Chapter 8: Monopoly and Monopolistic Competition
MULTIPLE CHOICE
1. If a monopolist faces a constant-elasticity demand curve given by Q = 202,500P –3 and has total costs
given by TC = 10Q, its profit-maximizing level of output is:
a.
50.
b.
60.
c.
75.
d.
100.
e.
120.
2. If a monopolist faces a constant-elasticity demand curve given by Q = 400P –2 and has total costs given
by TC = 0.625Q2, its profit-maximizing level of output is:
a.
0.
b.
2.
c.
4.
d.
6.
e.
8.
3. At the profit-maximizing level of output for the monopolist:
a.
total revenue is equal to total cost.
b.
total costs are minimized.
c.
total revenue is maximized.
d.
marginal revenue is equal to marginal cost.
e.
average revenue is equal to average cost.
4. For the Minnie Mice Company, the elasticity of demand is –6, and the profit-maximizing price is 30. If
MC is marginal cost and AVC is average variable cost, then:
a.
MC = 25.
b.
AVC = 25.
c.
MC = 30.
d.
AVC = 36.
e.
MC = 36.
5. Bathworks has exclusive rights to sell its perfumes. The demand for its perfumes faced by Bathworks
is given by Q = 250 – 0.5P. Bathworks’s costs are given by TC = 50Q + 5.5Q2. Its maximum
monopoly profit is:
a.
$6,750.
b.
$7,050.
c.
$7,500.
d.
$7,750.
e.
$8,750.
6. Craig’s Red Sea Restaurant is the only restaurant in Columbia, South Carolina, that sells Ethiopian
food. The demand for Ethiopian food is given by Q = 25 – P. Craig’s costs are given by TC = 25 + Q +
5Q2. Its maximum monopoly profit is:
a.
–$1.
b.
$21.
c.
$22.
d.
$24.
e.
$26.
7. My Big Banana (MBB) has a monopoly in Middletown on large banana splits. The demand for this
delicacy is given by Q = 80 – P. MBB’s costs are given by TC = 40 + 2Q + 2Q2. Its maximum
monopoly profit is:
a.
$267.
b.
$467.
c.
$627.
d.
$672.
e.
$674.
8. For the Mickey Mice Company, the price elasticity of demand is –3, average cost is $15, and marginal
cost is $30. Mickey’s profit-maximizing price is:
a.
$10.00.
b.
$20.00.
c.
$22.50.
d.
$30.00.
e.
$45.00.
9. Cal’s Cab Company (CCC) has a taxi monopoly in Wen Kroy. The demand for taxi services in Wen
Kroy is given by Q = 1,500 – P. CCC’s costs are given by TC = 100 – Q2 + 5Q3. Its maximum
monopoly profit is:
a.
$0.
b.
$5,500.
c.
$6,600.
d.
$7,700.
e.
$9,900.
10. So long as price exceeds average variable cost, in the model of monopoly, the firm maximizes profits
by producing where:
a.
the difference between marginal revenue and marginal cost is maximized.
b.
marginal revenue equals price.
c.
the difference between price and marginal cost is maximized.
d.
price equals marginal cost.
e.
marginal cost equals marginal revenue.
11. If Harry Doubleday’s price elasticity of demand is –2, and its profit-maximizing price is $6, then its:
a.
average cost is $3.00.
b.
average cost is $0.33.
c.
marginal cost is $3.00.
d.
marginal cost is $0.33.
e.
average cost is $5.67.
12. The Frank Failing Company has an average variable cost of $8, average fixed cost of $16, marginal
cost of $12, and elasticity of demand –3. Frank should:
a.
shut down.
b.
charge $8.
c.
charge $16.
d.
charge $18.
e.
charge $36.
13. In the model of monopoly, firms produce a:
a.
standardized product with considerable control over price.
b.
differentiated product with considerable control over price.
c.
standardized product with no control over price.
d.
differentiated product with no control over price.
e.
standardized or differentiated product with some control over price.
14. In the model of monopoly, there:
a.
are many firms producing differentiated products.
b.
are a few firms producing undifferentiated products.
c.
are a few firms producing differentiated products.
d.
are many firms producing undifferentiated products.
e.
is one firm producing a highly differentiated product.
15. A firm with no costs producing Q units and charging price P gets a return of r on total assets of A if P
equals:
a.
rA.
b.
(1 + r)A.
c.
(1 + r)A/Q.
d.
rA/Q.
e.
rAQ.
16. If price P, unit costs C, and quantity Q are known, the markup of markup-cost pricing is:
a.
(PQ – CQ)/Q.
b.
P – C/Q.
c.
(P – C)/Q.
d.
(P – C)/C.
e.
1 – (P – C)/Q.
