UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS

DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

PRACTICE PROBLEMS
MONOPOLY & PRICE DISCRIMINATION
1. The city bus system charges lower fares to senior citizens than to other passengers. Assuming that this
pricing strategy increases the profits of the bus system, we can conclude that senior citizens must have
a ________ for bus service than other passengers.
A) greater demand
B) lower demand
C) more elastic demand
D) less elastic demand

2. The marginal revenue curve for a monopolist is always less than the price because of the price effect.
A) True
B) False

3. Situations in which the more users of a product there are, the more useful the product becomes are:
A) network effects.
B) monopolies.
C) conglomerates.
D) exclusive franchises.

4. Consumer surplus is higher under a single-price monopoly than under a perfectly price-discriminating
monopoly.
A) True
B) False

5. Because monopoly firms are price-setters:

A) they can sell more only by lowering price.
B) they sell more at higher prices than at lower prices.
C) they take the market-determined price as given and sell all they can at that price.
D) they charge the highest possible price.

6. (Table: Prices and Demand) Look at the table Prices and Demand. Prof. Dumbledore has a monopoly on
magic hats. He sells at most one hat to each customer, and the table shows each customer's willingness
201211 1 PRACTICE PROBLEMS: MONOPOLY
UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

to pay. The marginal cost of producing a hat is $18. Suppose Dumbledorr can perfectly price-
discriminate. How many hats will he produce?
A) 3
B) 4
C) 5
D) 6

7. Which of the following is true?

A) A monopoly firm is a price-taker.
B) MR > P if the demand curve is downward sloping.
C) MR = MC is a profit-maximizing rule for any firm.
D) In monopoly P = MC when profits are maximized.

8. Wendy has a monopoly in the retailing of motor homes. She can sell five per week at $21,000 each. If she
wants to sell six, she can charge only $20,000 each. The quantity effect of selling the sixth motor home
is:
A) $20,000.
B) $10,000.
C) $15,000.
D) $21,000.

9. If a firm wants to charge different customers different prices, it must be:

A) a price-taker.
B) in perfect competition.
C) a price-setter.
D) a price-setter in perfect competition.

10. A monopolist's marginal cost curve shifts up, but the firm's demand curve remains the same and the
firm does not shut down. Compared to the condition before the increase in marginal costs, the
monopolist will ________ its price and ________ its level of production.
A) raise; decrease
B) not change; decrease
C) raise; increase
D) lower; increase

11. Suppose that you build a high-speed, magnetically powered transportation system from New York to
Los Angeles. High fixed costs resulting from the enormous quantity of capital used in this system
enable decreasing average cost for any conceivable level of demand. Your monopoly would result
from:
A) control of a scarce resource or input.
B) technological superiority.
C) increasing returns to scale.
D) government-created barriers.

201211 2 PRACTICE PROBLEMS: MONOPOLY

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

Figure: Short-Run Monopoly

12. (Figure: Short-Run Monopoly) Look at the figure Short-Run Monopoly. The profit-maximizing quantity
of output is quantity:
A) Q.
B) R.
C) S.
D) T.

13. (Figure: Short-Run Monopoly) Look at the figure Short-Run Monopoly. The profit-maximizing rule is
satisfied by the intersection at point:
A) G.
B) H.
C) J.
D) L.

14. (Figure: Short-Run Monopoly) Look at the figure Short-Run Monopoly. The marginal cost of producing
the profit-maximizing quantity is cost:
A) N.
B) O.
C) P.
D) Q.

15. (Figure: Short-Run Monopoly) In figure Short-Run Monopoly, the profit-maximizing price is price:
A) N.
B) O.
C) P.
D) Q.

16. Explain why the marginal revenue curve lies below the monopolist's demand curve.

17. If a monopoly is producing at the profit-maximizing level of output, then we can assume that at that
level of output, demand is:
A) price-elastic.
B) price-inelastic.
C) perfectly price-inelastic.
D) price unit-elastic.

201211 3 PRACTICE PROBLEMS: MONOPOLY

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

18. A natural monopoly exists whenever a single firm:

A) is owned and operated by the federal or local government.
B) is investor owned but has been granted the exclusive right by the government to operate in a market.
C) has economies of scale over the entire range of production that is relevant to its market.
D) has gained control over a strategic input of an important production process.

