resources to the market.
(E) Products are homogeneous.

Answer A

Correct. In long-run equilibrium, firms produce the profit-maximizing quantity by equating marginal cost

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to marginal revenue. The price set is greater than marginal cost, creating deadweight loss. Therefore,
monopolistically competitive firms are not allocatively efficient.

126. Which of the following statements is true for both a monopolistically competitive firm and a perfectly competitive
firm in long-run profit-maximizing equilibrium?
(A) Economic profits equal zero, and price equals marginal cost.
(B) Economic profits equal zero, and price equals marginal revenue.
(C) Marginal revenue equals marginal cost, and profits are positive.
(D) Economic profits equal zero, and marginal revenue equals marginal cost.
(E) Economic profits equal zero, and price exceeds marginal cost.

127. Which of the following is true for both a monopolistically competitive firm and a perfectly competitive firm in
long-run equilibrium?
(A) Marginal cost is greater than marginal revenue.
(B) Price is greater than marginal cost.
(C) Price is equal to average total cost.
(D) Price is equal to marginal cost.
(E) Marginal revenue is equal to average revenue.

128. Which of the following statements about cost is always true for both monopolies and perfectly competitive firms?

(A) Average total cost equals marginal cost when average total cost is a minimum.
(B) Marginal cost decreases as production increases.
(C) Average fixed cost is equal to marginal cost when average fixed cost is a minimum.
(D) Average variable cost is equal to marginal cost when marginal cost is a minimum.
(E) Average variable cost decreases as production increases.

129. Monopolistically competitive product markets are inefficient because

(A) price equals the marginal value to the buyer of the last item produced
(B) price is greater than marginal cost
(C) excessive competition prevents other firms from entering the market
(D) homogeneous goods are usually overpriced
(E) short-run economic profit-making opportunities exist

130. Which of the following is true of a monopolistically competitive firm in long-run equilibrium?

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(A) It produces where price equals marginal cost, and it earns zero economic profits.
(B) It produces where marginal revenue exceeds marginal cost, and it earns positive economic profits.
(C) It produces where marginal cost equals marginal revenue, and the price is equal to average total cost.
(D) It produces at the minimum average total cost, and it utilizes all excess capacity.
(E) It produces more than the allocatively efficient quantity, and the price is greater than marginal cost.

131. Which of the following must be true if a profit-maximizing monopolistically competitive firm continues to operate
in the short run while incurring a loss?
(A) Marginal revenue equals marginal cost and price is greater than average total cost.
(B) Marginal revenue equals marginal cost and price is greater than average variable cost.
(C) Marginal revenue equals marginal cost and price is less than average variable cost.
(D) Price equals both marginal cost and marginal revenue.
(E) Price is less than marginal revenue, but greater than average variable cost.

132. Monopolies are inefficient compared to perfectly competitive firms because monopolies
(A) produce output with average total cost exceeding average revenue
(B) produce more output than is social desirable
(C) charge a price less than marginal revenue
(D) charge a price greater than marginal cost
(E) charge a price less than average total cost

133. As the quantity of a good increases, which of the following is true in the elastic region of a monopolist's demand
curve?
(A) Marginal revenue and total revenue are negative.
(B) Marginal revenue is increasing, and total revenue is positive.
(C) Marginal revenue is decreasing, and total revenue is negative.
(D) Marginal revenue is positive, and total revenue is increasing.
(E) Marginal revenue is negative, and average revenue is decreasing.

Answer D

Correct. In the elastic region of the monopolist’s demand curve, marginal revenue is positive, and
decreasing. Total revenue is always positive and increases as quantity increases, because the percentage
change in the quantity is greater than the percentage change in the price along the elastic region of the
demand curve.

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134. Which of the following is true if a monopolist’s marginal revenue is negative at the current level of output?
(A) Demand for its product is unit elastic.
(B) Demand for its product is price elastic.
(C) Demand for its product is price inelastic.
(D) Marginal cost is equal to price.
(E) Marginal revenue is equal to price.

135. Monopolistically competitive firms are inefficient because they

(A) produce a lower level of output at a higher average cost than do perfectly competitive firms
(B) use production processes that are more capital-intensive than do perfectly competitive firms
(C) face downward-sloping demand curves, ensuring that marginal revenue is greater than average revenue
(D) produce at that level of output where price equals marginal cost
(E) realize diseconomies of scale

136. In monopolistic competition, an individual firm’s market power stems from which of the following?
(A) Economies of scale in production
(B) The production of a differentiated product
(C) The absence of perfectly competitive firms that produce similar products
(D) Barriers to entry allowing firms to earn economic profit
(E) The maintenance of excess capacity to meet unexpected increase in demand

Answer B

Correct. Monopolistic competition is a market structure that consists of many firms producing
differentiated products in a market with few or no barriers to entry or exit. Product differentiation allows
each firm to have market power over its differentiated product.

137. In long-run equilibrium, at which of the following output levels will a monopolistically competitive firm operate?
(A) Where long-run average total cost is at a minimum
(B) Where price equals marginal revenue
(C) Where price equals average total cost
(D) Where marginal revenue equals average total cost
(E) Where marginal revenue equals average revenue

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138.

For the monopolistically competitive firm represented by the graph above, the allocatively efficient quantity of
output is
(A)
(B)
(C)
(D)
(E)

Answer C

Correct. corresponds to where marginal cost intersects demand which is the allocatively efficient
quantity.

