Question

_____ 1. Which of the following statements about a monopoly is false?

1. With price discrimination deadweight loss is smaller but consumer surplus is also smaller
2. For a monopolized market to stay monopolized there have to be barriers to entry
3. With a monopoly, price will equal marginal cost
4. The more inelastic the demand, the higher the mark up of price over marginal cost

_____ 2. Which of the following statements about externalities is true?

1. A positive consumption externality will result in over consumption. The government should subsidize consumers to fix it.
2. If there's a negative production externality like pollution, the government should set a tax high enough so that the externality is completely eliminated
3. With a positive externality in consumption social benefit is above private benefit
4. Negative externalities create inefficiency but positive externalities improve it

2. True or False

1. In the long run, demand is more price elastic than in the short run

TRUE                                                              FALSE

2. An increase in the number of firms will result in higher price and lower consumer surplus

TRUE                                                              FALSE

3. If one country has absolute advantage in all goods then it cannot benefit from trade with another country

TRUE                                                              FALSE

4. If the number of firms in the market increases then consumer surplus will go down

TRUE                                                              FALSE

Answer 1

Ans) 1) Monopoly is when there is a single seller selling unique product. There is high barrier to entry and exit.

Price discrimination is the practice of charging different price for same product from different groups. Price discrimination lowers deadweightloss but it also lowers consumer surplus.

Option c. Price is above marginal cost im monopoly.

2) Externality is when the bystander bears the cost or benefit of any activity.

Both the externalities create inefficiency in the market. As negative externality produces more output than socially optimal while positive externality produces less output than socially optimal.

Option d.

3) True. Due to availability of more substitutes in long run, demand elasticity increases in long run.

4) False. With increase in number of firms, competition and supply will increase. This will result in lowering of price and hence consumer surplus will increase.

5) False. Even if a country has absolute advantage in all goods, it can still benefit from trade as trade is done on basis of comparative advantage.

6) False. Due to increase in number of firms, price will go down and consumer surplus will increase.