Perfect Monopoly

Question 1

List examples of reasons why monopolies exist.

Answer 1

Control of raw materials or processes;
Government granted franchise (i.e., exclusive right);
Increasing return to scale (i.e., natural monopolies).

Question 2

What is the shape of the demand curve for a firm in perfect monopoly?

Answer 2

Downward sloping (and, since the firm is the only firm in the industry, it is also the industry demand curve).

Question 3

Describe the point of short-run profit maximization for a firm in perfect monopoly.

Answer 3

Short-run profit is maximized where marginal revenue is equal to rising marginal cost. The price charged at that quantity will depend on the level of the demand curve.

Question 4

In the long-run, how may a monopoly firm increase its profits?

Answer 4

Reduce cost by changing the size if its operations;

Increase demand through advertising, promotion, etc.

Question 5

List the characteristics of a perfect monopoly.

Answer 5

A single seller
A commodity for which there are no close substitutes;
Restricted entry into the market.