These are original Marlbridge practice questions, not past exam questions. The mark points are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. All firms and data are fictional. Every monopoly here charges a single price to all buyers. A four-function calculator is enough.
Question 1 (multiple choice · core)
A monopoly finds that MR = MC at 300 units per week. At that quantity, the demand curve shows a price of $25, marginal cost is $12 and average total cost is $18. Which of the following describes its profit-maximising choice?
- (A) It charges $12 and earns zero economic profit.
- (B) It charges $25 and earns a weekly profit of $2,100.
- (C) It charges $25 and earns a weekly profit of $3,900.
- (D) It charges $18 and earns a weekly profit of $1,800.
Answer and explanation
Answer: (B). The price comes from the demand curve at the MR = MC quantity: $25. Profit = (P − ATC) × Q = (25 − 18) × 300 = $2,100.
- (A) reads the price from the MC curve, as a price taker would. A monopoly charges what buyers will pay for 300 units.
- (C) subtracts marginal cost instead of average total cost: (25 − 12) × 300 = 3,900. Profit needs the average cost of all units.
- (D) uses ATC as the price, and then calculates (18 − 12) × 300, which is not profit at all.
Question 2 (multiple choice · core)
Which situation best describes a natural monopoly?
- (A) One firm’s long-run average total cost is still falling at every quantity the market demands, so a single firm can supply the market more cheaply than two or more firms.
- (B) A firm owns the only supply of a natural resource, such as a mineral spring.
- (C) A firm holds a patent that gives it the sole right to sell a new medicine.
- (D) A firm’s long-run average total cost rises as it grows, so it stays small.
Answer and explanation
Answer: (A). A natural monopoly comes from economies of scale across the whole range of market demand.
- (B) is a monopoly based on control of a key resource. The word “natural” in the resource does not make it a natural monopoly.
- (C) is a legal (patent) monopoly.
- (D) describes diseconomies of scale, which favour many small firms, the opposite of a natural monopoly.
Question 3 (multiple choice · core)
Compare an unregulated monopoly with a perfectly competitive industry that has the same demand and the same marginal cost. The monopoly will have:
- (A) a higher price and the same output, so the only change is a transfer from buyers to the seller
- (B) a lower price, because it can use economies of scale that small firms cannot
- (C) a higher price and higher output, because it earns more profit to invest
- (D) a higher price, lower output, smaller consumer surplus and a deadweight loss
Answer and explanation
Answer: (D). The monopoly produces where MR = MC, which is a smaller quantity than where demand meets MC. Price is read from demand at that smaller quantity, so it is higher. Consumer surplus shrinks, and the surplus on the units no longer traded is lost: a deadweight loss.
- (A) misses the fall in output. If output stayed the same, there would be a transfer but no deadweight loss.
- (B) changes the assumption: the question says marginal cost is the same in both cases.
- (C) is wrong because higher price and higher output cannot both happen on a downward-sloping demand curve.
Question 4 (calculation · core)
Tamber Instruments (fictional) holds a patent on a digital tuning fork. Quantity is in thousand units per month; price and MC are in $ per unit; revenue and cost are in $ thousand per month. Fixed cost is $50 thousand per month.
| Q | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Price | 95 | 85 | 75 | 65 | 55 | 45 |
| MC | 15 | 20 | 28 | 32 | 45 | 60 |
(a) Calculate TR and MR, and find Tamber’s profit-maximising quantity and price. (b) Calculate Tamber’s maximum profit and its ATC at that quantity. (c) At what quantity is total revenue largest? Is Tamber producing on the elastic or inelastic part of its demand curve? Explain. (d) Tamber’s fixed cost rises by $150 thousand per month. What happens to its quantity, price and profit? Should it keep producing in the short run?
Worked solution
(a)
| Q | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| TR | 95 | 170 | 225 | 260 | 275 | 270 |
| MR | 95 | 75 | 55 | 35 | 15 | −5 |
MR ≥ MC up to Q = 4 (35 > 32); at Q = 5, MR = 15 < MC = 45. So Q = 4 thousand units and, from demand, P = $65.
(b) TC = 50 + 15 + 20 + 28 + 32 = 145. Profit = 260 − 145 = $115 thousand. ATC = 145 ÷ 4 = $36.25. Check: (65 − 36.25) × 4 = 115. Profit at Q = 3 (225 − 113 = 112) and Q = 5 (275 − 190 = 85) is lower.
(c) TR is largest ($275 thousand) at Q = 5. At Q = 4, MR is positive ($35), so a price cut would raise TR: demand is elastic there.
(d) Fixed cost does not change MR or MC, so Q stays 4 thousand and P stays $65. Profit falls by 150 to 115 − 150 = −$35 thousand, a loss. It should keep producing in the short run: TR ($260 thousand) covers variable cost (15 + 20 + 28 + 32 = $95 thousand), so P ($65) is above AVC ($23.75). Shutting down would mean losing the whole $200 thousand fixed cost. If the loss lasts, it leaves the market in the long run.
Suggested mark points (4): 1 for Q = 4 using MR and MC; 1 for P = $65 from demand; 1 for profit $115 thousand with working; 1 for (c) and (d) both correct with reasons.
Common error: choosing Q = 5 because TR is highest there. A monopoly maximises profit, not revenue.
Question 5 (graph · core)
A monopoly that is not a natural monopoly earns a positive economic profit.
(a) Draw a correctly labelled graph showing the firm’s demand, MR, MC and ATC curves. Label the profit-maximising quantity Qm and price Pm. (b) Shade and label the area of economic profit. (c) Label the allocatively efficient quantity Qe, and shade and label the deadweight loss. (d) Shade and label consumer surplus at Pm.
