Microeconomics I, UPNA

Chapter 8: Monopoly and Monopsony

Multiple Choice
1. Which of the folloin! statements is true"
a# Monopoly profits are !enerally $ero.
%# Monopoly profits are ma&imi$ed hen total re'enue is ma&imi$ed.
c# (he condition, MC ) M*, is the optimi$in! condition for monopolists and firms
in perfectly competiti'e mar+ets.
d# Usually the demand and mar!inal re'enue cur'es for a monopoly are the same.
Ans: C
,. (he mar!inal re'enue cur'e for a monopolist
a# ill ne'er ta+e a linear form.
%# ill alays ha'e dou%le the slope of the demand cur'e, hen demand is linear.
c# ill alays ha'e one-half the slope of the demand cur'e, hen demand is linear.
d# ill slope upard hen demand is elastic.
.. (o compute the optimal monopoly price ith a linear demand cur'e, the monopolist
a# should set MC ) M*, hich ould determine the optimal /uantity and price
ould e/ual MC and M* as ell.
%# should set MC ) M*, hich ould determine the optimal /uantity and price
ould %e found %y insertin! the optimal /uantity into the monopolist0s demand
cur'e.
c# should set MC ) M*, hich ould determine the optimal /uantity and price
ould %e found %y dou%lin! the mar!inal cost.
d# should set output here total re'enue ould %e the !reatest.
Ans: 1
2. 3ne ar!ument for alloin! monopolies to e&ist is
a# it ould %e inefficient to %rea+ up natural monopolies into smaller units.
%# monopolies lead to net economic %enefits as a rule.
c# the free mar+et acts as a more effecti'e re!ulator than the !o'ernment.
d# they allo for !reater standardi$ation of products and impro'ed /uality control.
4. Identify the truthfulness of the folloin! statements.
I. A monopolist faces a donard-slopin! demand cur'e, hereas a perfectly
competiti'e firm faces a hori$ontal demand cur'e.
II. A monopolist ma&imi$es profit, hereas a perfectly competiti'e firm cannot.
a# 1oth I and II are true.
%# 1oth I and II are false.
c# I is true5 II is false.
d# I is false5 II is true.
Microeconomics I, UPNA
Ans: C
6. Identify the truthfulness of the folloin! statements.
I. A monopoly mar+et consists of a sin!le seller facin! many %uyers.
II. 1ecause the monopolist is the only seller of her product, she may sell any /uantity
that she chooses for any !i'en price.
a# 1oth I and II are true.
%# 1oth I and II are false.
c# I is true5 II is false.
d# I is false5 II is true.
7. A monopolist ma&imi$es total re'enue here mar!inal re'enue
a# e/uals mar!inal cost.
%# is ma&imi$ed.
c# e/uals $ero.
d# is ne!ati'e.
Ans: C
8. (o ma&imi$e profit, the monopolist sets
a# price e/ual to mar!inal cost.
%# total re'enue e/ual to total cost.
c# mar!inal re'enue e/ual to mar!inal cost.
d# mar!inal re'enue e/ual to a'era!e cost.
8. If the monopolist is producin! here mar!inal re'enue e&ceeds mar!inal cost, then the
monopolist should 99999999999 to ma&imi$e profits.
a# produce more
%# produce less
c# stop producin!
d# raise price
Ans: A
1:. ;or a monopolist
a# sellin! price is !reater than mar!inal re'enue.
%# sellin! price is e/ual to mar!inal re'enue.
c# sellin! price is less than mar!inal re'enue.
d# sellin! price may %e a%o'e or %elo mar!inal re'enue5 it depends on the price
%uyers are illin! to pay.
11. (he monopolists a'era!e re'enue can %e defined as
a# (otal re'enue per unit of a'era!e re'enue
%# (otal re'enue per unit of output
c# A'era!e re'enue per unit of input
Microeconomics I, UPNA
d# A* ) A* < =
Ans: 1
1,. Identify the truthfulness of the folloin! statements.
I. ;or the monopolist, the a'era!e re'enue cur'e is the demand cur'e.
II. ;or the monopolist, mar!inal re'enue is less than a'era!e re'enue.
a# 1oth I and II are true.
%# 1oth I and II are false.
c# I is true5 II is false.
d# I is false5 II is true.
1.. ;or a monopolist
a# sellin! price is !reater than a'era!e re'enue.
%# sellin! price is e/ual to a'era!e re'enue.
c# sellin! price is less than a'era!e re'enue.
d# sellin! price may %e a%o'e or %elo a'era!e re'enue5 it depends on the price
%uyers are illin! to pay.
Ans: 1
12. A monopolist faces in'erse demand P = a - bQ. (he monopolist0s mar!inal re'enue
function is
a) MR = a-bQ.
b) MR = a Q.
c) MR = a 2bQ.
d) MR = a/Q b.
14. Which of the folloin! statements re!ardin! a monopolist0s profit ma&imi$in! condition
is false"
a# (he monopolist0s profit-ma&imi$in! price ill %e !reater than mar!inal cost for
the last unit supplied.
%# A monopolist can earn positi'e economic profit.
c# 1ecause monopoly price is a%o'e mar!inal cost and a monopoly earns positi'e
economic profit, there are no %enefits to consumers in the monopoly mar+et.
d# Price e/uals a'era!e re'enue at the profit-ma&imi$in! /uantity of output.
Ans: C
16. In'erse demand for a monopolist0s product is !i'en %y
.:: 6 P Q =
hile the
monopolist0s mar!inal cost is !i'en %y
. MC Q =
. (he profit-ma&imi$in! /uantity of
output for this monopolist is
a# .....
%# 1::
c# 4:
Microeconomics I, UPNA
d# ,:
17. In'erse demand for a monopolist0s product is !i'en %y
.:: 6 P Q =
hile the
monopolist0s mar!inal cost is !i'en %y
. MC Q =
. (he profit-ma&imi$in! price for this
monopolist is
a# 1::
%# 18:
c# 6:
d# 14:
Ans: 1
18. A monopolist faces an in'erse demand cur'e
.:: 6 P Q =
and has a constant mar!inal
cost of ,:. (he monopolist0s profit-ma&imi$in! output is
a# 26.67
%# ,....
c# ,:
d# .4
18. A monopolist faces in'erse demand
.:: 6 P Q =
and has mar!inal cost
1,: 6 MC Q = +
.
What price should this monopolist char!e to ma&imi$e profit"
a# 1:
%# 4:
c# ,1:
d# ,2:
Ans: >
,:. A monopolist faces in'erse demand
.:: 6 P Q =
and has total cost TC = 120Q + 6Q
2

