Chapter 8: Monopoly and Monopolistic Competition

MULTIPLE CHOICE
1.

If a monopolist faces a constant-elasticity demand curve given by Q =

3
202,500P and has total costs given by TC = 10Q, its profit-maximizing level of output is:
a.
b.
c.
d.
e.

50.
60.
75.
100.
120.

ANS: B
DIF: Moderate
REF: 259
TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

If a monopolist faces a constant-elasticity demand curve given by Q = 400P

2 and has total costs given by TC = 0.625Q2, its profit-maximizing level of output is:
2.

a.
b.
c.
d.
e.

0.
2.
4.
6.
8.

ANS: C
DIF: Moderate
REF: 259
TOP: Pricing and Output Decisions in Monopoly
3.
a.
b.
c.
d.
e.

MSC: Applied

At the profit-maximizing level of output for the monopolist:

total revenue is equal to total cost.
total costs are minimized.
total revenue is maximized.
marginal revenue is equal to marginal cost.
average revenue is equal to average cost.

ANS: D
DIF: Easy
REF: 261
TOP: Pricing and Output Decisions in Monopoly

MSC: Factual

4.
For the Minnie Mice Company, the elasticity of demand is 6, and the profitmaximizing price is 30. If MC is marginal cost and AVC is average variable cost, then:
a.
MC = 25.
b.
AVC = 25.
c.
MC = 30.
d.
AVC = 36.
e.
MC = 36.
ANS: A
DIF: Easy
REF: 261
TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

5.
Bathworks has exclusive rights to sell its perfumes. The demand for its
perfumes faced by Bathworks is given by Q = 250 0.5P. Bathworkss costs are given by TC
= 50Q + 5.5Q2. Its maximum monopoly profit is:
a.
b.
c.
d.
e.

$6,750.
$7,050.
$7,500.
$7,750.
$8,750.

a.
b.
c.
d.
e.

$6,750.
$7,050.
$7,500.
$7,750.
$8,750.

ANS: A
DIF: Easy
REF: 261
TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

6.
Craigs Red Sea Restaurant is the only restaurant in Columbia, South
Carolina, that sells Ethiopian food. The demand for Ethiopian food is given by Q = 25 P.
Craigs costs are given by TC = 25 + Q + 5Q2. Its maximum monopoly profit is:
a.
b.
c.
d.
e.

$1.
$21.
$22.
$24.
$26.

ANS: A
DIF: Easy
REF: 261
TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

7.
My Big Banana (MBB) has a monopoly in Middletown on large banana
splits. The demand for this delicacy is given by Q = 80 P. MBBs costs are given by TC =
40 + 2Q + 2Q2. Its maximum monopoly profit is:
a.
b.
c.
d.
e.

$267.
$467.
$627.
$672.
$674.

ANS: B
DIF: Easy
REF: 261
TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

8.
For the Mickey Mice Company, the price elasticity of demand is 3, average
cost is $15, and marginal cost is $30. Mickeys profit-maximizing price is:
a.
$10.00.
b.
$20.00.
c.
$22.50.
d.
$30.00.
e.
$45.00.
ANS: E
DIF: Easy
REF: 261
TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

9.
Cals Cab Company (CCC) has a taxi monopoly in Wen Kroy. The demand
for taxi services in Wen Kroy is given by Q = 1,500 P. CCCs costs are given by TC = 100
Q2 + 5Q3. Its maximum monopoly profit is:
a.
b.
c.
d.
e.

$0.
$5,500.
$6,600.
$7,700.
$9,900.