19. Wendy has a monopoly in the retailing of motor homes. She can sell five per week at $21,000 each. If
she wants to sell six, she can only charge $20,000 each. The price effect of selling the sixth motor
home is:
A) $20,000.
B) –$15,000.
C) –$5,000.
D) $25,000.

Figure: A Profit-Maximizing Monopoly Firm

20. (Figure: A Profit-Maximizing Monopoly Firm) Look at the figure A Profit-Maximizing Monopoly Firm.
This firm's cost per unit at its profit-maximizing quantity is:
A) $8.
B) $15.
C) $16.
D) $18.

21. (Figure: A Profit-Maximizing Monopoly Firm) Look at the figure A Profit-Maximizing Monopoly Firm.
The firm in this figure will produce ________ units of output per week.
A) 160
B) 220
C) 250
D) 300

22. (Figure: A Profit-Maximizing Monopoly Firm) The firm’s profit-maximizing price is:
A) $20.
B) $26.

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UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

C) $29.
D) $35.

23. (Figure: A Profit-Maximizing Monopoly Firm) Look at the figure A Profit-Maximizing Monopoly Firm.
This firm's profit per unit is:
A) $5.
B) $13.
C) $14.
D) $20.

24. A price-discriminating firm will adjust prices so that customers with more ________ demand pay
________ prices than (as) those customers with ________ elastic demand.
A) inelastic; lower; less
B) elastic; lower; less
C) elastic; the same; more
D) elastic; higher; less

Figure: The Monopolist II

25. (Figure: The Monopolist II) Look at the figure The Monopolist II. The deadweight loss associated with
this monopoly can be measured as the area:
A) 0.5(P1 – P2)(Q2 – Q1).
B) 0.5 (P2 – P4)(Q4 – Q2).
C) 0.5 (P1 – P3)Q3.
D) 0.5 (P1 – P3)Q2.

Figure: The Profit-Maximizing Output and Price

201211 5 PRACTICE PROBLEMS: MONOPOLY

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

26. (Figure: The Profit-Maximizing Output and Price) Look at the figure The Profit-Maximizing Output
and Price. Assume there are no fixed costs and AC = MC. At the profit-maximizing quantity of
production for the monopolist, total revenue is ________, total cost is ________, and profit is
________.
A) $600; $200; $400
B) $1,600; $3,200; $1,600
C) $4,800; $3,200; $1,600
D) $4,800; $1,600; $3,200

27. Monopoly is inefficient because some consumer surplus is transferred to producer surplus.
A) True
B) False

28. All of the following are examples of price discrimination except:

A) discounts for senior citizens at the movies.
B) discounts for families with young children at motels.
C) generally lower prices at Walmart than at Target.
D) cheaper air fares if the traveler stays over a Saturday.

29. (Table: Demand for Lenny's Coffee) Look at the table Demand for Lenny's Coffee. Lenny's Café is the
only source of coffee for hundreds of miles in any direction. Lenny is selling two cups of coffee. If he
wishes to lower the price and sell three cups of coffee, the:
A) quantity effect will dominate the price effect, and total revenue will decrease.
B) price effect will dominate the quantity effect, and total revenue will increase.
C) price effect will dominate the quantity effect, and total revenue will decrease.
D) quantity effect will dominate the price effect, and total revenue will increase.

30. (Table: Demand for Lenny's Coffee) Look at the table Demand for Lenny's Coffee. Lenny's Café is the
only source of coffee for hundreds of miles in any direction. If Lenny's marginal cost of selling coffee
is a constant $2, his profit-maximizing level of output is ________ cups at a price of ________ per
cup.
A) four; $6
B) eight; $3
C) five; $5
D) three; $7

201211 6 PRACTICE PROBLEMS: MONOPOLY

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

31. Suppose that a monopoly computer chip maker increases production from 10 microchips to 11
microchips. If the market price declines from $30 per unit to $29 per unit, marginal revenue for the
eleventh unit is:
A) $1.
B) $9.
C) $19.
D) $29.

32. Suppose the price elasticity of demand for coffee at the CoffeeBarn equals 1.71 for women and 0.55 for
men. A successful price discrimination strategy would lead to:
A) lower prices for men and women.
B) lower prices for men and higher prices for women.
C) lower prices for men and higher prices for women as long as the CoffeeBarn could prevent men from
reselling drinks to women.
D) higher prices for men and lower prices for women as long as the CoffeeBarn could prevent women
from reselling drinks to men.

