Monopoly and Natural Monopoly: Barriers to Entry, Price Maker, Welfare Loss, Regulation, Nationalisation, Price Discrimination

1. A pure monopoly exists when

A many firms sell identical products
B one firm is the sole supplier of a good or service
C many firms sell differentiated products
D no firm has barriers to entry

2. A monopolist is a price maker because it

A faces a perfectly elastic demand curve
B can influence market price by changing output
C has no control over output
D must accept the market price

3. Which is most likely to create monopoly power?

A free entry into the market
B many close substitutes
C legal patent protection
D perfect information

4. A barrier to entry is best defined as

A anything that makes it difficult for new firms to enter a market
B a fall in demand for a product
C a decrease in fixed costs
D a government subsidy to consumers only

5. Which is a natural barrier to entry?

A high fixed costs and economies of scale
B many small firms producing identical goods
C no sunk costs
D perfect mobility of resources

6. Which is a legal barrier to entry?

A patents
B low start-up costs
C free entry
D perfect competition

7. Which is a strategic barrier to entry?

A limit pricing by an incumbent firm
B falling average cost due only to industry growth
C consumer income falling
D government measuring inflation

8. A monopolist’s demand curve is

A perfectly elastic at the market price
B downward sloping
C upward sloping
D perfectly inelastic always

9. For a monopolist, marginal revenue is usually

A above average revenue
B equal to average revenue at every output
C below average revenue
D equal to total revenue

10. A monopolist maximises profit where

A MR = MC
B AR = AC
C MR = 0
D AC is at its maximum

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A monopolist produces where MR = MC. At this output, price is $30 and average cost is $18. What is the result?

A normal profit only
B supernormal profit
C loss
D shutdown immediately

12. A monopolist produces where MR = MC. At this output, AR = $20 and AC = $25. What is the result?

A supernormal profit
B normal profit
C loss
D revenue maximisation

13. A monopolist produces where MR = MC. At this output, AR = AC. The firm earns

A supernormal profit
B normal profit
C loss
D negative revenue

14. A monopolist can earn supernormal profit in the long run mainly because

A barriers to entry prevent new firms from competing it away
B all products are identical
C it faces perfect competition
D marginal cost is always zero

15. A monopoly is usually allocatively inefficient because

A P = MC
B P > MC
C P < MC
D AR = AC always

16. A monopoly may be productively inefficient because

A it always produces at minimum AC
B it may not produce at minimum average cost
C it always produces where P = MC
D it always earns losses

17. A monopoly may be dynamically efficient because

A supernormal profit may finance research and development
B it always has zero profit
C it never innovates
D barriers to entry prevent investment

18. X-inefficiency is more likely in monopoly because

A lack of competitive pressure may reduce pressure to minimise costs
B firms are forced to charge the lowest possible price
C new firms enter instantly
D products are always homogeneous

19. A deadweight welfare loss from monopoly occurs because

A monopoly output is usually below the allocatively efficient level
B monopoly output is always above the allocatively efficient level
C price is always below marginal cost
D marginal cost is zero at all outputs

20. Compared with perfect competition, monopoly usually leads to

A lower price and higher output
B higher price and lower output
C zero price and maximum output
D identical price and output in all cases

21. Which condition would remove the allocative inefficiency of monopoly, assuming no externalities?

A setting price equal to marginal cost
B setting price equal to total revenue
C setting output where MR = 0
D setting price above marginal cost

22. If monopoly price is $50 and marginal cost is $30, then

A society values extra units more than they cost to produce
B the firm is producing too much from society’s viewpoint
C allocative efficiency is achieved
D deadweight welfare loss is impossible

23. If a monopolist produces 100 units while the socially efficient output is 140 units, the monopoly causes

A underproduction of 40 units
B overproduction of 40 units
C productive efficiency
D zero welfare loss

24. A natural monopoly exists when

A one firm can supply the entire market at lower average cost than two or more firms
B many small firms can produce at lower average cost than one firm
C all firms face constant average cost
D marginal cost is always above average cost

25. A natural monopoly is most likely where

A fixed costs are very high and marginal costs are low
B fixed costs are zero and marginal costs are very high
C there are no economies of scale
D products are perfectly differentiated by advertising

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Which industry is most likely to be a natural monopoly?

