Chapter 11: Monopoly and Imperfect Competition

Question 1

What are the characteristics of a monopoly

Answer 1

• There is one seller of a good or service that has no close substitutes
• Dominant seller in the market to exert some control over the market
• Negative sloping demand curve
• Price setter BUT
  Quantity sold still depends on the principles of demand.
  Demand for highly price inelastic products creates scope for consumer exploitation
• A fundamental cause of monopoly is barriers to entry

Question 2

What are barriers to entry in a monopoly

Answer 2

• These barriers give rise to monopoly or near monopoly and may protect existing monopolies from competition
• Barriers to entry have the following sources: natural monopoly (economies of scale), limited size of the market, exclusive ownership of raw materials, patents, import restrictions

Question 3

Why are pure monopolies a rare occurrence

Answer 3

Because although most sellers are single sellers in an industry, they still sell products that have close substitutes making them near monopolies and not pure monopolies

Question 4

Profit maximisation of a monopolist

Answer 4

It is the same as that of any other firm. MR = MC
It then uses the demand curve to find a price that will induce the customers to buy the quantity

Since profit is maximised where MR = MC, this means a monopolist sets a price greater than MC, which is allocatively inefficient

Question 5

Because a monopolist must lower the price on all units in order to sell additional units, MR is always less than price.
True or False

Answer 5

True, because MR < P, MR curve will lie below the AR curve.
MR can even become negative