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AP Microeconomics Unit 4 Problem Set
Concept Group 1: Review of Perfect Competition
1. Explain why a firm that is making economic profit, is definitely making accounting profit.
2. If a firm is operating at a loss in the short-run, what must be true about the price?
3. Define lump-sum and per-unit subsidy and tax.
4. What costs do lump sum taxes and subsidies effect? Why?
5. What costs do per-unit subsidies and taxes effect? Why?
Concept Group 2: Introduction to Monopolies
Video Lesson:
 Video 1-“Monopoly basics”: https://www.khanacademy.org/economics-finance-domain/microeconomics/perfectcompetition-topic/monopolies-tutorial/v/monopoly-basics
 Video 2-“Monopolist optimizing price: Total revenue”: https://www.khanacademy.org/economics-financedomain/microeconomics/perfect-competition-topic/monopolies-tutorial/v/monopolist-optimizing-price-part-1-totalrevenue
 Video 3-“Monopolist optimizing price: Marginal revenue”: https://www.khanacademy.org/economics-financedomain/microeconomics/perfect-competition-topic/monopolies-tutorial/v/monopolist-optimizing-price-part-2-marginalrevenue
 Video 4-“Monopolist optimizing price: Deadweight loss”: https://www.khanacademy.org/economics-financedomain/microeconomics/perfect-competition-topic/monopolies-tutorial/v/monopolist-optimizing-price-part-2-marginalrevenue
 Video 5 (optional)-“Optional calculus proof of MR slope”: https://www.khanacademy.org/economics-financedomain/microeconomics/perfect-competition-topic/monopolies-tutorial/v/optional-calculus-proof-to-show-that-mr-hastwice-slope-of-demand
 Video 6-“Monopoly review”: https://www.khanacademy.org/economics-finance-domain/microeconomics/perfectcompetition-topic/monopolies-tutorial/v/review-of-revenue-and-cost-graphs-for-a-monopoly-1
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Explain five characteristics of monopolies.
Provide three examples of monopolies.
Explain four origins of monopolies.
Monopolies also use AFC, AVC, ATC, MC, and MR curves. Explain what each of those curves shows.
What is the difference between the MR curve of a perfectly competitive firm and the MR curve of a monopoly? Explain
why these curves are different.
11. Draw a monopoly graph that shows MC, ATC, D, and MR.
12. Explain why the MR curve is less than the demand curve. Complete the chart below, and plot on a graph.
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Price
Quantity Demanded
Total Revenue
Marginal Revenue
$11.00
0
10
1
9
2
8
3
7
4
6
5
5
6
4
7
3
8
2
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Explain the total revenue test.
Draw a graph that shows a monopoly demand and marginal revenue curve above a total revenue curve. Explain what
happens when marginal revenue hits zero. Highlight the areas of elastic and inelastic demand.
When will a monopoly produce? In the elastic, inelastic, or both ranges? Why?
What is the profit-maximizing point for a monopoly? Why is that the profit-maximizing point?
What price does a monopoly charge at that point? Why can it charge that amount?
Draw a graph that shows a monopoly making a profit.
Draw a graph that shows a monopoly making a loss.
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Figure 1
20. In figure 1, at what quantity does the monopoly produce? Why? What price does it charge? Why? Is the monopoly
making a profit or loss? How do you know?
21. In figure 1, imagine that the government sets a price ceiling at $6. What is the marginal revenue for the 6 th unit? What
quantity will be produced?
22. Draw a graph that shows the consumer surplus, producer surplus, and deadweight loss that occurs in a monopoly. Why
does a monopoly cause DWL?
23. Are monopolies productively efficient? How do you know? Draw a graph to show this phenomenon.
24. Are monopolies allocatively efficient? How do you know? Draw a graph to show this phenomenon.
25. Why do monopolies have little motivation to innovate?
26. In figure 1, if the monopoly charges a price of $5, is that price allocatively efficient? Explain.
27. What is a natural monopoly? Draw a graph to show this.
28. Give an example of a natural monopoly.
Concept Group 3: Regulating Monopolies
29. Why would the government regulate a monopoly?
30. How do governments regulate a monopoly? Why don’t they use taxes?
31. Where are the two places that that the government can place a price ceiling on a monopoly? Explain (1) the name of the
price, (2) where that price is located on the monopoly graph, and (3) the purpose of setting that price.
32. Draw a monopoly cost curve, and label the unregulated, socially optimal, and fair return prices. Which price is
allocatively efficient?
33. What can happen if the government sets a ceiling to get the socially optimal quantity? Show that on a graph?
Concept Group 4: Price Discrimination
34. Explain price discrimination. Provide 3 or more examples.
35. When monopolies price discriminate, who gets charged a higher price? Who gets charged lower prices?
36. What are three conditions that must be present for a firm to price discriminate?
37. When a firm price discriminates, what does marginal revenue equal? What are the results of price discrimination?
38. Draw a graph of a price discriminating monopoly. Show the price, CS, and profit.
Concept Group 2-4 FRQs: Complete FRQ #1-4
Concept Group 5: Monopolistic Competition
Video Lessons
 Video 7-“Oligopolies and monopolistic competition”: https://www.khanacademy.org/economics-financedomain/microeconomics/perfect-competition-topic/monopolistic-competition-oligop/v/oligopolies-and-monopolisitccompetition
 Video 8-“Monopolistic competition and economic profit”: https://www.khanacademy.org/economics-financedomain/microeconomics/perfect-competition-topic/monopolistic-competition-oligop/v/monopolistic-competition-andeconomic-profit
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Explain five characteristics of monopolistically competitive firms.
