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Quizzes > Business & Finance > Finance & Economics

Monopoly in Microeconomics Quiz: Test Your Market Mastery

Think you've mastered monopoly theory? Start the microeconomics monopoly quiz!

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
paper art monopoly board and market structure icons on sky blue background quiz banner

Take our free monopoly in microeconomics quiz and put your understanding of market structures on the line! This quiz is crafted for anyone curious about microeconomics monopoly quiz dynamics and eager to explore monopoly theory questions in depth. You'll test your grip on key concepts, from price-setting power to barriers to entry, and see where you stand in this economic monopoly test. For extra practice, challenge yourself with related monopoly questions and browse more microeconomics questions to master the market structures quiz. Enjoy immediate feedback and practical insights to boost your confidence. Ready to prove your expertise? Start now!

What market structure is characterized by a single seller and no close substitutes?
Monopoly
Perfect competition
Oligopoly
Monopolistic competition
A monopoly exists when one firm is the sole seller of a product without close substitutes, giving it significant market power. Barriers to entry prevent other firms from competing, ensuring the monopolist remains dominant. This contrasts with other market structures that feature multiple sellers. Investopedia
Which of the following is not a barrier to entry that can lead to monopoly power?
Government licensing
Economies of scale
Many small firms
High startup costs
Barriers to entry include government licensing, economies of scale, and high startup costs, all of which prevent new firms from entering. The presence of many small firms indicates low barriers and a competitive market. Therefore, many small firms is not a barrier to entry. Library of Economics and Liberty
In a monopoly, the firm's demand curve is identical to which of the following?
Perfectly inelastic
Marginal cost curve
Perfectly elastic
Downward-sloping market demand curve
A monopolist faces the entire market demand, which is downward-sloping. This means the firm must lower price to sell additional units. In contrast, firms in perfect competition face perfectly elastic demand. Khan Academy
Why is a monopolist called a price maker?
Because government fixes its price
Because it must accept the market price
Because it faces a downward-sloping demand curve and can set price by choosing output
Because it has no control over costs
A monopolist has market power because it is the sole seller, so it can choose output and set price accordingly. It faces the market demand curve, so price variability depends on its production decision. This contrasts with price takers in competitive markets. Investopedia
A monopolist maximizes profit by producing where which condition holds?
Price equals marginal cost
Total revenue equals total cost
Marginal revenue equals marginal cost
Price equals average cost
Profit maximization requires setting output where marginal revenue (MR) equals marginal cost (MC). At that point, any change in output would reduce profit. Unlike perfect competition, price does not equal MC for a monopolist. Econlib
For a monopolist, marginal revenue is always ______ price.
Equal to
Twice
Greater than
Less than
Because the monopolist must lower price to sell additional units, marginal revenue falls below price. Each extra unit sold adds less revenue than the price, due to the price reduction applied to all units. This relationship distinguishes monopoly from perfect competition. Khan Academy
Which of the following is an example of a natural monopoly?
Clothing store
Internet café
Local water utility
Fast-food restaurant
A natural monopoly arises when one firm can serve the entire market at lower cost due to large fixed costs and declining average costs. Utilities like water distribution typically exhibit these characteristics. Retail and service sectors generally lack that cost structure. Investopedia
The deadweight loss in a monopoly arises because:
Firms freely enter and exit the market
Price exceeds marginal cost, reducing output below the efficient level
Price equals marginal cost, maximizing consumer surplus
Monopolist produces at minimum average cost
Monopoly pricing sets price above marginal cost, leading to lower output than the socially efficient quantity. The reduction in transactions creates a deadweight loss, representing lost total surplus. Competitive markets set price equal to MC and produce efficiently. Econlib
Which statement about a monopolist's supply curve is correct?
It is the marginal cost curve above average variable cost
A monopolist does not have a well-defined supply curve
It is horizontal at market price
It is downward sloping like demand
Unlike competitive firms, monopolists cannot separate supply from demand because they choose price and quantity simultaneously. The concept of a supply curve (quantity supplied at each price independent of demand) does not apply. Instead, the monopolist's output is determined by MR=MC and the demand curve. Investopedia
A profit-maximizing monopolist will shut down in the short run if:
Marginal revenue falls below marginal cost
Price falls below average variable cost
Price falls below average total cost
Total revenue falls below total cost
A firm should shut down when revenue cannot cover variable costs, meaning price is below average variable cost. Fixed costs are sunk in the short run and do not affect the shutdown decision. This rule applies to all firms, including monopolists. Khan Academy
Under monopoly, consumer surplus compared to perfect competition is usually:
Higher because of lower price
Zero in every case
The same as in perfect competition
Lower because price is higher and quantity is lower
Monopoly pricing raises price and reduces output compared to perfect competition, shrinking the area under the demand curve that represents consumer surplus. Consumers pay more for fewer units, transferring surplus to the monopolist and creating deadweight loss. Competition maximizes consumer welfare by equating price and marginal cost. Investopedia
What is the primary source of deadweight loss in a monopoly?
Zero economic profit
Reduction in output and higher price compared to the efficient level
Increase in consumer surplus
Decrease in fixed costs
Deadweight loss occurs because monopolists restrict output to raise price above marginal cost. This reduction in trade volume means mutually beneficial transactions do not occur. The lost surplus from these foregone trades is the deadweight loss. Economics Help
