Chapter 10: Monopoly and Monopsony

Question 1

Monopoly

Answer 1

Market with only one seller but with many buyers.

Question 2

Monopsony

Answer 2

Just the opposite, many sellers but only one buyer.

Question 3

Market power

Answer 3

The ability of a seller or buyer to affect the price of a good.

Question 4

Explain why the monopolistic market has no supply curve, no one to one relationship between price and quantity

Answer 4

The reason for this is that monopolist’s output decision depends not only on marginal cost but also on the shape of the demand curve.

Question 5

Name the three factors that determine a firm’s elasticity of demand (monopoly power).

Answer 5

1. The elasticity of market demand
   Because pure monopolies are single firms their demand is equal to market demand (hence high inelastic nature and more market power).
2. The number of firms in the market
   Monopoly power falls the more firms enter the market due to higher competition, Number of major players also important (concentration of the market), barriers to entry, licenses, economies of scale
3. The interaction among firms
   Ways in which firms compete also important (aggressive nature vs collude)

Question 6

Rate-of-return regulation

Answer 6

Maximum price allowed by a regulatory agency is based on the (expected) rate of return that a firm will earn.

Question 7

True or False:
Another approach to regulation is setting price caps based on the firm’s variable costs.

Answer 7

True

Question 8

Explain oligopsony

Answer 8

A market with few buyers where they can still exert some form of market power.

Question 9

Define monopsony power

Answer 9

Refers to the buyers ability to affect the price of a good. It in fact enables the buyer to purchase the good for less of a price that would prevail in competitive market.