Tackle the Test: Free-Response Questions

1. Question

   
   

   1. Draw a correctly labeled graph showing a monopoly incurring a loss in the short run. Assume that the marginal cost curve is swoosh-shaped.

      
      
   
   

   2. How can the monopolist determine whether to shut down or produce at a loss in the short run?

      
      
   
   

   Rubric for FRQ 1 (9 points)

   

   1 point: Axes are correctly labeled.

   1 point: The demand curve is labeled and negatively sloped.

   1 point: The marginal revenue curve is labeled, negatively sloped, and below the demand curve.

   1 point: The profit-maximizing quantity is labeled on the horizontal axis where MC = MR.

   1 point: Price is determined on the demand curve above the point where MC = MR.

   1 point: The average total cost curve is labeled and U-shaped.

   1 point: Average total cost is above price at the profit-maximizing output.

   1 point: The marginal cost curve crosses the average total cost curve at the lowest point on the average total cost curve.

   1 point: The firm will produce despite a loss in the short run if P ≥ AVC.

2. Question

   
   

   1. Draw a graph showing a monopoly earning a normal profit in the short run. Assume that the marginal cost curve is swoosh-shaped.

      
      
   
   

   2. Can a monopoly earn a positive profit in the long run? Explain. (9 points)

      
      
   
   

   Rubric for FRQ 2 (9 points)

   

   1 point: Axes are correctly labeled as “$ per unit” or “Price, cost, marginal revenue” and “Quantity.”

   1 point: The demand curve is labeled and downward-sloping.

   1 point: The marginal revenue curve is labeled, downward-sloping, and below the demand curve.

   1 point: The profit-maximizing quantity is labeled on the horizontal axis where MC = MR.

   1 point: Price is determined on the demand curve above the point where MC = MR.

   1 point: The average total cost curve is labeled and U–shaped.

   1 point: Average total cost equals price at the profit-maximizing output.

   1 point: The marginal cost curve crosses the average total cost curve at the lowest point on the average total cost curve.

   1 point: Yes, a monopoly can earn a positive profit in the long run with the help of barriers to entry that keep out competitors.