A monopoly is a single seller of a product with no close substitutes, protected by barriers to entry. Think of the one electric utility serving your county, or the only hospital system within a two-hour drive.
| Barrier | Adult-world example |
|---|---|
| Legal | Drug patents, broadcast licenses, hospital certificate-of-need laws |
| Control of a key resource | One firm owns the region's only gravel quarry |
| Economies of scale | One utility serves everyone cheaper than two could (natural monopoly — Lesson 11) |
| Network effects | The payment platform every merchant already accepts |
Barriers are the deepest difference from perfect competition: with no entry to erode them, economic profits can persist in the long run.
The monopolist faces the entire downward-sloping market demand curve. To sell one more unit, a single-price monopolist must cut the price on every unit, not just the last one. Marginal revenue is therefore the new unit's price minus the revenue given up on all earlier units:
| P | Q | TR | MR |
|---|---|---|---|
| $10 | 1 | 10 | 10 |
| $9 | 2 | 18 | 8 |
| $8 | 3 | 24 | 6 |
| $7 | 4 | 28 | 4 |
| $6 | 5 | 30 | 2 |
| $5 | 6 | 30 | 0 |
MR < P for every unit after the first. For a linear demand curve, MR has the same vertical intercept and twice the slope — it hits zero at demand's midpoint, where demand is unit elastic and total revenue peaks. A profit-maximizing monopolist never knowingly operates on the inelastic half of demand: there MR < 0, so selling more lowers revenue while raising cost.
Profit = (Pm − ATC at Qm) × Qm — the familiar profit rectangle.
[GRAPH: Monopoly. X-axis "Quantity", Y-axis "Price/Cost". Downward demand D; MR below it with twice the slope, hitting the Q-axis at half of D's horizontal intercept. Upward MC; U-shaped ATC. MR = MC at Qm = 40; dashed line up to D gives Pm = $14; ATC at Qm = $9; profit rectangle (14 − 9) × 40 shaded. MC crosses D at Qc = 60, Pc = $10, labeled "allocatively efficient point". DWL triangle between D and MC from Qm to Qc shaded.]
The most common graphing error on this topic: reading the price off the MR curve. Price ALWAYS comes from the demand curve above Qm.
Against a competitive industry with the same costs (Pc, Qc where MC crosses D):
| Perfect competition | Monopoly | |
|---|---|---|
| Output | Qc | Qm < Qc |
| Price | Pc = MC | Pm > MC |
| Consumer surplus | Larger | Smaller (part transferred to profit) |
| Deadweight loss | None (long run) | Yes — triangle between D and MC from Qm to Qc |
| Allocative efficiency | P = MC ✓ | P > MC ✗ (underproduction) |
| Productive efficiency | Min ATC (long run) ✓ | Generally not at min ATC ✗ |
| Long-run economic profit | Zero | Can persist (barriers) |
The units between Qm and Qc are worth more to buyers (height of D) than they cost to make (height of MC), yet they are never produced. That lost surplus is the deadweight loss of monopoly. Note the distinction: profit is a transfer from consumers to the firm; deadweight loss is value no one receives.
One more caution: monopoly does not guarantee profit. A sole seller with weak demand — the only water park within 100 miles of a shrinking town — can run losses if ATC lies above demand at every output. The same MR = MC and shutdown rules apply.
1 — E. Correct: a single-price monopolist must cut price on all units to sell one more, so MR = new price minus revenue lost on earlier units, which is below price. A) confuses monopoly with perfect competition, where a price taker's MR does equal P. B) rising MC is a cost-side fact; MR < P is a revenue-side fact. C) barrier costs affect profit, not the MR–P relationship. D) misstates the firm's objective; profit maximization is exactly why the price-cut effect matters. Fix: whenever demand slopes down and one price applies to all units, write "MR = P minus the price cut on prior units," so MR < P after the first unit.
2 — C. Correct: quantity comes from MR = MC; price comes from the demand curve above that quantity — the two-step. A) P = MC is the efficient benchmark, not the monopolist's choice. B) is the classic error of reading price off the MR curve. D) minimizing ATC is productive efficiency, not profit maximization. E) unit elasticity marks maximum revenue, not maximum profit. Fix: say it as a chant — "quantity from MR = MC, price from demand."
3 — D. Correct: TR is 12, 22, 30, 36, 40, so MR is 12, 10, 8, 6, 4. Produce while MR ≥ MC ($6): through the 4th contract (MR = 6). Price is demand's value at 4 contracts, $9. A) produces the 5th unit, where MR ($4) < MC ($6). B) stops one unit early, leaving MR ($6) ≥ MC profit on the table. C) has the right quantity but prices at MC instead of demand. E) combines both errors — too much output and an MC price. Fix: build the MR column first, stop where MR meets MC, then read price from the demand column at that quantity.