Third-degree price discrimination involves:
Offering menu of quantity discounts
Charging each individual their maximum willingness to pay
Selling two-part tariffs only
Charging different prices to identifiable groups based on elasticity
Third-degree price discrimination segments consumers into groups with distinct elasticities of demand. The monopolist sets different prices for each group to maximize profit. Examples include student or senior discounts. Investopedia
The Lerner Index measures:
MR / MC
MC / Price
Price / MC
(Price - MC) / Price
The Lerner Index quantifies market power by showing markup over marginal cost as a fraction of price. A value of zero indicates perfect competition, whereas higher values indicate greater monopoly power. It is widely used in antitrust analysis. Investopedia
A regulated natural monopoly under average cost pricing:
Produces where price equals marginal cost
Operates at minimum average cost
Breaks even and earns zero economic profit
Earns monopoly profit
Average cost pricing sets price equal to average cost so the firm covers all costs without earning economic profits. This prevents monopoly rent but still allows the firm to operate. It may lead to allocative inefficiency if price exceeds marginal cost. tutor2u
Under single-price monopoly, consumer surplus is:
The area under the demand curve above the monopoly price
Equal to producer surplus
The area between price and marginal cost
Always zero
Consumer surplus is the difference between what consumers are willing to pay (demand curve) and what they actually pay (monopoly price). Under monopoly, this area is reduced compared to perfect competition. Producer surplus increases at consumers' expense. Econlib
For a monopoly, price elasticity of demand at the profit-maximizing output is:
Perfectly elastic
Elastic (absolute value greater than 1)
Inelastic (absolute value less than 1)
Unit elastic (absolute value equals 1)
At profit maximization (MR=MC), the demand curve is in the elastic region. If demand were inelastic, reducing output would raise revenue and lower cost, increasing profit. Monopolists never operate where demand is inelastic on the demand curve. Khan Academy
Price discrimination increases welfare relative to single-price monopoly if:
It leads to increased output toward the competitive level
It decreases total revenue
It raises price above the monopoly price
It reduces firm profit
By pricing according to willingness to pay, price discrimination can expand output and serve additional consumers who would be excluded under single pricing. This reduces deadweight loss by moving closer to the competitive quantity. However, distributional effects on consumer surplus vary by type. Investopedia
Which of the following is NOT a form of price discrimination?
Bulk discounts
Group pricing
Free entry
Two-part tariffs
Bulk discounts (second-degree), two-part tariffs, and group pricing (third-degree) are all price discrimination strategies. Free entry refers to market access conditions, not how prices are set for different consumers. Econlib
The profit-maximizing condition for a natural monopoly with continuously declining average costs is:
Price = MC
MR = MC where MC is below AC for all outputs
Price = AC
MC = AC
A natural monopoly has MC below AC over the relevant range, so the usual MR=MC rule still applies for profit maximization. Regulators then decide if pricing at MC (requiring subsidy) or AC is preferable. Price = MC is efficient but may not cover costs. Investopedia
The government can regulate a monopoly effectively by implementing:
Price caps (RPI - X regulation)
Removing all oversight
Higher barriers to entry
Subsidizing monopoly profits
Price cap regulation ties allowed price increases to inflation minus an efficiency factor (X), incentivizing cost reduction. It controls consumer prices without micromanaging costs. Other options either strengthen monopoly power or reduce consumer protection. UK OFGEM
Which type of price discrimination results in the monopolist capturing all consumer surplus?
First-degree price discrimination
Second-degree price discrimination
Uniform pricing
Third-degree price discrimination
First-degree, or perfect, price discrimination charges each consumer their maximum willingness to pay, extracting all consumer surplus. It is difficult to implement due to information requirements. Other forms leave some consumer surplus. Investopedia
In second-degree price discrimination, the firm:
Sets price equal to marginal cost
Charges each unit at each individual's maximum willingness to pay
Offers a menu of quantity-based price schedules for self-selection
Charges different fixed prices to consumer groups
Second-degree discrimination allows consumers to choose bundles or quantities that best fit their willingness to pay. Examples include quantity discounts or versioning. The firm does not identify consumer types directly. Economics Help
Rent-seeking behavior in monopoly refers to:
Cost savings achieved through efficient production
Resources spent lobbying for or protecting monopoly privileges
Increase in consumer welfare
Perfect competition in the long run
Rent-seeking involves using resources to secure exclusive market benefits, such as lobbying for regulations that protect monopoly status. These activities do not create new value and impose social costs. They shift surplus rather than expand it. Econlib
In a multi-plant monopoly, profit maximization requires:
Each plant sets MC equal to price
Total output is set where MC exceeds MR
Marginal cost is equal across all plants and equals marginal revenue
Average costs equal across all plants
A multi-plant monopolist maximizes profit by equating marginal cost across all plants and setting that common MC equal to MR. This allocates production efficiently given differing cost structures. Average costs may differ but do not drive allocation. Economics Help
X-inefficiency in monopoly refers to:
Zero profit condition
Higher-than-necessary costs due to lack of competitive pressure
Excessive cost reduction efforts
Perfect efficiency at minimum cost
X-inefficiency arises when a firm has little incentive to minimize costs, often due to monopoly power and weak competitive discipline. It leads to wasteful spending or slack in operations. Competitive markets typically constrain such inefficiencies. Investopedia
Under block pricing, a monopolist:
Charges different bundled prices for blocks of units to capture more surplus
Charges a single uniform price per unit
Only uses two-part tariffs
Charges each unit at marginal cost
