Chapter 15

Monopoly
Multiple Choice
1. Which of the following statements is correct?
a. A competitive firm is a price maker and a monopoly is a price taker.
b. A competitive firm is a price taker and a monopoly is a price maker.
c. Both competitive firms and monopolies are price takers.
d. Both competitive firms and monopolies are price makers.
2. Which of the following is an example of a barrier to entry?
(i) A key resource is owned by a single firm.
(ii) The costs of production make a single producer more efficient than a large number of producers.
(iii)
The government has given the existing monopoly the exclusive right to produce the good.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) only
d. All of the above are examples of barriers to entry.
3. When a natural monopoly exists, it is
a. always cost effective for government-owned firms to produce the product.
b. never cost effective for one firm to produce the product.
c. always cost effective for two or more private firms to produce the product.
d. never cost effective for two or more private firms to produce the product.
4. The simplest way for a monopoly to arise is for a single firm to
a. decrease its price below its competitors prices.
b. decrease production to increase demand for its product.
c. make pricing decisions jointly with other firms.
d. own a key resource.
5. Which of the following statements is true about patents and copyrights?
(i) They both have benefits and costs.
(ii) They lead to higher prices.
(iii)
They enhance the ability of monopolists to earn above-average profits.
a. (i) and (ii)
b. (ii) and (iii)
c. (ii) only
d. (i), (ii), and (iii)
6. Additional firms often do not try to compete with a natural monopoly because
a. they fear retaliation in the form of pricing wars from the natural monopolist.
b. they are unsure of the size of the market in general.
c. they know they cannot achieve the same low costs that the monopolist enjoys.
d. the natural monopoly doesn't make a huge profit.
7. A benefit to society of the patent and copyright laws is that those laws
a. help to keep prices down.
b. help to prevent a single firm from acquiring ownership of a key resource.
c. encourage creative activity.

d. discourage excessive amounts of output of certain products.

8. Sizable economic profits can persist over time under monopoly if the monopolist
a. produces that output where average total cost is at a maximum.
b. is protected by barriers to entry.
c. operates as a price taker rather than a price maker.
d. realizes revenues that exceed variable costs.
Table 15-1
Quantity
1
2
3
4
5
6
7
8
9
10

Price
35

Total
Revenue
35
64

Average
Revenue

Marginal
Revenue

32

29

29
17
11

23
120
17
99
80

11
8

-1
-7
-13

9. Refer to Table 15-1. If the monopolist sells 8 units of its product, how much total revenue will it
receive from the sale?
a. 14
b. 40
c. 112
d. 164
10. Refer to Table 15-1. If the monopolist wants to maximize its revenue, how many units of its product
should it sell?
a. 4
b. 5
c. 6
d. 8
11. Refer to Table 15-1. When 4 units of output are produced and sold, what is average revenue?
a. 17
b. 21
c. 23
d. 26
12. Refer to Table 15-1. What is the marginal revenue for the monopolist for the sixth unit sold?
a. 3
b. 5
c. 11
d. 17
13. Refer to Table 15-1. Assume this monopolist's marginal cost is constant at $12. What quantity of
output (Q) will it produce and what price (P) will it charge?
a. Q = 4, P = $29
b. Q = 4, P = $26

