Tackle the Test: Free-Response Questions

1. Question

   Draw a correctly labeled graph showing a profit-making natural monopoly. On your graph, indicate each of the following:

   
   

   
   

   1. the monopoly’s profit-maximizing output (Q_M )

      
      
   
   

   2. the monopoly’s price (P_M )

      
      
   
   

   3. the monopoly’s profit

      
      
   
   

   4. the regulated price that would maximize consumer surplus without creating losses for the firm (P_R)

      
      
   
   

   Rubric for FRQ 1 (9 points)

   

   1 point: The axes are correctly labeled.

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

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

   1 point: The average total cost curve is labeled and downward-sloping (not U-shaped!).

   1 point: The marginal cost curve is labeled and below the average total cost curve (it does not need to be flat).

   1 point: The profit-maximizing output, Q_M, is shown on the horizontal axis where MC = MR.

   1 point: The profit-maximizing price is found on the demand curve above the point where MC = MR.

   1 point: The monopoly profit area is correctly shaded and labeled.

   1 point: The regulated price is labeled on the vertical axis to the left of the point where the demand curve crosses the average total cost curve.

2. Question

   Draw a correctly labeled graph of a natural monopoly. Use your graph to identify each of the following:

   
   

   
   

   1. consumer surplus if the market were somehow able to operate as a perfectly competitive market

      
      
   
   

   2. consumer surplus with the monopoly

      
      
   
   

   3. monopoly profit

      
      
   
   

   4. deadweight loss with the monopoly (8 points)

      
      
   
   

   Rubric for FRQ 2 (8 points)

   

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

   1 point: The average total cost curve is labeled and downward-sloping.

   1 point: The marginal cost curve is labeled and below the average total cost curve (but not necessarily flat).

   1 point: An area analogous to triangle bca in the graph above is identified with shading or letters as the consumer surplus with a perfectly competitive market.

   1 point: An area analogous to triangle bed is identified with shading or letters as the consumer surplus with the monopoly.

   1 point: An area analogous to rectangle degf is identified with shading or letters as the monopoly profit.

   1 point: An area analogous to triangle ech is identified with shading or letters as the deadweight loss with the monopoly.