Block pricing sells discrete bundles of units at set prices, allowing the monopolist to extract more surplus from consumers with varying willingness to pay. It is a form of second-degree price discrimination. It differs from per-unit uniform pricing by offering quantity-based packages. Economics Help
The Herfindahl-Hirschman Index (HHI) for a pure monopoly is:
100
0
50
10,000
HHI is calculated as the sum of squared market shares (percentages). A single firm with 100% share yields 100² = 10,000, indicating maximum concentration. It is used in antitrust assessments. U.S. DOJ
Setting price equal to marginal cost in monopoly regulation leads to:
Zero deadweight loss with no subsidy
Negative consumer surplus
Socially efficient output but may require subsidy if MC < AC
Monopoly profit maximization
Price=MC achieves allocative efficiency by equating benefit and cost for each unit. However, if MC is below AC, the firm incurs losses unless subsidized. Regulators must balance efficiency and financial viability. Investopedia
Average cost pricing regulation sets price equal to:
Average cost, allowing zero economic profit
Demand elasticity
Marginal revenue
Marginal cost
Under average cost pricing, price covers all costs including a normal return but yields no economic profit. It is a compromise between efficiency and financial viability for regulated monopolies. It avoids subsidies but may cause allocative inefficiency. tutor2u
Which U.S. antitrust law specifically prohibits monopolization and attempts to monopolize?
Clayton Act
Federal Trade Commission Act
Robinson-Patman Act
Sherman Act Section 2
Section 2 of the Sherman Act outlaws monopolization or attempts to monopolize trade or commerce. The Clayton Act addresses specific practices like price discrimination and mergers. The FTC Act established the Federal Trade Commission. FTC
Patent protection typically grants monopoly power for:
A lifetime
20 years from filing in most jurisdictions
5 years
50 years
Most countries grant patents for 20 years from filing to incentivize innovation. After expiration, competitors can produce the invention. Shorter or longer terms vary by jurisdiction. WIPO
For a monopolist facing linear demand P = a - bQ, the marginal revenue function is:
MR = a - 2bQ
MR = 2a - bQ
MR = a - bQ
MR = bQ - a
For linear demand, MR has the same intercept (a) but twice the slope (2b), reflecting the need to lower price on all units to sell an extra unit. This relationship is fundamental to monopoly output decisions. Khan Academy
A natural monopoly's average cost curve is typically:
Continuously increasing
Constant
Continuously declining over the relevant output range
U-shaped
Natural monopolies arise when large fixed costs and economies of scale cause AC to decline over the market's demand range. This makes a single firm lowest-cost producer. U-shaped or increasing AC curves imply different market structures. Investopedia
Regulatory capture occurs when:
Government eliminates all industry regulations
Firms refuse to comply with regulations
Consumers control regulatory decision-making
Regulatory agencies advance the interests of firms they regulate over the public interest
Regulatory capture happens when the regulated industry exerts undue influence over its regulator, leading to policies favoring firm interests. This undermines the public welfare and market efficiency. It is a common concern in monopoly regulation. Econlib
Contestable markets are characterized by:
Free entry and exit with no sunk costs
High sunk costs that deter entry
A single dominant firm with protected status
Significant barriers to entry
A contestable market allows potential entrants to enter and exit freely without sunk costs. This threat of 'hit-and-run' entry disciplines incumbent pricing, approximating competitive outcomes even if only one firm operates. Barriers or sunk costs reduce contestability. Investopedia
The deadweight loss of monopoly equals:
Zero in all cases
The triangular area between demand and MC from monopoly to competitive output
The entire area under the demand curve
The rectangle of monopoly profit
Deadweight loss is the loss of total surplus from underproduction by the monopolist. Graphically, it is the triangle between demand and marginal cost curves from the monopoly quantity to the competitive quantity. It represents mutually beneficial trades that do not occur. Khan Academy
Under Ramsey pricing, a regulated monopoly sets prices so that:
Price equals average cost for all services
Markup over marginal cost is inversely proportional to the price elasticity of demand
Markup is higher for more elastic demands
Price equals marginal cost for all services
Ramsey pricing minimizes welfare loss subject to a revenue requirement by setting markups inversely to demand elasticity. Services with inelastic demand receive higher markups, preserving revenue while reducing distortions. It balances efficiency and financial viability. Investopedia
A dynamic monopoly differs from a static monopoly in that it:
Cannot earn profits in future periods
Considers intertemporal pricing and investment decisions over time
Has constant costs every period
Only applies MR=MC in a single period
Dynamic monopoly models incorporate expectations, investment, R&D, and the present value of future profits into pricing strategy. Such firms balance short-run profit with market power preservation over time. Static models focus only on a single period's MR=MC. Econlib
Network externalities in a monopoly imply that:
The value of the product increases as more consumers use it
Demand becomes perfectly inelastic
Marginal cost rises with each additional user
Value decreases as user base grows
Positive network externalities mean each additional user adds value for existing users, reinforcing market power. Examples include social media or telecommunication platforms. This can lead to natural monopoly tendencies and lock-in effects. Investopedia
First-degree price discrimination in a dynamic context allows the monopolist to:
Offer only quantity discounts at a single point in time
Extract the entire consumer surplus each period by adjusting individual prices over time
Charge a uniform price across all units and times
Always set price equal to marginal cost
Dynamic first-degree discrimination adjusts prices over time based on each consumer's willingness to pay and purchase history, capturing all surplus. It requires detailed consumer data and strong market power. It extends static perfect price discrimination into an intertemporal setting. tutor2u
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Study Outcomes

