Practice Quiz

Directions

There are 15 multiple choice questions in this quiz. Select the best answer by checking the button next to it. When you're finished, click "Results" to get your score. 
1. A firm is a monopoly if
(a) it faces a downward-sloping demand curve for its product.
(b)  it is a very large firm.
(c) it takes its rivals' actions into account when choosing its price and output levels.
(d)  its production decisions do not affect the price of its product.

 

2. A monopoly will maximize its profit by producing the quantity where
(a) price and marginal cost are equal.
(b) the demand curve crosses the average cost curve.
(c)  marginal cost reaches its minimum.
(d) marginal revenue equals marginal cost.

 

3. A monopoly will set price
(a) at the highest price along its demand curve.
(b) equal to the value at which marginal cost intersects the demand curve.
(c) so that it can sell the quantity at which marginal revenue is equal to marginal cost.
(d) so that it can sell the quantity at which marginal revenue is equal to zero.

 

4. When a simple monopolist chooses to sell an additional unit of a good or service  
(a) marginal revenue will be equal to the going market price.
(b) marginal revenue will always be negative.
(c) it will only have to lower its price on the additional unit.
(d) it will have to lower its price on the additional unit and on all other units.

 

5. What can, in general, be said about a monopoly's supply curve?
(a) A monopoly's supply curve, like that for a competitive firm, coincides with its marginal cost curve.
(b) A profit-maximizing monopoly will operate only on the elastic portion of its supply curve.
(c) The monopoly's supply curve is more inelastic than if the firm were competitive.
(d) The concept of a supply curve is meaningless in the context of the monopoly problem.

 

6. Using ( to represent price elasticity of demand, a simple monopolist will find that its marginal revenue at any point along its demand curve is equal to price at that point multiplied by
(a) (1 - 1/½h½)
(b) 1/½h½
(c) ½h½
(d) ½h½*MC

 

7. A monopolist will always end up choosing to operate
(a) even if its profits are negative.
(b) on the elastic portion of its demand curve.
(c) until such time as a new competitor enters its market.
(d) only if it can capture the entire consumer surplus.

Market Diagram

 

The following questions refer to the accompanying market diagram. PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly.

 

8. Refer to Market Diagram. What area represents the producer's surplus earned in the monopoly equilibrium?
(a) Area A + C + F.
(b)  Area C + F.
(c) Area C + D + F + G.
(d) Area C + D + E.

 

9. Refer to Market Diagram. Suppose this firm initially acted competitively. If the firm switched to the monopoly equilibrium, how much deadweight loss would be created?
(a)  Area E + H.
(b) Area G + H.
(c) Area B + D + E + G + H.
(d) Area D + E + G + H.

 

10. Refer to Market Diagram. The difference between producer's surplus as a monopolist and producer's surplus when setting price at what would exist in a competitive market is
(a) Area C + D + E - G - H.
(b) Area C + D - H.
(c) Area C + D + E - A - B.
(d) Area E + H.

 

11.  How does a per-unit subsidy affect the simple monopoly equilibrium?  
(a) The subsidy does not affect marginal cost and thus does not affect the monopoly equilibrium.
(b) The subsidy lowers the price charged by the monopoly, but it also lowers social gain.
(c) The subsidy increases the monopoly's profit but does not improve social gain.
(d) The subsidy causes both monopoly output and social gain to increase.

 

12.  An economic problem with using subsidies or price ceilings to move a monopoly toward the competitive equilibrium is that
(a) it may increase monopoly profits.
(b) it may decrease monopoly profits.
(c) policy makers may not be able to determine what the competitive equilibrium is.
(d) policy makers always need to be lobbied before taking any actions.

 

13. Consider a price ceiling imposed on a monopoly. For what quantities will the monopoly's new marginal revenue curve be horizontal at the ceiling price?.  
(a) For quantities where the demand curve lies above the ceiling price.
(b) For quantities where demand is elastic.
(c) For quantities where marginal cost is rising.
(d) Marginal revenue will be constant and equal to the ceiling price for all quantities.

 

14. Suppose regulators impose a price ceiling on a monopoly. If the price ceiling is set below the monopoly price but above the competitive price, then the monopoly will
(a) reduce its output.
(b) increase its production.
(c) produce the same output at a lower price.
(d) earn zero profit.

 

15. A natural monopoly exists when a firm  
(a) owns all of the world's known reserves of a natural resource.
(b)  has an average cost curve that is decreasing at the point where it crosses demand.
(c) has obtained a patent on a new genetically modified organism.
(d) is able to practice price discrimination in the sale of a natural resource.