139. Which of the following is true of monopolistically competitive firms in long-run equilibrium?
(A) Firms can earn positive economic profits.
(B) Firms face a perfectly elastic demand curve.
(C) Price equals marginal cost, which equals marginal revenue.
(D) Price will always be above average total cost.
(E) Marginal revenue equals marginal cost, and price equals average total cost.

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Answer E

Correct. The profit-maximizing firm produces where marginal revenue equals marginal cost. With easy
exit and entry, in the long run, firms earn zero economic profit in monopolistic competition, and
therefore, price equals average total cost.

140. Which of the following is true for a firm in long-run equilibrium in monopolistic competition?
(A) Given barriers to entry, the firm earns economic profits in long-run equilibrium.
(B) The firm is productively efficient, producing at the minimum of long-run average total cost.
(C) Price equals marginal revenue and marginal cost.
(D) There is neither allocative nor productive efficiency.
(E) Price is greater than average total cost in long-run equilibrium.

Answer D

Correct. With easy exit and entry, in the long run, firms earn zero economic profit in monopolistic
competition. The firm faces a downward-sloping demand curve, so price is greater than marginal cost,
which does equal marginal revenue at the profit-maximizing output level. With price greater than
marginal cost, there is no allocative efficiency. Also, since average total cost is falling, where the firm is
producing, it is not at the minimum of long-run average cost, so there is no productive efficiency.

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141.

Based on the information in the above graph describing a monopolistically competitive firm, which of the following
is true?
The firm is productively efficient since marginal cost intersects average cost at the minimum of average
(A)
cost.
(B) When maximizing profits, this firm will have economic losses but will still continue to produce.
The firm will produce where marginal revenue equals marginal cost and will set its price to equal
(C)
average total cost.
(D) With the firm making economic profits, it can be expected that new firms will enter this market.
(E) The firm will produce where demand is inelastic to capture all economies of scale.

Answer D

Correct. The profit-maximizing firm produces where marginal revenue equals marginal cost and, from
the demand curve above that output level, derives its product price. In this case, that price will be above
average total cost and the firm will make economic profits. With profits being earned, new firms will
enter the market over time.

142. One difference between monopolistic competition and oligopoly is that firms in monopolistic competition are
assumed to

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(A) cooperate in setting price and output

(B) act independently in setting price and output
(C) be interdependent
(D) face high barriers to entry
(E) be price takers

Answer B

Correct. Firms in monopolistic competition act independently in setting price and output while firms in
oligopoly are interdependent in setting price and output.

143. Which of the following statements correctly identifies a difference between perfect competition and monopolistic
competition?
In perfect competition there are no barriers to entry, but there are strong barriers in monopolistic
(A)
competition.
(B) In perfect competition there are many firms, but in monopolistic competition there are only a few firms.
In perfect competition the firms all sell products that are exactly the same, but in monopolistic
(C)
competition each firm sells a slightly differentiated product.
In perfect competition firms maximize profit by selling the quantity where marginal revenue equals
(D) marginal cost, but in monopolistic competition firms maximize profit by selling the quantity where
marginal revenue exceeds marginal cost.
In perfect competition there are few consumers, but in monopolistic competition there are many
(E)
consumers.

144. A monopoly is producing the allocatively efficient output if, for the last unit produced,
(A) price equals minimum average total cost
(B) price equals marginal cost
(C) marginal cost equals marginal revenue
(D) marginal cost equals average variable cost
(E) marginal revenue equals average variable cost

Answer B

Correct. Allocative efficiency means producers supply the quantity of each product that consumers
demand, this is achieved when the monopoly charges a price equal to marginal cost. A perfectly price
discriminating monopoly produces to where the price (of the last unit) equals marginal cost. There is no

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allocative inefficiency with perfect price discrimination.

145. Which of the following is true when a profit-maximizing monopolist produces in the elastic portion of its demand
curve?
(A) It can increase total revenue by raising price.
(B) It can decrease average total cost by reducing output.
(C) Price is equal to marginal revenue.
(D) Marginal revenue is less than marginal cost.
(E) Marginal revenue is positive.

Answer E

Correct. Marginal revenue decreases with output but is positive in the elastic portion of the demand
curve. That is, as price decreases, total revenue increases by smaller and smaller amounts and reaches a
maximum when marginal revenue is zero and demand becomes unit elastic.

Use the following graph to answer the questions below.

146. What price will the firm charge?

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(A)
(B)
(C)
(D)
(E)

Answer E

Correct. is determined on the demand curve above the quantity where marginal revenue equals
marginal cost. The quantity (output) is determined by the intersection of marginal revenue and marginal
cost.

147. What is the firm’s profit-maximizing quantity of output?

(A)
(B)
(C)
(D)
(E)

Answer A

Correct. corresponds to the quantity at which marginal revenue equals marginal cost. This profit-
maximizing rule, , applies to all firms, whether perfect competition, monopoly, monopolistic
competition, or oligopoly, as long as producing is preferable to shutting down. If price does not equal or
exceed average variable cost, then the firm will shut down rather than produce the quantity at which
.

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148.

What are the profit- and revenue-maximizing quantities for the monopolist whose revenue and cost conditions are
described by the graph above?

