370 Part 3/Unit IV
recognize ATC pricing, MC pricing, and monopolist pricing strategies, given a novel mo-
Tasks related to oligopoly and game theory
predict impact on prices given two collusive firms
Tasks related to public regulation
distinguish between average cost and marginal cost regulation pricing for monopoly
know reasons for government regulation of a monopoly
knows conditions causing a monopolist to act efficiently
identify inefficiencies within a monopoly model
recognize ATC pricing, MC pricing, and monopolist pricing strategies given a novel mo-
nopolist graph
Past Free Response AP* Questions: Based upon released free response questions, the students
have been required to demonstrate the following content related to this unit of instruction.
Questions related to monopoly
1989, identify characteristics of monopoly and their role in determining price and output
1992, recognize a business as a monopoly; explain how it determines level of output and
prices
1994, differentiate between marginal revenue and the monopolist demand curve; deter-
mine output and price
2002, recognize a monopoly industry and graph monopoly profits, outputs and price
2002B , compare and contrast competitive firm with monopolistic competitive firm and
industry; show and explain output changes, price changes and long-run profits
2003, draw monopoly graph showing price, output and profits; distinguish between mar-
ginal revenue and demand of a monopoly; indicate consumer surplus and deadweight loss
2004. analyze a monopoly graph with marginal social cost and marginal private cost, indi-
cating negative externalities; determine socially optimum price and output; determine and
calculate the amount of the tax/subsidy to correct output to social optimum amounts.
2004, analyze output and price in monopolistic competitive firm in long-run equilibrium;
analyze effect of entry; and an increase in fixed cost
lump sum tax (fixed cost); a per unit subsidy (variable cost) on output, price and profits;
compare monopolist profits with a perfect competition model/
2008, determination of natural monopoly output and price and determination of socially
efficient output; can evaluate and identify area of profit/losses given the socially efficient
output in the natural monopoly
Questions related to game theory
2007 & 2007B, Using Game Theory identify and define characteristics of a oligopoly
firm structure; reads pay-off matrix showing where two firms operate; identify dominant
strategy.
Questions related to public regulation
1997, determine price, output and profits of a natural monopoly; evaluate impact of gov-
ernment pricing which controls profits; evaluate efficient use of resources; determine con-
ditions of shutdown for a monopoly
2000, evaluate monopolist diagram for profit maximization, price and output; identify
elasticity of monopolist demand curve; compare and contrast consumer surplus for mo-
Part 3/Unit IV 373
Sample Multiple-Choice Questions for Micro Unit IV
Use this graph when answering the next question.
Figure 1
1. If the current market price for the firm depicted in Figure 1 above is OC, given the firm s cost
conditions, which output should it produce?
(A) OM
(B) OL
(C) OK
(D) OI
(E) Zero, this firm should shut down.
2. Which of the following indicates the firm s profit (or loss) at the profit-maximizing output?
(A) profit, BCFG
(B) profit, OCFK
(C) zero economic profit
(D) loss, OAEL
(E) loss, OCHI
3. Suppose an imperfectly competitive firm faces the following demand curve data for its prod-
uct.
Price Quantity
$8 5
$7 6
$6 7
What is the firm s marginal revenue from selling the seventh unit?
(A) $0
(B) $2
(C) $7
(D) $21
(E) $42
4. Which of the following is true of a monopolistic competitor at long-run equilibrium?
(A) MR < MC < price
(B) MR < MC = price
(C) MR = MC < price
(D) MR = MC = price
(E) MR = MC > price
5. Suppose the small town of Podunkville currently has only one vegetable stand, and there are
no costly barriers that keep competitors from opening new vegetable stands. Thus, the market
is contestable. Which of the following will be true?
(A) The monopoly vegetable stand will be able to produce at an output level that results in
economic profit equal to accounting profit.
(B) The monopoly vegetable stand will be able to charge prices that are high enough to pro-
duce long-run economic profits.
(C) The monopoly vegetable stand will produce at the least-cost production level and will
charge prices only sufficient to produce zero economic profits in the long run.
(D) The monopoly vegetable stand will be able to charge a price above the competitive price
in the long run.
(E) The monopoly vegetable stand will be replaced by long-run, profit-making monopolisti-
cally competitive firms.
6. Relative to a situation where only a single price is charged, a seller that engages in price dis-
crimination will
(A) charge consumers with an inelastic demand a lower price.
(B) charge consumers with an elastic demand a higher price.
(C) generally produce a larger total output.
(D) decrease social welfare and make all consumers worse off.
(E) generally produce a smaller total output.
Part 3/Unit IV 375
Use the following figure to answer the next three questions.