Provide five examples of monopolistically competitive firms.
Explain how monopolistically competitive firms are “monopolistic” and how they are “perfectly competitive.”
Define, and give some examples of, non-price competition.
What are two goals of advertising?
Draw a graph of a monopolistically competitive firm making a profit or a loss in the short run.
Draw a graph of a monopolistically competitive firm in the long run.
Explain if monopolistically competitive firms are or aren’t allocatively efficient.
Explain what excess capacity is.
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48. Draw a graph that shows a monopolistically competitive firm producing with excess capacity.
49. What are the advantages of being a monopolistically competitive firm?
Figure 2
50. In figure 2, explain if the firm is making a profit or a loss. How do you know? Shade the area of profit or loss. What will
happen in the long run?
51. In figure 2, what must be true if this company continues to produce?
52. Assume that in figure 2 demand increases and the firm is now earning short-run economic profits. How does that affect
the number of firms and the company’s profits in the long run?
53. In figure 2, if the company continues to produce, will it produce at the allocatively efficient level of output? Explain.
54. In figure 2, in the long-run, will the company be operating in a region where economies of scale exists? Explain.
55. What profits will a monopolistically competitive firm earn in the long run? Explain.
Concept Group 5 FRQs: Complete FRQ #5-7
Concept Group 6: Oligopoly
Video Lessons
 Video 9-“Oligopolies to cartels”: https://www.khanacademy.org/economics-finance-domain/microeconomics/perfectcompetition-topic/monopolistic-competition-oligop/v/oligopolies-duopolies-collusion-and-cartels
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Explain five characteristics of oligopolies.
Provide three examples of oligopolies.
Explain three barriers to entry in oligopolistic firms.
What is game theory?
Why are oligopolies interdependent?
Explain what a “Prisoner’s Dilemma” is. Draw the decision matrix.
Define “dominant strategy.”
Create a decision matrix for a firm, and explain what a firm’s dominant strategy is.
Explain Nash equilibrium.
Firm A
Sell more peaches
Sell more apples
Sell more peaches
120, 85
150, 120
Sell more apples
65, 100
50, 80
Firm B
65. Look at the decision matrix above. What is Firm A’s dominant strategy? What is firm B’s dominant strategy? Where is
Nash equilibrium?
Fun Company
Raise Prices
Silly Company
Lower Prices
Raise Prices
Lower Prices
Fun: 150
Fun: -100
Silly: 150
Silly: 400
Fun: 400
Fun: 0
Silly: -100
Silly: 0
66. Look at the decision matrix above. If Silly Co. raises prices and Fun Co. does not, Silly’s what will happen to Silly’s
profits?
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What will happen if Silly Co. raises prices?
Explain how oligopolies price their products.
Describe “price leadership” and how prices are set.
What is a cartel? Draw a graph for a cartel.
Draw a kinked demand curve for a non-colluding oligopoly. Label the elastic and inelastic ranges, and show the MC
curve.
Concept Group 6 FRQs: Complete FRQ #8-10
MONOPOLY FRQ
1.
2011 A #1
4
2.
2006 B #1
3.
2006 A #1
5
4.
2008 B #1
6
MONOPOLISTIC COMPETITION
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2009 B #1
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2007 A #1
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2007 B #1
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OLIGOPOLY
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2009 B #3
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2007 A #3
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10. 2007 B #2
Multiple Choice Practice
Identify the following market structures to answer questions 1-5 below:
1. Refer to the above figures. We would expect industry entry and exit to be relatively easy in:
A) Figure A. B) Figure C. C) Figure B. D) Figures B and D. E) Figures A and C.
2. Refer to the above figures. Both allocative and productive efficiency are being realized in:
A) all four figures. B) Figures B and D. C) Figure A. D) Figure B. E) Figure D.
3. Refer to the above figures. Collusion is most likely to occur in the industry(ies) represented by:
A) Figure A. B) Figure B. C) Figure C. D) Figure D. E) both Figures B and D.
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4. Refer to the above figures. Long-run economic profits are most likely to occur in:
A) Figures A and B. B) Figure B C) Figure D. D) Figures A and C.
E) Figure A.
5. Refer to the above figures. A homogeneous (standardized) product is most likely to be produced in:
A) Figure A. B) Figure B. C) Figure C. D) Figure D. E) Figures A and C.
6. Nonprice competition refers to:
A) competition between products of different industries, for example, competition between aluminum and steel in the
manufacture of automobile parts.
B) price increases by a firm that are ignored by its rivals.
C) advertising, product promotion, and changes in the real or perceived characteristics of a product.
