Monopoly worksheet

Monopoly: answer key

1. 1. (B) 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. (C) Two steps: find the quantity where MR = MC, then go up to the demand curve to read the price. (A) is the competitive firm's rule. Since MR < P for a monopolist, using P = MC would push output past the profit-maximizing point. (B) is just the break-even condition where economic profit equals zero; it doesn't maximize anything. (D) maximizes total revenue, not profit. A firm ignoring costs entirely will overshoot its optimal output.

3. 3. (B) The monopolist restricts output to where MR = MC, which means fewer units than competition's P = MC outcome. Fewer units on the market means a higher price along the demand curve. (A) contradicts basic demand logic because you can't sell more at a higher price without a demand shift. (C) describes what competition delivers, not monopoly. (D) is impossible; the monopolist raises price precisely *by* restricting the quantity.

4. 4. (C) DWL is surplus from transactions that would have made both buyer and seller better off but never happen because the monopolist restricts output. Every unit between Qm and Qc has buyers willing to pay more than the production cost, and that potential surplus simply disappears. (A) confuses a transfer with a loss. Profit shifts surplus from consumers to the producer, but it still exists. DWL is surplus that nobody receives. (B) is misleading; the monopolist deliberately skips those units because producing them would push MR below MC. (D) describes the per-unit markup, not total lost surplus.

5. 5. (C) 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.

6. 6. (B) MR = 100 − 2(30) = 100 − 60 = $40. At Q = 30, price would be P = 100 − 30 = $70, and MR ($40) is below P ($70), which is exactly the pattern we'd expect. (A) is the price, not MR. Reading the demand curve when the question asks for marginal revenue is probably the most common computational error on monopoly questions. (C) is the vertical intercept when Q = 0. (D) doesn't correspond to any correct calculation with these numbers.

7. 7. (B) A natural monopoly exists because economies of scale extend across the entire range of market demand. One firm's average cost keeps falling, so splitting production between two firms would just duplicate expensive fixed infrastructure. Water pipes are the classic example: one network costs far less to build and maintain than two overlapping ones. (A) describes a government-granted monopoly, which is a different category. (C) describes resource-based monopoly like De Beers with diamond mines. (D) has the logic backwards: natural monopolies emerge when demand is *small* relative to minimum efficient scale, meaning one firm can serve the whole market before exhausting scale advantages.

8. 8. (B) Profit per unit is (P − ATC), and total economic profit is that margin times quantity. On the graph, it shows up as the shaded rectangle from ATC up to P, with width Qm. (A) requires P = ATC exactly, which is the break-even case and isn't what the question describes. (C) has the inequality flipped; P > ATC means the firm is profitable, not losing money. (D) confuses revenue maximization (where MR = 0) with profit maximization (where MR = MC), because a firm chasing maximum revenue ignores costs and produces too much.

9. 9. (C) Set MR = MC: 120 − 4Q = 20, giving Qm = 25. Competitive output comes from P = MC: 120 − 2Q = 20, so Qc = 50. At Qm = 25, price = 120 − 50 = $70 and MC = $20. The DWL triangle spans from Q = 25 to Q = 50, with height of $70 − $20 = $50 at the left edge. DWL = 0.5 × 25 × 50 = $625. (B) likely results from a calculation mistake, possibly dropping the 0.5 from the triangle area or using wrong dimensions. (A) and (D) use incorrect measurements for the triangle's base or height.

10. 10. (B) 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.

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