Chapter 9

Monopoly
1. The monopolist faces
a. a perfectly inelastic demand curve.
b. a perfectly elastic demand curve.
c. the entire market demand curve.
d. all of the answers above are correct.
ANS
a. Incorrect. This is an extreme theoretical demand curve.
b. Incorrect. This is the demand curve for perfect competition.
c. Correct. The monopolist faces with elastic unit elastic and inelastic se!ments.
d. Incorrect. "nly answer c. is correct.
#. To maximi$e its profit a monopoly should choose a price where demand is
a. elastic.
b. inelastic.
c. unitary elastic.
d. vertical.
ANS
a. Correct. To maximi$e its profit a monopoly should choose a price where demand is
elastic.
b. Incorrect. To maximi$e its profit a monopoly should choose a price where demand is
elastic.
c. Incorrect. To maximi$e its profit a monopoly should choose a price where demand is
elastic.
d. Incorrect. To maximi$e its profit a monopoly should choose a price where demand is
elastic.
%. &hen mar!inal revenue is $ero for a monopolist facin! a downward'slopin! strai!ht'line
demand curve the price elasticity of demand is
a. !reater than 1.
b. e(ual to 1.
c. less than #.
d. e(ual to ).
1
ANS
a. Incorrect. The mar!inal revenue curve intersects the (uantity line where the demand
curve is unit elastic and price elasticity of demand is e(ual to 1.
b. Correct. &hen mar!inal revenue is $ero for a monopolist facin! a downward'slopin!
strai!ht'line demand curve the price elasticity of demand is !reater than 1.
c. Incorrect. The mar!inal revenue curve intersects the (uantity line where the demand
curve is unit elastic and price elasticity of demand is e(ual to 1.
d. Incorrect. The mar!inal revenue curve intersects the (uantity line where the demand
curve is unit elastic and price elasticity of demand is e(ual to 1.
*. +oth a perfectly competitive firm and a monopolist
a. always earn an economic profit.
b. maximi$e profit by settin! mar!inal cost e(ual to mar!inal revenue.
c. maximi$e profit by settin! mar!inal cost e(ual to avera!e total cost.
d. are price takers.
ANS
a. Incorrect. A perfectly competitive firm earns $ero economic profit in the lon! run.
b. Correct. +oth a perfectly competitive firm and a monopolist maximi$e profit by settin!
mar!inal cost e(ual to mar!inal revenue.
c. Incorrect. +oth market structures maximi$e profit by settin! ,-.,C.
d. Incorrect. A monopolist is a price maker not a price taker.
/. Suppose a monopolist0s demand curve lies below its avera!e variable cost curve. The firm
will
a. stay in operation in the short run.
b. earn an economic profit.
c. earn an economic profit in the lon! run.
d. shut down.
ANS
a. Incorrect. The monopolist shuts down because any price alon! the demand curve will
not cover the avera!e variable cost of producin! a !ood.
b. Incorrect. The monopolist shuts down because any price alon! the demand curve will
not cover the avera!e variable cost of producin! a !ood.
c. Incorrect. The monopolist shuts down because any price alon! the demand curve will
not cover the avera!e variable cost of producin! a !ood.
d. Correct. The monopolist shuts down because any price alon! the demand curve will
not cover the avera!e variable cost of producin! a !ood.
#
1. &hich of the followin! statements best describes the price output and profit conditions
of monopoly2
a. 3rice will e(ual mar!inal cost at the profit'maximi$in! level of output and
profits will be positive in the lon!'run.
b. 3rice will always e(ual avera!e variable cost in the short'run and either
profits or losses may result in the lon! run.
c. In the lon!'run positive economic profit will be earned.
d. All of the answers above are correct.
ANS
a. Incorrect. At the profit'maximi$in! or loss minimi$in! level of output ,- 4 ,C
which corresponds to price on the demand curve.
b. Incorrect. At the profit'maximi$in! or loss minimi$in! level of output ,- 4 ,C
which corresponds to price on the demand curve.
c. Correct. A monopolist always earns positive economic profit in the lon! run.
d. Incorrect. Answer c. is correct.