D) reductions in production costs that are not reflected in price reductions.
E) Price wars resulting from a breakdown in price leadership
7. Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because:
A) the number of firms in a monopolistic competitive industry is larger.
B) monopolistically competitive firms realize economic profits in the long run.
C) of product differentiation and consequent advertising activities.
D) monopolistically competitive producers use strategic pricing strategies to combat rivals.
E) firms have the incentive to form a cartel
8. Excess capacity refers to the:
A) amount by which actual production falls short of the minimum ATC output.
B) fact that entry barriers artificially reduce the number of firms in an industry.
C) differential between price and marginal costs which characterizes monopolistically competitive firms.
D) fact that most monopolistically competitive firms encounter diseconomies of scale.
E) fact that firms produce more than the socially optimal output
9. When a monopolistically competitive firm is in long-run equilibrium:
A) production takes place at minimum ATC.
B) marginal revenue equals marginal cost and price equals average total cost.
C) there is normal profit and marginal revenue is perfectly elastic
D) there is normal profit and price equals marginal cost.
E) they are productively efficient.
10. Game theory can be used to demonstrate that oligopolists:
A) rarely consider the potential reactions of rivals.
B) experience economies of scale.
C) extensively use advertising to increase demand
D) may be either homogeneous or differentiated.
E) can increase their profits through collusion.
11. The kinked-demand curve of an oligopolist is based on the assumption that:
A) competitors will follow a price cut but ignore a price increase.
B) competitors will match both price cuts and price increases.
C) competitors will ignore a price cut but follow a price increase.
D) there is no product differentiation.
E) collusion will lead to a vertical gap in the marginal revenue curve
12. Advertising can hinder economic efficiency in an industry when it:
A) reduces brand loyalty.
B) increases entry barriers.
C) enables firms to achieve substantial economies of scale.
D) increases consumer awareness of substitute products.
E) allows new firms to easily enter the industry.
13. Product differentiation is a key characteristic of:
A) purely competitive markets only.
B) monopolistically competitive markets only.
C) monopolistic markets only.
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D) both monopolistically competitive and perfectly competitive markets.
E) All firms that make economic profit in the long run.
14. Pure monopolists may obtain economic profits in the long run because:
A) of advertising.
B) marginal revenue is constant as sales increase.
C) of barriers to entry
D) of non-price competition
E) of diseconomies of scale
15. The pure monopolist's demand curve is relatively elastic:
A) in the price range where total revenue is declining.
B) at all points where the demand curve lies above the horizontal axis.
C) in the price range where marginal revenue is negative.
D) in the price range where marginal revenue is positive.
E) in the range where marginal costs are falling
16. A perfectly price discriminating pure monopolist:
A) produces less output than a non-price discriminating monopoly.
B) produces the same output as a perfectly competitive industry.
C) charges a price which equals the buyer's marginal cost.
D) provides a larger amount of consumer surplus that a non-price discriminating monopoly.
E) charges a price where MR=MC.
17. Refer to the above diagram for a natural monopolist. If the monopolist is unregulated, it will maximize profits by charging:
A) at the socially optimal price
B) a price above P3 and selling a quantity less than Q3.
C) price P3 and producing output Q3.
D) price P2 and producing output Q2.
E) price P1 and producing output Q1.
18. Refer to the above diagram for a natural monopolist. If a governmental regulatory commission forced the monopoly to
produce at the allocatively efficient level of production:
A) the monopoly would incur a profit.
B) the government would have to provide a subsidy.
C) output will decrease.
D) the firm will earn only a normal profit.
E) price will equal minimum ATC
19. Which of the following is true of a pure monopolist’s demand curve?
(A) It is perfectly inelastic.
(B) It is perfectly elastic.
(C) It coincides with its marginal revenue curve.
(D) It lies below its marginal revenue curve.
(E) It lies above its marginal revenue curve.
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20. For the firm in the graph—an unregulated monopolist—the price elasticity of demand is unit elastic at a price and output of
(A) P3 and Q.
(B) P2 and Q2.
(C) P1 and Q1.
(D) P4 and Q3.
(E) P2 and Q3.
21. The profit-maximizing production output for this firm Is
(A) Q1.
(B) Q2.
(C) Q3.
(D) Q.
(E) 0.
22. The profit-maximizing price for this firm is
(A) P1.
(B) P2.
(C) P3.
(D) P4.
(E) Q1.
23. The profit per unit for this firm is
(A) P1 P2.
(B) P3 P4.
(C) P3 P2.
(D) P1 P4.
(E) P2 P3.
24. What happens to a monopolist’s price, profits, and output if fixed costs decrease?
Price
Profits
Output
A.
Decrease
Increase
Decrease
B.
Decrease
Decrease
Decrease
C.
No change
Increase
No change
D.
Increase
Increase
Increase
E.
Decrease
No change
Increase
25. In the long run, a monopolistically competitive firm will make
(A) more economic profit than a perfectly competitive firm.
(B) less economic profit than a perfectly competitive firm.
(C) more economic profit than a monopoly.
(D) more economic profit than an oligopolist.
(E) zero economic profit.
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