Exercise 9.

1
If the monopolist's demand curve is downward
sloping, then the marginal revenue curve is

A)
horizontal

B)
vertical

C)
downward sloping with the same slope

D)
downward sloping with steeper slope

E)
downward sloping with more gentle
slope

Answers to Exercise 9.1

The correct answer is (D).
When demand curve is a downward
sloping straight line, the marginal
revenue is also a downward sloping
straight line, and it is twice the slope of
the demand curve.
Price
10

D: Slope = -0.5
MR: Slope = -1

MR
10

D
20

Quantity

Exercise 9.2
For perfectly competitive firm price _____
marginal revenue, and for monopolist price
____ marginal revenue.

A) equals; equals

B) equals; is greater than

C) equals; is less than

D) is greater than; equals

E) is less than; equals

3

Answers to Exercise 9.2

The correct answer is (B).
For perfect competition, price is fixed for
every unit. The firm will always earn an
additional revenue equal to the price when
selling one more unit.
For monopoly, price drops for all units
when selling one more unit of output. The
firm earns an additional revenue less than
the price when selling one more unit
4

Answers to Exercise 9.2

Monopoly

Perfect Competition

TR

MR

TR

MR

$5

$5

$5

$5

$5

$5

$5

$10

$5

$4

$8

$3

$5

$15

$5

$3

$9

$1

Exercise 9.3
Perfect competition is efficient and
monopoly is not because in perfect
competition __________ while in monopoly
__________.

A) P=MC; P>MC

B) P=MC; P<MC

C) P<MR; P=MR

D) P=MR; P=MC

E) P=MR; P<MR
6

Answers to Exercise 9.3

The correct answer is (A).
For perfect competition, the optimal
output is P = MC, which means
allocative efficiency.
For monopoly, the optimal output is MR
= MC. Since P > MR, at the optimal
output P > MC, implies allocative
inefficiency.

Exercise 9.4
(a) Explain why a firm that practices price
discrimination tend to earn a higher profit
than one that charge a single price.
(b) If the demand for residential phone line
is elastic while the demand for commercial
phone line is inelastic, what should the
telecommunication firm do to its pricing in
order to maximize profit?
8

Answers to Exercise 9.4

(a) Different consumers have different willingness
to pay. If the firm charge a single price to all
customers, some consumers may actually be
willing to pay more and hence they enjoy
consumer surplus. With price discrimination, the
firm can charge a higher price to those who are
willing to pay more, hence profit can be increased.
(b) The firm should charge a higher price for
commercial phone and a lower price for residential
phone in order to maximize profit.
9

Exercise 9.5
(1) Can a monopoly incur losses?
(2) Is the monopoly always inefficient
compared to perfect competition?

10

Answers to Exercise 9.5

(1) A monopoly need not always earn economic
profit. Economic profit occurs when P > ATC but
some monopolists may encounter price control
such that they operate at a loss. They need the
government subsidy to remain operational.
(2) A natural monopoly can be more efficient than
perfect competition when there are economies of
scale to exploit. Also a monopolist that practice
perfect price discrimination is as efficient as
perfect competition.
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