  1. Understand Monopoly Fundamentals -

    Grasp the defining features of a monopoly and how it differs from other market structures through targeted questions and explanations.

  2. Analyze Monopoly Pricing Strategies -

    Evaluate how monopolies set prices and output levels to maximize profits and the implications for consumer surplus.

  3. Identify Barriers to Entry -

    Recognize and categorize the economic and legal barriers that prevent new firms from entering a monopolized market.

  4. Differentiate Market Structures -

    Distinguish between perfect competition, oligopoly, and monopoly by comparing their key characteristics and market outcomes.

  5. Evaluate Welfare Impacts -

    Assess the social and economic consequences of monopoly power on allocative efficiency and consumer welfare.

  6. Apply Monopoly Theory to Real-World Cases -

    Use theoretical models to analyze actual monopolistic markets and predict firm behavior under monopoly conditions.

Cheat Sheet

  1. Price Setting & MR=MC Rule -

    Monopolists set output where marginal revenue (MR) equals marginal cost (MC) to maximize profit, unlike perfect competitors. You can remember "MR Meets MC" as a quick mnemonic when tackling the monopoly in microeconomics quiz. According to Mankiw's Principles of Economics, this helps pinpoint the profit-maximizing quantity and corresponding price on the demand curve.

  2. Barriers to Entry -

    Barriers can be natural (large economies of scale) or artificial (patents, licensing), and they protect monopoly power by keeping competitors out. A handy example is the pharmaceutical industry, where long patent life blocks generic rivals (Harvard Business Review insights). Understanding these barriers is key to any microeconomics monopoly quiz question on market dynamics.

  3. Downward-Sloping Demand Curve -

    A monopolist faces the entire market demand curve (P = a - bQ), so reducing output raises price. This contrasts with perfect competition and is often tested in market structures quizzes. Recall "single seller, single demand" to quickly identify monopoly theory questions.

  4. Lerner Index of Monopoly Power -

    The Lerner Index (L = (P - MC) / P) measures a firm's markup over cost, ranging from 0 (competitor) to 1 (pure monopoly). It's a formula worth memorizing for any economic monopoly test. Higher values signal stronger monopoly power, as noted in reputable journals like the Journal of Economic Perspectives.

  5. Deadweight Loss & Welfare Effects -

    Monopolies create deadweight loss - the triangular welfare loss when price exceeds marginal cost - reducing total surplus. The area of triangle DWL = ½ × (Pm - Pc) × (Qc - Qm) illustrates this graphically in welfare economics textbooks. Recognizing this concept boosts your confidence on a market structures quiz.

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