Module M07 Quiz: Monopoly
30 questions · Introductory · Mix of multiple choice, calculation, and short answer
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Attempt each question before clicking Show Answer. For calculation questions, write out your working first.
Question 1
Lesson L01 · Market Structure
Which is a natural barrier to entry for a monopolist?
Type: Multiple Choice
- A) Government price controls
- B) Economies of scale so large that one firm can supply the market at lower cost than two
- C) Patents on all consumer goods
- D) Advertising expenditure
Show Answer
Answer: B) Economies of scale so large that one firm can supply the market at lower cost than two
Natural monopolies arise when LRATC is still falling at the quantity demanded — one firm is most efficient.
Question 2
Lesson L01 · Market Structure
Australia Post holds a legal monopoly on which service?
Type: Multiple Choice
- A) Parcel delivery
- B) Standard letter delivery under 250g
- C) Express post
- D) International mail
Show Answer
Answer: B) Standard letter delivery under 250g
Australia Post holds a legislated monopoly on ordinary letter delivery — a statutory barrier to entry.
Question 3
Lesson L01 · Market Structure
A firm has 100% market share in widgets. Its monopoly profit is $2m/yr. If barriers fall and a competitor enters with 40% market share, estimate the original firm's new profit assuming linear demand and equal costs.
Type: Calculation
Show Answer
Answer: $720,000
With 60% market share, revenue roughly halves relative to full monopoly. Rough estimate: 60%^2 × $2m ≈ $720k (Cournot-style intuition).
Question 4
Lesson L01 · Market Structure
Explain why network effects create a barrier to entry in technology markets.
Type: Short Answer
Show Answer
Answer: Network effects mean a product's value rises with users. An entrant with few users offers less value than the incumbent, making it very hard to attract customers away even with a superior product.
The incumbent's large user base is itself a barrier — switching costs and reduced network value deter defection.
Question 5
Lesson L01 · Market Structure
Which of the following is NOT a barrier to entry?
Type: Multiple Choice
- A) Patent protection
- B) High sunk costs
- C) Lower costs than rivals due to scale
- D) A new firm entering the market
Show Answer
Answer: D) A new firm entering the market
A new firm entering is the result of barriers being overcome, not a barrier itself.
Question 6
Lesson L02 · Market Structure
For a monopolist with linear demand P=100-Q, what is the marginal revenue function?
Type: Multiple Choice
- A) MR=100-Q
- B) MR=100-2Q
- C) MR=50-Q
- D) MR=100+Q
Show Answer
Answer: B) MR=100-2Q
For linear demand P=a-bQ, MR=a-2bQ — twice the slope. Here MR=100-2Q.
Question 7
Lesson L02 · Market Structure
Why is marginal revenue less than price for a monopolist?
Type: Multiple Choice
- A) The monopolist has lower costs
- B) To sell one more unit the monopolist must lower price on ALL units sold not just the marginal one
- C) Monopolists face elastic demand
- D) Government regulation forces lower MR
Show Answer
Answer: B) To sell one more unit the monopolist must lower price on ALL units sold not just the marginal one
The price reduction to sell one more unit applies to all existing units — the revenue gain on the new unit is offset by revenue lost on inframarginal units.
Question 8
Lesson L02 · Market Structure
Demand: P=80-2Q. Calculate MR when Q=10.
Type: Calculation
Show Answer
Answer: $40
MR=80-4Q; at Q=10: MR=80-40=$40.
Question 9
Lesson L02 · Market Structure
Why does the MR curve lie below the demand curve for a monopolist but coincide with it for a perfectly competitive firm?
Type: Short Answer
Show Answer
Answer: A price-taking firm can sell any quantity at the market price without affecting it — each unit adds exactly P to revenue. A monopolist must lower price to sell more, so each additional unit adds less than P to total revenue.
Market power means the firm faces a downward-sloping demand, creating a wedge between P and MR.
Question 10
Lesson L02 · Market Structure
At what output does a monopolist maximise revenue (not profit)?
Type: Multiple Choice
- A) Where MR=MC
- B) Where MR=0 (unit elastic point on demand)
- C) Where P=ATC
- D) Where demand is inelastic
Show Answer
Answer: B) Where MR=0 (unit elastic point on demand)
Total revenue is maximised where MR=0 (|PED|=1). Profit maximisation requires MR=MC which is typically at lower output.