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Profit-Maximizing Revenue-Maximizing
(A)

Profit-Maximizing Revenue-Maximizing
(B)

Profit-Maximizing Revenue-Maximizing
(C)

Profit-Maximizing Revenue-Maximizing
(D)

Profit-Maximizing Revenue-Maximizing
(E)

149. Which of the following is true for a monopoly but NOT for a perfectly competitive firm?
(A) The firm maximizes profit by equating marginal cost to marginal revenue.
(B) The firm's demand curve is the same as its average revenue curve.
(C) At the profit-maximizing output level, price is less than marginal revenue.
(D) The firm faces a downward-sloping demand curve.
(E) The firm earns zero economic profit in the long run.

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150. Which of the following about the relationship between marginal revenue (MR) and price (P) under monopolistic
competition and perfect competition is correct?

Monopolistic Competition Perfect Competition

(A)
MR>P MR=P

Monopolistic Competition Perfect Competition

(B)
MR<P MR=P

Monopolistic Competition Perfect Competition

(C)
MR decreases when P increases MR increases when P decreases

Monopolistic Competition Perfect Competition

(D)
MR=P MR=P

Monopolistic Competition Perfect Competition

(E)
MR=P MR<P

151. Which of the following is always true of a monopoly that is producing a level of output such that marginal revenue
is negative?
(A) It is experiencing economies of scale in production.
(B) It is maximizing total revenue.
(C) It is producing where demand is price elastic.
(D) It could lower price to increase profits.
(E) It could decrease output to increase profits.

152. Which of the following is necessary for a firm to practice price discrimination?

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(A) The government strictly enforces antitrust laws.

(B) The firm is a member of a cartel.
(C) The firm can prevent resale of its goods.
(D) The demand curve for the product is perfectly inelastic.
(E) The demand curve for the product is perfectly elastic.

153. Regulating a natural monopoly to set its output price equal to the marginal cost of production will result in
economic losses because for the last unit of output produced, marginal cost is
(A) less than the marginal willingness to pay and less than average total cost
(B) greater than the marginal willingness to pay and less than average total cost
(C) equal to the marginal willingness to pay and less than average total cost
(D) equal to the marginal willingness to pay and equal to average total cost
(E) greater than the marginal willingness to pay and equal to average total cost

Answer C

Correct. Marginal willingness to pay is determined by the price along the demand curve. When marginal
cost is equal to the price, then it is also equal to the marginal willingness to pay (demand). For a natural
monopoly, average total cost decreases along the relevant range of demand, therefore marginal cost must
lie below the average total cost along that range. Therefore, for the last unit of output produced, marginal
cost will be equal to the marginal willingness to pay and less than the average total cost, since the firm is
earning economic losses.

154. Which of the following statements concerning a natural monopoly is true?

(A) Average total cost is always less than marginal cost in the long run.
(B) At the allocatively efficient level of output, monopoly profit and deadweight loss are both equal to zero.
If the monopolist chooses to produce the quantity at which price is equal to average cost, it would earn a
(C)
normal profit.
The monopolist can earn positive economic profits by producing the allocatively efficient output in the
(D)
short run.
Production efficiency could be improved if another firm were to enter and compete with the single
(E)
monopolist.

Answer C

Correct. With a natural monopoly, there are economies of scale (falling long-run average cost) over the

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range of the effective demand. Thus, a single firm can supply the entire market at a lower average total
cost than two or more competing firms sharing the market. If the monopoly chooses to set the price equal
to average total cost and avoid regulation, it would earn a normal or zero economic profit.

155. The condition for allocative efficiency is violated when

(A) firms are price makers( price searchers)

(B) short-run profits exist in a competitive industry
(C) price equals average total cost
(D) the market demand curve is inelastic in a competitive industry
(E) the market demand curve is elastic in a competitive industry

156. The characteristic of oligopolistic firms that makes them different from all other types of firms is that oligopolistic
firms
(A) are regulated by a state agency or federal agency
(B) consider each other’s decisions
(C) advertise their products
(D) produce differentiated products
(E) produce identical products

157. One difference between a firm in a perfectly competitive market and an unregulated monopoly is that the
perfectly competitive firm can increase the quantity it sells at the market price, whereas the monopoly
(A)
must lower its price to sell more
perfectly competitive firm sells differentiated products, whereas the monopoly sells a homogeneous
(B)
product
(C) price elasticity of demand for a monopoly is much higher than that for a perfectly competitive firm
(D) monopolist seeks to maximize profits, whereas the perfectly competitive firm maximizes revenues
(E) monopolist can never change a price, whereas the perfect competitor can

158. Over the past 5 years, 50 new restaurants have opened and 30 have closed in the city of Zuni. Currently there are
110 restaurants operating in the city. Which of the following best represents the market structure, barriers to entry,
and economic profits in the long run?

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Market Structure Barriers to Entry Long-Run Economic Profits

(A)
Perfect competition Low Negative

Market Structure Barriers to Entry Long-Run Economic Profits

(B)
Perfect competition High Positive

Market Structure Barriers to Entry Long-Run Economic Profits

(C)
Monopolistic competition Low Zero

Market Structure Barriers to Entry Long-Run Economic Profits

(D)

Monopolistic competition High Positive

Market Structure Barriers to Entry Long-Run Economic Profits

(E)
Monopolistic competition High Zero

159. Which of the following is true of a monopolistically competitive firm in long-run equilibrium?
(A) The firm produces the allocatively efficient level of output.
The firm is allocatively inefficient, because it produces an output level at which price is greater than
(B)
marginal cost.
(C) The firm produces an output level that minimizes average total cost.
(D) The firm produces in the inelastic range of its demand curve.
(E) The firm earns positive economic profits but zero accounting profits.