4 — D. Correct: profit = (P − ATC) × Q = (50 − 38) × 200 = $2,400. A) uses P − MC ($20 × 200); MC is for choosing quantity, not measuring profit. B) uses ATC − MC, a gap with no profit meaning. C) is total revenue (50 × 200), ignoring cost entirely. E) is total cost (38 × 200), not profit. Fix: profit per unit is always P minus ATC; multiply by Q and never let MC into the profit formula.
5 — A. Correct: on the inelastic half of demand, MR < 0 — cutting output raises total revenue (the price effect dominates) and lowers total cost, so profit must rise. B) MR can never exceed price for a price maker. C) confuses a movement along demand with a shift of demand. D) inelastic demand says nothing about P versus MC; price can be well above MC there. E) is backwards — TR rising with output is the elastic range. Fix: MC ≥ 0 forces MR ≥ 0 at the optimum, so a profit maximizer always ends up on the elastic portion of demand.
6 — A. Correct: persistence of profit is a barriers question — certificate-of-need laws, licensing, and scale economies block hospital entry, while restaurant entry is nearly free. B) perfectly elastic demand describes a price taker, the opposite of a hospital system. C) fixed costs determine loss size in the short run, not whether entry erodes profit. D) inelastic demand raises the profit-maximizing markup but cannot stop entry by itself. E) reverses the two: the hospital is the stronger price maker. Fix: when asked why profit lasts, answer with entry barriers, not demand elasticity or cost structure.
7 — E. Correct: allocative efficiency requires P = MC, which occurs where MC crosses demand — 450 units at $60. A) is the monopoly outcome (Qm, Pm), the inefficient point. B) mixes the monopoly quantity with the MC value. C) pairs the efficient quantity with the monopoly price. D) invents a midpoint with no economic meaning. Fix: "efficient" always means the D-and-MC intersection; "profit-maximizing" always means the MR-and-MC intersection.
8 — B. Correct: a monopolist chooses a point on its demand curve; if ATC exceeds demand everywhere, every choice loses money. A) reflects the misconception that monopoly guarantees profit — barriers protect profit only if demand is strong enough. C) no firm can charge more than the demand curve allows and still sell the units. D) losses come from ATC above price, not from the MR–MC relationship. E) a monopolist by definition faces downward-sloping, not perfectly elastic, demand. Fix: market power sets the markup; demand versus ATC decides profit or loss — check them separately.
9 — B. Correct: profit is a transfer of surplus from consumers to the firm; deadweight loss is the triangle of surplus destroyed because units between Qm and Qc go unproduced. A) the rectangle and triangle are different areas with different meanings. C) DWL is lost surplus, not the surplus consumers keep. D) regulation changes the sizes of both, not their definitions. E) profitable monopolies still restrict output below Qc, so DWL exists. Fix: rectangle = transfer (someone gets it); triangle = deadweight loss (no one gets it).
10 — A. Correct: DWL = ½ × base × height = ½ × (60 − 40) × (14 − 8) = ½ × 20 × 6 = $60. B) forgets the ½ in the triangle formula. C) computes (14 − 8) × 40, a rectangle over the units actually produced. D) multiplies the price gap by the efficient quantity. E) reports only the output gap of 20 units without valuing it. Fix: DWL is a triangle — half of (output gap) × (price-minus-MC gap at Qm).
11 — B. Correct: for linear demand, MR shares the vertical intercept ($100) and has twice the slope, so it reaches zero at half the demand curve's horizontal intercept: 250 units. A) MR coincides with demand only for a price taker (or a perfect price discriminator). C) halves the intercept instead of the horizontal reach. D) MR can never sit above demand for a single-price seller. E) keeps demand's slope, flattening MR by half too little. Fix: linear demand → MR: same start on the price axis, twice as steep, zero at demand's midpoint.
12 — C. Correct: patents deliberately trade a temporary deadweight loss for dynamic gains — expected monopoly profit funds and motivates innovation that would otherwise not occur. A) patents restrict output below, not past, the competitive level. B) patent-protected prices are higher, not lower, during the term. D) patents do not change the elasticity of demand, and perfectly elastic demand is not the result. E) deadweight loss depends on P > MC, not on whether accounting costs are covered. Fix: static efficiency (today's DWL) and dynamic efficiency (tomorrow's innovation) are separate ledgers — a good patent argument weighs one against the other.
1 — E. Correct: a single-price monopolist must cut price on all units to sell one more, so MR = new price minus revenue lost on earlier units, which is below price. A) confuses monopoly with perfect competition, where a price taker's MR does equal P. B) rising MC is a cost-side fact; MR < P is a revenue-side fact. C) barrier costs affect profit, not the MR–P relationship. D) misstates the firm's objective; profit maximization is exactly why the price-cut effect matters. Fix: whenever demand slopes down and one price applies to all units, write "MR = P minus the price cut on prior units," so MR < P after the first unit.
2 — C. Correct: quantity comes from MR = MC; price comes from the demand curve above that quantity — the two-step. A) P = MC is the efficient benchmark, not the monopolist's choice. B) is the classic error of reading price off the MR curve. D) minimizing ATC is productive efficiency, not profit maximization. E) unit elasticity marks maximum revenue, not maximum profit. Fix: say it as a chant — "quantity from MR = MC, price from demand."