Question 11
Lesson L03 · Market Structure
A monopolist faces P=120-Q and MC=20. What is profit-maximising output?
Type: Calculation
Show Answer
Answer: Q*=50
MR=120-2Q=MC=20 → 2Q=100 → Q*=50
Question 12
Lesson L03 · Market Structure
Using P=120-Q and MC=20 from Q1, what price does the monopolist charge?
Type: Calculation
Show Answer
Answer: P*=$70
P=120-Q*=120-50=$70
Question 13
Lesson L03 · Market Structure
A monopolist charges $70, ATC at profit-max output is $45. Output is 50 units. What is total profit?
Type: Calculation
Show Answer
Answer: $1,250
Profit=(P-ATC)×Q=(70-45)×50=$1,250
Question 14
Lesson L03 · Market Structure
Why do monopolists always produce in the elastic portion of their demand curve?
Type: Short Answer
Show Answer
Answer: In the inelastic region MR is negative — producing more would reduce total revenue and increase costs, reducing profit. Profit maximisation (MR=MC≥0) requires operating where MR≥0, which is the elastic region.
Where |PED|<1, MR<0 — no profit-maximising firm would produce there.
Question 15
Lesson L03 · Market Structure
A monopolist faces MC=ATC=$30 at all outputs. If demand is P=100-Q, what is economic profit?
Type: Calculation
Show Answer
Answer: $1,225
MR=100-2Q=30→Q*=35; P*=65; Profit=(65-30)×35=$1,225
Question 16
Lesson L04 · Market Structure
Compared to perfect competition, a monopolist produces:
Type: Multiple Choice
- A) More output at a lower price
- B) Less output at a higher price
- C) The same output at a higher price
- D) Less output at a lower price
Show Answer
Answer: B) Less output at a higher price
Monopolist restricts Q below competitive level to raise P above MC, creating deadweight loss.
Question 17
Lesson L04 · Market Structure
Deadweight loss from monopoly arises because:
Type: Multiple Choice
- A) The monopolist earns excess profit
- B) Units that would create positive surplus are not produced because P>MC
- C) The government taxes monopoly profit
- D) Consumers have less income
Show Answer
Answer: B) Units that would create positive surplus are not produced because P>MC
DWL = units not produced where WTP > MC. The monopolist restricts output to Q* < Q_competitive.
Question 18
Lesson L04 · Market Structure
With P=100-Q and MC=20, calculate the deadweight loss from monopoly vs perfect competition.
Type: Calculation
Show Answer
Answer: $1,250
PC: Q=80,P=20. Monopoly: Q=50,P=70. DWL=0.5×(70-20)×(80-50)=0.5×50×30=\(750. (Note: exact value depends on method; triangle area = 0.5×base×height=\)750)
Question 19
Lesson L04 · Market Structure
Why is natural monopoly difficult to regulate efficiently?
Type: Short Answer
Show Answer
Answer: Setting P=MC (efficient) may force the firm to price below ATC causing losses and exit. Setting P=ATC (break-even) eliminates losses but still creates some DWL. The regulator faces a trade-off between efficiency and financial viability.
There is no pricing rule that achieves both allocative efficiency and financial sustainability without a subsidy.
Question 20
Lesson L04 · Market Structure
Which best describes the welfare transfer in a monopoly compared to competitive equilibrium?
Type: Multiple Choice
- A) Society gains welfare from monopoly pricing
- B) Consumer surplus is transferred to producer surplus plus there is an irreversible DWL
- C) Producer surplus is transferred to consumers
- D) There is no welfare change
Show Answer
Answer: B) Consumer surplus is transferred to producer surplus plus there is an irreversible DWL
The monopoly profit rectangle represents a transfer from consumers to the monopolist; the DWL triangle is lost to everyone.
Question 21
Lesson L05 · Market Structure
Which condition is NOT required for price discrimination to work?
