AP Microeconomics Quiz: Monopoly

What this quiz covers

This quiz focuses on Monopoly, giving you a quick way to practice the rules, question types, and explanations that matter most for AP Microeconomics.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. earn positive economic profits and increase its production level.
2. earn zero economic profit, also known as a fair return.
3. incur economic losses because price will be below average total cost. (correct answer)
4. produce less output than it would if it were unregulated.

Explanation: For a natural monopoly, the long-run average total cost (LRATC) is downward sloping, which means the marginal cost (MC) curve must lie below the LRATC curve. If regulators enforce a socially optimal price where $P = MC$, the price will be less than the average total cost ($P < ATC$). This will cause the firm to suffer economic losses and, without a subsidy, it may shut down in the long run.

Question 2

1. The firm must be a natural monopoly with continuously decreasing average total costs.
2. The firm must have some degree of market power and be able to prevent the resale of its product. (correct answer)
3. The firm must incur marginal costs that are lower for some customer groups than for others.
4. The firm must face a perfectly elastic demand curve from all its identifiable customer groups.

Explanation: To practice price discrimination, a firm must first have market power to control the price. Second, it must be able to segment its customers into groups based on their willingness to pay (i.e., different price elasticities of demand). Third, it must be able to prevent arbitrage, or the resale of the product from the low-price group to the high-price group.

Question 3

1. greater than the marginal cost, indicating that the market underproduces the good. (correct answer)
2. less than the marginal cost, indicating that the market overproduces the good.
3. equal to the marginal cost, indicating that the market achieves allocative efficiency.
4. equal to zero, because the monopolist produces where marginal revenue is maximized.

Explanation: In a market, the price consumers are willing to pay for a unit of a good represents its marginal benefit to society. The marginal cost of production is the marginal cost to society. A monopolist produces where $P > MC$. This means that for the last unit produced, the marginal benefit to society (P) is greater than the marginal cost (MC), which signifies an under-allocation of resources to the good's production and results in deadweight loss.

Question 4

1. Price will increase, and output will decrease.
2. Price will decrease, and output will increase.
3. Price and output will not change. (correct answer)
4. Price will increase, but output will not change.

Explanation: A lump-sum tax is a fixed cost, as it does not vary with the level of output. An increase in fixed costs will increase average total cost but will not affect marginal cost or marginal revenue. Since the profit-maximizing output is determined by the intersection of the marginal revenue and marginal cost curves ($MR = MC$), neither the optimal output nor the corresponding price will change. The tax will, however, reduce the firm's total profit.

Question 5

1. more inelastic demand for air travel compared to leisure travelers. (correct answer)
2. more elastic demand for air travel compared to leisure travelers.
3. perfectly inelastic demand for air travel, while leisure travelers have elastic demand.
4. lower willingness to pay for air travel in absolute terms.

Explanation: A price-discriminating firm maximizes its profit by charging higher prices to customers with a more inelastic demand and lower prices to customers with a more elastic demand. Business travelers often have less flexibility in their travel plans and are less sensitive to price changes, indicating a more inelastic demand. Leisure travelers are typically more flexible and price-sensitive, indicating a more elastic demand.

Question 6

1. greater than its average total cost. (correct answer)
2. equal to its average total cost.
3. less than its average total cost but greater than its average variable cost.
4. equal to its marginal revenue.

Explanation: Economic profit is calculated as total revenue minus total cost. On a per-unit basis, this is price minus average total cost ($P - ATC$). For total economic profit to be positive, the price charged must be greater than the average total cost at the quantity being produced.

Question 7

1. inelastic portion of its long-run average cost curve.
2. elastic portion of its demand curve. (correct answer)
3. inelastic portion of its demand curve.
4. unit elastic point on its demand curve.

Explanation: A monopolist maximizes profit by producing where marginal revenue ($MR$) equals marginal cost ($MC$). Since production costs ($MC$) are always positive, $MR$ must also be positive. Marginal revenue is positive only when demand is price elastic. If the firm were operating in the inelastic region, it could increase its price, which would decrease quantity, decrease total cost, and increase total revenue, thus increasing profit. Therefore, a monopolist will always operate in the elastic region of its demand curve.

Question 8

1. Monopoly produces more output and charges a lower price.
2. Monopoly produces less output and charges a higher price. (correct answer)
3. Monopoly produces the same output but charges a higher price.
4. Monopoly produces less output but charges the same price.

Explanation: A perfectly competitive industry produces where supply equals demand, resulting in an allocatively efficient quantity where $P = MC$. A monopolist restricts output to the level where $MR = MC$, which is a smaller quantity. By restricting output, the monopolist is able to charge a higher price as determined by the market demand curve. This leads to a less efficient outcome with higher prices and lower quantities.

Question 9

1. Output will increase, and price will decrease.
2. Output will decrease, and price will increase. (correct answer)
3. Output and price will remain unchanged.
4. Output will decrease, and price will remain unchanged.

Explanation: A per-unit tax is a variable cost, so it increases both the marginal cost (MC) and average total cost (ATC) curves, shifting them upward. The monopolist's profit-maximizing rule is to produce where $MR = MC$. Since the MC curve has shifted up, its intersection with the unchanged MR curve will occur at a lower quantity of output. At this lower quantity, the price charged on the demand curve will be higher.

Question 10

1. guarantee that the firm will earn a positive economic profit from the software.
2. create a legal barrier to entry, allowing the firm to function as a monopolist. (correct answer)
3. ensure the software is sold at the socially optimal price where price equals marginal cost.
4. encourage other firms to develop compatible software to increase competition.

