Th3.4: Williamson Trade Off

Question 1

Refer to PP

Look at Graph 41. What does this diagram show?

Answer 1

the effects of a monopolist compared to perfect competition - it is known as the Williamson trade off

Question 2

Refer to PP

Look at Graph 41. What is assumed in order to make the diagram easier to follow?

Answer 2

assumed that the industry is a constant cost industry where AC = MC

Question 3

Refer to PP

Look at Graph 41. Where would the market produce if it were perfectly competitive?

Answer 3

would produce where price = AR = MC at Q1P1

Question 4

Refer to PP

Look at Graph 41. If the industry wants to become a monopoly where would it produce?

Answer 4

it would produce MC = MR at Q2P2

Question 5

Draw the diagram three times please

Answer 5

okay :(

Question 6

Refer to PP

Look at Graph 41. What has the shift from perfect competition to monopoly meant?

Answer 6

has meant less production of the good and therefore less resources used, which causes deadweight loss of BCD, the orange area

Question 7

Refer to PP

Look at Graph 41. What has happened regarding consumer and produce surplus?

Answer 7

there is a fall in consumer surplus from ADP1, the total shaded area, to ADP2, the yellow area.
P2BCP1, the purple area, has been turned into producer surplus whilst BCD has been lost as deadweight loss

Question 8

What may monopolists suffer from due to a lack of competition?

Answer 8

suffer from X-inefficiency. MC = AC may rise and this will cause an even further fall in consumer surplus

Question 9

Alternatively, a large monopolist may enjoy…

Answer 9

large economies of scale which allow AC to fall. if these fall by a large enough amount, then consumer surplus will grow larger than would exist in perfect competition

Question 10

What does Schumpeter argue?

Answer 10

monopolies will have large retained profits and will be able to exploit new products or production techniques without worrying about competitors

Question 11

What does Schumpeter’s argument suggest would happen for monopolies?

Answer 11

it would make them more productively efficient (as costs are lower) more allocative efficient (as there are new products in the market) and dynamically efficient

Question 12

What do monopolists avoid?

Answer 12

avoid undesirable duplication of services and prevent a misallocation of resources

Question 13

What may cross subsidisation do?

Answer 13

may waste resources since profits from one sector finance losses in another, whilst instead they should stop production of this good