Tips for chapter 10, MICRO

Monopoly is a theory of market structure based on three

assumptions. There is one seller, it sells a product that has no close
substitutes, and the barriers to entry are extremely high.
Make sure to understand these assumptions and barriers.
Natural Monopoly: the condition where economies of scale are
so pronounced that only one firm can survive.
Monopoly Pricing and Output (See Exhibits 1, 2, 3, and 4.) A
monopolist:

Maximizes economic profit or minimizes economic losses by

equating MC = MR (golden rule),
Is a price searcher,
Its demand and marginal revenue curves are not the same; MR
is half way between Demand and vertical axis,
Charges a P > MR,
Could make a profit or loss in the short-run.

Price Discrimination:
The monopolist may sell all units of its product for the same price,
that is, be a single price monopolist. However, under certain
conditions, a monopolist could practice price discrimination, which
occurs when the seller charges different prices for the very same
product it sells and the price differences do not reflect cost
differences. There are three types of price discrimination:
(1) Perfect price discrimination or discrimination among units,
(2) Second-degree price discrimination or discrimination among
quantities, and
(3) Third-degree price discrimination or discrimination among
buyers.

 Make sure to understand the definition and conditions of price

discrimination, Arbitrage, and the comparison of a perfectly
competitive firm, single-price monopolist, and perfectly pricediscriminating monopolist (See Exhibit 9 for comparison.)
Comparison of Perfect Competition and Monopoly market
structures:
At this point you need to review the structure of perfect competition
from chapter 9 and compare it with the structure of Monopoly in
detail. The comparison includes:
Price, Demand, MR, MC, Consumers Surplus,
Profit, Loss, Short-run, Long-run,
The Case against Monopoly / Deadweight Loss, and
Rent seeking, and X-inefficiency.

Sample Questions for Chapter 10, MICRO

Multiple Choices
Identify the choice that best completes the statement or answers the question.
____ 1. If economies of scale are so pronounced in an industry that only one firm can survive
in the industry, this firm is called a(n) __________ monopoly.
a. financial
b. natural
c. structured
d. independent
____ 2. A price searcher
a. faces a horizontal demand curve.
b. is a seller that searches for good employees and pays them a low wage.
c. is a seller that searches for the best location to sell its product.
d. is a seller that has the ability to control to some degree the price of the
product it sells.

e. none of the above

____ 3. Which of the following statements is true?
a. A monopolist can charge whatever price it wants without losing any
customers, by virtue of its monopoly position.
b. A monopolist can always increase its profits by increasing its price.
c. In the monopoly market structure, there are low barriers to entry.
d. A monopolist is assured of positive economic profits.
e. none of the above
____ 4. In maximizing profits, a single-price monopolist will charge a price that is
a. less than marginal cost.
b. equal to marginal cost.
c. greater than marginal cost.
d. There is not enough information to answer the question.
____ 5. If a monopolist wishes to sell an additional unit of the good, then
a. it must raise its price to signal consumers that its product is now a
more important part of their budget, and they will purchase more.
b. like a competitive firm, it can simply make more output available and
not lower price.
c. it must lower price.
d. it can raise price and not worry that sales will decrease.
e. a and d
____ 6. Which of the following is characteristic of the monopoly firm?
a. It produces the quantity of output at which marginal revenue equals
marginal cost, MR = MC.
b. It charges a price per unit for its product that is equal to marginal cost.
c. It always earns a profit, because it is a single seller of a product.
d. a and b
e. a and c
____ 7. Which of the following is not a necessary condition of price discrimination?
a. The seller must be a price searcher.

b. The seller must be able to distinguish between customers willing to

pay different prices.
c. It must cost the seller more to service some customers than others.
d. Reselling the product must be extremely costly or must not be possible
____ 8. Suppose Johnny, seven years old, is selling lemonade and he sells each of his buyers
the refreshment for the maximum price that each buyer is willing to pay. Johnny is
practicing
a. perfect competition.
b. perfect price discrimination.
c. second-degree price discrimination.
d. third-degree price discrimination.
____ 9. A single-price monopolist sets a price of $35. Which of the following is true?
a. The average cost of that unit must be $35.
b. The marginal cost of that unit must be $35.
c. The marginal revenue of that unit must be $35.
d. The marginal revenue of that unit must be less than $35.
Exhibit 24-2

