Test Your Knowledge: Calculate Monopoly Profit/Loss Graphically Quiz

📚 Quick Study Guide

• 📈 Demand Curve: Represents the quantity consumers are willing to buy at different prices. For a monopolist, this is the market demand curve.
• 💰 Marginal Revenue (MR): The additional revenue from selling one more unit. For a monopolist, MR is always below the demand curve because to sell more, they must lower the price on all units.
• ⚙️ Marginal Cost (MC): The additional cost of producing one more unit.
• ⚖️ Profit Maximization: Monopolists maximize profit where Marginal Revenue (MR) equals Marginal Cost (MC). This determines the quantity ($Q^*$).
• 💲 Price Determination: The price ($P^*$) is found by going up from the optimal quantity ($Q^*$) to the demand curve.
• 📉 Average Total Cost (ATC): The total cost divided by the quantity. If ATC is below the price at $Q^*$, the monopolist makes a profit. If ATC is above the price, the monopolist incurs a loss.
• 🔑 Profit Calculation: Profit = $(P^* - ATC) \times Q^*$. If this value is negative, it represents a loss.
• 📊 Graphical Representation: Profit is represented by the area of a rectangle with height $(P^* - ATC)$ and width $Q^*$.

Practice Quiz

1. A monopolist maximizes profit at the quantity where:

   1. A) Marginal Cost (MC) equals Average Total Cost (ATC)
   2. B) Marginal Revenue (MR) equals Average Total Cost (ATC)
   3. C) Marginal Revenue (MR) equals Marginal Cost (MC)
   4. D) Price equals Marginal Cost (MC)

2. On a graph, the price a monopolist charges is found:

   1. A) At the intersection of MR and MC.
   2. B) Where the MC curve intersects the demand curve.
   3. C) By going up from the quantity where MR=MC to the demand curve.
   4. D) Where ATC is minimized.

3. If, at the profit-maximizing quantity, a monopolist's Average Total Cost (ATC) is above the price, the monopolist is:

   1. A) Making a profit.
   2. B) Breaking even.
   3. C) Incurring a loss.
   4. D) Necessarily shutting down.

4. The area representing a monopolist's profit on a graph is a rectangle with the height equal to:

   1. A) Price minus Marginal Cost (P - MC).
   2. B) Price minus Average Total Cost (P - ATC).
   3. C) Marginal Revenue minus Marginal Cost (MR - MC).
   4. D) Price minus Average Variable Cost (P - AVC).

5. What does the monopolist's demand curve represent?

   1. A) The individual firm's demand.
   2. B) The market demand.
   3. C) The combined demand of all firms in the industry.
   4. D) The demand for a specific product feature.

6. Why is the Marginal Revenue (MR) curve below the demand curve for a monopolist?

   1. A) Because of government regulations.
   2. B) Because the monopolist must lower the price on all units to sell more.
   3. C) Because the monopolist's costs are higher.
   4. D) Because of consumer surplus.

7. If a monopolist's $P = 10$, $ATC = 8$, and $Q = 5$, what is the profit?

   1. A) 10
   2. B) 40
   3. C) 50
   4. D) 100