Type: Multiple Choice
- A) Market power
- B) Ability to identify and separate consumer groups
- C) No arbitrage (resale) between groups
- D) Government permission to discriminate
Show Answer
Answer: D) Government permission to discriminate
Price discrimination requires market power, identifiable groups, and prevention of resale — no government permission is needed.
Question 22
Lesson L05 · Market Structure
Student discounts at cinemas are an example of:
Type: Multiple Choice
- A) First-degree price discrimination
- B) Second-degree price discrimination
- C) Third-degree price discrimination
- D) Predatory pricing
Show Answer
Answer: C) Third-degree price discrimination
Third-degree PD charges different prices to identifiable groups (students vs adults) based on different demand elasticities.
Question 23
Lesson L05 · Market Structure
A monopolist can perfectly price discriminate. Demand: P=100-Q, MC=20. What is total output and profit?
Type: Calculation
Show Answer
Answer: Q=80; Profit=$3,200
With perfect PD, firm sets P=MC at margin → Q=80 (same as PC). Profit = entire consumer surplus = area of triangle = 0.5×80×80=$3,200
Question 24
Lesson L05 · Market Structure
Why does first-degree price discrimination eliminate deadweight loss?
Type: Short Answer
Show Answer
Answer: The firm charges each consumer exactly their WTP, so every unit where WTP≥MC is sold. No mutually beneficial transactions are foregone — the efficient quantity is produced.
With perfect PD, the firm captures all surplus but produces the efficient quantity.
Question 25
Lesson L05 · Market Structure
Airlines charge different prices to business and leisure travellers for the same route. This is:
Type: Multiple Choice
- A) First-degree PD
- B) Second-degree PD
- C) Third-degree PD
- D) Not price discrimination because the seats are identical
Show Answer
Answer: C) Third-degree PD
Airlines identify business/leisure travellers (via booking timing, flexibility) and exploit their different elasticities — classic third-degree PD.
Question 26
Lesson L06 · Market Structure
The ACCC can authorise a merger if it finds the merger will not:
Type: Multiple Choice
- A) Increase profits for the merging firms
- B) Substantially lessen competition in a market
- C) Create a firm larger than $1bn
- D) Reduce employment
Show Answer
Answer: B) Substantially lessen competition in a market
The ACCC assesses mergers under the substantial lessening of competition (SLC) test under the Competition and Consumer Act 2010.
Question 27
Lesson L06 · Market Structure
A natural monopoly has LRATC=\(30 at all outputs and demand P=80-Q. The regulator sets P=LRATC=\)30. What is output?
Type: Calculation
Show Answer
Answer: Q=50
P=80-Q=30 → Q=50. At this price the firm breaks even (zero economic profit) but does not achieve allocative efficiency (P>MC only if MC<LRATC).
Question 28
Lesson L06 · Market Structure
Which regulatory approach gives the NBN operator a guaranteed return on capital but weakest incentive for cost efficiency?
Type: Multiple Choice
- A) Price cap regulation
- B) Rate-of-return regulation
- C) Public ownership
- D) Deregulation
Show Answer
Answer: B) Rate-of-return regulation
Rate-of-return regulation allows the firm to earn a set return — it has no incentive to cut costs since higher costs are passed through.
Question 29
Lesson L06 · Market Structure
Describe one way the ACCC has used access regulation to promote competition.
Type: Short Answer
Show Answer
Answer: The ACCC can declare infrastructure (e.g. NBN network, gas pipelines, airports) as regulated access services, requiring the owner to provide access to competitors on non-discriminatory terms at regulated prices.
Access regulation prevents infrastructure owners from using their bottleneck position to foreclose downstream competition.
Question 30
Lesson L06 · Market Structure
Why might the Supermarket Code of Conduct be preferred over a forced divestiture of Coles or Woolworths?
Type: Multiple Choice
- A) Divestiture is illegal in Australia
- B) Breaking up firms is irreversible and may sacrifice scale economies; a code addresses conduct without restructuring the industry
- C) A code generates more ACCC revenue
- D) Divestiture reduces competition
Show Answer
Answer: B) Breaking up firms is irreversible and may sacrifice scale economies; a code addresses conduct without restructuring the industry
Structural remedies (divestiture) are blunt and permanent. Conduct remedies address specific harmful behaviours while preserving efficiency gains from scale.