____10. Refer to Exhibit 24-2. Total revenue at the profit-maximizing quantity of output is the
a. area 0P0AQ0.
b. area 0P3FQ0.

c. distance from Q0 to A.
d. distance from Q0 to D.
e. none of the above
Exhibit 24-3

____11. Refer to Exhibit 24-3. The level of output the profit-maximizing perfectly pricediscriminating monopolist produces is
a. q1.
b. q2.
c. q3.
d. q4.
Exhibit 24-4
Quantity Fixe
Price Demand
d
ed
Cost
$100
90
80

0
1
2

$10
10
(B)

Variab
le Cost

Total
Reven
ue

Total
Cost

$0
25
65

(D)
(E)
(F)

(I)
(J)
(K)

Margin Margin
al
al Cost
Revenu
e
(N)
(O)

(S)
(T)

(A)
60
50

3
4
5

10
10
10

130
(C)
310

225
(G)
(H)

(L)
220
(M)

(P)
(Q)
(R)

(U)
(V)
(W)

____12. Refer to Exhibit 24-4. The profit-maximizing single-price monopolist's maximum

profit is
a. $70.
b. $85.
c. $110.
d. $130.
e. $140.
____13. Refer to Exhibit 24-4. What dollar amounts go in blanks (H), (I), (J), (K), and (L),
respectively?
a. $250; $10; $35; $75; and $140
b. $9; $70; $50; $30; and $10
c. $250; $15; $10; $30; and $50
d. $0; $90; $160; $210; and $240
Exhibit 24-6

____14. Refer to Exhibit 24-6. Let C be the demand curve facing a perfectly pricediscriminating monopolist and P0 the price it charges for the last unit of X it sells. The
marginal cost of the last unit

a.
b.
c.
d.

is less than P0.

equals P0.
is greater than P0.
could be any of the above, depending on the shape of the marginal cost
curve.

Exhibit 24-7

____15. Refer to Exhibit 24-7. The total revenue collected by a profit-maximizing single-price
monopolist is
a. $4,500.
b. $2,250.
c. $6,750.
d. $9,000.
____16. Refer to Exhibit 24-7. Let D be the demand curve facing a perfectly pricediscriminating monopolist. The marginal revenue it receives from selling the 150th
unit of good X sold equals
a. $60.
b. $45.
c. $30.
d. $0, since it sells less than 150 units.

____17. Which of the following statements is false?

a. Congress has granted the U.S. Postal Service the exclusive franchise to
deliver first-class mail.
b. A natural monopoly exists where economies of scale are so
pronounced in an industry that only one firm can survive.
c. In the United States patents are granted for a period of 10 years.
d. A public franchise is a right granted to a firm by government that
permits the firm to provide a particular good or service and excludes
all others from doing the same.
____18. As long as the demand curve lies above the marginal revenue curve for a monopolist,
it will charge a price for its product that is
a. above total cost.
b. below marginal cost.
c. above marginal cost.
d. above average total cost.
e. c and d
____19. One difference between a perfectly competitive firm and a monopoly firm is
a. a perfectly competitive firm maximizes profit by producing the
quantity of output at which MR = MC, and the monopoly firm does
not.
b. a monopoly firm is resource allocative efficient, and a perfectly
competitive firm is not.
c. the monopoly firm charges the highest per-unit price for its product,
and the perfectly competitive firm does not.
d. the demand curve and the marginal revenue curve are the same for the
perfectly competitive firm, but they are not the same for the monopoly
firm.
e. c and d
____20. "Rent seeking" refers to
a. trying to pay the lowest rent possible for an apartment or house.
b. trying to lower rent that is paid on a factory in order to lower fixed
costs.