33. In monopoly:
A) a basic condition for efficiency is violated because P > MC.
B) consumers are confronted with a price that is lower than marginal cost.
C) consumers will consume more of the good than is economically efficient.
D) consumers are confronted with a price that is lower than average total cost.

34. (Table: Demand and Total Cost) Look at the table Demand and Total Cost. Lenoia runs a natural
monopoly producing electricity for a small mountain village. The accompanying table shows Lenoia's
demand and total cost of producing electricity. The maximum profit Lenoia can make is:
A) $225.
B) $425.
C) $400.
D) $1,800.

35. A monopoly is producing at the output level where average total cost equals $30, marginal revenue is
$40, and the price is $50. If ATC is at its minimum level and the ATC curve is U-shaped, in order to
maximize profits this firm should:
A) increase output.
B) reduce output.
C) do nothing; it is already maximizing profits.
D) shut down.

201211 7 PRACTICE PROBLEMS: MONOPOLY

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

36. The pricing in monopoly prevents some mutually beneficial trades. The value of these unrealized
mutually beneficial trades is called:
A) sunk costs.
B) opportunity costs.
C) a deadweight loss.
D) inequities.

37. A downward-sloping demand curve will ensure that:

A) P = MR.
B) P > MR.
C) P < MR.
D) P = MC.

Scenario: A Small-Town Monopolist

A monopolist sells cable subscriptions in a small town and finds that it can sell 100 subscriptions when
the price is $15 a week and an additional 75 subscriptions when the price is $10 a week. The MC for
the provision of the cable is $5 a week. There are no fixed costs.

38. (Scenario: A Small-Town Monopolist) Use the information from the scenario A Small-Town
Monopolist. If the company is allowed to offer different prices for its good, what is the maximum
amount of profit this company can earn?
A) $1,000
B) $750
C) $1,375
D) $1,520

39. (Scenario: A Small-Town Monopolist) Use the information from the scenario A Small-Town
Monopolist. If this monopolist chooses to sell subscriptions at one price, it will sell ________ units at
a price of ________ and earn economic profits equal to ________.
A) 75; $10; $500
B) 100; $15; $1,000
C) 175; $15; $1,000
D) 100; $10; $750

40. (Scenario: A Small-Town Monopolist) Use the information from the scenario A Small-Town
Monopolist. Compared to charging a single price, the deadweight loss:
A) increases when this monopolist price-discriminates.
B) decreases when this monopolist price-discriminates.
C) stays the same when this monopolist price-discriminates.
D) is equal to zero.

Scenario: Monopolist
The demand curve for a monopolist is as follows: P = 75 – 0.5Q, and the monopolist has the following
MC expressed as P = 2Q. Assume also that ATC at the profit-maximizing level of production is equal
to $12.50.

41. (Scenario: Monopolist) Using the information from the scenario Monopolist, the profit-maximizing
output is ________ and the profit-maximizing price is equal to ________.
A) 25 units; $75.00
201211 8 PRACTICE PROBLEMS: MONOPOLY
UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

B) 20 units; $62.50
C) 25 units; $75.50
D) 25 units; $62.50

42. (Scenario: Monopolist) Using the information from the scenario Monopolist, the MR curve is:
A) P = 150 – 0.5Q.
B) P = 75 – Q.
C) P = 150 – Q.
D) P = 225 – Q.

43. (Scenario: Monopolist) Using the information from the scenario Monopolist, you calculate the
deadweight loss from this monopolist's production as:
A) $31.25.
B) $12.50.
C) $0.
D) $30.00.

44. (Scenario: Monopolist) Using the information from the scenario Monopolist, you calculate the profit-
maximizing level of profit per unit as:
A) $62.50.
B) $0.
C) $75.00.
D) $50.00.

45. Why will a single-price monopolist never set the price in the inelastic range of the demand curve.?

46. If a monopolist can engage in perfect price discrimination, then:

A) it produces at the socially efficient level.
B) consumer surplus is maximized.
C) producer surplus is minimized.
D) the government may impose fines on the monopolist.

47. If a monopoly is forced to charge a price equal to marginal cost:

A) output will fall.
B) the deadweight loss will decrease.
C) consumer surplus will decrease.
D) other firms will enter the industry.