Figure 2
7. What price should an imperfectly competitive firm, with the cost and demand conditions de-
picted above, charge if it wants to maximize its profit?
(A) $6
(B) $8
(C) $10
(D) $12
(E) Zero, this firm should shut down.
8. What is the maximum economic profit that this firm will be able to earn?
(A) zero
(B) $200
(C) $400
(D) $600
(E) $1,200
9. If the cost and demand conditions of this imperfectly competitive firm are representative of
the market, what will happen in the future?
(A) Firms will go out of business, and the market price will rise.
(B) The current market price will tend to persist into the future.
(C) New firms will enter the market, and the market price will decline.
(D) The firms in this industry probably will collude in order to increase their profitability.
(E) The firms in this industry will be replaced by a monopoly, and market price will fall.
10. Which of the following statements accurately describes a difference between a firm that is a
monopolist and one that is a competitive price-taker?
(A) Marginal revenue and market price are equal for the competitive price taker but not for
the monopolist.
(B) The monopolist does not always produce the output that equates marginal cost and mar-
ginal revenue; the competitive price taker does.
(C) The monopolist charges the highest price possible; the competitive price taker charges a
price equal to its per-unit costs.
(D) A monopolist can earn economic profit in the short run; a competitive price taker cannot.
(E) A competitive price taker can earn economic profit in the short run; a monopolist cannot.
11. Which of the following best explains why the monopolist s marginal revenue is less than the
sales price?
(A) To sell more units, the monopolist must reduce price on all units sold.
(B) As the monopolist expands output, the average total cost will decline.
(C) The monopolist charges each consumer the highest possible price.
(D) When a firm has a monopoly, consumers have no choice other than to pay the price set
by the monopolist.
(E) The monopolist charges each consumer a price equal to the marginal cost.
12. An industry is said to be a natural monopoly when
(A) legal barriers limit entry into the market.
(B) diseconomies of scale are present in the market.
(C) the market demand for the product supplied by a firm is inelastic.
(D) long-run ATC continues to decline as firm size increases.
(E) larger firms have higher per unit costs than their smaller rivals.
Use this graph when answering the next question.
Figure 3
13. In Figure 3, what price and output would an unregulated profit-maximizing monopolist
choose?
(A) price A and output T
(B) price B and output S
(C) price B and output R
(D) price C and output R
(E) price A and output S
14. If a regulatory agency were using the normal return (zero economic profit) criteria to im-
pose a price on a monopolist with the cost and demand conditions depicted in Figure 3, what
price would the regulators set and what output would the monopolist produce?
(A) price A and output T
(B) price B and output S
(C) price B and output R
(D) price C and output R
(E) price A and output S
Part 3/Unit IV 377
Use this graph when answering the next question.
Figure 4
15. Indicate the maximum profit (or minimum loss) a pure monopolist with the cost and demand
conditions depicted in Figure 4 above would be able to achieve.
(A) profit of AIHE
(B) profit of BKJC
(C) losses of BKJC
(D) losses of EHGF
(E) profit of EHGF
16. Which of the following best explains why a perfectly competitive firm faces a horizontal de-
mand curve at the market equilibrium price and an imperfectly competitive firm faces a down-
ward-sloping demand curve?
(A) A perfectly competitive firm will lose all of its sales if it raises its price above the market
equilibrium because it produces products that are identical to its competitors. An imper-
fectly competitive firm produces a differentiated product and will lose only some sales if
it raises its price.
(B) A perfectly competitive firm will lose all of its sales if it lowers its price below the mar-
ket equilibrium because it produces products that are identical to its competitors. An im-
perfectly competitive firm produces a differentiated product and will lose only some sales
if it lowers its price.
(C) A perfectly competitive firm will lose all of its sales if it raises its price above the market
equilibrium because it produces products that are differentiated from its competitors. An
imperfectly competitive firm produces a product that is identical to its competitors and
will lose only some sales if it raises its price.
(D) A perfectly competitive firm will lose only some of its sales if it raises its price above the
market equilibrium because it produces products that are identical to its competitors. An
imperfectly competitive firm produces a differentiated product and will lose all of its
sales if it raises its price.
(E) A perfectly competitive firm will lose only some of its sales if it raises its price above the
market equilibrium because it produces products that are identical to its competitors. An
imperfectly competitive firm produces a differentiated product and will lose all of its
sales if it lowers its price.
378 Part 3/Unit IV
Use this graph when answering the next question.
Figure 5
17. Based on the information in Figure 5 above, which of the following is correct?
(A) From the viewpoint of economic efficiency, the output implied by point A is best, but a
profit-maximizing monopolist will choose the output associated with D.