ANS: E
DIF: Easy
REF: 261
TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

10.
So long as price exceeds average variable cost, in the model of monopoly, the
firm maximizes profits by producing where:
a.
the difference between marginal revenue
and marginal cost is maximized.
b.
marginal revenue equals price.
c.
the difference between price and marginal
cost is maximized.
d.
price equals marginal cost.
e.
marginal cost equals marginal revenue.
ANS: E
DIF: Moderate
REF: 261
TOP: Pricing and Output Decisions in Monopoly

MSC: Conceptual

11.
If Harry Doubledays price elasticity of demand is 2, and its profitmaximizing price is $6, then its:
a.
average cost is $3.00.
b.
average cost is $0.33.
c.
marginal cost is $3.00.
d.
marginal cost is $0.33.
e.
average cost is $5.67.
ANS: C
DIF: Moderate
REF: 262
TOP: Pricing and Output Decisions in Monopoly

MSC: Applied

12.
The Frank Failing Company has an average variable cost of $8, average fixed
cost of $16, marginal cost of $12, and elasticity of demand 3. Frank should:
a.
shut down.
b.
charge $8.
c.
charge $16.
d.
charge $18.
e.
charge $36.
ANS: D
DIF: Moderate
REF: 262
TOP: Pricing and Output Decisions in Monopoly
13.
a.
b.
c.
d.
e.

In the model of monopoly, firms produce a:

standardized product with considerable
control over price.
differentiated product with considerable
control over price.
standardized product with no control over
price.
differentiated product with no control over
price.
standardized or differentiated product with
some control over price.

ANS: B
DIF: Easy
REF: 264
TOP: Pricing and Output Decisions in Monopoly
14.
a.
b.
c.
d.
e.

MSC: Applied

MSC: Conceptual

In the model of monopoly, there:

are many firms producing differentiated
products.
are a few firms producing undifferentiated
products.
are a few firms producing differentiated
products.
are many firms producing undifferentiated
products.
is one firm producing a highly differentiated

a.

are many firms producing differentiated

products.
are a few firms producing undifferentiated
products.
are a few firms producing differentiated
products.
are many firms producing undifferentiated
products.
is one firm producing a highly differentiated
product.

b.
c.
d.
e.

ANS: E
DIF: Easy
REF: 264
TOP: Pricing and Output Decisions in Monopoly

MSC: Conceptual

15.
A firm with no costs producing Q units and charging price P gets a return of r
on total assets of A if P equals:
a.
rA.
b.
(1 + r)A.
c.
(1 + r)A/Q.
d.
rA/Q.
e.
rAQ.
ANS: D
MSC: Factual

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

16.
If price P, unit costs C, and quantity Q are known, the markup of markupcost pricing is:
a.
(PQ CQ)/Q.
b.
P C/Q.
c.
(P C)/Q.
d.
(P C)/C.
e.
1 (P C)/Q.
ANS: D
MSC: Factual

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

17.
Harriet Quarterly wants a 25% return on the $100 of assets she has in her
company. Her average variable costs are $50 per unit, and she has no fixed costs. If she sells
10 units, what price should she charge?
a.
$52.50.
b.
$62.50.
c.
$75.00.
d.
$87.50.
e.
$125.00.
ANS: A
MSC: Applied

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

18.
Joes T-shirts has costs given by TC = $100 + 3Q, where Q is the number of
shirts. If Joe charges $5 each, the percentage markup for 100 shirts is:
a.
20%.
b.
25%.
c.
33%.
d.
50%.
e.
67%.
ANS: B

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

MSC: Applied
19.
When producing 10 units, Jean has total variable costs of $100, total fixed
costs of $100, and assets of $100. She wants a return of 10%. What price should she charge?
a.
$11.
b.
$21.
c.
$30.
d.
$210.
e.
$300.
ANS: B
MSC: Applied

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

20.
If C is total cost, Q is quantity, P is price, and A is total assets, the target
return r is defined by:
a.
(PQ C)/A.
b.
[1 (P C)/Q]A.
c.
[1 (P C)Q]A.
d.
(P C)Q/A.
e.
1 (P C)Q/A.
ANS: A
MSC: Conceptual

DIF: Easy

REF: 268

TOP: Cost-Plus Pricing

21.
If elasticity of demand is 2, marginal cost is $4, and average cost is $6, a
profit-maximizing markup price is:
a.
$4.
b.
$6.
c.
$8.
d.
$10.
e.
$12.
ANS: C
DIF: Easy
REF: 272
TOP: Can Cost-Plus Pricing Maximize Profit?