3 — D. Correct: TR is 12, 22, 30, 36, 40, so MR is 12, 10, 8, 6, 4. Produce while MR ≥ MC ($6): through the 4th contract (MR = 6). Price is demand's value at 4 contracts, $9. A) produces the 5th unit, where MR ($4) < MC ($6). B) stops one unit early, leaving MR ($6) ≥ MC profit on the table. C) has the right quantity but prices at MC instead of demand. E) combines both errors — too much output and an MC price. Fix: build the MR column first, stop where MR meets MC, then read price from the demand column at that quantity.
4 — D. Correct: profit = (P − ATC) × Q = (50 − 38) × 200 = $2,400. A) uses P − MC ($20 × 200); MC is for choosing quantity, not measuring profit. B) uses ATC − MC, a gap with no profit meaning. C) is total revenue (50 × 200), ignoring cost entirely. E) is total cost (38 × 200), not profit. Fix: profit per unit is always P minus ATC; multiply by Q and never let MC into the profit formula.
5 — A. Correct: on the inelastic half of demand, MR < 0 — cutting output raises total revenue (the price effect dominates) and lowers total cost, so profit must rise. B) MR can never exceed price for a price maker. C) confuses a movement along demand with a shift of demand. D) inelastic demand says nothing about P versus MC; price can be well above MC there. E) is backwards — TR rising with output is the elastic range. Fix: MC ≥ 0 forces MR ≥ 0 at the optimum, so a profit maximizer always ends up on the elastic portion of demand.
6 — A. Correct: persistence of profit is a barriers question — certificate-of-need laws, licensing, and scale economies block hospital entry, while restaurant entry is nearly free. B) perfectly elastic demand describes a price taker, the opposite of a hospital system. C) fixed costs determine loss size in the short run, not whether entry erodes profit. D) inelastic demand raises the profit-maximizing markup but cannot stop entry by itself. E) reverses the two: the hospital is the stronger price maker. Fix: when asked why profit lasts, answer with entry barriers, not demand elasticity or cost structure.
7 — E. Correct: allocative efficiency requires P = MC, which occurs where MC crosses demand — 450 units at $60. A) is the monopoly outcome (Qm, Pm), the inefficient point. B) mixes the monopoly quantity with the MC value. C) pairs the efficient quantity with the monopoly price. D) invents a midpoint with no economic meaning. Fix: "efficient" always means the D-and-MC intersection; "profit-maximizing" always means the MR-and-MC intersection.
8 — B. Correct: a monopolist chooses a point on its demand curve; if ATC exceeds demand everywhere, every choice loses money. A) reflects the misconception that monopoly guarantees profit — barriers protect profit only if demand is strong enough. C) no firm can charge more than the demand curve allows and still sell the units. D) losses come from ATC above price, not from the MR–MC relationship. E) a monopolist by definition faces downward-sloping, not perfectly elastic, demand. Fix: market power sets the markup; demand versus ATC decides profit or loss — check them separately.
9 — B. Correct: profit is a transfer of surplus from consumers to the firm; deadweight loss is the triangle of surplus destroyed because units between Qm and Qc go unproduced. A) the rectangle and triangle are different areas with different meanings. C) DWL is lost surplus, not the surplus consumers keep. D) regulation changes the sizes of both, not their definitions. E) profitable monopolies still restrict output below Qc, so DWL exists. Fix: rectangle = transfer (someone gets it); triangle = deadweight loss (no one gets it).
10 — A. Correct: DWL = ½ × base × height = ½ × (60 − 40) × (14 − 8) = ½ × 20 × 6 = $60. B) forgets the ½ in the triangle formula. C) computes (14 − 8) × 40, a rectangle over the units actually produced. D) multiplies the price gap by the efficient quantity. E) reports only the output gap of 20 units without valuing it. Fix: DWL is a triangle — half of (output gap) × (price-minus-MC gap at Qm).
11 — B. Correct: for linear demand, MR shares the vertical intercept ($100) and has twice the slope, so it reaches zero at half the demand curve's horizontal intercept: 250 units. A) MR coincides with demand only for a price taker (or a perfect price discriminator). C) halves the intercept instead of the horizontal reach. D) MR can never sit above demand for a single-price seller. E) keeps demand's slope, flattening MR by half too little. Fix: linear demand → MR: same start on the price axis, twice as steep, zero at demand's midpoint.
12 — C. Correct: patents deliberately trade a temporary deadweight loss for dynamic gains — expected monopoly profit funds and motivates innovation that would otherwise not occur. A) patents restrict output below, not past, the competitive level. B) patent-protected prices are higher, not lower, during the term. D) patents do not change the elasticity of demand, and perfectly elastic demand is not the result. E) deadweight loss depends on P > MC, not on whether accounting costs are covered. Fix: static efficiency (today's DWL) and dynamic efficiency (tomorrow's innovation) are separate ledgers — a good patent argument weighs one against the other.