econ practice test questions

Why does a monopoly produce where MR = MC, not where P = MC?

Because a monopoly wants to maximize profit, not be efficient.

Explanation: MR = MC is the profit-max rule. If MR > MC, you make more money by producing more. If MR < MC, you lose money. But price is always higher than MC in a monopoly.

In the long run, what happens to profits in monopolistic competition?

They go to zero (normal profit).
➡ Explanation: New firms enter if there's profit, and that makes everyone's demand curve shift left until no one is making extra cash.

What is excess capacity?

When a firm produces less than the lowest point of ATC.
➡ Explanation: In monopolistic competition, firms don’t make enough to hit the lowest cost per unit. So they’re not using all their resources efficiently — they have “extra space.”

Why is the demand curve above marginal revenue for monopolies?

Because they have to lower price on all units to sell more.
➡ Explanation: When you sell more stuff, you gotta cut prices — not just for the new buyers, but for everyone. That makes MR lower than price.

What makes an oligopoly different from a monopoly?

An oligopoly has a few big firms, not just one.
➡ Explanation: Think soda industry — Coke and Pepsi. They watch each other closely, but it’s not a total monopoly.

Why do firms in oligopolies sometimes cheat on collusion agreements?

To make more profit for themselves.
➡ Explanation: If they agree to keep prices high but one sneaks in lower prices, they can steal customers and make extra money. But it ruins the deal.

What does a kinked demand curve show?

That prices are sticky in an oligopoly.
➡ Explanation: If one firm raises prices, others won’t follow (you lose customers). But if you lower prices, everyone matches you (no gain). So prices don’t change much — hence the “kink.”

What is a cartel?

A group of firms that collude to act like a monopoly.
➡ Explanation: They agree to keep prices high and limit output — like OPEC with oil. Illegal in many places 'cause it’s anti-competition.

Why do monopolistic competitors advertise a lot?

To differentiate their products.
➡ Explanation: Their products aren’t identical, so they use ads to stand out — like shampoos or burgers trying to seem “special.”

What happens to total revenue when MR = 0?

total revenue is at its maximum.
➡ Explanation: After that point, MR goes negative and total revenue starts to fall. So that’s the peak of the revenue mountain.

Where does a monopoly set quantity and price?

Quantity at MR = MC, Price on the demand curve above that Q.
➡ Explanation: They choose the Q where making one more unit stops being worth it (MR = MC), then go up to see what price consumers will pay at that quantity.

What is the dominant strategy in a game matrix?

The strategy that’s best no matter what the other player does.
➡ Explanation: It’s your go-to move — like always picking rock in rock-paper-scissors and still winning somehow.

What is the Nash equilibrium?

When both players choose their best strategy given the other’s choice — no one wants to change.
➡ Explanation: It’s stable. Like “meh, I could do worse” energy.

Why don’t oligopolies compete with price?

Because price wars hurt everyone.
➡ Explanation: If one lowers their price, the others follow, and boom — no one makes profit. So they compete with ads, features, or packaging instead.

Which of the following best explains why marginal revenue is less than price for a monopoly?

A. The firm must lower price on all units to sell an additional unit
B. The firm has perfectly elastic demand
C. The firm can sell as many units as it wants at any price
D. The firm faces increasing marginal costs

✅ Correct Answer: A
Explanation: To sell more, monopolies must lower price on all units, so each extra unit brings in less than the price.

In monopolistic competition, firms in the long run will most likely...

A. Earn positive economic profits
B. Earn zero economic profits
C. Shut down
D. Produce at the minimum point of ATC

✅ Correct Answer: B
Explanation: New firms enter when there’s profit, which drives down demand for existing firms until everyone’s breaking even.

A monopolist will maximize profit by producing the quantity at which:

A. P = MC
B. MR = MC
C. P = MR
D. ATC = MC

✅ Correct Answer: B
Explanation: That’s the golden rule of profit maximization: where marginal revenue equals marginal cost.

Which of the following best describes excess capacity in monopolistic competition?

A. Producing more than the socially optimal quantity
B. Producing at the point where P = MC
C. Producing less than the quantity that minimizes ATC
D. Producing at the minimum point of ATC

Correct Answer: C
Explanation: These firms don't produce enough to hit their lowest cost per unit. That leftover efficiency = excess capacity.

What is the likely outcome if firms in an oligopoly form a cartel?

A. Prices will fall to marginal cost
B. The market becomes perfectly competitive
C. The firms behave like a monopoly
D. Firms always cheat, so nothing happens

Correct Answer: C
Explanation: A cartel = a monopoly squad. They restrict output and raise prices to max profit — together.

On a monopoly graph, where is consumer surplus located?

A. Below the MC curve
B. Between MR and MC
C. Above the price, below the demand curve
D. Below the price, above ATC

Correct Answer: C
Explanation: Consumer surplus is always above the price, under the demand curve — it’s how much buyers “save.”

Which condition must be true for price discrimination to work?

A. All buyers must have identical preferences
B. The product must be resellable
C. The firm must have market power
D. The market must be perfectly competitive

✅ Correct Answer: C
Explanation: You can’t price discriminate without the power to set prices. You also need to separate buyers and stop resale.

Why is there deadweight loss in monopoly markets?

A. The firm earns too much profit
B. Some mutually beneficial trades don't happen
C. Government taxes raise costs
D. Firms produce too much

Correct Answer: B
Explanation: There are people who want to buy at prices above cost, but the monopoly won’t sell to them — so society misses out.

In a kinked demand curve, why might prices be “sticky”?

A. Firms are price takers
B. Demand is perfectly elastic
C. Firms expect others to match price cuts but not price increases
D. Prices are regulated by the government

Correct Answer: C
Explanation: If you raise your price, no one follows. If you drop it, they all match. So no one wants to move first. It’s a price standoff.

If a firm charges each consumer exactly their willingness to pay, this is:

A. Perfect competition
B. Price discrimination
C. Consumer surplus
D. Break-even pricing

✅ Correct Answer: B
Explanation: That’s perfect price discrimination — everyone pays the max they’re willing to, and the firm eats up all the surplus.