$$\text{Profit} = (P - ATC) \times Q$$

Question 1

Which of the following best describes a monopoly?

Accepted Answer

A market with one seller of a good or service with no close substitutes.

Question 2

What is the primary source of market power for Turing Pharmaceuticals in the Daraprim case?

Accepted Answer

Legal barriers to entry, specifically FDA approval requirements.

Question 3

Which equation represents the profit-maximizing rule for a monopolist?

Accepted Answer

$$P \u003e MR = MC$$

Question 4

A monopolist faces a downward-sloping demand curve. If it lowers the price to sell more units, what happens to total revenue?

Accepted Answer

Total revenue may increase or decrease, depending on the relative size of the quantity effect and the price effect.

Question 5

Which of the following is NOT a type of price discrimination?

Accepted Answer

Fourth-degree price discrimination.

Question 6

Suppose a monopolist owns all the bauxite mines in a country. What type of barrier to entry is this?

Accepted Answer

Control of key resources.

Question 7

Why does a natural monopoly arise?

Accepted Answer

Because economies of scale allow one firm to supply the entire market at lower cost than multiple firms.

Question 8

Which of the following best describes network externalities?

Accepted Answer

A product’s value increases as more consumers use it.

Question 9

If a monopolist sets a price equal to marginal cost, what is the likely outcome?

Accepted Answer

The outcome will be socially efficient, but the monopolist may not cover its costs.

Question 10

Which government policy is designed to prevent anti-competitive pricing and deadweight loss?

Accepted Answer

Antitrust policy.

Question 11

A monopolist’s marginal revenue is always less than the price of the good. Why?

Accepted Answer

Because the monopolist must lower the price on all units to sell additional units.

Question 12

Which formula correctly calculates a monopolist’s profit?

Accepted Answer

$$	ext{Profit} = (P - ATC) 	imes Q$$

Question 13

Which of the following is an example of third-degree price discrimination?

Accepted Answer

Offering senior citizen discounts at a movie theater.

Question 14

If a monopolist is regulated to charge a fair-returns price, what does this mean?

Accepted Answer

Price equals average total cost.

Question 15

What is the deadweight loss associated with monopoly?

Accepted Answer

The loss of consumer and producer surplus due to the monopolist producing less than the socially optimal quantity.

Question 16

Which of the following is a real-world example of a firm with legal market power?

Accepted Answer

A company with a patent for a new drug.

Question 17

Why do firms offer mail-in rebates instead of simply discounting the price up front?

Accepted Answer

To price discriminate by segmenting customers based on their willingness to complete the rebate process.

Question 18

Suppose Claritin is awarded a patent and becomes a monopoly. What happens to consumer surplus compared to a competitive market?

Accepted Answer

Consumer surplus decreases.

Question 19

Which of the following statements about supply curves is true for monopolists?

Accepted Answer

A monopolist does not have a supply curve because it is a price maker.

Question 20

Which of the following is a potential benefit of monopoly for society?

Accepted Answer

Monopolies can spur innovation, especially in industries with strong competitors.

Monopoly: Market Structure, Sources of Power, and Policy

Study Guide - Practice Questions