Understanding Economics 126 8- Monopoly
Multiple Choice Questions
Understanding Economics 127 8- Monopoly
N/03/3/13
3 The diagram shows the relationship between a firm's total revenue and the quantity of goods sold.
revenue
quantity O
TR
What is the price elasticity of demand for the good?
A zero
B between zero and one
C one
D between one and infinity J/04/3/10
4 The diagram shows a firm‟s total revenue curve.
O revenue
output TR
At the curve‟s highest point
A marginal revenue is equal to marginal cost.
B average revenue is equal to average cost.
C marginal revenue is equal to average revenue.
D marginal revenue is zero.
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Understanding Economics 128 8- Monopoly
N/04/3/12
5 A monopolist finds that at his current level of output, marginal revenue is $2.00 and marginal cost is $2.50.
In order to increase his current level of profits, which strategy should the monopolist adopt?
price output A decrease unchanged B decrease increase C increase decrease D increase unchanged J/05/3/11
6 The diagram shows a firm‟s demand curve and its marginal revenue curve.
D P
MR O
price
quantity What is the price elasticity of demand at price OP?
A Zero B 0.5 C 1.0 D infinity
N/06/3/09
7 The diagram shows a firm‟s average revenue curve.
revenue
output O
AR
What can be deduced from the average revenue curve about the firm‟s total revenue as it increases output?
A It will rise continuously.
B It will fall continuously.
C It will rise initially then fall.
D It will fall initially then rise.
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Understanding Economics 129 8- Monopoly
N/06/3/15
8 The diagram shows the initial cost and revenue curves of a monopoly supplier.
P
J K L M
AR MC
MR costs,
revenue
O
output
What will be the firm's profit-maximising level of output if the government fixes the price at OP?
A OJ B OK C OL D OM
N/07/3/09
9 A monopolist faces a downward-sloping straight-line demand curve.
Which diagram shows his total revenue curve (TR)?
output O
A B
output O
total revenue
total revenue TR
TR
C D
output
O O output
total revenue
total revenue TR
TR
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Understanding Economics 130 8- Monopoly
N/07/3/13
10 At its current level of output a monopolist is on the price-inelastic part of its demand curve.
Which changes should it make to price and output in order to maximise its profits?
price output A increase increase B increase decrease C decrease decrease D decrease increase J/09/3/07
11 A firm estimates that, all else remaining unchanged, an increase in its output will result in an equal proportionate increase in its revenue.
What can be deduced from this about the price elasticity of demand for the firm‟s product?
A It is –1.
B It is +1.
C It is perfectly inelastic.
D It is perfectly elastic.
J/09/3/08
12 The diagram shows the initial cost and revenue curves of a profit-maximising monopolist.
P
J K L M
AR MC
MR costs,
revenue
O
output
What output will the firm produce if the government fixes the price at OP?
A OJ B OK C OL D OM
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Understanding Economics 131 8- Monopoly
J/09/3/13
13 The diagram shows the cost and revenue curves of a profit-maximising monopolist.
AR MR
O M
Q K
J
MC ATC
output revenue,
cost
What measures the monopoly profit per unit of output made by the firm?
A JM B JK C JM × OQ D JK × OQ
N/09/3/10
14 The price elasticity of demand for a firm‟s product is zero.
What will be the effect on the firm‟s revenue if it increases its price by 5 %?
A Its revenue will be unchanged.
B Its revenue will increase by 5 %.
C Its revenue will decrease by 5 %.
D Its revenue will fall to zero.
J/10/3/08
15 The diagram shows a firm‟s demand curve and its marginal revenue curve.
D P
O MR price
quantity
What is the approximate price elasticity of demand at price OP?
A 0.25 B 0.5 C 1 D 2
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Understanding Economics 132 8- Monopoly
N/11/32/03
16 To prevent a surplus of milk, each milk producer is given a production quota which specifies the volume of milk he is allowed to supply.
Initially the quotas are not tradable, but then trade in quotas is allowed.