48. The GoSports Company is a profit-maximizing firm with a monopoly in the production of school team
pennants. The firm sells its pennants for $10 each. We can conclude that GoSports is producing a level
of output at which:
A) average total cost equals $10.
B) average total cost is greater than $10.
C) marginal revenue equals $10.
D) marginal cost equals marginal revenue.

49. Suppose that a monopoly firm is required to pay a new annual license fee just for the privilege of doing
business in its city and that the fee is somewhat less than the economic profit the firm is now earning.
In response to the increase in fees, the firm will:
201211 9 PRACTICE PROBLEMS: MONOPOLY
UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

A) raise its price by less than the amount of the license fee.
B) raise its price by the amount of the license fee.
C) raise its price by somewhat more than amount of the license fee.
D) not change its price.

50. If a monopolist is producing a quantity that generates MC > MR, then profit:
A) is maximized.
B) is maximized only if MC = P.
C) can be increased by increasing production.
D) can be increased by decreasing production.

51. Why is the demand curve for a monopolist downward sloping, while the demand curve for the perfectly
competitive firm is horizontal?

52. The demand curve facing a monopolist is:

A) horizontal, the same as that facing a perfectly competitive firm.
B) downward sloping, the same as that facing a perfectly competitive firm.
C) upward sloping, the same as that facing a perfectly competitive firm.
D) downward sloping, unlike the horizontal demand curve facing a perfectly competitive firm.

53. Price discrimination leads to a ________ price for consumers with a ________ demand.
A) higher; less elastic
B) higher; more elastic
C) higher; perfectly elastic
D) lower; less elastic

54. One government policy for dealing with a natural monopoly is to:
A) impose a price floor to eliminate the deadweight loss.
B) impose a price ceiling to reduce economic profit.
C) break it up into smaller firms.
D) impose fines on the monopolist.

201211 10 PRACTICE PROBLEMS: MONOPOLY

UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

Answers
1. C
2. True
3. A
4. True
5. A
6. D
7. C
8. A
9. C
10. A
11. C
12. B
13. D
14. C
15. A
16. Assuming a monopolist does not use price discrimination, the monopolist must lower the price to sell
more units. This lowering of the price has two effects on total revenue. First, the lower price applies to
all units sold, not just the next unit. This price effect tends to lower total revenue. Second, the lower
price allows more units to be sold. This quantity effect tends to increase total revenue. Because the
quantity effect of more revenue will be partially offset by the price effect of less revenue, the additional
(marginal) revenue must be lower than the price, which is given by the demand curve. Therefore, the
marginal revenue curve will lie below the demand curve.
17. A
18. C
19. C
20. C
21. B
22. C
23. B
24. B
25. B
26. D
27. False
28. C
29. D
30. A
31. C
32. D
33. A
34. A
35. A
36. C
37. B
38. C
39. B
40. B
41. D
42. B
201211 11 PRACTICE PROBLEMS: MONOPOLY
UNIVERSITY OF TORONTO ECO100: INTRODUCTORY ECONOMICS
DEPARTMENT OF ECONOMICS ROBERT GAZZALE, PHD

43. A
44. D
45. If the firm is operating in the inelastic portion of the demand curve, a decrease in price will actually
decrease total revenue. An increase in price will increase total revenue. So the monopolist will increase
price until further increases cease to increase total revenue. The inelastic range of demand falls in the
lower half of the demand curve. In this range, marginal revenue is negative. Because marginal cost can
never be negative, there is no way that the monopolist can set MR = MC in the lower half of the
demand curve. So for these two reasons, a monopolist (at least an unregulated one) will never set the
price in the lower half, or inelastic range, of the demand curve.
46. A
47. B
48. D
49. D
50. D
51. The perfectly competitive firm is a price-taker, which means it cannot influence the market price and
therefore takes it as given by the market. The firm then sells as much as it can at that price. This results
in the demand curve for each firm's product being horizontal at the market price. The monopolist is
the sole seller, so the demand for the firm's product is the market demand for the product. If the
monopolist wants to sell more units, the firm must lower the price. So the monopoly demand curve is
downward sloping.
52. D
53. A
54. B

201211 12 PRACTICE PROBLEMS: MONOPOLY