c. Q = 5, P = $23
d. Q = 7, P = $17
14. Marginal revenue can become negative for
a. both competitive and monopoly firms.
b. competitive firms, but not for monopoly firms.
c. monopoly firms, but not for competitive firms.
d. neither competitive nor monopoly firms.
15. In a competitive market, a firm's supply curve dictates the amount it will supply. In a monopoly
market the
a. same is true.
b. supply curve conceptually makes sense, but in practice is never used.
c. supply curve will have limited predictive capacity.
d. decision about how much to supply is impossible to separate from the demand curve it faces.
16. Due to the nature of the patent laws on pharmaceuticals, the market for such drugs
a. always remains a competitive market.
b. always remains a monopolistic market.
c. switches from competitive to monopolistic once the firm's patent runs out.
d. switches from monopolistic to competitive once the firm's patent runs out.
17. In a market characterized by monopoly, the market demand curve is
a. upward sloping.
b. horizontal.
c. downward sloping.
d. vertical.
18. What is the monopolist's profit under the following conditions? The profit-maximizing price charged
for goods produced is $12. The intersection of the marginal revenue and marginal cost curves occurs
where output is 10 units and marginal cost is $6. Average total cost for 10 units of output is $5.
a. $60
b. $70
c. $100
d. $120
19. The profit-maximization problem for a monopolist differs from that of a competitive firm in which
of the following ways?
a. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a
monopolist maximizes profit at the point where marginal revenue exceeds marginal cost.
b. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a
monopolist maximizes profit at the point where average revenue exceeds marginal cost.
c. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to
marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profitmaximizing level of output is smaller than it is for larger levels of output.
d. For a profit-maximizing competitive firm, thinking at the margin is much more important than it
is for a profit-maximizing monopolist.
Scenario 15-1
A monopoly firm maximizes its profit by producing Q = 500 units of output. At that level of output, its
marginal revenue is $30, its average revenue is $60, and its average total cost is $34.

20. Refer to Scenario 15-1. The firm's profit-maximizing price is

a. $30.
b. between $30 and $34.
c. between $34 and $60.
d. $60.
21. Refer to Scenario 15-1. At Q = 500, the firm's total revenue is
a. $13,000.
b. $15,000.
c. $17,000.
d. $30,000.
22. Refer to Scenario 15-1. The firm's maximum profit is
a. $13,000.
b. $15,000.
c. $17,000.
d. $30,000.
23. Refer to Scenario 15-1. At Q = 500, the firm's marginal cost is
a. less than $30.
b. $30.
c. $34.
d. greater than $34.
24. If a monopoly lowers its price, its
a. total revenue must increase.
b. total revenue must decrease.
c. marginal revenue must increase.
d. marginal revenue must decrease.
25. The following table gives information on the price, quantity, and total cost of production for a
monopolist. How much profit will the firm earn at the profit-maximizing price?
P
5
4
3
2
1
0
a.
b.
c.
d.

Q
0
5
10
15
20
25

TC
3
8
18
33
53
78

$9
$12
$15
$18

26. If a monopolist can sell 7 units when the price is $4 and 8 units when the price is $3, then marginal
revenue of selling the eighth unit is equal to
a. $3.
b. $4.
c. $24.
d. -$4.
27. The supply curve for the monopolist

a.
b.
c.
d.

is horizontal.
is vertical.
is upward sloping.
does not exist.

28. Suppose a monopolist chooses the price and production level which maximizes its profit. From that
point, to increase societys economic welfare, output would need to be increased as long as
a. average revenue exceeds marginal cost.
b. average revenue exceeds average total cost.
c. marginal revenue exceeds marginal cost.
d. marginal revenue exceeds average total cost.
29. Monopoly pricing prevents some mutually beneficial trades from taking place. These unrealized
mutually beneficial trades are
a. of little concern to society.
b. a deadweight loss to society.
c. a sunk cost to society.
d. also observed in competitive markets.
30. Consumers' willingness to pay for a good minus the amount they actually pay for it equals
a. consumer surplus.
b. consumer benefit.
c. price discriminant.
d. quantity demanded.
Figure 15-1
The figure below depicts the demand and marginal cost curves of a profit-maximizing monopolist.

31. Refer to Figure 15-1. A benevolent social planner would have the monopoly operate at an output
level
a. below Q0.
b. above Q0.
c. equal to Q0.
d. equal to zero.
32. Refer to Figure 15-1. If the monopoly operates at an output level below Q 0, then an increase in
output toward Q0 (but not so large an increase as to exceed Q0) would
a. raise the price and raise total surplus.
b. lower the price and raise total surplus.
c. raise the price and lower total surplus.

d. lower the price and lower total surplus.

Figure 15-2
The figure below depicts the demand, marginal revenue and marginal cost curves of a profitmaximizing monopolist.

