3.4.5

Question 1

Name 3 of the 5 characteristics for monopoly

Answer 1

• High barriers to entry and exit into the market
• Firms are price makers
• Dominated by a single large firm
• Firms are profit maximisers (mc=mr)
• Supernormal profit can be made in the short and long run

Question 2

What’s the condition for profit to be maximised?

Answer 2

MC = MR

Question 3

Draw a monopoly diagram

Answer 3

• Y axis labelled as “Price”
• X axis labelled as “Output”
• Marginal cost line labelled as “MC”
• Average cost line labelled as “AC”
• Marginal revenue line labelled as “MR”
• Quantity where profit is maximised labelled as “Qpm”
• Supernormal profit shaded in as the difference of total revenue and total costs

Question 4

What’s third degree price discrimination?

Answer 4

Charging a different price to different groups of consumers for the same good.

Question 5

Name 2 conditions for there to be third degree price discrimination

Answer 5

• Ability to set prices - having some market power
• Ability to segment different classes of consumers (e.g. rail card to prove you are a senior citizen)
• Ability to prevent resale - adults using child tickets

Question 6

What’s an example of an industry whereby third degree price discrimination occurs?

Answer 6

Train industry - as in buying train tickets.

Question 7

Name 2 benefits of a monopoly

Answer 7

• Economies of scale
• Dynamic efficiency

Question 8

Name 2 cons of a monopoly

Answer 8

• Productive inefficiency
• Allocative inefficiency
• Third-degree price discrimination

Question 9

Name an example of a natural monopoly

Answer 9

• Gas network
• Electricity grid
• Railway infrastructure

Question 10

Draw a graph for natural monopoly

Answer 10

• Y axis is Price
• X axis is Output
• Demand line as D = AR
• MR line at twice the gradient pulling D = AR down
• AC line but it’s falling continuously as output increases
• Since AC is as such MC is below it pulling it down