17. Harriet Quarterly wants a 25% return on the $100 of assets she has in her company. Her average
variable costs are $50 per unit, and she has no fixed costs. If she sells 10 units, what price should she
charge?
a.
$52.50.
b.
$62.50.
c.
$75.00.
d.
$87.50.
e.
$125.00.
18. Joe’s T-shirts has costs given by TC = $100 + 3Q, where Q is the number of shirts. If Joe charges $5
each, the percentage markup for 100 shirts is:
a.
20%.
b.
25%.
c.
33%.
d.
50%.
e.
67%.
19. When producing 10 units, Jean has total variable costs of $100, total fixed costs of $100, and assets of
$100. She wants a return of 10%. What price should she charge?
a.
$11.
b.
$21.
c.
$30.
d.
$210.
e.
$300.
20. If C is total cost, Q is quantity, P is price, and A is total assets, the target return r is defined by:
a.
(PQ – C)/A.
b.
[1 – (P – C)/Q]A.
c.
[1 – (P – C)Q]A.
d.
(P – C)Q/A.
e.
1 – (P – C)Q/A.
21. If elasticity of demand is –2, marginal cost is $4, and average cost is $6, a profit-maximizing markup
price is:
a.
$4.
b.
$6.
c.
$8.
d.
$10.
e.
$12.
22. If the demand curve is horizontal, the price elasticity used to calculate the profit-maximizing price is:
a.
–10.
b.
–5.
c.
–0.
d.
–1.
e.
infinity.
23. If ç is the elasticity of demand, a profit maximizer sets a markup price of:
a.
MC[1/(1 + 1/
)].
b.
MC[1/(1 – 1/
)].
c.
AC[1/(1 –
)].
d.
AC[1/(1 – 1/
)].
e.
1/(1 –
).
24. If the profit-maximizing markup price is marginal cost times 2, the elasticity of demand must be:
a.
–0.
b.
–1/2.
c.
–1.
d.
–4/3.
e.
–2.
25. To maximize profit, the firm must:
a.
mark up average variable costs.
b.
mark up marginal costs.
c.
mark up average fixed costs.
d.
set the markup equal to –1/(
+ 1).
e.
b and d
26. If revenues from selling quantities x and y of jointly produced goods X and Y were TRX = 300 – xy +
50x and TRY = 1,000 – xy + 2y, and 10 units of y were produced, then marginal revenue with respect to
X would be:
a.
$10.
b.
$20.
c.
$30.
d.
$40.
e.
$50.
27. If revenues from selling quantities x and y of jointly produced goods X and Y were TRX = 100 – xy + 2x
and TRY = 500 – xy + 3y, then marginal revenue with respect to X would be:
a.
–2 – y.
b.
–y.
c.
–x(2y + 5).
d.
–(2y + 5).
e.
2(1 – y).
28. If John produces joint products A and B and refuses to sell all the A he produces, then:
a.
A is a high-demand good.
b.
A is a low-demand good.
c.
A is a high-cost good.
d.
A is a low-cost good.
e.
John is definitely not profit maximizing.
29. A producer of two fixed proportion outputs A and B, producing QA = QB with marginal revenues MRA
and MRB, should equate marginal cost to:
a.
the maximum (MRA, MRB).
b.
the minimum (MRA, MRB).
c.
MRA, which should equal MRB.
d.
the horizontal sum of MRA and MRB.
e.
the vertical sum of MRA and MRB.
30. A producer of fixed proportion goods X and Y (Q = QX = QY) has marginal costs and revenues of MC =
12Q, MRX = 54 – 6QX, MRY = 126 – 12QY . The producer should produce how many units?
a.
3.
b.
5.25.
c.
6.
d.
8.25.
e.
10.
31. When a producer of joint goods refuses to sell all of one good, the producer:
a.
is not rational.
b.
must destroy some of the high-demand good.
c.
must destroy some of the low-demand good.
d.
must give away some of the high-demand good.
e.
must give away some of the low-demand good.
32. A producer refuses to sell some of one joint product. MRA is the marginal revenue for a low-demand
good. If the producer were to sell all its production, what would be true of MRA?
a.
MRA = demand for A.
b.
MRA = 0.
c.
MRA = marginal cost of A.
d.
MRA < 0.
e.
MRA = 1.
33. Fred Stickwick produces fixed proportion goods A and B, with QA = QB, marginal costs MC, and
marginal revenues MRA and MRB. If demand for A is greater than demand for B, Fred should only:
a.
produce B to the quantity where MRB = 0.
b.
sell B to the quantity where MRB = 0 if MRA is still > MC.
c.
produce B to the quantity where MRB = MC.
d.
sell B to the quantity where MRB = MC.
e.
produce B to the quantity where MRB = MRA.