160. Which of the following is true of a monopolisti-cally competitive firm in long-run equilibrium?

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(A) Price equals marginal cost and average total cost.

(B) Price equals average total cost but is greater than marginal cost.
(C) Price equals marginal cost and is greater than average total cost.
(D) The firm makes no attempt to differentiate its products.
(E) The firm earns positive economic profits by producing at minimum average cost.

161. Which of the following is true for a monopolist that engages in perfect price discrimination?
The firm sells the profit-maximizing quantity of the regular monopolist but charges each consumer a
(A)
price higher than the regular monopoly price.
(B) There is more consumer surplus than exists with a regular monopoly.
The monopolist further restricts output compared to the regular monopoly, creating greater deadweight
(C)
loss.
(D) The monopolist sells the allocatively efficient quantity of output.
(E) The monopolist no longer faces a downward-sloping demand curve, becoming a price taker.

Answer D

Correct. The perfectly price-discriminating monopolist sells each unit of output at the maximum price the
consumer is willing to pay, as shown by the demand curve. The firm continues to sell output demand
equals marginal cost, which is the allocatively efficient output level. Since each consumer pays the
maximum price, he or she is willing to pay for the product and there is no consumer surplus. All surplus
is producer surplus.

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162.

The graph above shows the demand ( ), marginal revenue ( ), marginal cost ( ), and average total cost (
) curves for a monopoly. Based on the information in the graph provided, what is the profit-maximizing
quantity for a monopolist that engages in perfect price discrimination?
(A)
(B)
(C)
(D)
(E)

Answer D

Correct. is where (demand line) is equal to . This is where the firm is allocatively efficient and
practicing perfect price discrimination. With perfect price discrimination, a monopolist produces the
quantity where price equals marginal cost (just as a competitive market would) but extracts all economic
surplus associated with its product and eliminates all deadweight loss.

163. Which of the following statements relating to a firm in an imperfectly competitive market and a firm in a perfectly
competitive market is true?

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(A) Firms in both types of markets will likely advertise the merits of their products to increase sales.
Firms in both types of markets will increase price to increase total revenues when their demand is
(B)
inelastic.
An imperfectly competitive firm must lower its price to increase sales, while a perfectly competitive
(C)
firm can increase sales by increasing output at the current price.
Barriers to entry give both imperfectly competitive and perfectly competitive firms market power to
(D)
raise price.
As their product becomes different from their competitors’ product, both an imperfectly competitive
(E)
firm and a perfectly competitive firm will face less elastic consumer demand.

Answer C

Correct. The imperfectly competitive firm is a price maker, and it faces a downward-sloping demand
curve. The perfectly competitive firm is a price taker, and it faces a perfectly elastic (horizontal) demand
curve. Thus, the imperfectly competitive firm must lower price to increase sales; the perfectly
competitive firm can increase its sales at the given market price by increasing output.

164. Which of the following statements relating to a firm in an imperfectly competitive market and a firm in a perfectly
competitive market is true?
An imperfectly competitive firm does not experience diminishing returns, while a perfectly competitive
(A)
firm experiences diminishing returns.
An imperfectly competitive firm will always earn economic profits, while a perfectly competitive firm
(B)
always earns zero economic profits.
An imperfectly competitive firm and a perfectly competitive firm have a marginal revenue that equals
(C)
the product price.
When an imperfectly competitive firm raises the price, it will likely continue to sell some units of
(D)
output, but when a perfectly competitive firm raises the price, it will sell no output.
(E) Both imperfectly competitive and perfectly competitive firms face no barriers to entry.

Answer D

Correct. The imperfectly competitive firm faces a downward-sloping demand curve; when raising price,
the firm will sell less output but continue to sell some output. The perfectly competitive firm is a price
taker and will sell no output if it charges a price higher than the market price.

165. Assume a profit-maximizing monopolist is able to price discriminate, dividing its consumers into two distinct
groups charging each a different price. Based on this information, which of the following is true?

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The monopolist would earn greater profit charging each consumer the same price, not charging two
(A)
different prices.
The price discrimination can only be successful if one group can resell the product but the other group
(B)
cannot.
(C) The group with the more elastic demand will pay the lower price.
(D) The consumers with less willingness to pay will pay the higher price.
(E) The group with greater production costs will pay a lower price.

Answer C

Correct. By charging each group a different price, based on willingness to pay, the producer makes a
greater profit. The group with the greater willingness to pay, or less elastic demand, pays a higher price,
and the group that has the more elastic demand will pay the lower price.

166. A firm with market power engages in price discrimination in order to

(A) cover the cost of serving each consumer
(B) increase its profits
(C) charge a lower price
(D) produce the allocatively efficient quantity
(E) increase consumer surplus

Answer B

Correct. A firm sets its price equal to the maximum amount a consumer is willing to pay for that unit to
capture additional consumer surplus and to increase its profits.

167. If a monopolist can increase output and profit by engaging in perfect price discrimination, allocative efficiency will

(A) improve even though consumer surplus goes to zero

(B) possibly improve or get worse depending on whether consumer surplus increases or decreases
possibly improve or get worse depending on whether consumer surplus increases by more or less than
(C)
the increase in producer surplus
(D) get worse because producer surplus increases by more than the increase in consumer surplus
(E) be unchanged because although producer surplus increases, total surplus is unaffected

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Answer A

Correct. A monopolist engaging in perfect price discrimination will continue selling output at the
maximum price consumers are willing to pay until price is equal to marginal cost (the allocatively
efficient outcome). Therefore, the perfectly price-discriminating monopolist will produce the allocatively
efficient quantity of output and consumer surplus will decrease to zero.