A local water supply network
B street food stalls
C wheat farming
D hairdressing salons

27. A natural monopoly’s LRAC curve is likely to

A fall over the full range of market demand
B rise immediately from the first unit
C remain perfectly horizontal at all outputs
D be unrelated to output

28. Breaking up a natural monopoly may increase costs because

A economies of scale may be lost
B competition always raises productive efficiency in every case
C marginal cost becomes zero
D demand becomes perfectly elastic

29. Marginal cost pricing for a natural monopoly may require a subsidy because

A price may be below average cost
B price will always exceed average cost
C output will become zero
D monopoly profit will become infinite

30. Average cost pricing for a natural monopoly means setting price where

A AR = AC
B MR = MC
C MR = 0
D MC = 0

31. Average cost pricing allows a natural monopoly to

A earn normal profit
B earn unlimited supernormal profit
C make unavoidable losses
D maximise revenue

32. The main disadvantage of average cost pricing compared with marginal cost pricing is that

A it may not achieve allocative efficiency
B it always causes price to be zero
C it makes all firms leave instantly
D it eliminates all consumer surplus

33. Nationalisation of a monopoly means

A private ownership is transferred to government ownership
B government sells the firm to shareholders
C the firm enters perfect competition
D barriers to entry disappear automatically

34. Privatisation of a nationalised monopoly may improve efficiency if

A profit motive and competition/regulation increase cost discipline
B all prices are banned
C the firm is forced to make losses forever
D output must fall to zero

35. A risk of privatising a natural monopoly is that

A a private monopoly may exploit consumers if weakly regulated
B fixed costs disappear
C marginal cost must rise above price
D economies of scale become impossible

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

36. Which is a possible method of regulating monopoly?

A price cap regulation
B removing all consumer protection
C giving the monopoly unlimited legal protection
D banning substitutes permanently

37. A price cap is designed mainly to

A limit the price a monopoly can charge
B guarantee supernormal profit
C increase monopoly power
D prevent output from rising

38. A regulator may use RPI – X price cap regulation to

A force efficiency gains to be passed to consumers through lower real prices
B make prices rise faster than inflation always
C remove all incentives to reduce costs
D make marginal cost irrelevant

39. One possible problem with monopoly regulation is

A regulatory capture
B perfect information for regulators always
C zero administrative cost
D firms always voluntarily reveal true costs

40. Regulatory capture occurs when

A the regulator starts acting in the interests of the regulated firm rather than consumers
B consumers take over the firm
C firms face perfect competition
D government removes all barriers to entry

41. Price discrimination occurs when a firm

A charges different prices to different consumers for the same product not justified by cost differences
B charges the same price to all consumers
C lowers price only because costs fall
D produces only one unit

42. For price discrimination to be successful, the firm must have

A some monopoly power
B perfect competition
C no ability to separate markets
D perfectly elastic demand in all markets

43. Which condition is necessary for price discrimination?

A prevention of resale between consumer groups
B identical price elasticity in every market
C free entry into the market
D zero fixed costs

44. A cinema charging lower ticket prices to students than adults is most likely

A price discrimination
B perfect competition
C marginal cost pricing
D external economy

45. An airline charging higher prices for last-minute business travellers than early leisure travellers is most likely using

A price discrimination
B average cost pricing
C nationalisation
D buffer stock policy

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

46. Under third-degree price discrimination, a monopolist charges a higher price in the market with

A more price-inelastic demand
B more price-elastic demand
C perfectly elastic demand
D zero demand

47. Price discrimination may increase output if

A the firm serves markets that would otherwise be unprofitable at a single price
B resale is perfectly easy
C all consumers have identical elasticity
D the firm has no market power

48. Which consumer is most likely to pay a higher price under price discrimination?

A a consumer with inelastic demand and few alternatives
B a consumer with elastic demand and many substitutes
C a consumer who can easily resell the product
D a consumer with zero willingness to pay

49. Which chain best explains monopoly welfare loss?

A barriers to entry → monopoly power → output restriction → P > MC → deadweight welfare loss
B free entry → perfect competition → P > MC → monopoly profit
C monopoly power → output expansion beyond social optimum → P < MC → welfare loss
D price discrimination → all consumers pay zero → welfare maximised always