MSC: Applied

22.
If the demand curve is horizontal, the price elasticity used to calculate the
profit-maximizing price is:
a.
10.
b.
5.
c.
0.
d.
1.
e.
infinity.
ANS: E
DIF: Easy
REF: 272
TOP: Can Cost-Plus Pricing Maximize Profit?
23.
a.
b.
c.
d.
e.
ANS: B

MSC: Conceptual

If is the elasticity of demand, a profit maximizer sets a markup price of:

MC[1/(1 + 1/)].
MC[1/(1 1/)].
AC[1/(1 )].
AC[1/(1 1/)].
1/(1 ).
DIF: Moderate

REF: 272

TOP: Can Cost-Plus Pricing Maximize Profit?

MSC: Factual

24.
If the profit-maximizing markup price is marginal cost times 2, the elasticity
of demand must be:
a.
0.
b.
1/2.
c.
1.
d.
4/3.
e.
2.
ANS: E
DIF: Moderate
REF: 272
TOP: Can Cost-Plus Pricing Maximize Profit?
25.
a.
b.
c.
d.
e.

MSC: Applied

To maximize profit, the firm must:

mark up average variable costs.
mark up marginal costs.
mark up average fixed costs.
set the markup equal to 1/( + 1).
b and d

ANS: E
DIF: Difficult
REF: 272
TOP: Can Cost-Plus Pricing Maximize Profit?

MSC: Conceptual

26.
If revenues from selling quantities x and y of jointly produced goods X and Y
were TRX = 300 xy + 50x and TRY = 1,000 xy + 2y, and 10 units of y were produced, then
marginal revenue with respect to X would be:
a.
$10.
b.
$20.
c.
$30.
d.
$40.
e.
$50.
ANS: C
DIF: Easy
REF: 273
TOP: The Multiple-Product Firm: Demand Interrelationships

MSC: Applied

27.
If revenues from selling quantities x and y of jointly produced goods X and Y
were TRX = 100 xy + 2x and TRY = 500 xy + 3y, then marginal revenue with respect to X
would be:
a.
2 y.
b.
y.
c.
x(2y + 5).
d.
(2y + 5).
e.
2(1 y).
ANS: E
DIF: Easy
REF: 273
TOP: The Multiple-Product Firm: Demand Interrelationships

MSC: Applied

28.
If John produces joint products A and B and refuses to sell all the A he
produces, then:
a.
A is a high-demand good.
b.
A is a low-demand good.
c.
A is a high-cost good.
d.
A is a low-cost good.
e.
John is definitely not profit maximizing.

a.
b.
c.
d.
e.

A is a high-demand good.
A is a low-demand good.
A is a high-cost good.
A is a low-cost good.
John is definitely not profit maximizing.

ANS: B
DIF: Easy
REF: 276
TOP: Pricing of Joint Products: Fixed Proportions

MSC: Factual

29.
A producer of two fixed proportion outputs A and B, producing QA = QB
with marginal revenues MRA and MRB, should equate marginal cost to:
a.

the maximum (MRA, MRB).

b.

the minimum (MRA, MRB).

c.
d.

MRA, which should equal MRB.

the horizontal sum of MRA and MRB.

e.

the vertical sum of MRA and MRB.

ANS: E
DIF: Easy
REF: 276
TOP: Pricing of Joint Products: Fixed Proportions

MSC: Factual

30.
A producer of fixed proportion goods X and Y (Q = QX = QY) has marginal
costs and revenues of MC = 12Q, MRX = 54 6QX, MRY = 126 12QY . The producer
should produce how many units?
a.
3.
b.
5.25.
c.
6.
d.
8.25.
e.
10.
ANS: C
DIF: Easy
REF: 276
TOP: Pricing of Joint Products: Fixed Proportions
31.
a.
b.
c.
d.
e.

MSC: Applied

When a producer of joint goods refuses to sell all of one good, the producer:
is not rational.
must destroy some of the high-demand
good.
must destroy some of the low-demand good.
must give away some of the high-demand
good.
must give away some of the low-demand
good.

ANS: C
DIF: Moderate
REF: 276
TOP: Pricing of Joint Products: Fixed Proportions

MSC: Conceptual

32.
A producer refuses to sell some of one joint product. MRA is the marginal
revenue for a low-demand good. If the producer were to sell all its production, what would be
true of MRA?
a.
MRA = demand for A.
b.
c.
d.
e.