168. A firm with market power sells its product in two markets. The firm faces the same cost curves in both markets but
faces a relatively elastic demand in one market for its product and a relatively inelastic demand in the other market
for that same product. Which of the following will increase the firm’s profits?
(A) The firm charges a lower price in both markets.
(B) The firm charges a higher price in both markets.
(C) The firm charges a price equal to its marginal cost in both markets.
The firm charges a lower price in the market with elastic demand and a higher price in the market with
(D)
inelastic demand.
The firm charges a lower price in the market with inelastic demand and a higher price in the market with
(E)
elastic demand.

Answer D

Correct. Because consumers are more responsive to price changes when demand is elastic, the firm will
charge a lower price to consumers with elastic demand to incentivize these consumers to buy more of
their product (increasing total revenue and, all else equal, increasing profits). Conversely, consumers
with relatively inelastic demand are less responsive to price changes; thus, the firm can increase price
without reducing unit sales significantly (increasing total revenue and, all else equal, increasing profits).

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169.

Given the information in the graph provided, what is the monopolist’s profit-maximizing quantity and price
combination?
(A)
(B)
(C)
(D)
(E)

Answer E

Correct. To maximize profits, firms should produce the quantity at which marginal revenue equals
marginal cost . This is achieved when the firm produces The monopolist sets the price
from the demand curve at .

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170.

For the firm shown in the graph above, which combination of output and price will maximize its profit?

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Output Price
(A)
Q1 P4

Output Price
(B)

Q1 P1

Output Price
(C)

Q2 P3

Output Price
(D)

Q2 P2

Output Price
(E)

Q3 P2

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171.

For the firm shown in the graph above, the short- run, profit-maximizing strategy would be to set output at
(A) Q1, price at P1, and suffer a loss
(B) Q1, price at P3, and earn an economic profit
(C) Q1, price at P3, and earn only a normal profit
(D) Q2, price at P2, and earn an economic profit
(E) Q2, price at P2, and earn only a normal profit

172. Which of the following best explains why it is difficult to maintain lasting collusive agreements?
There is an unavoidable conflict in that a collusive agreement can increase the profits of some, but not
(A)
all, firms in the industry.
There is little potential for gain from collusion unless there is a large number of consumers in the
(B)
market.
Each firm in the industry views itself as facing a vertical demand curve, even though the market demand
(C)
curve is downward sloping.
(D) The firms in the industry have a common incentive to increase output to a more competitive level.
Each firm realizes that its profits would increase if it were the only firm to violate the collusive
(E)
agreement by increasing its production slightly.

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173.

Based on the information in the graph above, what are the profit-maximizing output quantities for a single-price
monopolist and for a monopolist that engages in perfect price discrimination?
(A) For a single-price monopolist, . With perfect price discrimination, .

(B) For a single-price monopolist, . With perfect price discrimination, .

(C) For a single-price monopolist, . With perfect price discrimination, .

(D) For a single-price monopolist, . With perfect price discrimination, .
(E) For a single-price monopolist, . With perfect price discrimination, .

Answer B

Correct. Profit maximization requires the firm to produce where marginal revenue equals marginal cost.
For a single-price monopoly, marginal revenue is less than the price. In the graph above, the single-price
profit-maximizing firm would produce at . For a firm that can perfectly price discriminate, the
marginal revenue curve and the demand curve are the same curve. Therefore, if the profit-maximizing
firm could perfectly price discriminate, it would produce .

174. Prosper Company is a profit-maximizing monopoly producing toy cubes. Prosper Company is currently earning
positive economic profit. Which of the following combinations of events will definitely cause Prosper Company’s
profit to increase?

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(A) A decrease in demand for toy cubes and a decrease in fixed costs to produce toy cubes
(B) A decrease in demand for toy cubes and an increase in fixed costs to produce toy cubes
(C) A decrease in demand for toy cubes and a decrease in variable costs to produce toy cubes
(D) An increase in demand for toy cubes and an increase in government subsidies to produce toy cubes
(E) An increase in demand for toy cubes and an increase in fixed costs to produce toy cubes

Answer D

Correct. An increase in demand will increase both price and quantity of units sold (increasing total
revenue). An increase in government subsidies will lower total costs for Prosper Company. This
combination of an increase in total revenue and a decrease in total costs will cause Prosper Company’s
profits to increase.

175. Which of the following statements is true for a perfectly competitive firm but not true for a monopoly?
(A) The firm's price is equal to its average revenue.
(B) The firm cannot affect the market price for its good.
(C) It is difficult for other firms to enter the industry.
(D) The demand for the firm's product is unit elastic.
(E) The firm must lower its price in order to sell more of its product.

176. A monopolistically competitive firm is currently producing the profit-maximizing level of output. If the price of a
variable input increases, which of the following will occur?
(A) The firm will increase its output to increase its revenue.
(B) The firm will increase the price of its output by the same amount.
(C) The firm’s average total cost and marginal cost curves will shift upward.
(D) The firm’s average fixed cost will decrease as it decreases production.
(E) The firm’s fixed cost will increase, but its output level will be unaffected.

177. A monopolist introduces a technological innovation that lowers the marginal cost and average cost of production.
The price of the good and the level of output are most likely to change in which of the following ways?