c. the actions of individuals who spend resources to influence public

policy in the hope of transferring income to themselves from others.
d. the fact that the deadweight loss triangle is a genuine cost of
monopoly.
e. none of the above
____21. When a monopolist can perfectly price discriminate, it follows that
a. price equals marginal revenue.
b. price equals marginal cost at the quantity of output it chooses to
produce.
c. the monopolist is resource-allocative efficient.
d. b and c
e. a, b, and c
____22. A single-price monopolist with the same demand and cost conditions as a perfectly
price-discriminating monopolist produces __________ output than the perfectly pricediscriminating monopolist and __________ resource-allocative efficient.
a. less; is
b. less; is not
c. more; is
d. more; is not
____23. Buying low and selling high is often referred to as
a. price discrimination.
b. rent seeking.
c. arbitrage.
d. X-inefficiency.
e. capitalization.
Essay
24. Explain why price is greater than marginal revenue for a single-price monopolist and
how this differs from perfect competition.
25. Describe the condition under which a profit-maximizing monopolist will be resource
allocative efficient.

Sample Questions for Chapter 10, MICRO

Answer Section
MULTIPLE CHOICES
1. ANS:
LOC:

B
PTS:
Monopoly

DIF:

Easy NAT: Analytic

2. ANS:
LOC:

D
PTS:
Monopoly

DIF:

Easy NAT: Analytic

3. ANS:
LOC:

E
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

4. ANS:
LOC:

C
PTS:
Monopoly

DIF:

Easy NAT: Analytic

5. ANS:
LOC:

C
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

6. ANS:
LOC:

A
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

7. ANS:
LOC:

C
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

8. ANS:
LOC:

B
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

9. ANS:
LOC:

D
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

10. ANS:
LOC:

B
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

11. ANS:
LOC:

C
PTS:
Monopoly

DIF:

Difficult

12. ANS:

DIF:

Moderate NAT: Analytic

PTS:

NAT: Analytic

LOC:

Monopoly

13. ANS:
LOC:

A
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

14. ANS:
LOC:

B
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

15. ANS:
LOC:

C
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

16. ANS:
LOC:

B
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

17. ANS:
LOC:

C
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

18. ANS:
LOC:

C
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

19. ANS:
LOC:

D
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

20. ANS:
LOC:

C
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

21. ANS:
LOC:

E
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

22. ANS:
LOC:

B
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

23. ANS:
LOC:

C
PTS:
Monopoly

DIF:

Moderate NAT: Analytic

ESSAY
24. ANS:
A monopolist faces a downward-sloping demand curve since the firm is also the
industry. With a downward-sloping demand curve, the firm must lower the price to
sell an additional unit of a good. For a single-price monopolist, all buyers pay the
same price so the seller lowers the price not only on the additional unit sold, but
also on all previous units sold. This results in both a gain and a loss of revenue.
The revenue gained equals the price of the product times one. The revenue lost
equals the difference between the new lower price and the old higher price times
the number of previous units sold. Marginal revenue equals the revenue gained
minus the revenue lost. In perfect competition, the firm can sell all of the units that
it wants without having to lower the price. Therefore, the extra revenue gained
from selling one more unit of the good is the same as the price of that good and
there is no corresponding lost revenue because the firm did not have to lower the
price to sell more units.
PTS: 1

DIF: Difficult

NAT:Analytic

LOC:

Monopoly

25. ANS:
To be resource allocative efficient, the firm must sell its product at a price equal to
the marginal cost of the last unit sold. The monopolist will maximize profits at the
output level where MR = MC and since P > MR for a single-price monopolist, it
follows that the single-price monopolist produces a quantity of output where P >
MC. The condition necessary for the monopolist to be resource allocative efficient
is that the firm is a perfect price discriminator. In this case, P = MR and the
monopolist produces the quantity of output at which MR = MC, and therefore
where P = MC.
PTS: 1

DIF: Difficult

NAT:Analytic

LOC:

Monopoly