Social Studies: AP Microeconomics: Market Structures and Monopoly Worksheet

Question 1

List the four main market structures studied in AP Microeconomics and identify one key characteristic of each.

Accepted Answer

The four main market structures are perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition has many firms selling identical products, monopolistic competition has many firms selling differentiated products, oligopoly has a few interdependent firms, and monopoly has one firm with significant barriers to entry.

Question 2

A monopolist faces a downward-sloping demand curve. Explain why its marginal revenue curve lies below its demand curve.

Accepted Answer

The marginal revenue curve lies below the demand curve because the monopolist must lower the price on all units sold to sell one additional unit. The extra revenue from the new unit is partly offset by the lower price received on previous units.

Question 3

A monopolist's marginal cost is $12 and its marginal revenue is $15 at the current output level. Should the firm increase, decrease, or keep the same level of output? Explain.

Accepted Answer

The firm should increase output because marginal revenue is greater than marginal cost. Producing another unit adds more to total revenue than it adds to total cost, so profit will rise.

Question 4

At the profit-maximizing output, a monopolist charges $25 per unit and has an average total cost of $18 per unit. If it sells 1,000 units, calculate its total profit.

Accepted Answer

The monopolist earns $7,000 in profit. Profit per unit is $25 minus $18, which equals $7, and $7 times 1,000 units equals $7,000.

Question 5

Describe two common barriers to entry that can allow a monopoly to exist.

Accepted Answer

Two common barriers to entry are legal barriers, such as patents or licenses, and control of an essential resource. These barriers prevent or discourage other firms from entering the market and competing with the monopolist.

Question 6

A patent gives a company the exclusive right to sell a new medicine for a period of time. Explain how this can create temporary monopoly power and why society might allow it.

Accepted Answer

A patent can create temporary monopoly power because it prevents other firms from legally copying and selling the product. Society might allow this because patents encourage innovation by helping firms recover research and development costs.

Question 7

Use the monopoly graph idea to explain how a monopolist chooses price and quantity.

Accepted Answer

A monopolist produces the quantity where marginal revenue equals marginal cost. Then it uses the demand curve to find the highest price consumers are willing to pay for that quantity.

Question 8

Why does a single-price monopolist usually produce less and charge a higher price than a perfectly competitive industry with the same costs?

Accepted Answer

A single-price monopolist restricts output to the quantity where marginal revenue equals marginal cost and then charges the price from the demand curve. A perfectly competitive industry produces where price equals marginal cost, which leads to a lower price and a higher quantity.

Question 9

Define deadweight loss in a monopoly market and explain why it occurs.

Accepted Answer

Deadweight loss is the loss of total surplus that occurs when the market produces less than the socially efficient quantity. In a monopoly, it occurs because the monopolist restricts output below the level where price equals marginal cost.

Question 10

A monopolist charges a price of $40 and has a marginal cost of $20 at the profit-maximizing quantity. Explain what this tells us about allocative efficiency.

Accepted Answer

The market is not allocatively efficient because price is greater than marginal cost. Consumers value the last unit at $40, but it costs only $20 to produce, so more output would increase total surplus.

Question 11

Explain why a monopolist will not choose to produce on the inelastic portion of its demand curve.

Accepted Answer

A monopolist will not produce on the inelastic portion of demand because lowering output would raise price and increase total revenue while also lowering total cost. Therefore, producing on the inelastic portion cannot maximize profit.

Question 12

What is price discrimination? Give one real-world example and explain how it can increase a firm's profit.

Accepted Answer

Price discrimination occurs when a firm charges different prices to different consumers for the same good or service when the price difference is not based on cost differences. An example is student discounts for movie tickets. It can increase profit by charging higher prices to consumers with less elastic demand and lower prices to consumers with more elastic demand.

Question 13

A natural monopoly has very high fixed costs and low marginal costs. Explain why one large firm may be more efficient than several smaller firms in this market.

Accepted Answer

One large firm may be more efficient because average total cost falls over a large range of output. If several smaller firms divided the market, each firm would produce less and have a higher average total cost.

Question 14

A government sets a price ceiling on a natural monopoly equal to marginal cost. Explain one benefit and one possible problem with this policy.

Accepted Answer

A benefit is that marginal cost pricing can achieve allocative efficiency because price equals marginal cost. A possible problem is that the firm may earn an economic loss if price is below average total cost, so the government may need to provide a subsidy.

Question 15

Compare monopoly and monopolistic competition in the long run. Include product differentiation, barriers to entry, and economic profit.

Accepted Answer

Both monopoly and monopolistic competition face downward-sloping demand curves because firms have some market power. A monopoly has high barriers to entry and can earn long-run economic profit, while monopolistic competition has low barriers to entry and firms earn zero economic profit in the long run because entry shifts demand for existing firms.

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Social Studies: AP Microeconomics: Market Structures and Monopoly

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