Chapter 7.4

Question 1

Potential barriers to entry in a monopoly

Answer 1

Economies of scale
Natural monopolies
Branding
Legal barriers
Control of essential resources
Aggressive tactics

Question 2

Examples of legal barriers

Answer 2

Patents
Licences
Copyrights
Tariffs, quotas and other trade restrictions

Question 3

Price-maker

Answer 3

Firms that have the ability to control the price at which they sell their output

Question 4

When do firms have market power?

Answer 4

Whenever the firms faces a downward-sloping demand curve

Question 5

Why can the monopolist continue to make abnormal profits in the long run?

Answer 5

High barriers to entry prevent potential competitor firms from entering

Question 6

Natural monopoly

Answer 6

A firm that has economies of scale so large that it is possible for the single firm alone to supply the entire market at a lower average cost than two or more firms

Question 7

How can you tell from a graph if a firm is a natural monopoly?

Answer 7

If the market demand cuts LRAC when it is still falling

Question 8

What does a monopoly cause in terms of social welfare?

Answer 8

Market failure, where MB > MC and the monopolist gains some of the consumer surplus as producer surplus

Question 9

How is the underallocation of resources at the profit-maximizing level of output indicated in a monopoly?

Answer 9

P > MC

Question 10

Criticisms of monopolies

Answer 10

Welfare loss, allocative inefficiency and market failure
Higher price and lower output
Loss of consumer surplus to monopolist
Negative impacts on the distribution of income
Lack of competition may lead to higher costs
Possibly less innovative

Question 11

Potential benefits of monopolies

Answer 11

Economies of scale
Natural monopoly
R&D for product development and technological innovation