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Economics 101 Practice Test: Monopoly

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In economics, a monopoly is a market structure where a single seller or producer has a dominant position in an industry or sector. Here are some characteristics of monopolies: Profit maximizer: Monopolists choose prices and outputs to maximize profits. Price maker: Monopolists decide the price of the product by determining the quantity. Price discrimination: Monopolists can change the price or quantity of the product. Monopolies can benefit from economies of scale, which is the ability to produce mass quantities at lower costs per unit. They can also set prices and keep pricing... Show more

In economics, a monopoly is a market structure where a single seller or producer has a dominant position in an industry or sector.

Here are some characteristics of monopolies:
Profit maximizer: Monopolists choose prices and outputs to maximize profits.
Price maker: Monopolists decide the price of the product by determining the quantity.
Price discrimination: Monopolists can change the price or quantity of the product.

Monopolies can benefit from economies of scale, which is the ability to produce mass quantities at lower costs per unit. They can also set prices and keep pricing consistent and reliable for consumers.
However, monopolies can harm consumer interests because there is no suitable competition to encourage lower prices or better-quality offerings. Monopolies can also create deadweight loss, which is a loss of economic efficiency.

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Economics 101 Practice Test: Monopoly

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1. The monopolist’s profit-maximizing quantity of output is where

price equals marginal revenue.average cost equals marginal revenue.marginal cost equals marginal revenue.All of these are correct.

2. The incentive to reduce costs is eliminated or reduced if the government

operates a monopoly.Both a and b are correct.Neither a nor b is correct.requires a monopoly to set average total cost equal to price.

3. When a monopolist can price discriminate perfectly then

deadweight loss is increased.consumer surplus and deadweight losses are transformed into monopoly profits.the price effect dominates the output effect on monopoly revenue, so profits fall.consumer surplus is increased.

4. A fundamental source of monopoly market power arises from

availability of “free” natural resources, such as water or air.perfectly elastic demand.barriers to entry.perfectly inelastic demand.

5. Consider a profit-maximizing monopoly pricing under the following conditions: The profit-maximizing price charged for goods produced is $16. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $8. The socially efficient level of production is 14 units. The demand curve and marginal cost curves are linear. What is the deadweight loss?

None of the above is correct.$48$8$16

6. Which of the following is not true for a profit-maximizing monopoly?

price is greater than marginal revenue.price is greater than average revenue.profits equal total revenue minus total cost.marginal revenue equals marginal cost.

7. The economic inefficiency of a monopolist can be measured by the

number of consumers who are unable to purchase the product because of its high price.excess profit generated by monopoly firms.poor quality of service offered by monopoly firms.deadweight loss.

8. The defining characteristic of a natural monopoly is

economies of scale over the relevant range of output.marginal cost is constant over the relevant range of output.marginal cost is U-shaped over the relevant range of output.diseconomies of scale over the relevant range of output.

9. Which of the following is inconsistent with price discrimination?

Charging customers willing to clip coupons a lower price.Price per-unit increases with the quantity a person purchases.Colleges and universities provide financial aid to needy students.Movie tickets are priced lower for children than for adults.

10. Suppose that a firm has a monopoly on the production of a prescription drug, regulating them on the basis of cost has problems because

All of these are correct.a monopolist’s costs, by definition, are higher than costs of perfectly competitive firms.it does not provide an incentive for the monopolist to reduce its cost.a monopolist is still able to generate excessive economic profits.

11. If regulators require a monopoly to set price equal to average total cost

consumer surplus is maximized.Neither a nor b is correct.Both a and b are correct.total social welfare is maximized.

12. In theory, perfect price discrimination increases

All of these are correct.consumer surplus.deadweight loss.the monopolist’s profits.

13. At the point where the monopolist produces, the value of the good to the marginal buyer is

less than price.greater than the marginal cost to the monopolist.greater than price.less than the marginal cost to the monopolist.

14. Mergers

may be advantageous if they allow for synergies.Both of the above are correct.None of the above is correct.may be advantageous because competitive firms have little incentive to reduce costs as their economic profits are zero.

15. The demand curve for an individual firm’s output is

downward sloping for both a competitive firm and a monopoly.downward sloping for a competitive firm and horizontal for a monopoly.horizontal for both a competitive firm and a monopoly.horizontal for a competitive firm and downward sloping for a monopoly.

16. Which of the following is a barrier to entry?

no close substitute for a producta homogeneous producta downward-sloping demand curvea single producer is more efficient than a large number of producers

17. A perfectly price-discriminating monopolist is able to

do none of the above.maximize profit and produce a level of output more consistent with optimal social well-being.exercise illegal preferences over the gender of its employees.produce a level of output consistent with optimal social well-being, but not maximize profit.

18. The marginal revenue of a monopoly is

equal to price.greater than price.less than price.greater than price for low levels of output, but less than price at higher levels of output.

19. For a monopoly firm, which of the following equalities is true?

All of these are correct.price = marginal costprice = marginal revenueprice = average revenue

20. Price discrimination is the practice of:

selling more output in one market than in another market.charging lower prices in the long run than in the short run.charging lower prices in the short run than in the long run.selling the same good at different prices to different customers.

21. If a benevolent social planner ran a monopoly, price

and output would be lower.and output would be higher.None of the above is correct.would be lower and output would be higher.

22. Which of the following statements about a firm’s market pricing of its product is true?

A competitive firm is a price maker and a monopoly is a price taker.Both competitive firms and monopolies are price takers.Both competitive firms and monopolies are price makers.A competitive firm is a price taker and a monopoly is a price maker.

23. In which of the following industries do firms set prices?

monopoly markets, but not competitive marketscompetitive and monopoly marketscompetitive markets, but not monopoly marketsneither competitive nor monopoly markets

24. For a monopoly market, total surplus can be defined as the value of the good to the

consumers plus the cost of making the good.consumers minus the cost of making the good.producers minus the cost incurred by consumers.producers plus the cost incurred by consumers.

25. OPEC often holds oil production below capacity in an effort to

compel consumers to conserve oil.compel consumers to search for oil substitutes.keep prices above the competitive level.create a shift in the demand for oil.

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