MRA = 0.
MRA = marginal cost of A.
MRA < 0.
MRA = 1.

ANS: D
DIF: Moderate
REF: 276
TOP: Pricing of Joint Products: Fixed Proportions

MSC: Conceptual

33.
Fred Stickwick produces fixed proportion goods A and B, with QA = QB,
marginal costs MC, and marginal revenues MRA and MRB. If demand for A is greater than
demand for B, Fred should only:
a.
produce B to the quantity where MRB = 0.
b.

sell B to the quantity where MRB = 0 if

MRA is still > MC.

c.

produce B to the quantity where MRB =

MC.
sell B to the quantity where MRB = MC.

d.
e.

produce B to the quantity where MRB =

MRA.

ANS: B
DIF: Difficult
REF: 276
TOP: Pricing of Joint Products: Fixed Proportions

MSC: Conceptual

34.
Jack O. Trades produces joint products A and B with linear demands DA >
DB. Given MRB is marginal revenue for B and MCB is marginal cost of B, Jacks total
marginal revenue curve changes slope at the quantity where:
a.
MRB = MCB.
b.

DB = MCB.

c.
d.

MRB = DB.
MRB = 0.

e.

DB = 0.

ANS: D
DIF: Difficult
REF: 276
TOP: Pricing of Joint Products: Fixed Proportions
35.
isocost curve:
a.

MSC: Conceptual

For a producer of joint products X and Y with total costs CX and CY, an
isolates CX and CY separately.

b.

shows points where CX = CY .

c.
d.

shows points where cost curves are tangent.

shows points where CX /CY is constant.

e.

shows points where CX + CY is constant.

ANS: E
DIF: Easy
REF: 278
TOP: Output of Joint Products: Variable Proportions

MSC: Factual

36.
For a producer of joint products X and Y with total revenue and RY, an
isorevenue curve:
a.
isolates RX and RY separately.
b.

shows points where RX = RY .

c.
d.

shows points where revenue curves are

tangent.
shows points where RX /RY is constant.

e.

shows points where RX + RY is constant.

a.

isolates RX and RY separately.

b.

shows points where RX = RY .

c.
d.

shows points where revenue curves are

tangent.
shows points where RX /RY is constant.

e.

shows points where RX + RY is constant.

ANS: E
DIF: Easy
REF: 278
TOP: Output of Joint Products: Variable Proportions

MSC: Factual

37.
A monopsonist faces a market labor supply curve w = 20 + L, where w is the
wage rate and L is the number of workers employed. If the firms labor demand curve is w =
200 4L, what is the optimal wage rate and quantity of labor employed?
a.
w = 50 and L = 30.
b.
w = 56 and L = 36.
c.
w = 80 and L = 30.
d.
w = 104 and L = 32.
e.
None of the above.
ANS: A
MSC: Applied

DIF: Easy

REF: 281

TOP: Monopsony

38.
A monopsonist faces a market labor supply curve w = 40 + 2L, where w is the
wage rate and L is the number of workers employed. If the firms labor demand curve is w =
200 L, what is the optimal wage rate and quantity of labor employed?
a.
w = 146.7 and L = 53.3.
b.
w = 168 and L = 32.
c.
w = 104 and L = 32.
d.
w = 40 and L = 160.
e.
w = 32 and L = 168.
ANS: C
MSC: Applied
39.
a.
b.
c.
d.
e.
ANS: D
Competition
MSC: Factual
40.
a.
b.
c.
d.
e.

DIF: Easy

REF: 281

TOP: Monopsony

In the model of monopolistic competition, there can be short-run:

losses or profits, but there must be profits in
long-run equilibrium.
profits, but there must be losses in long-run
equilibrium.
losses or profits, but there must be losses in
long-run equilibrium.
losses or profits, but there must be neither
profits nor losses in long-run equilibrium.
losses, but there must be profits in long-run
equilibrium.
DIF: Easy

REF: 283

TOP: Monopolistic

In the model of monopolistic competition, firms produce a:

standardized product with considerable
control over price.
differentiated product with considerable
control over price.
standardized product with no control over
price.
differentiated product with no control over
price.
differentiated product with some control
over price.

a.

standardized product with considerable

control over price.
differentiated product with considerable
control over price.
standardized product with no control over
price.
differentiated product with no control over
price.
differentiated product with some control
over price.

b.
c.
d.
e.
ANS: E
Competition
MSC: Factual
41.
a.
b.
c.
d.
e.

