Price and Output in Monopoly, Monopolistic Competition and Perfect Competition

Question 1

What is the minimum-cost level of output?

Answer 1

The minimum-cost level of output corresponds to the lowest point on the average total cost curve.

Anything falling to the left is less than, and anything falling to the right is greater than.

Question 2

Characterize how a monopolist solves its profit-maximization problem?

Answer 2

Choose quantity so that marginal revenue equals marginal cost

Question 3

How do economists measure the economic inefficiency of a monopoly?

Answer 3

Deadweight loss. Deadweight loss measures the amount of surplus lost or forgone because of a market inefficiency such as a market controlled by a monopolist.

Question 4

Which of the following statements is true about a monopoly compared to a perfectly competitive market? (Assume the monopoly’s MC curve is identical to the market supply curve in the competitive market.)

I. A typical monopoly charges a price above the perfectly competitive price.
II. A typical monopoly generates deadweight loss.
III. A typical monopoly produces less than the quantity that corresponds to maximum efficiency.

Answer 4

All are true.