Question 1

A monopoly is producing output so that average total cost is $30, marginal revenue is $40, and the price is $50. If ATC is at its minimum level and the ATC curve is U-shaped, to maximize profits this firm should:
A) increase output.
B) reduce output.
C) do nothing; it is already maximizing profits.
D) shut down.

Accepted Answer

Since the monopoly is producing output at a price of $50, it is earning a positive profit since the price is greater than the average total cost of production ($30). Furthermore, since the marginal revenue is greater than the average total cost at the current level of output, increasing output will lead to an even greater profit. As long as the marginal revenue is greater than the marginal cost at any level of output, the profit can be increased by producing more. Therefore, the best choice for the firm is to increase output.

Question 2

If a monopolist is producing a quantity that generates MC = P, then profit:
A) is maximized.
B) is maximized only if MR = P.
C) can be increased by increasing production.
D) can be increased by decreasing production.

Accepted Answer

The answer of If a monopolist is producing a quantity...

Question 3

At a monopoly's profit-maximizing level of output:
A) marginal revenue equals marginal cost.
B) marginal revenue is greater than marginal cost.
C) marginal revenue is less than marginal cost.
D) price is less than marginal cost.

Accepted Answer

A monopolist maximizes profit where marginal revenue equals marginal cost. At this point, there is no more gain in revenue from increasing production, since additional units sold would result in a decrease in total revenue due to higher costs. Therefore, the monopolist produces where marginal revenue equals marginal cost in order to maximize profit.

Question 4

An increase in the fixed costs of a monopoly firm would _____ price and _____ quantity in the short run.
A) increase; decrease
B) increase; increase
C) not change; not change
D) decrease; decrease

Accepted Answer

In the short run, an increase in fixed costs for a monopoly firm does not affect the price or quantity because the firm's pricing decisions are based on marginal costs, not fixed costs. Fixed costs are sunk in the short run and do not influence marginal cost or the firm's output and pricing decisions.

Question 5

Suppose that a profit-maximizing monopoly firm undergoes a substantial technological change that reduces its marginal and average total costs by $40. If in response to its reduction in cost the firm changes its price in a profit-maximizing way, then we can predict that its total output will:
A) rise.
B) fall.
C) remain unchanged.
D) It is not possible to make a determination from the information given.

Accepted Answer

With the reduction in marginal and average total costs, the monopoly would have more room to lower its price while still earning a profit. This means it can expand its output and capture a larger share of the market. Therefore, total output is likely to rise.

Question 6

If a monopolist is producing a quantity that generates MC > MR, then profit:
A) is maximized.
B) is maximized only if MC = P.
C) can be increased by increasing production.
D) can be increased by decreasing production.

Accepted Answer

When MC > MR, the additional cost of producing an extra unit is greater than the additional revenue gained from selling it. This means that the monopolist is producing beyond the profit-maximizing level of output. By decreasing production, the monopolist can increase its profit.

Question 7

A monopolist responds to a decrease in demand by _____ price and _____ output.
A) increasing; decreasing
B) increasing; increasing
C) decreasing, increasing
D) decreasing; decreasing

Accepted Answer

The answer of A monopolist responds to a decrease in...

Question 8

Which of the following is TRUE?
A) Profit-maximizing behavior occurs only in perfectly competitive markets.
B) Additional units of a good should be produced as long as MR < MC.
C) The profit-maximizing solution occurs where MR = MC.
D) The profit-maximizing solution occurs where MR > MC.

Accepted Answer

The profit-maximizing solution for a firm occurs where marginal revenue (MR) equals marginal cost (MC). This is the point where producing one more unit would not increase profit, as the cost of producing that unit equals the revenue it generates.

Question 9

If a monopolist is producing a quantity that generates MC > MR, then profit:
A) is maximized.
B) is maximized only if MC = P.
C) can be increased by increasing price.
D) can be increased by decreasing price.

Accepted Answer

To increase profit when MC > MR, the monopolist should reduce output, which typically leads to an increase in price due to the inverse relationship between quantity supplied and price in monopolistic markets. This strategy increases MR to match or exceed MC, thus increasing profits.

Question 10

If a monopolist is producing a quantity that generates MC < MR, then profit:
A) is maximized.
B) is maximized only if MC = P.
C) can be increased by increasing production.
D) can be increased by decreasing production.

Accepted Answer

To maximize profits, a monopolist should produce at the level where marginal cost (MC) equals marginal revenue (MR). If MC < MR, increasing production will bring MC closer to MR, increasing profits.

Question 11

A monopolist responds to an increase in demand by _____ price and _____ output.
A) increasing; decreasing
B) increasing; increasing
C) decreasing; increasing
D) decreasing; decreasing

Accepted Answer

A monopolist responds to an increase in demand by increasing both price and output to maximize profits.

Question 12

A monopolist responds to an increase in marginal cost by _____ price and _____ output.
A) increasing; decreasing
B) increasing; increasing
C) decreasing; increasing
D) decreasing; decreasing

Accepted Answer

When a monopolist faces an increase in marginal cost, they typically respond by increasing the price to cover the higher costs and decreasing output to maintain their profit margins.

Question 13

Suppose that the Yankee Cap Company is a profit-maximizing firm with a monopoly in the production of baseball caps. The firm sells its baseball caps for $25 each. For this information, we can assume that the Yankee Cap Company is producing a level of output at which:
A) marginal revenue equals $25.
B) marginal cost equals marginal revenue.
C) average total cost equals $25.
D) average total cost is greater than $25.

Accepted Answer

In a monopoly, a profit-maximizing firm produces where marginal cost equals marginal revenue, not necessarily where price equals marginal revenue.

