Q: A firm’s profit can be calculated as:

$$Profit = (P - ATC) \times Q$$

Question 1

Which of the following best describes the difference between a firm demand curve and a market demand curve?

Accepted Answer

The firm demand curve shows the quantity your firm will sell if you change your firm's price, while the market demand curve shows the total quantity all consumers will purchase across all firms at any given price.

Question 2

In a perfectly competitive market, the individual firm’s demand curve is:

Accepted Answer

Perfectly elastic.

Question 3

A monopoly maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 4

Why does marginal revenue ($$MR) $$lie below the demand curve for a monopolist?

Accepted Answer

Because the monopolist must lower the price on all units sold to sell an additional unit, creating a discount effect.

Question 5

Which of the following is NOT a source of market power?

Accepted Answer

Perfect information

Question 6

Suppose a monopolist faces the following demand curve: $$P = 100 - 2Q$$ and has constant marginal cost $$MC = 20. $$What is the profit-maximizing quantity?

Accepted Answer

$$Q = 30$$

Question 7

Which of the following best explains the deadweight loss associated with monopoly power?

Accepted Answer

The monopolist produces less than the socially optimal quantity, so some mutually beneficial trades do not occur.

Question 8

Which of the following is an example of a government-created barrier to entry?

Accepted Answer

Patents for new pharmaceutical drugs

Question 9

If a monopolist can perfectly price discriminate, what is the effect on consumer surplus and deadweight loss?

Accepted Answer

Consumer surplus is zero, deadweight loss is zero.

Question 10

Which of the following is a real-world example of a natural monopoly?

Accepted Answer

A local water distribution company

Question 11

A firm’s profit can be calculated as:

Accepted Answer

$$Profit = (P - ATC) 	imes Q$$

Question 12

Which of the following is NOT a typical strategy for creating barriers to entry?

Accepted Answer

Offering group discounts

Question 13

In the long run, if there are no barriers to entry, what will happen to economic profits in a monopolistically competitive market?

Accepted Answer

Economic profits will tend toward zero.

Question 14

Which of the following best describes the effect of new competitors entering a market?

Accepted Answer

The incumbent firm’s demand curve shifts left and becomes flatter.

Question 15

A monopolist faces the following demand curve: $$P = 80 - Q. If $$marginal cost is constant at $$MC = 20$$, what price will the monopolist charge at the profit-maximizing output?

Accepted Answer

$$P = 50$$

Question 16

Which of the following is a key difference between perfect competition and monopoly?

Accepted Answer

Monopolies produce where $$P \u003e MC$$, while perfect competition produces where $$P = MC.$$

Question 17

Which of the following is an example of price discrimination using the hurdle method?

Accepted Answer

Offering a discount to customers who use coupons

Question 18

Why might a regulator set the price for a natural monopoly at average total cost ($$ATC) $$rather than marginal cost ($$MC$$)?

Accepted Answer

Because setting $$P = MC$$ would result in losses for the monopolist, requiring subsidies.

Question 19

Which of the following is a supply-side strategy for creating barriers to entry?

Accepted Answer

Developing unique cost advantages through research and development

Question 20

If a monopolist’s marginal revenue is negative, what does this imply about the demand curve?

Accepted Answer

The discount effect is greater than the output effect, and total revenue is decreasing as quantity increases.

Chapter 16: Monopoly and Market Power: Structure, Pricing, and Welfare in Macroeconomics

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