Who would gain or lose when trade in quotas takes place?
purchasers of quotas sellers of quotas A
B C D
gain gain lose lose
gain lose gain lose J/12/32/14
17 In the diagram the imposition of a tax on a commodity causes its supply curve to shift from S1 to S2.
price
O
quantity D
J
K M
N P2
P1
Q2 Q1 S2
S1
Which area measures the resulting deadweight loss?
A P1P2JK B JKQ1Q2 C JKM D JKN
J/13/32/10
18 The demand for a firm‟s product is perfectly inelastic.
What will be the effect on the firm‟s revenue if it increases its price by 5%?
A Its revenue will be unchanged.
B Its revenue will increase by 5%.
C Its revenue will decrease by 5%.
D Its revenue will fall to zero.
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Understanding Economics 133 8- Monopoly
J/14/32/11
19 A monopolist faces a downward-sloping straight-line demand curve.
Which diagram shows his total revenue curve (TR)?
output O
A B
output O
total revenue
total revenue TR
TR
C D
output
O O output
total revenue
total revenue TR
TR
N/14/32/10
20 The price elasticity of demand for a firm‟s product is zero.
What will be the effect on the firm‟s revenue if it reduces its price by 5%?
A Its revenue will be unchanged. B Its revenue will decrease by 5%.
C Its revenue will increase by 5%. D Its revenue will fall to zero.
N/14/32/11
21 The diagram shows an industry producing under conditions of constant average costs.
Under perfect competition, the industry produces output OV.
Which area measures the increase in the industry‟s profits if it were to become a monopoly?
A XYSO B XYWT C XYZT D YZW
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Understanding Economics 134 8- Monopoly
N/14/32/17
22 A government introduces tax incentives which promote effort and enterprise. They also redistribute income from those who receive a higher marginal utility from money to those with a lower marginal utility from money.
What effect will these tax incentives have on efficiency and equity?
efficiency equity A
B C D
increase increase reduce reduce
increase reduce increase
reduce J/15/32/10
23 The diagram shows the demand curve for a firm‟s product.
price
quantity O
D
Which diagram depicts the shape of the firm‟s corresponding total revenue (TR) curve?
revenue
quantity A
O
revenue
quantity B
O
revenue
quantity C
O
revenue
quantity D
O TR
TR TR
TR
N/15/32/13
24 The diagram shows the initial cost and revenue curves of a profit-maximising monopolist.
P
J K L M
AR MC
MR cost,
revenue
O
output
What output will the firm produce if the government fixes the price at OP?
A OJ B OK C OL D OM
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Understanding Economics 135 8- Monopoly
J/16/32/07
25 A monopolist changes its objective from profit maximisation to sales revenue maximisation.
O Q1 Q2
output
AR MC
AC
MR P1
P2 F
H K L J G cost,
revenue
On the diagram, which areas represent the monopolist‟s total profit?
original profit final profit A P1HJP2 P2KLF
B P1HJP2 JKLG
C P1HGF P2KLF
D P1HGF JKLG
J/16/32/08
26 A firm estimates that, all else remaining unchanged, an increase in its output will result in a fall in its revenue.
What can be concluded from this?
A The demand for the firm‟s product is price-elastic.
B The demand for the firm‟s product is price-inelastic.
C The supply of the firm‟s product is price-elastic.
D The supply of the firm‟s product is price-inelastic.
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Understanding Economics 136 9-Externalities
Section: 9 Externalities
Externalities are factors which result in a benefit or cost to a firm or society which originate, in part, from outside the firm or as an adjunct to productive activity. A firm which does not invest in training its labour force itself, for example, may nonetheless benefit from being able to attract employees who have been trained by other firms or by the government. Pollution is an example of external cost imposed on society: a chemical company which pollutes the air or contaminates river water incurs only the immediate cost of producing its product, while society suffers the extra cost of cleaning up the atmosphere and river.
Externalities are „third party‟ or „spill over‟ effects of an economic transaction. They exist when the costs or benefits of an economic transaction are split over to a third party i.e. to people other than buyers and sellers of the product. Externalities can be categorized as follows:
(1) Negative (2) Positive