Monopoly Practice Questions

8 representative multiple-choice questions on monopoly for AP Microeconomics, drawn from our 39-question bank for this module. Work through each one, then open “Show answer” for the correct choice and an explanation. For scored, timed practice across the full bank, take a full practice test.

Prefer to read? The same questions, with answers

1. 1. Why is a monopolist's marginal revenue curve below its demand curve?

   • A. Because the monopolist has high fixed costs
   • B. Because to sell more, it must lower the price on ALL units
   • C. Because consumers don't value monopoly products
   • D. Because the government regulates monopoly prices
   Show answer

   Correct answer: B. Because to sell more, it must lower the price on ALL units

   Selling one additional unit forces the monopolist to drop the price on every unit already being sold. The revenue gained from the new buyer is partly offset by the revenue lost on all previous units, which puts MR below price at every quantity. (A) has nothing to do with it. Fixed costs don't affect marginal revenue, which measures the change in revenue from one additional unit. (C) doesn't make sense; consumer valuation doesn't explain the gap between MR and price. (D) describes regulated monopoly, which is a separate topic entirely.

2. 2. A monopolist earning positive economic profit in the long run is possible because:

   • A. The monopolist is more efficient than competitors
   • B. The government subsidizes the monopolist
   • C. Barriers to entry prevent competitors from entering the market
   • D. Demand for the product is perfectly inelastic
   Show answer

   Correct answer: C. Barriers to entry prevent competitors from entering the market

   In a competitive market, positive economic profit is a signal that draws new entrants. Firms flood in and profit gets competed down to zero. Monopolists avoid that outcome because barriers to entry (patents, resource control, scale economies, legal restrictions) keep rivals out indefinitely. (A) doesn't matter; even an inefficient monopolist earns profit if nobody can enter. (B) describes a specific policy, not the general mechanism that sustains monopoly profits. (D) is wrong because no real demand curve is perfectly inelastic. At some price level, buyers will walk away.

3. 3. For a monopolist with a linear demand curve P = a − bQ, the marginal revenue curve:

   • A. Has the same slope as the demand curve
   • B. Has twice the slope of the demand curve and the same vertical intercept
   • C. Is horizontal at the market price
   • D. Lies above the demand curve at every quantity
   Show answer

   Correct answer: B. Has twice the slope of the demand curve and the same vertical intercept

   For P = a − bQ, total revenue = aQ − bQ², so MR = a − 2bQ. Same y-intercept (a), but the slope is −2b instead of −b, so MR falls twice as fast. (A) is wrong because the slope doubles. (C) describes the demand curve facing a perfectly competitive firm, not a monopolist. (D) has it backwards. MR lies *below* demand at every positive quantity because selling more means cutting the price on all existing units.

4. 4. Compared to the perfectly competitive outcome, a single-price monopolist causes a transfer of surplus from consumers to the producer and also:

   • A. Increases total surplus because the monopolist is more efficient
   • B. Creates deadweight loss because some mutually beneficial trades do not occur
   • C. Eliminates all consumer surplus by charging each buyer their maximum willingness to pay
   • D. Reduces producer surplus because the monopolist produces fewer units
   Show answer

   Correct answer: B. Creates deadweight loss because some mutually beneficial trades do not occur

   The monopolist restricts output below the competitive level. Units between Qm and Qc would have generated surplus because buyers valued them above MC, but they're never produced. That lost surplus is deadweight loss, and nobody receives it. (A) is wrong because monopoly *reduces* total surplus; restricting output destroys value regardless of the firm's efficiency. (C) describes perfect (first-degree) price discrimination, not single-price monopoly. A single-price monopolist leaves consumer surplus intact for buyers who value the good above the monopoly price. (D) has it backwards. The monopolist's producer surplus actually *increases* relative to competition because the higher price on units sold more than compensates for reduced volume.

5. 5. For the same firm, what is the allocatively efficient quantity?

   • A. 80
   • B. 100
   • C. 40
   • D. 50
   Show answer

   Correct answer: A. 80

   Allocative efficiency means price equals marginal cost, so the last unit is worth exactly what it cost society to make. Setting 100 - Q = 20 gives Q = 80, double the monopoly output. Answering 40 confuses the profit-maximising quantity with the efficient one, and the gap between those two numbers is the entire welfare case against monopoly.

6. 6. A monopolist practising PERFECT price discrimination will:

   • A. Produce less than a single-price monopolist and create more deadweight loss
   • B. Produce the allocatively efficient quantity and capture all consumer surplus
   • C. Charge every buyer the same price but produce more
   • D. Earn zero economic profit in the long run
   Show answer

   Correct answer: B. Produce the allocatively efficient quantity and capture all consumer surplus

   Charging each buyer exactly their willingness to pay makes marginal revenue equal to the demand curve, so MR = MC now happens at the same output as P = MC. Output rises to the efficient level and deadweight loss disappears. The surplus does not vanish though, it all goes to the firm as profit. So perfect price discrimination is efficient but not equitable, which is the distinction the question tests.

7. 7. In the long run, a monopoly protected by barriers to entry can:

   • A. Never earn economic profit
   • B. Earn profit only if it price discriminates
   • C. Continue earning economic profit indefinitely
   • D. Earn only normal profit, as entry competes profits away
   Show answer

   Correct answer: C. Continue earning economic profit indefinitely

   Barriers to entry are precisely what stops the usual long-run adjustment. In perfect competition and monopolistic competition, economic profit attracts entrants until it disappears; a protected monopolist faces no such entry, so its profit can persist. This is the clearest structural difference between monopoly and the other market structures and it is tested constantly.

8. 8. Student and senior discounts at a cinema are an example of:

   • A. A price ceiling
   • B. Predatory pricing
   • C. Perfect price discrimination
   • D. Third-degree price discrimination
   Show answer

   Correct answer: D. Third-degree price discrimination

   Third-degree price discrimination charges different prices to identifiable GROUPS with different elasticities of demand. Students and seniors tend to have more elastic demand, so they get the lower price. Perfect, or first-degree, discrimination would mean a different price for every individual buyer, which almost never happens in practice because it requires knowing each person's willingness to pay.