50. Which chain best explains natural monopoly regulation?

A high fixed costs → falling LRAC over market demand → one firm may be lowest-cost supplier → regulation may be needed to prevent exploitation
B low fixed costs → rising LRAC → many firms impossible → price must be zero
C no economies of scale → one firm cheapest → no regulation needed
D perfect competition → high barriers to entry → nationalisation impossible

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. Answer: B

A wrong: many firms selling identical products is perfect competition.
B correct: pure monopoly means one firm is the sole supplier in the market.
C wrong: many firms selling differentiated products is monopolistic competition.
D wrong: monopoly power usually depends on barriers to entry.

2. Answer: B

A wrong: perfectly elastic demand is faced by a perfectly competitive firm.
B correct: a monopolist faces the market demand curve, so it can influence price by changing output.
C wrong: a monopolist controls its own output.
D wrong: accepting the market price describes a price taker.

3. Answer: C

A wrong: free entry destroys monopoly power.
B wrong: close substitutes reduce monopoly power.
C correct: patent protection legally prevents rivals from copying, giving monopoly power.
D wrong: perfect information increases competition.

4. Answer: A

A correct: a barrier to entry is anything that restricts or prevents new firms entering a market.
B wrong: falling demand is not itself a barrier to entry.
C wrong: lower fixed costs make entry easier.
D wrong: consumer subsidy is not necessarily an entry barrier.

5. Answer: A

A correct: high fixed costs and economies of scale can naturally prevent small new firms competing.
B wrong: many small identical firms suggest competition.
C wrong: no sunk costs make entry and exit easier.
D wrong: perfect resource mobility supports competition.

6. Answer: A

A correct: patents are legal protection against entry.
B wrong: low start-up costs reduce barriers.
C wrong: free entry means no barrier.
D wrong: perfect competition has no major barriers.

7. Answer: A

A correct: limit pricing is a deliberate strategy by an incumbent to discourage entry.
B wrong: industry-wide cost reduction is not a strategic entry barrier.
C wrong: falling consumer income affects demand, not entry directly.
D wrong: measuring inflation is unrelated.

8. Answer: B

A wrong: perfectly elastic demand is perfect competition.
B correct: monopoly faces the market demand curve, which slopes downward.
C wrong: demand usually does not slope upward.
D wrong: monopoly demand is not always perfectly inelastic.

9. Answer: C

A wrong: MR is below AR for a downward-sloping demand curve.
B wrong: MR equals AR only under perfect competition.
C correct: to sell more, monopoly usually lowers price on all units, so MR is below AR.
D wrong: MR is extra revenue, not total revenue.

10. Answer: A

A correct: profit maximisation occurs where MR = MC.
B wrong: AR = AC gives normal profit/break-even.
C wrong: MR = 0 gives revenue maximisation.
D wrong: maximum AC is not a firm objective.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Answer: B

A wrong: normal profit occurs when AR = AC.
B correct: price/AR $30 is greater than AC $18, so supernormal profit is made.
C wrong: loss occurs when AR < AC.
D wrong: shutdown depends on AVC, not given here.

12. Answer: C

A wrong: supernormal profit requires AR > AC.
B wrong: normal profit requires AR = AC.
C correct: AR $20 is below AC $25, so the firm makes a loss.
D wrong: revenue maximisation occurs where MR = 0.

13. Answer: B

A wrong: supernormal profit requires AR > AC.
B correct: AR = AC means total revenue covers total cost including normal profit.
C wrong: loss requires AR < AC.
D wrong: revenue is not negative.

14. Answer: A

A correct: barriers to entry stop new firms entering and competing away supernormal profit.
B wrong: identical products are linked to perfect competition.
C wrong: monopoly is not perfect competition.
D wrong: MC is not always zero.

15. Answer: B

A wrong: P = MC means allocative efficiency.
B correct: monopoly usually restricts output, so price exceeds marginal cost.
C wrong: P < MC would mean output is too high from efficiency viewpoint.
D wrong: AR = AC is not always true.

16. Answer: B

A wrong: monopoly does not always produce at minimum AC.
B correct: monopoly may produce away from minimum average cost, causing productive inefficiency.
C wrong: P = MC would mean allocative efficiency.
D wrong: monopoly can earn supernormal profit.