33. Refer to Figure 15-2. Which of the following areas represents the deadweight loss due to monopoly
pricing?
a. Triangle bde
b. Triangle bge
c. Rectangle acdb
d. Rectangle cfgd
34. Refer to Figure 15-2. Which area represents the total surplus lost due to monopoly pricing?
a. Triangle bde.
b. Triangle bge.
c. Rectangle acdb.
d. Rectangle cfgd.
35. Which of the following statements is correct?
a. The benefits that accrue to a monopolys owners are equal to the costs that are incurred by
consumers of that firm's product.
b. The deadweight loss that arises in monopoly stems from the fact that the profit-maximizing
monopoly firm produces a quantity of output that exceeds the socially-efficient quantity.
c. The deadweight loss caused by monopoly is similar to the deadweight loss caused by a tax on a
product.
d. The primary social problem caused by monopoly is monopoly profit.
36. To maximize total surplus with a monopoly firm, a benevolent social planner would
a. choose the level of output where MR = MC.
b. choose the level of output where MR intersects the demand curve.
c. choose the level of output where MC intersects the demand curve.
d. allow the free market system to determine the level of output.
37. The social cost of a single-price monopoly is equal to its
a. economic profit.
b. fixed cost.
c. dead weight loss.

d. variable cost.
38. One method used to control the ability of firms to capture monopoly profit in the United States is
through
a. government purchase of products produced by monopolists.
b. government distribution of a monopolist's excess production.
c. enforcement of antitrust laws.
d. regulation of firms in highly competitive markets.
39. For a typical natural monopoly, average total cost is
a. falling and marginal cost is above average total cost.
b. falling and marginal cost is below average total cost.
c. rising and marginal cost is below average total cost.
d. rising and marginal cost is above average total cost.
40. The assessment by George Stigler concerning the tradeoffs between "market failure" and "political
failure" in the American economy provides support for which of the following solutions to the
problems of monopolies?
a. Public ownership of monopolies
b. Government regulation of monopolies
c. Government incentives to promote competition in monopolized industries
d. Doing nothing at all
41. Private ownership of a monopoly may benefit society because the monopoly will have an incentive
to
a. charge a price that is consistent with that of a benevolent social planner.
b. charge a price that prevents some people from buying.
c. price its good according to the intersection of marginal cost and average revenue.
d. lower its costs to earn a higher profit.
42. Which of the following is not a way the government can respond to the inefficient allocation of
resources associated with monopolies?
a. Preventing mergers through antitrust laws.
b. Regulating the prices that monopolies can charge.
c. Requiring the monopolies to produce more than their profit-maximizing level of output.
d. Running the monopoly itself.
43. Price discrimination is a rational strategy for a profit-maximizing monopolist when
a. the monopolist finds itself able to produce only limited amounts of output.
b. consumers are unable to be segmented into identifiable markets.
c. the monopolist wishes to increase the deadweight loss that results from profit-maximizing
behavior.
d. there is no opportunity for arbitrage across market segments.
44. In theory, perfect price discrimination
a. decreases the monopolist's profits.
b. decreases consumer surplus.
c. increases deadweight loss.
d. reduces the number of consumers who purchase the monopolys product.
45. Which of the following may eliminate some or all of the inefficiency that results from monopoly
pricing?
a. The government can regulate the monopoly.

b. The monopoly can be prohibited from price discriminating.

c. The monopoly can be forced to operate at a point where its marginal revenue is equal to its
marginal cost.
d. None of the above would eliminate any inefficiency associated with a monopoly.
46. Compared to the monopoly outcome with a single price, imperfect price discrimination
(i) sometimes raises total surplus.
(ii) sometimes lowers total surplus.
(iii)
always leads to a lower quantity of output.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. Any of these outcomes is possible.
47. With perfect price discrimination
a. the monopoly eliminates all price discrimination by charging each customer the same price.
b. the monopoly charges each customer an amount equal to the monopolist's marginal cost of
production.
c. the deadweight loss from monopoly is eliminated.
d. consumer surplus is gained as monopoly profits are eliminated.
48. Customers who purchase a book from Dave's Bookstore are charged 20% more than customers who
purchase the same book from the Dave's Bookstore website. This is an example of
a. perfect price discrimination.
b. price discrimination.
c. deadweight loss.
d. socially inefficient output.
49. Which of the following is an example of price discrimination?
a. Nabisco provides cents-off coupons for its products.
b. Amtrak offers a lower price for weekend travel compared to weekday rates on the same routes.
c. Hotel rates for AAA members are lower than for nonmembers.
d. All of the above are correct.
50. A monopolist that practices perfect price discrimination
a. creates no deadweight loss.
b. charges one group of buyers a higher price than another group, such as offering a student
discount.
c. produces the same monopoly level of output as when a single price is charged.
d. charges some customers a price below marginal cost because costs are covered by the highpriced buyers.

