1 Chapter 8 Practice Quiz Tutorial Monopoly ©2004 South-Western

2 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.

3 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. Profits are always maximized if the firm produces at the point where MR = MC.

4 $100 $75 $50 $ $125 $150 $175 $ ATC MC MR=MC D MR Profit AVC Q P

5 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.

6 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. D. All of the above are characteristics of a monopoly.

7 $20 $ $30 $ ATC AVC MC D MR Exhibit 8-8 Q P

8 5. As shown in Exhibit 8-8 the profit- maximizing 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.

9 6. As shown in Exhibit 8-8, 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.

10 7. To maximize profit or minimize loss, the monopolist in Exhibit 8-8 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.

11 8. If the monopolist in Exhibit 8-8 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.

12 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.

What is the act of buying a commodity at a lower price and selling it in 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

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 urn 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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