Page 664 - Krugmans Economics for AP Text Book_Neat

2. True or false? Explain your answer. 3. Suppose a monopolist mistakenly believes that her or his
a. Society’s welfare is lower under monopoly because some marginal revenue is always equal to the market price. Assuming
consumer surplus is transformed into profit for the constant marginal cost and no fixed cost, draw a diagram
monopolist. comparing the level of profit, consumer surplus, total surplus,
b. A monopolist causes inefficiency because there are and deadweight loss for this misguided monopolist compared
consumers who are willing to pay a price greater than or to a smart monopolist.
equal to marginal cost but less than the monopoly price.

Tackle the Test: Multiple-Choice Questions
1. Which of the following statements is true of a monopoly as c. use price regulation
compared to a perfectly competitive market with the same d. public ownership
costs? e. elimination of the market
I. Consumer surplus is smaller.
4. Which of the following markets is an example of a regulated
II. Profit is smaller.
natural monopoly?
III. Deadweight loss is smaller.
a. local cable TV
a. I only
b. gasoline
b. II only
c. cell phone service
c. III only
d. organic tomatoes
d. I and II only
e. diamonds
e. I, II, and III
5. Which of the following is most likely to be higher for a
2. Which of the following is true of a natural monopoly?
regulated natural monopoly than for an unregulated natural
a. It experiences diseconomies of scale.
monopoly?
b. ATC is lower if there is a single firm in the market.
a. product variety
c. It occurs in a market that relies on natural resources for its
b. quantity
production.
c. price
d. There are decreasing returns to scale in the industry.
d. profit
e. The government must provide the good or service to achieve
e. deadweight loss
efficiency.
3. Which of the following government actions is the most
common for a natural monopoly in the United States?
a. prevent its formation
b. break it up using antitrust laws
Tackle the Test: Free-Response Questions
1. Draw a correctly labeled graph showing a profit-making natural
Answer (9 points)
monopoly. On your graph, indicate each of the following:
a. the monopoly’s profit-maximizing output (Q M ) Price, cost,
b. the monopoly’s price (P M ) marginal
revenue
c. the monopoly’s profit
d. the regulated price that would maximize consumer surplus
Profit
without creating losses for the firm (P R )
P M
P R ATC
MC
D
MR
Q M Q R Quantity

622 section 11 Market Structures: Perfect Competition and Monopoly