and mar!inal cost
1,: 6 MC Q = +
. What is the ma&imum profit the monopolist can earn
in this mar+et"
a# 6:
%# ,2:
c# 6::
d# 1,::
,1. Which of the folloin! %est e&plains hy there is no meanin!ful supply cur'e for a
monopolist"
a# (he monopolist is the only supplier.
%# Price is e&o!enous to the monopolist.
Microeconomics I, UPNA
c# (he monopolist is already ma&imi$in! profits5 thus, it doesn0t need a supply
cur'e.
d# Price is endo!enous. (hat is, the monopolist determines %oth /uantity and price.
?ence, there is no lon!er a uni/ue association %eteen price and /uantity
supplied.
Ans: >
,,. A natural monopoly refers to
a# Any monopoly %ased on natural resources.
%# Any monopoli$ed mar+et.
c# A monopoli$ed mar+et here the %arriers to entry are not structural.
d# A mar+et for hich the total cost incurred %y a sin!le firm producin! that output
is less than the com%ined total cost of to or more firms producin! the same total
output %eteen them.
Ans: >
,.. A monopoly mar+et is one ith
a# one %uyer and one seller.
%# one %uyer and many sellers.
c# many %uyers and one seller.
d# many %uyers and many sellers.
,2. Identify the false statement.
a# A monopolist and a perfectly competiti'e firm %oth ma&imi$e profits.
%# A monopolist and a perfectly competiti'e firm %oth produce an output le'el here
mar!inal re'enue e/uals mar!inal cost.
c# A monopolist and a perfectly competiti'e firm %oth produce here price e/uals
mar!inal cost.
d# A monopolist and a perfectly competiti'e firm %oth char!e a price %ased on the
demand cur'e facin! the firm and the costs %orne %y the firm.
Ans: C
,4. A monopolist faces in'erse demand
.:: , P Q =
. (he monopolist0s mar!inal re'enue
function is
a#
.:: , MR Q =
%#
.:: MR Q =
c#
.:: 2 MR Q =
Microeconomics I, UPNA
d#
.::
, MR
Q
=
,6. An increase in demand for a monopolist ill cause the
a# profit-ma&imi$in! price to decrease hen mar!inal cost decreases as /uantity
increases.
%# profit-ma&imi$in! price to increase hen mar!inal cost decreases as /uantity
increases.
c# profit-ma&imi$in! price to decrease hen mar!inal cost increases as /uantity
increases.
d# profit-ma&imi$in! price to stay constant re!ardless of the shape of the mar!inal
cost cur'e.
Ans: A
,7. A monopolist faces a demand cur'e
2
4: Q P