Model answer and suggested Marlbridge rubric
Axes: vertical “Price, cost ($)”; horizontal “Quantity”.
(a) Downward-sloping D; MR below D starting at the same price-axis point. U-shaped ATC with an upward-sloping MC through its lowest point. Qm is where MR crosses MC; Pm is on D directly above Qm, and above ATC at Qm.
(b) Profit: the rectangle with height Pm minus ATC at Qm, and width 0 to Qm.
(c) Qe is where D crosses MC, to the right of Qm. Deadweight loss: the triangle bounded by D (above), MC (below) and the vertical line at Qm, with its point where D meets MC.
(d) Consumer surplus: the triangle below D and above the horizontal line at Pm, from 0 to Qm.
| Point | What earns it |
|---|---|
| 1 | Correctly labelled axes; D and MR with MR below D |
| 1 | Qm at MR = MC and Pm read from D above Qm |
| 1 | Profit rectangle between Pm and ATC at Qm |
| 1 | Qe where D = MC, and DWL triangle between D and MC from Qm to Qe |
| 1 | Consumer surplus triangle above Pm, below D, up to Qm |
Do not award the second point if Pm is placed where MR meets MC.
Question 6 (calculation · core)
Dravel Rail (fictional) is the only train company on a route. Monthly demand is P = 120 − 2Q, so MR = 120 − 4Q (Q in thousand tickets, P in $). Marginal cost and average total cost are both constant at $20.
(a) Find the profit-maximising quantity, price and profit. (b) Calculate consumer surplus and the deadweight loss. (c) If the route were served by a perfectly competitive industry with the same costs, what would consumer surplus be? How much of the lost consumer surplus goes to Dravel as profit? (d) Dravel’s revenue would be largest at 30 thousand tickets. Explain why Dravel does not choose this quantity.
Worked solution
All money values are in $ thousand per month.
(a) MR = MC: 120 − 4Q = 20, so Q = 25 thousand tickets. Price: 120 − 2 × 25 = $70. Profit = (70 − 20) × 25 = 1,250.
(b) CS = ½ × (120 − 70) × 25 = 625. Competitive quantity where P = MC: 120 − 2Q = 20, so Q = 50. DWL = ½ × (70 − 20) × (50 − 25) = 625.
(c) Competitive CS = ½ × (120 − 20) × 50 = 2,500. Consumers lose 2,500 − 625 = 1,875; of that, 1,250 becomes Dravel’s profit and 625 is the deadweight loss (1,250 + 625 = 1,875).
(d) At 30 thousand tickets, MR = 120 − 120 = 0, but each ticket still costs $20 to provide. The tickets between 25 and 30 thousand add less to revenue than to cost, so they reduce profit.
Suggested mark points (4): 1 for Q = 25 and P = $70; 1 for profit 1,250; 1 for CS 625 and DWL 625; 1 for (c) and (d) correct.
Question 7 (explanation · stretch)
Fendle Fibre (fictional) owns the only broadband cable network in a city. Its long-run total cost is TC = 1,200 + 5Q, where Q is thousand subscribers per month and TC is in $ thousand per month. Monthly demand is P = 21 − 0.05Q, so MR = 21 − 0.1Q.
(a) Calculate ATC at 100, 200 and 300 thousand subscribers. What do the results show? (b) Compare the cost of serving 300 thousand subscribers with one firm and with three equal firms. Use this to explain why the market is a natural monopoly. (c) Find Fendle’s profit-maximising quantity, price and profit. (d) A new firm considers laying its own cables and winning 60 thousand subscribers at Fendle’s price. Use ATC to explain why it is unlikely to enter.
Model answer and suggested Marlbridge rubric
(a) ATC = 1,200 ÷ Q + 5: $17, $11 and $9. ATC keeps falling as output rises (MC of $5 is always below ATC), so there are economies of scale across the range shown.
(b) One firm: 1,200 + 5 × 300 = $2,700 thousand. Three firms of 100 each: 3 × (1,200 + 500) = $5,100 thousand. Each extra firm repeats the large fixed cost of a network. Because ATC is falling over the whole range of market demand (demand reaches zero price at 420 thousand), one firm can supply the market at the lowest total cost: a natural monopoly.
(c) MR = MC: 21 − 0.1Q = 5, so Q = 160 thousand subscribers. Price: 21 − 0.05 × 160 = $13. ATC = 1,200 ÷ 160 + 5 = $12.50. Profit = (13 − 12.50) × 160 = $80 thousand per month.
(d) With 60 thousand subscribers, the entrant’s ATC would be 1,200 ÷ 60 + 5 = $25, far above the $13 price. It would make a loss, so it stays out. The high fixed cost of a network acts as a barrier to entry.
| Point | What earns it |
|---|---|
| 1 | Three ATC values and the conclusion that ATC falls (economies of scale) |
| 1 | $2,700 vs $5,100 thousand, linked to repeating the fixed cost |
| 1 | Q = 160, P = $13 from demand, profit $80 thousand |
| 1 | Entrant’s ATC $25 > $13, so a loss, so no entry |
Accept any correct use of the cost figures in (b), for example ATC $9 for one firm against $17 for each of three firms.
How did you do?
- Q1, Q4 or Q6 wrong: re-read “How a monopoly chooses its output” and Worked examples 1 and 2 in the study guide. Read the price from demand, and use ATC for profit.
- Q3 or Q5 marked down: re-read “Reading a monopoly graph”, Figure 1 and “Monopoly compared with perfect competition”.
- Q2 or Q7 incomplete: re-read “Natural monopoly” and Worked example 3.
Then tick off the topic checklist.