True/False
1. When a monopoly charges a higher price, fewer of its goods are sold.
2. The De Beers Diamond company advertises heavily to promote the sale of all diamonds, not just its
own. This is evidence that it has a monopoly position to some degree.
3. The De Beers Diamond company is not worried about differentiating its product from all other
gemstones.
4. The amount of power that a monopoly has depends on whether there are close substitutes for its

product.
5. If the government deems a newly invented drug to be truly original, the pharmaceutical company is
given the exclusive right to manufacture and sell the drug for 50 years.
6. Declining average total cost with increased production is one of the defining characteristics of a
natural monopoly.
7. Average revenue for a monopoly is the total revenue divided by the quantity produced.
8. For a monopoly, marginal revenue is often greater than the price they charge for their good.
9. Like monopolies, competitive firms choose to produce a quantity in which marginal revenue equals
marginal cost.
10. It doesn't make sense to talk about a monopolist's supply curve.
11. During the life of a drug patent, the monopoly pharmaceutical firm maximizes profit by producing
the quantity at which marginal revenue equals marginal cost.
12. Antitrust laws give the Justice Department the authority to challenge potential mergers between
companies in an effort to safeguard society from monopoly power.
13. Some companies merge in order to lower costs through efficient joint production.
14. A common solution to monopoly in European countries is public ownership.
15. The proper level of government intervention is ambiguous when dealing with a monopoly.
16. Firms with substantial monopoly power are quite common, because many goods are truly unique.
17. 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 profit.
18. Movie theatres charge different prices to different groups of people based on the differing marginal
costs that exist from group to group.
19. Airlines often separate their customers into business travelers and personal travelers by giving a
discount to those travelers who stay over a Saturday night.
20. University financial aid can be viewed as a type of price discrimination.
21. By offering lower prices to customers who buy a large quantity, a monopoly is price discriminating.
22. Goods that do not have close substitutes have downward-sloping demand curves.

Short Answer
1. Describe how government is involved in creating a monopoly. Why might the government create
one? Give an example.
2. What is the defining characteristic of a natural monopoly? Give an example of a natural monopoly.
3. 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. Using your understanding of monopoly, discuss the context in which your electricity
provider is a monopolist. Is this characterization universally applicable? Carefully explain your
answer.
4. There has been much discussion of deregulating electricity and natural gas delivery companies in the
United States. Using your understanding of monopolies, discuss the likely effect of deregulation on

prices in these two industries.

5. Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods.
6. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the deadweight
loss from taxation?
7. What is the deadweight loss due to profit-maximizing monopoly pricing under the following
conditions: The price charged for goods produced is $10. The intersection of the marginal revenue
and marginal cost curves occurs where output is 100 units and marginal revenue is $5. The socially
efficient level of production is 110 units. The demand curve is linear and downward sloping and the
marginal cost curve is linear and upward sloping.
8. In many countries, the government chooses to "internalize" the monopoly by owning monopoly
providers of goods and services. (In some cases these firms are "nationalized" and the government
actually buys or confiscates firms that operate in monopoly markets). What would be the advantages
and disadvantages of such an approach to ensuring the "best interest of society" is promoted in these
markets? Carefully explain your answer.
9. Let's assume that a monopolist decides to maximize revenue, rather than profit. How does this
operating objective change the size of the deadweight loss? If you are a "benevolent" manager of a
monopoly firm and are interested in reducing the deadweight loss of monopoly, should you
maximize profits or maximize revenue? Carefully explain your answer.
10. Why might economists prefer private ownership of monopolies over public ownership of
monopolies?
11. One solution to the problems of marginal-cost pricing of a regulated monopolist is average cost
pricing. In this model, the monopolist is allowed to price its production at average total cost. How
does average-cost pricing differ from marginal-cost pricing? Does this solution maximize social
well-being?
12. What are the four ways that government policymakers can respond to the problem of monopoly?
13. Explain the benefits and costs of antitrust laws.
14. Why do economists usually prefer private ownership to public ownership of natural monopolies?
15. One example of price discrimination occurs in the publishing industry when a publisher initially
releases an expensive hardcover edition of a popular novel, and later releases a cheaper paperback
edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination
pricing strategy.