17. Answer: A

A correct: monopoly’s long-run supernormal profit can fund research, technology and innovation.
B wrong: monopoly does not always have zero profit.
C wrong: monopolies can innovate.
D wrong: barriers may protect profits that finance investment.

18. Answer: A

A correct: without strong competition, managers may allow costs to rise above minimum possible levels.
B wrong: monopolies are not forced to charge the lowest price.
C wrong: high barriers stop instant entry.
D wrong: homogeneous products are not the key issue.

19. Answer: A

A correct: monopoly restricts output below the allocatively efficient level, creating lost welfare.
B wrong: monopoly normally underproduces, not overproduces.
C wrong: monopoly price is usually above MC.
D wrong: MC is not always zero.

20. Answer: B

A wrong: monopoly usually raises price and reduces output.
B correct: compared with perfect competition, monopoly tends to charge higher price and produce lower output.
C wrong: monopoly does not charge zero price.
D wrong: price and output are not identical in all cases.

21. Answer: A

A correct: allocative efficiency requires P = MC when there are no externalities.
B wrong: price cannot sensibly equal total revenue.
C wrong: MR = 0 gives revenue maximisation.
D wrong: P > MC is allocative inefficiency.

22. Answer: A

A correct: price reflects consumers’ marginal valuation; if P $50 > MC $30, extra units are worth more than they cost.
B wrong: P > MC means output is too low, not too high.
C wrong: allocative efficiency requires P = MC.
D wrong: deadweight loss is likely.

23. Answer: A

A correct: monopoly produces 100 instead of socially efficient 140, so underproduction is 40 units.
B wrong: output is below, not above, the efficient level.
C wrong: this does not show productive efficiency.
D wrong: underproduction causes welfare loss.

24. Answer: A

A correct: natural monopoly exists when one firm can supply the market at lower average cost than multiple firms.
B wrong: this would support competition.
C wrong: constant average cost does not create natural monopoly.
D wrong: natural monopoly often has MC below AC over much of demand.

25. Answer: A

A correct: high fixed costs and low marginal costs create strong economies of scale.
B wrong: zero fixed costs and high MC do not usually create natural monopoly.
C wrong: no economies of scale weakens natural monopoly.
D wrong: advertising differentiation is not natural monopoly.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Answer: A

A correct: water networks require expensive infrastructure and duplication would be inefficient.
B wrong: street food stalls have low entry barriers.
C wrong: wheat farming often has many producers.
D wrong: hairdressing has many small suppliers.

27. Answer: A

A correct: natural monopoly usually has LRAC falling across the relevant market demand range.
B wrong: immediately rising LRAC would not support one large supplier.
C wrong: horizontal LRAC means no scale advantage.
D wrong: LRAC is directly related to output scale.

28. Answer: A

A correct: splitting production between firms may reduce scale and raise average costs.
B wrong: competition does not always lower costs in natural monopoly.
C wrong: marginal cost does not become zero because of breakup.
D wrong: demand elasticity is not the main issue.

29. Answer: A

A correct: MC pricing may set price below AC, so the firm needs subsidy to avoid losses.
B wrong: if price exceeded AC, subsidy would not be needed.
C wrong: output does not become zero.
D wrong: profit would not become infinite.

30. Answer: A

A correct: average cost pricing sets price where average revenue equals average cost.
B wrong: MR = MC is profit maximisation.
C wrong: MR = 0 is revenue maximisation.
D wrong: MC = 0 is not average cost pricing.

31. Answer: A

A correct: AC pricing lets the firm cover all costs including normal profit.
B wrong: AC pricing prevents unlimited supernormal profit.
C wrong: it avoids losses by covering average cost.
D wrong: revenue maximisation occurs where MR = 0.

32. Answer: A

A correct: AC pricing gives normal profit but price may be above MC, so allocative efficiency is not achieved.
B wrong: price is not zero.
C wrong: firms do not instantly leave if normal profit is earned.
D wrong: consumer surplus is not eliminated.

33. Answer: A

A correct: nationalisation transfers ownership from private sector to government.
B wrong: selling to shareholders is privatisation.
C wrong: nationalisation does not create perfect competition.
D wrong: barriers do not automatically disappear.