DIF: Easy

REF: 283

TOP: Monopolistic

Firms that produce similar, slightly differentiated products are called a(n):
oligarchy.
oligopoly.
cabal.
cartel.
product group.

ANS: E
Competition
MSC: Factual

DIF: Easy

REF: 283

TOP: Monopolistic

42.
So long as price exceeds average variable cost, in the model of monopolistic
competition, a firm maximizes profits by producing where:
a.
the difference between marginal revenue
and marginal cost is maximized.
b.
marginal cost equals marginal revenue.
c.
marginal revenue equals price.
d.
the difference between price and marginal
cost is maximized.
e.
price equals marginal cost.
ANS: B
Competition
MSC: Conceptual

DIF: Moderate

REF: 284

TOP: Monopolistic

43.
The ABC Company estimates that a newspaper advertising campaign would
cost $25,000 and would generate $35,000 in new revenues. The firm should begin this
campaign as long as:
a.
price elasticity of demand is at least 2.5 (in
absolute value).
b.
price elasticity of supply is 1.
c.
price elasticity of demand is at least 1.4 (in
absolute value).
d.
marginal cost of production is no more than
$25,000.
e.
price elasticity of supply is 1.4.
ANS: C
Expenditures
MSC: Applied

DIF: Moderate

REF: 286

TOP: Advertising

44.
A supplier of fur coats estimates that the price elasticity of demand for its
coats is 3.75. The firm has determined that an additional $100,000 in advertising would
generate $275,000 in additional revenues. You would advise the firm to:
a.
advertise, because the marginal revenues are
greater than the cost of advertising.
b.
spend only $50,000 on advertising, because
the marginal revenue from an additional
dollar of advertising is less than $3.75.
c.
abandon the advertising plan, because the
demand elasticity is greater than 1 (in
absolute value).

a.

advertise, because the marginal revenues are

greater than the cost of advertising.
spend only $50,000 on advertising, because
the marginal revenue from an additional
dollar of advertising is less than $3.75.
abandon the advertising plan, because the
demand elasticity is greater than 1 (in
absolute value).
abandon the advertising plan, because the
marginal revenue from an additional dollar
of advertising is less than $3.75.
advertise, because the fur coats are a luxury
item.

b.
c.
d.
e.
ANS: D
Expenditures
MSC: Applied

DIF: Moderate

REF: 286

TOP: Advertising

45.
If a firm in a monopolistically competitive industry is profit maximizing, it
should choose its level of advertising such that the marginal revenue of an additional dollar of
advertising:
a.
is equal to the elasticity of its demand curve
minus 1.
b.
is exactly $1.
c.
increases revenues by $1.
d.
is equal to 1 plus the elasticity of its demand
curve.
e.
is equal to the elasticity of its demand
curve.
ANS: E
Expenditures
MSC: Factual
46.
a.
b.
c.

DIF: Easy

REF: 287

TOP: Advertising

Firms advertise in order to:

build brand loyalty.
appeal to the price-sensitive consumers.
increase the demand elasticities of their
loyal customers.
shift the market supply curve to the left.
shift the market demand curve to the left.

d.
e.

ANS: A
DIF: Easy
REF: 288
TOP: Advertising, Price Elasticity, and Brand Equity: Evidence on Managerial Behavior
MSC: Factual
47.
a.
b.
c.
d.
e.

Firms offer promotions in order to:

build brand loyalty.
appeal to the price-sensitive consumers.
increase the demand elasticities of their
loyal customers.
shift the market supply curve to the left.
shift the market demand curve to the left.

ANS: B
DIF: Easy
REF: 288
TOP: Advertising, Price Elasticity, and Brand Equity: Evidence on Managerial Behavior
MSC: Factual