Explanation: Copyrights and patents are forms of intellectual property protection granted by the government. Their primary economic function is to create a legal barrier to entry, preventing other firms from copying and selling the protected creation. This gives the creator a temporary monopoly, providing an incentive for innovation and creativity.

Question 11

1. less than its average total cost.
2. less than its average fixed cost.
3. less than its average variable cost. (correct answer)
4. equal to its marginal cost.

Explanation: The shutdown rule is the same for a monopoly as for any other firm. In the short run, a firm should continue to operate as long as the price it receives per unit is sufficient to cover its average variable cost ($P \geq AVC$). If the price falls below the average variable cost ($P < AVC$) at all output levels, the firm's total revenue will not even cover its total variable costs, and its losses would be minimized by shutting down and only paying its fixed costs.

Question 12

1. The monopolist produces a good for which there are many close substitutes.
2. The monopolist is a price taker and must accept the price determined by the market.
3. The monopolist is the only seller in the market, so it faces all the buyers. (correct answer)
4. The monopolist can sell as much as it wants at a single, unchanging market price.

Explanation: By definition, a monopoly is a market structure with a single seller of a unique product with no close substitutes. Because the monopolist is the sole provider, the demand for its product is identical to the entire market demand for that product. Therefore, it faces a downward-sloping market demand curve.

Question 13

1. is transferred to the government in the form of tax revenue.
2. remains as consumer surplus, but is enjoyed by fewer consumers.
3. is lost to society and becomes deadweight loss. (correct answer)
4. is used to cover the monopoly's higher production costs.

Explanation: The transition from perfect competition to monopoly leads to a restriction of output and an increase in price. This creates two main effects on surplus: 1) a transfer of surplus from consumers to the producer (the monopolist), and 2) a loss of surplus from trades that no longer occur due to the higher price and lower quantity. This lost surplus, which benefits neither the producer nor the consumer, is called deadweight loss.

Question 14

1. equal to the price of its product because it is the only seller.
2. less than the price of its product because it must lower the price on all units to sell more. (correct answer)
3. greater than the price of its product because it has significant market power.
4. constant and equal to price, regardless of the quantity sold.

Explanation: A monopolist faces the entire downward-sloping market demand curve. To sell an additional unit, it must lower the price not just for that unit, but for all previously sold units as well (this is the price effect). Consequently, the marginal revenue gained from selling one more unit is less than the price charged for that unit. In contrast, a perfectly competitive firm faces a perfectly elastic demand curve, so its marginal revenue is equal to the market price.

Question 15

1. The firm's ability to set its price equal to its marginal revenue.
2. The presence of substantial barriers to entry that prevent competition. (correct answer)
3. A perfectly elastic demand for the firm's unique product.
4. The complete absence of fixed costs in its production process.

Explanation: High barriers to entry—such as patents, control of a key resource, or significant economies of scale—are the defining feature that allows a monopoly to exist and persist. These barriers prevent potential competitors from entering the market, which in turn allows the monopolist to maintain its market power and sustain long-run economic profits.

Question 16

1. price equals marginal cost, and then set price according to the marginal revenue curve.
2. price equals average total cost, which guarantees zero economic profit.
3. marginal revenue equals marginal cost, and then set price according to the demand curve. (correct answer)
4. marginal revenue equals average total cost, which maximizes per-unit profit.

Explanation: The universal rule for profit maximization for any firm is to produce at the quantity where marginal revenue equals marginal cost ($MR = MC$). Once this quantity is determined, the monopolist sets the highest possible price for that quantity, which is found by going up to the demand curve. The other options describe conditions for allocative efficiency ($P=MC$), zero economic profit ($P=ATC$), or are not standard profit-maximizing rules.

Question 17

1. produces an output level where the price charged is greater than its marginal cost. (correct answer)
2. can earn positive economic profits both in the short run and the long run.
3. often fails to produce at the minimum point of its average total cost curve.
4. faces a downward-sloping demand curve, which causes marginal revenue to be negative.

Explanation: Deadweight loss represents a loss of total economic surplus due to inefficiency. Allocative efficiency occurs when resources are distributed such that the marginal benefit to society (represented by price) equals the marginal cost ($P = MC$). A profit-maximizing monopolist produces where $P > MR = MC$. This inequality ($P > MC$) indicates that society values the last unit produced more than it cost to make, and a deadweight loss arises because mutually beneficial trades do not occur.

Question 18

1. Consumer surplus and deadweight loss will both be zero, and producer surplus is maximized. (correct answer)
2. The firm will produce less output than a single-price monopolist but capture all consumer surplus.
3. The marginal revenue curve will lie below the demand curve, and deadweight loss will increase.
4. The firm will produce the socially optimal quantity, but all surplus will be distributed to consumers.

Explanation: With perfect price discrimination, the monopolist charges each consumer their maximum willingness to pay. This means the firm's demand curve also becomes its marginal revenue curve. The firm produces up to the point where $P = MC$, which is the allocatively efficient quantity. Because each consumer pays exactly their willingness to pay, there is no consumer surplus. All the potential surplus becomes producer surplus, and deadweight loss is eliminated.

Question 19

1. it is the only firm legally allowed to operate in a market due to a government patent.
2. it can produce the entire output for the market at a lower cost than two or more firms could. (correct answer)
3. its marginal cost curve is downward sloping over the entire relevant range of market demand.
4. it maximizes profit by producing the quantity where price equals average total cost.

Explanation: A natural monopoly exists when extensive economies of scale allow a single firm to supply the entire market demand at a lower average cost than if multiple firms were in the industry. This is represented by a long-run average total cost (LRATC) curve that is downward sloping for the relevant range of output.