AP_Krugman_Textbook

616 section 11 Market Structures: Perfect Competition and Monopoly

Tackle the Test: Multiple-Choice Questions

Refer to the graph provided for questions 1–4.

1. The monopolist’s profit-maximizing output is
   a. 0.
   b. 4.
   c. 5.
   d. 8.
   e. 10.


2. The monopolist’s total revenue equals
   a. $80.
   b. $160.
   c. $240.

B

C

MR

MC = ATC

D

$100

20

60

–20

–40

0

Quantity of diamonds

Price, cost,
marginal
revenue of
diamond

45 8 10

A

d. $300.

e. $480.

3. The monopolist’s total cost equals
   a. $20.
   b. $80.
   c. $160.
   d. $240.
   e. $480.


4. The monopolist is earning a profit equal to
   a. $0.
   b. $40.
   c. $80.
   d. $160.
   e. $240.


5. How does a monopoly differ from a perfectly competitive
   industry with the same costs?
   I. It produces a smaller quantity.
   II. It charges a higher price.
   III. It earns normal profits in the long run.
   a. I only
   b. II only
   c. III only
   d. I and II only
   e. I, II, and III

Tackle the Test: Free-Response Questions

1. a. Draw a correctly labeled graph showing a monopoly
   incurring a loss in the short run.
   b. How can the monopolist determine whether to shut down
   or produce at a loss in the short run?

Answer (10 points)

QM Quantity

Price, cost,
marginal
revenue

PM

D

MR

MC

ATC

1 point:Axes are correctly labeled.

1 point:The demand curve is labeled and negatively sloped.

1 point:The marginal revenue curve is labeled, negatively sloped, and below

the demand curve.

1 point:The marginal cost curve is labeled and slopes upward in the shape of

a swoosh.

1 point:The profit-maximizing quantity is labeled on the horizontal axis

where MC =MR.

1 point:Price is determined on the demand curve above the point where

MC =MR.

1 point:The average total cost curve is labeled and U–shaped.

1 point:Average total cost is above price at the profit-maximizing output.

1 point:The marginal cost curve crosses the average total cost curve at the

lowest point on the average total cost curve.

1 point:The firm will produce despite a loss in the short run if P≥AVC.

2. a. Draw a graph showing a monopoly earning a normal
   profit in the short run.
   b. Can a monopoly earn a normal profit in the long run?
   Explain.