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Price Level of Output

(A)
Remain constant Remain constant

Price Level of Output

(B)
Remain constant Increase

Price Level of Output

(C)
Increase Decrease

Price Level of Output

(D)
Decrease Increase

Price Level of Output

(E)
Decrease Remain constant

178. Assume that a monopolistically competitive firm is currently maximizing profit with an output of 100 units and a
price of $50. Which of the following is true?
(A) Total revenue is maximized when the firm produces 100 units of output.
(B) Marginal revenue equals $50 when the firm produces 100 units of output.
(C) Marginal cost is greater than marginal revenue when the firm produces 150 units of output.
(D) Marginal cost is minimized when the firm produces 100 units of output.
(E) Average total cost is minimized when the firm produces 100 units of output.

179. Assume that a monopolist is producing in the inelastic portion of its demand curve. Which of the following will
occur if the monopolist decreases its price?

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(A) Marginal revenue will decrease, but profits will increase.

(B) Marginal revenue will increase, but profits will decrease.
(C) Total revenue will decrease, but profits will increase.
(D) Both total revenue and profits will decrease.
(E) Both total revenue and profits will increase.

180. Assume that a profit-maximizing monopoly is charging a single price. If the monopoly can price discriminate and
charge each consumer what he or she is willing to pay, which of the following will occur?

(A) The quantity of output produced will increase.

(B) Total cost will decrease.
(C) Economic profit will decrease.
(D) Consumer surplus will increase.
(E) Demand will decrease.

181.

Pam and Tara run two competing lemonade stands in a town. In the payoff matrix above, the first entry in each cell
shows the profits to Pam, and the second entry in each cell shows the profits to Tara. According to the information,
which of the following is true?

(A) If Pam sets the high price, Tara will do best by charging the low price.
(B) If Pam sets the low price, Tara will do best by charging the high price.
(C) The dominant strategy for both is to charge the high price.
(D) The dominant strategy for Tara is to set the low price and for Pam is to set the high price.
(E) Neither Tara nor Pam has a dominant strategy.

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182.

Evergreen and Nature View are bidding for a landscaping contract. The payoff matrix above shows what each
firm’s total weekly profits from all its operations will be for each combination of bids. The first entry in each cell
shows Evergreen’s profit, and the second entry in each cell shows Nature View’s profit. A Nash equilibrium results
under which of the following conditions?
(A) When Evergreen bids low, no matter what Nature View’s bid is
(B) When both firms bid high and when both firms bid low
(C) When Evergreen bids high and Nature View bids low
(D) When both firms bid low
(E) When both firms bid high
There are four firms in an oligopolistic industry. The four firms agree to collude and act like a monopoly.

183. If one of the firms violates the agreement and charges a lower price or sells a larger quantity than what was agreed
to, what will happen in the short run?

(A) The firm that cheats will earn higher profits, and industry profits will be lower.
(B) The firm that cheats will earn higher profits, and industry profits will be higher.
(C) The firm that cheats will earn lower profits, and industry profits will be lower.
(D) The firm that cheats will earn lower profits, and industry profits will be higher.
(E) The firms that do not cheat will earn higher profits.

184. The project funding decisions made by two interdependent research companies, Creative and Genezyz, resulted in a
profit of million for Creative and a profit of million for Genezyz. Which of the following is required for this
combination of project choices to be a Nash equilibrium?

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(A) Genezyz charges a lower price to its customers than Creative does.
(B) Neither firm has a dominant strategy.
(C) Neither firm could earn higher profits by unilaterally changing its project choice.
(D) Creative could earn a higher profit if it chose a different project when Genezyz chose its initial project.
(E) The combined profits of the two firms are maximized at the current combination of project choices.

Answer C

Correct. A Nash equilibrium exists when neither firm can unilaterally increase its profits by altering their
strategy.

185. Downtown Tech Company and Uptown Tech Company compete in the gaming console market. Downtown Tech
Company is deciding whether to charge a high price or a low price for its product. Uptown Tech Company is
deciding whether to invest in research and development or advertising. Each company’s profit depends on the
actions taken by the other firm, which are listed in the payoff matrix provided. The first entry in the matrix is
Downtown Tech Company’s profit, and the second is Uptown Tech Company’s profit. Each firm independently and
simultaneously selects an action. Each firm knows all of the information about the payoffs associated with the
strategies each firm can choose.

Uptown Tech Company

Research and Development Advertising
High Price
Downtown Tech Company
Low Price

The Nash equilibrium to this game, if one exists, is which of the following?
(A) High Price, Research and Development
(B) Low Price, Advertising
(C) High Price, Advertising
(D) Low Price, Research and Development
(E) None of the strategy pairs represents a Nash equilibrium.

Answer E

Correct. Neither firm has a dominant strategy, therefore, none of these strategies represents a Nash
equilibrium.

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186. The following table shows the profits associated with the pricing strategies of two oligopolistic firms, Agronomia
and Farmingdale. Each firm has two possible strategies: to charge a low price or a high price. The first entry in each
cell shows the profits to Agronomia and the second the profits to Farmingdale.

If the two firms do not cooperate, as a result of the firms’ pricing decisions the profits of each firm will be which of
the following?