Question 14

The GoSports Company is a profit-maximizing firm with a monopoly in the production of school team pennants. The firm sells its pennants for $10 each. We can conclude that GoSports is producing a level of output at which:
A) average total cost equals $10.
B) average total cost is greater than $10.
C) marginal revenue equals $10.
D) marginal cost equals marginal revenue.

Accepted Answer

In order to maximize profits, a monopolist will produce at the output level where marginal cost (MC) equals marginal revenue (MR). Since GoSports is a profit-maximizing monopoly, it will produce where MC=MR. Therefore, the correct answer is D.

Question 15

Suppose that a monopoly firm is required to pay a new annual license fee to do business in its city and that the fee is somewhat less than the economic profit the firm is now earning. In response to the increase in fees, the firm will:
A) raise its price by less than the amount of the license fee.
B) raise its price by the amount of the license fee.
C) raise its price by somewhat more than amount of the license fee.
D) not change its price.

Accepted Answer

A monopoly firm maximizes profit by setting its output where marginal revenue equals marginal cost, not by directly setting its price based on costs. The imposition of a license fee affects its total costs but does not change the marginal cost of production or the demand for its product. Therefore, the firm is unlikely to change its price in response to the fee.

Question 16

Use the following to answer questions:
Figure: Short-Run Monopoly 
-(Figure: Short-Run Monopoly) Look at the figure Short-Run Monopoly. The profit-maximizing rule is satisfied by the intersection at point:
A) G.
B) H.
C) J.
D) L.

Accepted Answer

The answer of Use the following to answer questions:
Figure: Short-Run...

Question 17

Suppose a monopoly is producing output so that marginal revenue equals marginal cost. If the monopolist reduces output, it:
A) can charge a higher price.
B) will increase profits.
C) will decrease marginal revenue.
D) can charge a higher price and it will increase profits.

Accepted Answer

Reducing output allows the monopolist to charge a higher price due to decreased supply, but it does not necessarily increase profits as it may move away from the profit-maximizing condition where marginal revenue equals marginal cost.

Question 18

Suppose that a profit-maximizing monopoly firm undergoes a substantial technological change that reduces its marginal and average total costs by $40. If in response to its reduction in cost the firm changes its price in a profit-maximizing way, then we can predict that its total economic profit will:
A) fall.
B) remain unchanged.
C) rise.
D) It is not possible to make a determination from the information given.

Accepted Answer

With the reduction in costs, the monopoly firm now has a larger profit margin on each unit of output. If it lowers its price in response to this cost-reduction, it might attract more customers and thus sell more units. Therefore, the increase in quantity sold will overtake the reduction in price which increases economic profit.

Question 19

A monopoly responds to a decrease in marginal cost by _____ price and _____ output.
A) increasing; decreasing
B) increasing; increasing
C) decreasing; increasing
D) decreasing; decreasing

Accepted Answer

A monopoly will decrease price and increase output in response to a decrease in marginal cost. This is because their marginal revenue, which is the price they charge minus the cost of producing one additional unit, will also decrease. By decreasing their price, they can continue to sell the same quantity of output as before, while also driving away potential competition. By increasing their output, they can take advantage of the lower marginal cost and increase profits.

Question 20

If a monopolist is producing a quantity that generates MC = MR, then profit:
A) is maximized.
B) is maximized only if MC = P.
C) can be increased by increasing production.
D) can be increased by decreasing production.

Accepted Answer

If a monopolist is producing a quantity that generates MC = MR, then profit is maximized because at this point, the marginal revenue equals the marginal cost, which means that the last unit produced added as much revenue as cost. If the monopolist produces more or less than this quantity, the marginal cost will be either greater or lesser than the marginal revenue, leading to a decline in profit. Thus, the best choice is A) profit is maximized.

Quiz 13: Monopoly

A monopoly is producing output so that average total cost is $30, marginal revenue is $40, and the price is $50. If ATC is at its minimum level and the ATC curve is U-shaped, to maximize profits this firm should:

If a monopolist is producing a quantity that generates MC = P, then profit:

At a monopoly's profit-maximizing level of output:

An increase in the fixed costs of a monopoly firm would _ price and _ quantity in the short run.

Suppose that a profit-maximizing monopoly firm undergoes a substantial technological change that reduces its marginal and average total costs by $40. If in response to its reduction in cost the firm changes its price in a profit-maximizing way, then we can predict that its total output will:

If a monopolist is producing a quantity that generates MC > MR, then profit:

A monopolist responds to a decrease in demand by _ price and _ output.

Which of the following is TRUE?

If a monopolist is producing a quantity that generates MC > MR, then profit:

If a monopolist is producing a quantity that generates MC < MR, then profit:

A monopolist responds to an increase in demand by _ price and _ output.

A monopolist responds to an increase in marginal cost by _ price and _ output.

Suppose that the Yankee Cap Company is a profit-maximizing firm with a monopoly in the production of baseball caps. The firm sells its baseball caps for $25 each. For this information, we can assume that the Yankee Cap Company is producing a level of output at which:

The GoSports Company is a profit-maximizing firm with a monopoly in the production of school team pennants. The firm sells its pennants for $10 each. We can conclude that GoSports is producing a level of output at which:

Suppose that a monopoly firm is required to pay a new annual license fee to do business in its city and that the fee is somewhat less than the economic profit the firm is now earning. In response to the increase in fees, the firm will:

Use the following to answer questions: Figure: Short-Run Monopoly -(Figure: Short-Run Monopoly) Look at the figure Short-Run Monopoly. The profit-maximizing rule is satisfied by the intersection at point:

Suppose a monopoly is producing output so that marginal revenue equals marginal cost. If the monopolist reduces output, it:

A monopoly responds to a decrease in marginal cost by _ price and _ output.

If a monopolist is producing a quantity that generates MC = MR, then profit: