Q: Suppose a natural monopoly has a total cost function $$C(Q) = 100 + 5Q$$, where $$Q is $$the quantity produced. If the market demand is $$Q = 50 at a $$price of $$P = 15$$, what is the average cost at this output level?

$$\frac{100 + 5 \times 50}{50} = 6$$

Question 1

Which of the following best describes a monopoly?

Accepted Answer

A market in which one firm sells a good or service with no close substitutes and blocks the entry of new firms.

Question 2

What is a barrier to entry in the context of monopoly?

Accepted Answer

A constraint that protects a firm from potential competitors.

Question 3

A natural monopoly arises when:

Accepted Answer

One firm can meet the entire market demand at a lower average cost than two or more firms could.

Question 4

Which of the following is an example of a legal monopoly?

Accepted Answer

A firm that is the only provider due to a government-granted patent.

Question 5

Which scenario best illustrates a single-price monopoly?

Accepted Answer

DeBeers sells diamonds of the same quality to all its customers at the same price.

Question 6

Which of the following is an example of price discrimination?

Accepted Answer

IMAX charges $$6 per movie ticket for children younger than 8, and 8.50 $$per movie ticket for adults.

Question 7

Suppose a natural monopoly has a total cost function $$C(Q) = 100 + 5Q$$, where $$Q is $$the quantity produced. If the market demand is $$Q = 50 at a $$price of $$P = 15$$, what is the average cost at this output level?

Accepted Answer

$$\frac{100 + 5 	imes 50}{50} = 6$$

Question 8

If a monopoly faces a downward-sloping demand curve, what is the relationship between marginal revenue (MR) and price (P)?

Accepted Answer

$$MR \u003c P$$ for all units sold except the first.

Question 9

A government grants a public franchise to a firm to provide water services in a city. This is an example of:

Accepted Answer

A legal monopoly.

Question 10

Which of the following is NOT a characteristic of a monopoly?

Accepted Answer

Free entry and exit.

Question 11

Suppose a monopoly can perfectly price discriminate. What is the consumer surplus in this market?

Accepted Answer

Zero, because the monopoly captures all surplus as profit.

Question 12

If a monopoly sets its price where marginal cost equals marginal revenue, which equation represents the profit-maximizing condition?

Accepted Answer

$$MC = MR$$

Question 13

A legal monopoly can be created by all of the following EXCEPT:

Accepted Answer

A firm having the lowest average cost in the industry.

Question 14

Which of the following best explains why a natural monopoly is likely to exist in the provision of electricity?

Accepted Answer

High fixed costs and declining average costs over the relevant range of output.

Question 15

If a monopoly is earning economic profits in the short run, what is likely to happen in the long run if barriers to entry remain?

Accepted Answer

The monopoly can continue to earn economic profits.

Question 16

Suppose a single-price monopoly faces the following demand curve: $$P = 20 - Q. If $$the marginal cost is constant at $$MC = 4$$, what is the profit-maximizing quantity?

Accepted Answer

$$Q = 8$$

Question 17

Which of the following is a real-world example of price discrimination?

Accepted Answer

An airline charges different prices for the same seat depending on when the ticket is purchased.

Question 18

If a monopoly is regulated to set price equal to marginal cost, what is a likely outcome?

Accepted Answer

The monopoly may incur economic losses if average cost exceeds marginal cost.

Question 19

Which of the following is NOT a method by which a monopoly can be created?

Accepted Answer

By having many firms freely enter and exit the market.

Question 20

Suppose a monopoly faces the following total revenue function: $$TR = 100Q - 2Q^2$. What is the marginal revenue function?

Accepted Answer

$$MR = 100 - 4Q$$

Monopoly: Key Concepts and Applications

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