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Agronomia's Profit Farmingdale's Profit

(A)

$50 $100

Agronomia's Profit Farmingdale's Profit

(B)
$150 $150

Agronomia's Profit Farmingdale's Profit

(C)

$300 $50

Agronomia's Profit Farmingdale's Profit

(D)
$100 $100

Agronomia's Profit Farmingdale's Profit

(E)
$300 $300

187.
Quantity Price ($) Total Cost ($)
1 10 11
2 8 14
3 7 18
4 5 25
5 3 34

The table provided shows price and cost data for Howell’s Toy Hoops, a typical profit-maximizing firm that sells its
toys in a monopolistically competitive market. At the profit-maximizing quantity, the economic profit for Howell’s
Toy Hoops is

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(A) -$19
(B) -$5
(C) -$1
(D) $2
(E) $3

Answer E

Correct. Howell’s Toy Hoops will maximize profit by producing up to the last unit where marginal
revenue is greater than or equal to marginal cost. As quantity increases from 2 units to 3 units, total
revenue changes from $16 ( ) at 2 units of output to $21 ( ) at 3 units of output, so
marginal revenue is $5 when 3 units of output are produced. Marginal cost is $4 ( ) at 3 units
of output, so this is the last unit where marginal revenue is greater than marginal cost. Economic profit at
3 units of output is total revenue ($21) minus total cost ($18), which equals $3.

188. If a perfectly competitive industry were monopolized without any changes in cost conditions, the price and quantity
produced would change in which of the following ways?

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Price Quantity
(A)
Increase Increase

Price Quantity
(B)
Increase Decrease

Price Quantity

(C)

Increase May increase or decrease

Price Quantity
(D)
Decrease Increase

Price Quantity
(E)
Decrease Decrease

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The following questions refer to the graph below.

189. If the firm produces 10 units of output, its economic profits will equal
(A) 0
(B) $50
(C) $100
(D) $150
(E) $200

190. Which of the following is most likely to occur if the firm increases production beyond 10 units?
(A) Consumers would be willing to purchase more than 10 units at the price of $20 per unit.
(B) The firm would definitely experience a loss.
(C) The firm would have to lower its price to sell more than 10 units.
(D) The firm's average cost of production would initially increase.
(E) The firm's profits would increase.

191. If the marginal cost curve of a monopolist shifts up, which of the following will occur to the monopolist’s price and
output?

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Price Output
(A)
Decrease Increase

Price Output
(B)
Decrease Decrease

Price Output
(C)
Increase No change

Price Output
(D)
Increase Increase

Price Output
(E)
Increase Decrease

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The following questions refer to the graph of a monopolist shown below

192. If the monopolist is unregulated, its profitmaximizing price and output level would lead to a deadweight loss equal
to area
(A) RUV
(B) RTV
(C) RTW
(D) TUV
(E) UVW

193. At the current quantity that a firm is selling, the firm has marginal revenue of and marginal cost of .
Which of the following is true?
(A) The firm is maximizing profit.
(B) The firm’s profits would increase if the firm increased the quantity sold.
(C) The firm’s profits would increase if the firm decreased the quantity sold.
(D) The firm earns negative economic profit.
(E) The firm earns zero accounting profit.

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Answer C

Correct. The firm is producing where marginal cost is greater than marginal revenue. Profit is maximized
when marginal revenue equals marginal cost, so the firm will increase its profits by decreasing output to
where marginal revenue equals marginal cost.

194. Which of the following is most likely to occur if a single-price monopolist is replaced by a perfectly competitive
market?
(A) Prices will increase.
(B) The deadweight loss will decrease.
(C) Profits will increase.
(D) Output will decrease.
(E) The firm’s cost curves will shift upward.

195.
Zeb
Lower Prices Same Prices
Lower Prices ; ;
Art
Same Prices ; ;

The above payoff matrix illustrates the daily profit for two restaurant owners, Art and Zeb. Each owner has the
choice to lower prices for early bird customers or keep prices the same. The first entry in each cell indicates the
profits for Art, and the second entry in each cell indicates the profits for Zeb. Each restaurant independently and
simultaneously chooses its action and has complete information of the payoff matrix. Which of the following is a
Nash equilibrium?
(A) Both Art and Zeb will lower prices.
(B) Art will lower prices, and Zeb will charge the same prices.
(C) Art will charge the same prices, and Zeb will lower prices.
(D) Both Art and Zeb will charge the same prices.
(E) There is no Nash equilibrium.

Answer A

Correct. In Nash equilibrium, both Art and Zeb will charge lower prices. The combination of strategies is
Nash because neither party has an incentive to change strategy unilaterally to move to any other
combination.

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North Springs and South Springs are two firms that serve the local market for bottled water. Each firm must choose to
either maintain or increase its current output. The first entry in each cell in the payoff matrix below shows the profits for
North Springs, and the second entry in each cell shows the profits for South Springs.

196. If the two firms do not cooperate, which of the following represents the payoff North Springs and South Springs
receive in the dominant-strategy equilibrium and the Nash equilibrium?

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Dominant Strategy Nash Equilibrium

(A)
None ($27, $28)

Dominant Strategy Nash Equilibrium

(B)
$27, $28) ($15, $45)

Dominant Strategy Nash Equilibrium

(C)
($30, $26) ($15, $45)

Dominant Strategy Nash Equilibrium

(D)
($27, $28) ($27, $28)

Dominant Strategy Nash Equilibrium

(E)
($30, $26) ($27, $28)

197.
Sam’s
Lower Prices Same Prices
Lower Prices
Amy’s
Same Prices

The above payoff matrix illustrates the daily profit for two restaurants, Amy’s and Sam’s. Each restaurant has the
choice to lower prices for early bird customers or keep prices the same. The first entry in each cell indicates the
profits for Amy’s, and the second entry in each cell indicates the profits for Sam’s. Each restaurant independently
and simultaneously chooses its action and has complete information of the payoff matrix. Based on the information
and assuming Amy’s and Sam’s do not cooperate, which action will each pursue?

