Monopoly: exam-style questions
Written in the style of A-level papers. 40 marks. Work on screen and open the answers as you go, or print a copy.
Section A: multiple choice
1A monopolist maximises profit at the output where: [1]
- MC = AR
- MC = MR
- AC = AR
- MR = 0
Answer
B. Profit rises while each extra unit adds more to revenue than to cost, so it is maximised where MC = MR. MC = AR is the allocatively efficient output; MR = 0 maximises revenue, not profit.
2A monopolist faces a straight-line demand curve. At the output where its MR is zero, price elasticity of demand is: [1]
- perfectly inelastic
- unitary
- perfectly elastic
- greater than 1 (elastic)
Answer
B. Total revenue is at its maximum where MR is zero, and total revenue is maximised where demand is unit elastic.
3A profit-maximising monopolist with a positive marginal cost will always produce on: [1]
- the inelastic part of its demand curve
- the elastic part of its demand curve
- the point of unit elasticity
- the part of demand that lies below AC
Answer
B. MC is positive, so at MC = MR, MR is also positive. MR is positive only where demand is price elastic.
4A natural monopoly exists when: [1]
- one firm holds a patent on the product
- long-run average cost is still falling at the output that meets market demand
- the government owns the only firm in the industry
- one firm has at least 25% of the market
Answer
B. If LRAC is still falling at the level of market demand, one firm can supply the whole market more cheaply than two or more firms could.
5Compared with a perfectly competitive industry with the same costs, a profit-maximising monopoly is likely to charge: [1]
- a higher price and produce a lower output
- a lower price and produce a higher output
- a higher price and produce a higher output
- the same price and produce a lower output
Answer
A. The monopolist restricts output to where MC = MR, which is below the competitive output, and reads a higher price off the demand curve.
Section B: data and short answer
A firm is the only supplier of a specialist medical test in a region. The table shows the demand for the test each day. The firm has fixed costs of £15 a day and its marginal cost is constant at £10 per test.
| Tests per day | Price (AR), £ | Total revenue, £ | Marginal revenue, £ |
|---|---|---|---|
| 1 | 20 | ||
| 2 | 18 | ||
| 3 | 16 | ||
| 4 | 14 | ||
| 5 | 12 |
6Complete the total revenue and marginal revenue columns. [3]
Mark guidance
- Total revenue: £20, £36, £48, £56, £60 (1 mark)
- Marginal revenue: £20, £16, £12, £8, £4 (1 mark)
- All ten values correct (1 mark)
7Using the data, identify the profit-maximising number of tests and the price the firm charges. [2]
Mark guidance
- 3 tests a day (1 mark): the third test adds £12 to revenue and £10 to cost; the fourth would add £8 to revenue but £10 to cost
- Price £16 (1 mark)
8Calculate the firm’s daily profit at this output. Show your working. [2]
Mark guidance
- Total cost = £15 + (3 × £10) = £45; total revenue = £48 (1 mark)
- Profit = £48 − £45 = £3 a day (1 mark)
9Draw a diagram to show a profit-maximising monopoly making abnormal profit. Label the price, the output and the area of abnormal profit. [4]
Mark guidance
- Axes labelled (price, costs and revenue; output) with AR and MR starting from the same point, MR twice as steep (1 mark)
- MC cutting ATC at the lowest point of ATC (1 mark)
- Output where MC = MR, with price read up to AR (1 mark)
- Abnormal profit shown as the rectangle between price and ATC at that output (1 mark)
10Explain one reason why a monopoly may be able to keep abnormal profit in the long run. [4]
Mark guidance
- Identifies a barrier to entry, such as a patent, economies of scale, brand loyalty or control of a key resource (1 mark)
- Explains how it stops entry: for example, a patent makes it illegal for rivals to make the product (1 mark)
- Links to profit: without new firms, supply in the market does not rise, so the price is not pushed down (1 mark)
- Applies it: so the gap between price and average cost, and therefore abnormal profit, persists (1 mark)
Section C: extended answer
11Evaluate whether the abnormal profits earned by firms with monopoly power are always against the interests of consumers. [20]
Mark guidance
A typical split is knowledge 6, application and analysis 6, evaluation 8; check your own board’s scheme.
Analysis could include
- Profit maximisation at MC = MR gives a higher price and lower output than a competitive market with the same costs
- Price above MC means allocative inefficiency and a deadweight welfare loss; part of consumer surplus becomes producer surplus
- Output below the lowest point of ATC means productive inefficiency; lack of competition may also allow X-inefficiency
- Barriers to entry let the profit persist, so consumers cannot switch to cheaper rivals
Evaluation could include
- Dynamic efficiency: abnormal profit can fund research and new products that benefit consumers over time
- Economies of scale: a large firm may have lower costs, so its price can be below the competitive price (natural monopoly)
- Contestability: if barriers are low, the threat of entry may keep prices close to competitive levels
- Regulation such as price caps or competition authority action can limit the harm
- It depends on how high the barriers are, how the profit is used and the time period being considered
Levels
Top band: a range of points developed in full chains of reasoning, applied to the context, with judgements that are weighed and supported ("it depends on..."). Middle band: some developed chains but evaluation is one-sided or asserted. Bottom band: points listed or described without chains, little or no evaluation.