34. Jack O. Trades produces joint products A and B with linear demands DA > DB. Given MRB is marginal
revenue for B and MCB is marginal cost of B, Jack’s total marginal revenue curve changes slope at the
quantity where:
a.
MRB = MCB.
b.
DB = MCB.
c.
MRB = DB.
d.
MRB = 0.
e.
DB = 0.
35. For a producer of joint products X and Y with total costs CX and CY, an isocost curve:
a.
isolates CX and CY separately.
b.
shows points where CX = CY .
c.
shows points where cost curves are tangent.
d.
shows points where CX /CY is constant.
e.
shows points where CX + CY is constant.
36. For a producer of joint products X and Y with total revenue and RY, an isorevenue curve:
a.
isolates RX and RY separately.
b.
shows points where RX = RY .
c.
shows points where revenue curves are tangent.
d.
shows points where RX /RY is constant.
e.
shows points where RX + RY is constant.
37. A monopsonist faces a market labor supply curve w = 20 + L, where w is the wage rate and L is the
number of workers employed. If the firm’s labor demand curve is w = 200 – 4L, what is the optimal
wage rate and quantity of labor employed?
a.
w = 50 and L = 30.
b.
w = 56 and L = 36.
c.
w = 80 and L = 30.
d.
w = 104 and L = 32.
e.
None of the above.
38. A monopsonist faces a market labor supply curve w = 40 + 2L, where w is the wage rate and L is the
number of workers employed. If the firm’s labor demand curve is w = 200 – L, what is the optimal
wage rate and quantity of labor employed?
a.
w = 146.7 and L = 53.3.
b.
w = 168 and L = 32.
c.
w = 104 and L = 32.
d.
w = 40 and L = 160.
e.
w = 32 and L = 168.
39. In the model of monopolistic competition, there can be short-run:
a.
losses or profits, but there must be profits in long-run equilibrium.
b.
profits, but there must be losses in long-run equilibrium.
c.
losses or profits, but there must be losses in long-run equilibrium.
d.
losses or profits, but there must be neither profits nor losses in long-run equilibrium.
e.
losses, but there must be profits in long-run equilibrium.
40. In the model of monopolistic competition, firms produce a:
a.
standardized product with considerable control over price.
b.
differentiated product with considerable control over price.
c.
standardized product with no control over price.
d.
differentiated product with no control over price.
e.
differentiated product with some control over price.
41. Firms that produce similar, slightly differentiated products are called a(n):
a.
oligarchy.
b.
oligopoly.
c.
cabal.
d.
cartel.
e.
product group.
42. So long as price exceeds average variable cost, in the model of monopolistic competition, a firm
maximizes profits by producing where:
a.
the difference between marginal revenue and marginal cost is maximized.
b.
marginal cost equals marginal revenue.
c.
marginal revenue equals price.
d.
the difference between price and marginal cost is maximized.
e.
price equals marginal cost.
43. The ABC Company estimates that a newspaper advertising campaign would cost $25,000 and would
generate $35,000 in new revenues. The firm should begin this campaign as long as:
a.
price elasticity of demand is at least 2.5 (in absolute value).
b.
price elasticity of supply is 1.
c.
price elasticity of demand is at least 1.4 (in absolute value).
d.
marginal cost of production is no more than $25,000.
e.
price elasticity of supply is 1.4.
44. A supplier of fur coats estimates that the price elasticity of demand for its coats is –3.75. The firm has
determined that an additional $100,000 in advertising would generate $275,000 in additional revenues.
You would advise the firm to:
a.
advertise, because the marginal revenues are greater than the cost of advertising.
b.
spend only $50,000 on advertising, because the marginal revenue from an additional dollar
of advertising is less than $3.75.
c.
abandon the advertising plan, because the demand elasticity is greater than 1 (in absolute
value).
d.
abandon the advertising plan, because the marginal revenue from an additional dollar of
advertising is less than $3.75.
e.
advertise, because the fur coats are a luxury item.
45. If a firm in a monopolistically competitive industry is profit maximizing, it should choose its level of
advertising such that the marginal revenue of an additional dollar of advertising:
a.
is equal to the elasticity of its demand curve minus 1.
b.
is exactly $1.
c.
increases revenues by $1.
d.
is equal to 1 plus the elasticity of its demand curve.
e.
is equal to the elasticity of its demand curve.
46. Firms advertise in order to:
a.
build brand loyalty.
b.
appeal to the price-sensitive consumers.
c.
increase the demand elasticities of their loyal customers.
d.
shift the market supply curve to the left.
e.
shift the market demand curve to the left.
47. Firms offer promotions in order to:
a.
build brand loyalty.
b.
appeal to the price-sensitive consumers.
c.
increase the demand elasticities of their loyal customers.
d.
shift the market supply curve to the left.
e.
shift the market demand curve to the left.