Transcript Economics for Today 2nd edition Irvin B. Tucker

Chapter 9
Practice Quiz
Monopoly
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1. A monopolist always faces a demand curve
that is
a. perfectly inelastic.
b. perfectly elastic.
c. unit elastic.
d. the same as the market demand curve.
D. A monopoly is the only seller, so there is no
distinction between the market demand
curve and the individual demand curve.
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2. A monopoly sets the
a. price at which marginal revenue equals
zero.
b. price that maximizes total revenue.
c. highest possible price on its demand curve.
d. price at which marginal revenue equals
marginal cost.
D. As shown in the next slide, profits are
always maximized if the firm produces
at the point where MR = MC.
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3. A monopolist sets
a. the highest possible price.
b. a price corresponding to the minimum
average total cost.
c. a price equal to marginal revenue.
d. a price determined by the point on the
demand curve corresponding to the level
of output at which marginal revenue
equals marginal cost.
e. none of the above.
D. Demand determines price in all market
forms.
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4. Which of the following is true for the
monopolist?
a. Economic profit is possible in the long-run.
b. Marginal revenue is less than the price
charged.
c. Profit maximizing or loss minimizing
occurs when marginal revenue equals
marginal cost.
d. All of the above are true.
D. As shown in the graph on the next
slide, all of the above are
characteristics of a monopoly.
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.
Exhibit 11 Profit Maximizing for a Monopolist
Price, costs and revenue (dollars)
40
MC
30
ATC
20
AVC
10
D
MR
0
100
200
300
400
Quanitity of output (units per day)
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5. As shown in Exhibit 11, the profitmaximizing or loss-minimizing output
for this monopolist is
a. 100 units per day.
b. 200 units per day.
c. 300 units per day.
d. 400 units per day.
B. 200 units is the point at which MR = MC.
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6. As shown in Exhibit 11, this monopolist
a. should shut down in the short-run.
b. should shut down in the long-run.
c. earns zero economic profit.
d. earns positive economic profit.
D. At the point where MR = MC (on the
vertical line), P is greater than ATC;
therefore, total revenue is greater than total
cost and an economic profit is being made.
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7. To maximize profit or minimize loss, the
monopolist in Exhibit 11 should set its price at
a. $30 per unit.
b. $25 per unit.
c. $20 per unit.
d. $10 per unit.
e. $40 per unit.
B. Maximum profit or minimized losses
are found by drawing a vertical line
where MR = MC. This line intersects the
demand curve at $25.
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8. If the monopolist in Exhibit 11 operates
at the profit-maximizing output, it will
earn total revenue to pay about what
portion of its total fixed cost?
a. None.
b. One-half.
c. Two-thirds.
d. All total fixed costs.
D. Since the monopolist is making a profit,
it can pay all of its fixed costs.
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9. For a monopolist to practice effective price
discrimination, one necessary condition is
a. identical demand curves among groups of
buyers.
b. differences in the price elasticity of demand
among groups of buyers.
c. a homogeneous product.
d. none of the above.
B. Price discrimination takes place when a
monopolist is faced with buyers that are
widely different; therefore, the buyers
elasticity of demand for the product will
be different.
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10. What is the act of buying a commodity at a
lower price and selling it at a higher price?
a. Buying short.
b. Discounting.
c. Tariffing.
d. Arbitrage.
D. The practice of earning a profit by
buying a good at a low price and
reselling the good at a higher price.
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11. Under both perfect competition and
monopoly, a firm
a. is a price taker.
b. is a price maker.
c. will shut down in the short run if price falls
short of average total cost.
d. always earns a pure economic profit.
e. sets marginal cost equal to marginal
revenue.
E. The profit maximizing output for any
firm is where MR = MC.
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12. At any point where a monopolist’s
marginal revenue is positive, the
downward-sloping straight-line demand
curve is
a. perfectly elastic.
b. elastic, but not perfectly elastic.
c. unitary elastic.
d. inelastic.
B. When marginal revenue is zero, the demand
curve is unitary elastic, and it is inelastic when
marginal revenue is negative. Demand is
perfectly elastic in perfect competition.
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13. Suppose a monopolist charges a price corresponding to the
intersection of the marginal cost and marginal revenue
curves. If this price is between its average variable cost and
average total cost curves, the firm will
a. earn an economic profit.
b. stay in operation in the short-run, but shut down in the
long run if demand remains the same.
c. shut down.
d. none of the above.
B. If the firm can cover its average variable cost, it is
paying for the cost of operating. In the long run,
demand could increase and the firm earns economic
profit.
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14. In contrast to a perfectly competitive firm,
a monopolist operates in the long run at a
quantity of output at which
a. P = MC.
b. MR = MC.
c. P = ATC.
d. P > MR.
D. The perfectly competitive firm’s demand
curve is perfectly elastic; therefore, the
firms operates where P = MR. For a
monopolist, the MR curve is downward
sloping and below the price.
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15. The monopolist, unlike the perfectly
competitive firm, can continue to earn an
economic profit in the long run because of
a. collusive agreements with competitors.
b. price leadership.
c. cartels.
d. a dominant firm.
e. extremely high barriers to entry.
E. Answers a. – d. can increase a monopolist’s profits, but
a key characteristic that results in long run economic
profit is an extremely high barrier to entry.
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