ANS
Multiple Choice:
1-10: BDDDD CCBCC
21-30: DABDB DDABA
41-50: DCDBA ACBDA

11-20: DBBCD DCBBD

31-40: CBBBC CCCBD

True/False:
TTFTF TTFTT TTTTT FTFTT TT
Short Answer:
1.
The government can create a monopoly by giving a single firm the exclusive right to produce some
good. Monopolies are created for many reasons; one important one is the recognition that a single firm
in industries characterized by high fixed costs can usually supply the entire market at a lower cost than
having multiple firms in the industry. Examples include most utility companies. The government also
grants sole ownership of inventions through patent laws in order to help eliminate the market failure that
is likely to otherwise occur in the markets for those goods.
2.
The defining characteristic of a natural monopoly is when a firm can supply a good or service to an
entire market at a smaller cost than could two or more firms. It may also be defined when goods are
excludable, but non rival (see Chapter 11). The examples provided in the text include a water
distribution system and a bridge.
3.
In this case, the firms are monopolists in the short run when consumers are unable to change their
"home heating" systems. In the long run, consumers can change from electric appliances to natural gas
appliances, and thus lessen the monopoly power of utility providers. As long as consumers are able to
substitute, in the long run the monopoly power is reduced.
4.
If deregulation leads to increased competition then production and prices should move toward the
competitive equilibrium. If deregulation does not lead to increased competition then the monopoly
production and price outcome is likely. The success of deregulation movements hinges on their ability
to use markets to promote competitive market outcomes.
5.
A profit-maximizing monopolist chooses the output level where MR = MC and chooses the
corresponding price off of the market demand curve.
6.

A profit-maximizing monopolist will choose to produce Q 0 units of output and sell at price P 0. However,
marginal cost is MC0. This is identical to the deadweight loss of taxation when the tax forces a wedge

between market price and marginal cost.

7.
$25
8.
As long as the government "owner" pursues a production and pricing policy that approaches a
competitive outcome, social well-being can be enhanced. In this case the government ownership would
benefit society. However, in most cases, government owners operate much like private sector
monopolists. The political economy of government institutions does not ensure that government owners
will pursue socially optimal policy. Also, governments have no incentive to reduce costs or innovate.
9.
A revenue maximizer operates where MR = 0. This solution moves the monopolist closer to the socially
optimal competitive outcome, and reduces deadweight loss. Revenue maximization is potentially a more
"socially" optimal objective for monopoly markets than profit maximization.
10.
The private monopolist is governed by the market. Even though the market solution is sub-optimal, it
may be better than outcomes generated by publicly owned monopolies. Publicly owned monopolies
may restrict output to levels below the private market outcome and thus generate an even lower level of
social surplus than a private profit-maximizing monopolist. They also may not work to reduce costs.
11.
Average-cost pricing always guarantees that the monopolist earns zero economic profits, but does not
ensure a socially optimal market solution.
12.
Trying to make monopolized industries more competitive. Regulating the behavior of monopolies.
Turning some private monopolies into public enterprises. Do nothing.
13.
Benefits: Promote competition by preventing mergers and breaking-up companies. Costs: May increase
cost of operating by restricting synergy mergers.
14.
Private owners have an incentive to minimize cost as long as they reap part of the benefit in the form of
higher profit. By contrast, government bureaucrats have no incentive to reduce costs and the losers are
customers and taxpayers, whose only recourse is the political system.
15.
The answer should address the three basic lessons of price discrimination. First, price discrimination is a
rational strategy that can lead to higher monopoly profits. Second, price discrimination requires an
ability to separate customers according to their willingness to pay. Third, price discrimination can raise
economic welfare.