= and that the monopolist has a constant

mar!inal cost of 74. (he monopolist0s profit-ma&imi$in! price is
a# ,4
%# 4:
c# 74
d# 1::
,8. @uppose a monopolist faces a demand cur'e Q = aP
-b
and that the monopolist has a
constant mar!inal cost of C. (he monopolist0s profit-ma&imi$in! price is
a# #
1
1 A
b
C P =
%#
# < 1 A b C P =
c#
#
1
1
1
A
b
C P

=
d) P = C(-1/b)
Ans: C
,8. ;or a linear demand cur'e, hen the monopolist operates in the 99999999 re!ion of the
demand cur'e, it can increase total re'enue %y 9999999999 price.
a# inelastic5 raisin!
%# inelastic5 loerin!
c# unitary elastic5 loerin!
d# unitary elastic5 raisin!
Microeconomics I, UPNA
Ans: A
.:. A monopolist faces linear in'erse demand P = a bQ and constant mar!inal cost, c.
Which of the folloin! !i'es a correct formula for the monopolist0s profit ma&imi$in!
price"
a) P = (a/b c)
b) P = a/2.
c) P = (a+c)/2
d) P = a/2 + c.
.1. If a monopolist0s mar!inal cost shifts upard,
a# total re'enue ill remain unchan!ed.
%# total re'enue ill increase.
c# total re'enue ill fall.
d# total re'enue may rise or fall dependin! on the slope of the demand cur'e.
Ans: C
.,. B'aluate the truthfulness of the folloin! statements
I. (he hori$ontal sum of the mar!inal cost cur'es of indi'idual plants is called
multiplant mar!inal cost cur'e.
II. A !roup of producers that collusi'ely determines the price and output in a mar+et
is cartel.
a# I and II are true.
%# I and II are false.
c# I is true5 II is false.
d# II is true5 I is false.
Ans: A
Microeconomics I, UPNA
CC*eference: Use the folloin! dia!ram to anser the ne&t fi'e /uestions A41-44#.
... CC(he profit-ma&imi$in! price for a perfectly competiti'e firm ould %e
a# 18:
%# ,1:
c# ,2:
d# 1eteen ,1: and ,2:
.2. CC(he profit-ma&imi$in! price for a monopolist ould %e
a# 18:
%# ,1:
c# ,2:
d# 1eteen ,1: and ,2:
.4. CC(he total economic %enefit under perfect competition ould %e
a# ,,7::
%# 1,.4:
c# 674
d# 4::
.6. CC(he total economic %enefit under monopoly ould %e
a# .::
%# 6::
c# 8::
d# 1,,::
.7. CC(he deadei!ht loss under monopoly ould %e
a# 74
%# 14:
c# ,,4
d# .::