(B) From the viewpoint of economic efficiency, the output implied by point C is best, but a
profit-maximizing monopolist will choose the output associated with A.
(C) From the viewpoint of economic efficiency, the output implied by point D is best, but a
profit-maximizing monopolist will choose the output associated with A.
(D) From the viewpoint of economic efficiency, the output implied by point B is best, but a
profit-maximizing monopolist will choose the output associated with A.
(E) From the viewpoint of economic efficiency, the output implied by point A is best, and a
profit-maximizing monopolist will choose the output associated with A.
18. A competitive price-taker firm will tend to expand its output so long as
(A) its marginal revenue is positive.
(B) its marginal revenue is greater than the market price.
(C) its marginal revenue is less than the market price.
(D) its marginal cost is less than the market price.
(E) its marginal cost is greater than the market price.
19. If a firm in a competitive price-searcher market finds that its marginal revenue exceeds its
marginal cost at the current rate of output, it should
(A) raise the price of the product and expand its output.
(B) raise the price of the product and reduce its output.
(C) lower the price of the product and expand its output.
(D) lower the price of the product and reduce its output.
(E) lower the price of the product and keep output the same.
20. Use the following table of expected cost and revenue data to answer the following question.
Output (tons per month) Total Cost (dollars) Price per Ton (dollars)
3 2,250 500
4 2,500 500
5 2,800 500
6 3,050 500
7 3,450 500
8 4,000 500
9 4,575 500
10 5,150 500
If this firm is a profit maximizer, what will be the output of the firm and in what market struc-
ture does it operate?
(A) 6, imperfect competition
(B) 7, perfect competition
(C) 7, imperfect competition
(D) 8, perfect competition
(E) 8, imperfect competition
Use this graph when answering the next question.
Figure 6
21. The demand and cost conditions in an industry are as depicted in Figure 6 above. In the view-
point of economic efficiency, the ideal price and output would be
(A) price, P1; quantity produced, Q1.
(B) price, P2; quantity produced, Q1.
(C) price, P2; quantity produced, Q2.
(D) price, P3; quantity produced, Q1.
(E) price, P1; quantity produced, Q2.
22. The two conflicting tendencies that a firm has in an oligopolistic industry are
(A) the incentive to cheat to maximize joint profits and the incentive to raise prices.
(B) the incentive to cheat and avoid collusion and the incentive to raise price to maximize the
firm s share of profits.
(C) the incentive to increase output in order to minimize per-unit costs and the incentive to
reduce price in order to maximize joint profit.
(D) the incentive to cooperate to maximize joint profits and the incentive to cheat on the
agreement in order to increase the firm s share of the profit.
(E) the incentive to collude and charge the highest possible price and then cheat on the agree-
ment and charge the lowest possible price to increase total revenue.
Use the payoff matrix below to answer the next three questions.
23. Based on the information in the payoff matrix box above, which of the following is correct?
(A) Francis and Jim both have a dominant strategy.
(B) Francis has a dominant strategy, but Jim does not.
(C) Jim has a dominant strategy, but Francis does not.
(D) Neither Francis nor Jim has a dominant strategy.
(E) While neither Francis nor Jim have a dominant strategy, they would be better off if they
did have one.
24. Based on the information in the payoff matrix box above, if Francis and Jim were to agree to a
binding collusive agreement, their respective profits would be
(A) $75 and $75.
(B) $75 and $5.
(C) $50 and $50.
(D) $10 and $10.
(E) $5 and $75.
Jim
Francis
A
A
B
B
$50
$50
$5
$5
$10
$10
$100
$100
25. Based on the information in the payoff matrix box above, if Francis and Jim were to simulta-
neously reach a non-collusive decision, their respective profits would be
(A) $75 and $75.
(B) $75 and $5.
(C) $50 and $50.
(D) $10 and $10.
(E) $5 and $75.
Answers to Multiple-Choice Sample Questions for Micro Unit IV
Sample Free-Response Question for Micro Unit IV
Figure 7
1. Using the graph above, answer each of the following questions.
(A) What is the profit-maximizing price this firm would charge?
(B) What is the profit-maximizing quantity this firm would produce?
(C) What area would describe the profit (or loss) earned by this profit-maximizing firm?
(D) In what market structure is this firm operating?
(E) If the government were to regulate this firm to break even, what would be the regulated
price and quantity?
(F) What is the socially optimum price and quantity for this firm?
382 Part 3/Unit IV
Answers to Free-Response Sample Question for Micro Unit IV
This question would be graded using a 9 point rubric.