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(A) Both Amy’s and Sam’s will lower prices.

(B) Amy’s will lower prices, and Sam’s will charge the same prices.
(C) Amy’s will charge the same prices, and Sam’s will lower prices.
(D) Both Amy’s and Sam’s will charge the same prices.
(E) There is insufficient information to answer the question.

Answer A

Correct. Setting lower prices is a dominant strategy for both Amy’s and Sam’s.

The graph shows the cost and revenue curves for a profit-maximizing monopolist that produces teddy bears. The letters in
the graph represent the enclosed areas.

198. If the monopolist engages in perfect price discrimination, which of the following will happen?
(A) Consumer surplus will remain the same and producer surplus will increase by area .
Both consumer surplus and producer surplus will decrease by area , and the
(B)
deadweight loss will remain constant.
Consumer surplus will increase by area , producer surplus will decrease by area , and the
(C)
deadweight loss will be zero.
Consumer surplus and deadweight loss will be zero because all economic surplus will be transferred to
(D)
producer surplus.
(E) Both consumer surplus and producer surplus will increase because output produced will increase to .

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Answer D

Correct. Producer surplus will increase, and consumer surplus and the deadweight loss will decrease to
zero, because all economic surplus will be captured by the monopolist as profit. Producer surplus will be
equal to area .

199. If the monopolist charges a single price for teddy bears, which of the following describes an accurate outcome?
The consumer surplus equals area , the producer surplus equals area , and the deadweight loss
(A)
equals area .
The consumer surplus equals area , the producer surplus equals area , and the deadweight
(B)
loss equals area .
The consumer surplus equals area , the producer surplus equals area , and the deadweight
(C)
loss equals area .
Consumer surplus equals area , producer surplus equals area , and deadweight loss
(D)
equals area .
The consumer surplus equals area , the producer surplus equals area , and the deadweight
(E)
loss equals area .

Answer D

Correct. The consumer surplus is the area under the demand curve and above the price, given by area
; the producer surplus is equal to the economic profit of the monopoly, given by area ;
and the deadweight loss is given by area , indicating the reduction in total economic surplus.

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200.
Price Quantity Demanded

A profit-maximizing monopolist faces the market demand schedule provided and has a constant marginal cost of
. If the monopolist engages in perfect price discrimination, its total revenue will equal which of the following?
(A)
(B)
(C)
(D)
(E)

Answer D

Correct. The firm can charge the maximum possible price for each unit, which enables the firm to
capture all available consumer surplus for itself. In perfect price discrimination the firm knows the exact
price that the consumer will pay. If at , then the firm will sell up to the fifth unit and have a
total revenue of .

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Rover’s Rest and Dave’s Den are the only two dog daycare companies in a town. Each firm is considering whether to run
ads or to not run ads. The first entry in each cell shows Dave’s Den’s profit, and the second entry shows Rover’s Rest’s
profit. Each dog daycare company independently and simultaneously chooses its strategy. Assume the two firms know all
the information in the matrix and do not cooperate. Use the payoff matrix provided to answer the next two questions.

201. Which of the following represents the Nash equilibrium?

(A) Dave’s Den chooses “Run Ads,” and Rover’s Rest chooses “No Ads.”
(B) Both Dave’s Den and Rover’s Rest choose “Run Ads.”
(C) Both Dave’s Den and Rover’s Rest choose “No Ads.”
(D) Dave’s Den chooses “No Ads,” and Rover’s Rest chooses “Run Ads.”
(E) There are multiple Nash equilibria.

Answer D

Correct. A Nash equilibrium exists when neither firm can unilaterally increase its profits by altering its
strategy. When Dave’s Den chooses “No Ads” and Rover’s Rest chooses “Run Ads,” neither firm can
alter its strategy to increase its profit.

202. The advertising agency raises its prices, causing a firm that chooses to run ads to earn $200 less in profits. Once the
firms adjust to the higher advertising prices, what is the total combined profit of the two firms in the new Nash
equilibrium?

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(A) $500
(B) $700
(C) $1,300
(D) $1,500
(E) $1,600

Answer E

Correct. A Nash equilibrium exists when neither firm can unilaterally increase its profits by altering its
strategy. If choosing “Run Ads” causes a firm to earn $200 less in profits, the new Nash equilibrium will
be where both Dave’s Den follows its dominant strategy of “No Ads” and Rover’s Rest follows its new
dominant strategy of “No Ads.” This will result in the total combined profit of the two firms of
.

203. If Zeta, a single producer, had exclusive control of a key resource needed to produce good , a likely result would
be which of the following?
(A) Good would be produced in a perfectly competitive market.
(B) Slight differences in output would lead to good being in a monopolistically competitive market.
(C) There would be a barrier to entry, and Zeta would have a monopoly on good .
(D) Only a few firms would produce good , so there would be an oligopoly.
(E) Zeta must have decreasing returns to scale and operate as a natural monopoly in producing good .

Answer C

Correct. For a monopoly to persist, there needs to be a barrier to entry. Exclusive control of a vital
resource would serve as such a barrier to entry and prevent new firms from entering the market to
produce good .

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