5. &hich of the followin! is true for the monopolist2
a. ,ar!inal revenue is less than the price char!ed.
b. 6conomic profit is possible in the lon! run.
c. 3rofit maximi$in! or loss minimi$in! occurs when mar!inal revenue e(uals mar!inal
cost.
d. All of the answers above are correct.
ANS
a. Incorrect. All of the answers are correct.
b. Incorrect. All of the answers are correct.
c. Incorrect. All of the answers are correct.
d. Correct. All of the answers are correct.
7. Althou!h a monopoly can char!e any price it wishes it chooses
a. the hi!hest price.
b. price e(ual to mar!inal cost.
c. the price that maximi$es profit.
d. competitive prices.
e. a fair price.
ANS
a. Incorrect. The monopolist sets the price that corresponds to the output where ,- 4
,C which does not correspond to the hi!hest price ,C or a fair price.
b. Incorrect. The monopolist sets the price that corresponds to the output where ,- 4
,C which does not correspond to the hi!hest price ,C or a fair price.
c. Correct. The monopolist sets the price that corresponds to the output where ,- 4 ,C
which does not correspond to the hi!hest price ,C or a fair price.
d. Incorrect. The monopolist sets the price that corresponds to the output where ,- 4
,C which does not correspond to the hi!hest price ,C or a fair price.
%
Exhibit 11 Profit maximizing for a monopolist
8. As shown in 6xhibit 11 the profit'maximi$in! price for the monopolist is
a. "31.
b. "3#.
c. "3%.
d. "3*.
e. "3/.

ANS
a. Incorrect. "31 does not e(ual the point on the demand curve where ,- 4 ,C.
b. Incorrect. "3# does not e(ual the point on the demand curve where ,- 4 ,C.
c. Incorrect. "3% does not e(ual the point on the demand curve where ,- 4 ,C.
d. Correct. At "3* on the demand curve ,- 4 ,C at point +.
1). As shown in 6xhibit 11 if the monopolist produces the profit'maximi$in! output
total revenue is the rectan!ular area
a. "91A31.
b. "9#+3#.
c. "9%C3%.
d. "9#:3*.
ANS
a. Incorrect. Total revenue must be a rectan!le formed from a point on the demand curve.
b. Incorrect. Total revenue must be a rectan!le formed from a point on the demand curve.
c. Incorrect. Total revenue must be a rectan!le formed from a point on the demand curve.
d. Correct. Total revenue at price "3* is "9#:3*.
*
11. As shown in 6xhibit 11 the monopolist0s total cost is which of the followin! areas2
a. 31A63/.
b. 3#+:3*.
c. 3%C:3/.
d. 3*:63/.
e. None of the answers above are correct.
ANS
a. Incorrect. This is a meanin!less area.
b. Incorrect. This is a meanin!less area.
c. Incorrect. This is a meanin!less area.
d. Incorrect. This is a meanin!less area.
e. Correct. Total cost points are not shown in the !raph.
1#. The profit'maximi$in! output for the monopolist in 6xhibit 11 is
a. $ero.
b. "91.
c. "9#
d. "9%.
ANS
a. Incorrect. This output does not correspond to point + where ,- 4 ,C.
b. Incorrect. This output does not correspond to point + where ,- 4 ,C.
c. Correct. "9# corresponds to point + where ,- 4 ,C.
d. Incorrect. This output does not correspond to point + where ,- 4 ,C.
1%. As shown in 6xhibit 11 if the monopolist produces the profit'maximi$in! output
total revenue is the rectan!ular area
a. "9A31.
b. "9#+3#.
c. "9%C3%.
d. "9#:3*.
ANS
a. Incorrect. This is a meanin!less area.
b. Incorrect. This area is profit at "9#.
c. Incorrect. This is not total cost at the profit'makin! output of "9#.
d. Correct. At "9# total revenue is "9#:3*.
1*. As shown in 6xhibit 11 the monopolist0s profit maximi$in! price'(uantity point is
a. A.
b. +.
c. C.
d. :.
e. 6.
