Question

In: Economics

1. We previously discussed the assumptions that define both competitive and monopoly markets. Which of the...

1. We previously discussed the assumptions that define both competitive and monopoly markets. Which of the following is/are assumptions that are present in competitive markets but not present in monopoly markets?
a. Firms are profit maximizers
b. Firms incur marginal costs
c. Price equals marginal revenue
d. Markets are efficient and maximize total surplus
e. c and d are both correct
2. Suppose that the manufacture of widgets involves large economies of scale. In other words, as the scale of production grows for a single firm, long run ATC falls. Suppose further that a single firm enters this market first and invests heavily in capital equipment. Is this market likely to evolve into a monopoly and if so why?
a. This market may indeed evolve into a “natural monopoly” because of the presence of economies of scale and an aggressive and well-financed first entrant
b. This market cannot evolve into a monopoly because of the absence of barriers to entry
c. This market will not evolve into a monopoly because firms desire to maximize total surplus for society and themselves
d. This market will evolve into a monopoly because the government will likely confer a monopoly right on the first entrant
3. True or false. The law of copyright provides an example of a government created monopoly.
a. True
b. False
4. Which of the following are differences between competitive and monopoly markets?
a. Monopoly markets under-produce from societies standpoint
b. Positive economic profits in the long-run are possible in a monopoly market
c. For competitive firms, price equals marginal revenue
d. All of the above are differences
5. Which of the following best explains the welfare costs (the inefficiency) of monopoly markets?
a. A monopolist maximizes profits
b. A monopolist under produces such that there are units not produced for which marginal costs are less than willingness to pay of consumers (some positive surplus transactions are not enjoyed)
c. A monopolist charges a price greater than what a competitive market would charge for the same good
d. None of the above explains the welfare costs imposed by monopolies
6. Following up on question 5 above, your answer demonstrates which of the following terms?
a. Perfect competition
b. Consumer surplus
c. Deadweight loss
d. Average total costs

Solutions

Expert Solution

(1) In perfect Competition firm price equals to marginal revenue and average revenue and perfect competition is a market condition where market is fully efficient and produce maximum surplus

so option E is correct

(2) This market is example of natural monopoly and in and there are high barrier to entry

so option A is correct

(3) copyright is not a type of monopoly and government create monopoly where government is a sole a producer of good or service where creation of competition is not easy. above statement is false

so option B is correct

(4)

Monopoly is inefficient because it produce lower amount with higher cost so monopoly

and in long run monopoly can produce economic profit

In perfect Competition firm price equals to marginal revenue and average revenue

so option A B C are correct

so option E is answer

(5) a monopolist work on higher marginal cost with lower output so

A monopolist under produces such that there are units not produced for which marginal costs are less than willingness to pay of consumers

so option B is correct explanation for welfare cost in monopoly market

(6) Loss in welfare demonstrated by dead weight loss

so option C is correct


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