Tutorial 6- Monopoly

Part 1: True/ False

1. Monopolists can achieve any level of profit they desire because they have unlimited
market power.

2. The fundamental cause of monopolies is barriers to entry.

3. A monopolist maximizes profit by producing an output level where marginal cost equals
price.
4. A monopolist produces an output level where marginal revenue equals marginal cost and
charges a price where marginal cost equals average total cost.
5. A monopoly creates a deadweight loss to society because it produces less output than the
socially efficient level.
6. Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces
an output level of 100 units, and charges a price of $50. The socially efficient level of
output is 200 units. Assume that the demand curve and marginal revenue curve are the
typical downward-sloping straight lines. The monopoly deadweight loss equals $4,000.
7. Movie theatres charge different prices to different groups of people based on the differing
marginal costs that exist from group to group.
8. By selling hardcover books to die-hard fans and paperback books to less enthusiastic
readers, the publisher is able to price discriminate and raise its profits.
9. A monopolist earns higher profits by charging one price than by practicing price
discrimination.
10. A monopolist produces where P = MC = MR.
Part 2: Short answer
Question 1
In the market for "home heating" consumers typically have several options (e.g., electricity,
heating fuel, natural gas, propane, etc.), yet we often think of firms in this industry as
behaving like monopolists. Discuss the context in which your electricity provider is a
monopolist. Is this characterization universally applicable? Explain your answer.
Question 2
Describe how government is involved in creating a monopoly. Why might the government
create one? Give an example.
Question 3
What is the defining characteristic of a natural monopoly? Give an example of a natural
monopoly.
Part 3: Multiple choice
1. A monopoly market is characterized by
a. many buyers and sellers.
b. “natural” products.
c. barriers to entry.
d. a Nash equilibrium.
2. Which of the following is an example of a barrier to entry?
a. Matthew offers free samples of his latest flavored coffee drink to entice customers
to buy a cup.
b. Mark charges a lower price to students than to faculty for his tattoo services.
c. Luke charges a higher hourly price to business students than to liberal arts students
for his economics tutoring.
d. John obtained a copyright for the song he wrote and recorded.
3. The market demand curve for a monopolist is typically
a. unit price elastic.
b. downward sloping.
c. horizontal.
d. vertical.
4. Monopolies use their market power to
a. charge prices that equal minimum average total cost.
b. increase the quantity sold as they increase price.
c. charge a price that is higher than marginal cost.
d. dump excess supplies of their product on the market.
5. Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian
restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only
business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing
his profit, which of the following statements is true?
a. Meatball prices will be less than marginal cost.
b. Meatball prices will equal marginal cost.
c. Meatball prices will exceed marginal cost.
d. Costs are irrelevant to Angelo because he is a monopolist.
6. What is the shape of the monopolist’s marginal revenue curve?
a. a downward-sloping line that is identical to the demand curve
b. a downward-sloping line that lies below the demand curve
c. a horizontal line that is identical to the demand curve
d. a horizontal line that lies below the demand curve
7. For a monopoly firm, which of the following equalities is always true?
a. price = marginal revenue
b. price = average revenue
c. price = total revenue
d. marginal revenue = marginal cost
8. A monopolist maximizes profits by
a. producing an output level where marginal revenue equals marginal cost.
b. charging a price that is greater than marginal revenue.
c. earning a profit of (P - MC) x Q.
d. Both a and b are correct.
9. A profit-maximizing monopolist charges a price of $14. The intersection of the marginal
revenue curve and the marginal cost curve occurs where output is 15 units and marginal
cost is $7. What is the monopolist’s profit?
a. $90
b. $105
c. $180
d. Not enough information is given to determine the answer.
10. Suppose when a monopolist produces 50 units its average revenue is $8 per unit, its
marginal revenue is $4 per unit, its marginal cost is $4 per unit, and its average total cost
is $3 per unit. What can we conclude about this monopolist?
 a. The monopolist is currently maximizing profits, and its total profits are $200.
b. The monopolist is currently maximizing profits, and its total profits are $250.
c. The monopolist is not currently maximizing its profits; it should produce more
units and charge a lower price to maximize profit.
d. The monopolist is not currently maximizing its profits; it should produce fewer
units and charger a higher price to maximize profit.
11. For a profit-maximizing monopolist,
a. P > MR = MC.
b. P = MR = MC.
c. P > MR > MC.
d. MR < MC < P.
12. The economic inefficiency of a monopolist can be measured by the
a. number of consumers who are unable to purchase the product because of its high
price.
b. excess profit generated by monopoly firms.
c. poor quality of service offered by monopoly firms.
d. deadweight loss.
Figure 15-8
Price

M arginal Cost
20

15

10

Demand
100 150 200 Quantity
M arginal Revenue
13. Refer to Figure 15-8. To maximize its profit, a monopolist would choose which of the
following outcomes?
a. 100 units of output and a price of $10 per unit
b. 100 units of output and a price of $20 per unit
c. 150 units of output and a price of $15 per unit
d. 200 units of output and a price of $20 per unit
14. Refer to Figure 15-8. The monopolist's maximum profit
a. is $800.
b. is $1,000.
c. is $1,250.
d. cannot be determined from the diagram.
15. Refer to Figure 15-8. The deadweight loss caused by a profit-maximizing monopoly
amounts to
a. $150.
b. $200.
c. $250.
d. $500.