/
ANS
a. Incorrect. This is not a point on the demand curve.
b. Incorrect. This is not a point on the demand curve.
c. Incorrect. This is not a point on the demand curve.
d. Correct. 3oint : on the demand curve corresponds to point + where ,- 4 ,C.
e. Incorrect. 3oint 6 on the demand curve does not correspond to point + where ,- 4
,C.
1/. Suppose a monopolist char!es a price correspondin! to the intersection of mar!inal
cost and mar!inal revenue. If the price is between its avera!e variable cost and avera!e
total cost curves the firm will
a. earn an economic profit.
b. stay in operation in the short run but shut down in the lon! run if demand
remains the same.
c. shut down.
d. none of the above answers is correct.
ANS
a. Incorrect. The monopolist;s price must exceed its avera!e variable cost to earn an
economic profit.
b. Correct. <nless the monopolist;s price exceeds its avera!e total cost it will not earn a
positive economic profit.
c. Incorrect. The monopolist will shut down if the price at ,- 4 ,C is less than its
avera!e variable cost.
d. Incorrect. Answer b. is correct.
11. The act of buyin! a commodity in one market at a lower price and sellin! it in another
market at a hi!her price is known as
a. buyin! lon!.
b. sellin! short.
c. a tariff.
d. arbitra!e.
ANS
a. Incorrect. This answer is meanin!less.
b. Incorrect. This term refers to a stock transaction.
c. Incorrect. This term refers to a tax on imports.
d. Correct. The act of buyin! a commodity in one market at a lower price and sellin! it in
another market at a hi!her price is known as arbitra!e.
15. "ne necessary condition for effective price discrimination is
a. identical tastes amon! buyers.
b. difference in the price elasticity of demand amon! buyers.
c. a sin!le homo!eneous market.
d. two or more markets with easy resale of products between them.
1
ANS
a. Incorrect. This is not a necessary condition for price discrimination.
b. Correct. "ne necessary condition for effective price discrimination is
difference in the price elasticity of demand amon! buyers.
c. Incorrect. This is not a necessary condition for price discrimination.
d. Incorrect. 6asy resale of products would prevent price discrimination.
17. An example of price discrimination is the price char!ed for
a. an economics textbook at a campus bookstore.
b. !asoline.
c. theater tickets that offer lower prices for children.
d. a posta!e stamp.
ANS
a. Incorrect. :ifferent prices are not char!ed for the same textbooks.
b. Incorrect. :ifferent prices are not char!ed for the same type of !asoline.
c. Correct. +oth children and adults see the same movie but pay different prices.
d. Incorrect. :ifferent prices are not char!ed for the same posta!e stamp.
18. Suppose a monopolist and a perfectly competitive firm have the same cost curves.
The monopolistic firm would
a. char!e a lower price than the perfectly competitive firm.
b. char!e a hi!her price than the perfectly competitive firm.
c. char!e the same price as the perfectly competitive firm.
d. refuse to operate in the short run unless an economic profit could be made.
ANS
a. Incorrect. Since the monopolist faces a demand curve with !reater elasticity it will
char!e the hi!her prices.
b. Correct. Since the monopolist faces a demand curve with !reater elasticity it will
char!e the hi!her prices.
c. Incorrect. Since the monopolist faces a demand curve with !reater elasticity it will
char!e the hi!her prices.
d. Incorrect. +oth firms will not shut down if the price where ,- 4 ,C exceeds avera!e
variable cost.
#). Suppose there are two markets for football !ames=1> rich alumni fully as committed
as the lower'income students to their alma mater and =#> students. +ased on this
information which market will have the lower price elasticity of demand and pay the
hi!her price if the university price discriminates2
a. The student market.
b. The alumni markets.
5
ANS
a. Incorrect. Tickets are a bi!!er part of their bud!et and so their elasticity will tend to be
hi!her.
b. Correct. Tickets are a smaller part of alumni bud!ets and so their elasticity will tend to
be lower.
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