2.11c Imperfect Competition

Question 1

The more imperfect a market is… the _____ the market power available to firms

Answer 1

The more imperfect a market is, the GREATER the market power available to firms

Question 2

Why do we only draw 1 DIG for monopolies?

Answer 2

There is only 1 firm in a monopoly, therefore the firm IS the market
(so no need for a market DIG..)

Question 3

Up until what point will the monopolist keep producing?

Answer 3

The monopolist will not produce any output in the price inelastic portion of the demand curve because MR is negative and profits can not be maintained (TR falls).
–> The monopolist will produce output until MR = 0 (where revenues are maximised)

Question 4

Why do monopolist firms only want to make normal profit (NOT abnormal profit) in the SHORT RUN?

Answer 4

Because you want to deter firms from entering the market so you set prices lower to prevent them to enter.
(when AC = P)

Question 5

Why might monopolist firms make a loss?

Answer 5

• To raise barriers to entry
• Predatory pricing in reducing competition
• Increasing/ growing the market
  OR because the monopolist no longer controls its cost
  –> Costs have increased: energy increased (due to Russia-Ukraine war)

Question 6

In the long run it is rational to believe the monopolist will make _______ profits

Answer 6

In the long run it is rational to believe that the monopolist will continue to make abnormal profits

Question 7

Is a monopolist allocatively efficient?

Answer 7

Due to the lack of competition, the monopolist is not allocatively efficient

Question 8

Show a monopolistic firm making an “abnormal profit”?

Answer 8

Question 9

Show a monopolistic firm making a “normal profit”?

Question 10

Show a monopolistic firm making a “loss profit”?

Answer 10

Question 11

When does allocative efficiency occur?

Answer 11

Allocative efficiency occurs when AR = MC, or where P=MC

A monopolistically competitive firm is NEVER allocatively efficient as their price is greater than MC

Question 12

What is the difference between a monopolist and monopolistic competition DIGs?

Answer 12

The elasticity of the demand curve
- monopoly –> demand is price inelastic (as its the only firm)
- monopolistic competition –> demand is more price elastic than a monopoly (as there are more firms)