34. Answer: A

A correct: private ownership may increase incentives to reduce costs, especially with competition or regulation.
B wrong: prices are not banned.
C wrong: forced permanent losses would reduce efficiency/investment.
D wrong: output does not have to fall to zero.

35. Answer: A

A correct: if regulation is weak, a privatised natural monopoly may charge high prices or reduce quality.
B wrong: fixed costs do not disappear.
C wrong: MC does not have to rise above price.
D wrong: economies of scale remain possible.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

36. Answer: A

A correct: price cap regulation limits monopoly pricing.
B wrong: removing protection worsens exploitation risk.
C wrong: unlimited legal protection strengthens monopoly.
D wrong: banning substitutes strengthens market power.

37. Answer: A

A correct: price caps restrict the maximum price charged.
B wrong: they do not guarantee supernormal profit.
C wrong: they aim to limit monopoly power.
D wrong: they do not directly prevent output rising.

38. Answer: A

A correct: RPI – X lets prices rise by inflation minus expected efficiency gains, pushing firms to cut costs.
B wrong: prices rise slower than inflation if X is positive.
C wrong: it creates incentives to reduce costs.
D wrong: marginal cost remains relevant to efficiency.

39. Answer: A

A correct: regulators may be influenced by the firms they regulate.
B wrong: regulators rarely have perfect information.
C wrong: regulation has administrative costs.
D wrong: firms may hide or manipulate cost information.

40. Answer: A

A correct: regulatory capture occurs when the regulator protects the firm’s interests instead of the public interest.
B wrong: consumers do not take over the firm.
C wrong: capture is not perfect competition.
D wrong: removing barriers is deregulation/liberalisation.

41. Answer: A

A correct: price discrimination means different prices for the same good/service not explained by cost differences.
B wrong: same price is uniform pricing.
C wrong: cost-based price difference is not price discrimination.
D wrong: output level is irrelevant.

42. Answer: A

A correct: the firm needs market power to set different prices.
B wrong: perfect competition prevents price discrimination.
C wrong: markets must be separable.
D wrong: perfectly elastic demand prevents charging different prices.

43. Answer: A

A correct: resale must be prevented, otherwise low-price buyers resell to high-price buyers.
B wrong: different elasticities are needed, not identical elasticities.
C wrong: free entry weakens market power.
D wrong: fixed costs are irrelevant.

44. Answer: A

A correct: students and adults are charged different prices for the same cinema service, likely due to different elasticities.
B wrong: cinema market is not perfect competition.
C wrong: marginal cost pricing is price = MC.
D wrong: external economy is cost saving from industry growth.

45. Answer: A

A correct: airlines separate customers by willingness to pay/time of booking and charge different prices.
B wrong: average cost pricing sets price equal to AC.
C wrong: nationalisation is public ownership.
D wrong: buffer stock stabilises commodity prices.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

46. Answer: A

A correct: higher prices are charged to consumers with more inelastic demand because they are less responsive.
B wrong: elastic consumers get lower prices to keep them buying.
C wrong: perfectly elastic demand would not tolerate a higher price.
D wrong: zero demand means no sales.

47. Answer: A

A correct: price discrimination can open lower-price markets that would not be served under one uniform price.
B wrong: easy resale destroys discrimination.
C wrong: identical elasticity reduces ability to discriminate effectively.
D wrong: no market power means no price discrimination.

48. Answer: A

A correct: consumers with inelastic demand and few substitutes can be charged higher prices.
B wrong: elastic consumers need lower prices.
C wrong: resale ability prevents separation.
D wrong: zero willingness to pay means they will not buy.

49. Answer: A

A correct: entry barriers protect monopoly power, allowing output restriction, price above MC and deadweight welfare loss.
B wrong: free entry causes competition, not monopoly profit.
C wrong: monopoly usually underproduces with P > MC, not overproduces with P < MC.
D wrong: price discrimination does not make all prices zero.

50. Answer: A

A correct: high fixed costs create falling LRAC over market demand, so one firm may be cheapest, but regulation may be needed to prevent abuse.
B wrong: low fixed costs and rising LRAC do not create natural monopoly.
C wrong: no economies of scale means one firm is not necessarily cheapest.
D wrong: perfect competition does not have high barriers.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.