Question

Which of the following is NOT a source of monopoly power?

Select one:

a.

government regulations prohibiting entry of new firms

b.

decreasing marginal costs

c.

innovation

d.

economies of scale

An example of a monopoly would be:

Select one:

a.

a gasoline service station in Los Angeles.

b.

a sole provider of electrical power in a city.

c.

a grocery store in Chicago.

d.

Walmart.

Natural monopolies:

Select one:

a.

produce the optimal quantity of output, unlike other monopolies.

b.

exist when one firm can produce the market output at a lower cost than two or more firms.

c.

generally experience large diseconomies of scale, leading to production inefficiencies and work stoppages.

d.

face market demand curves that are perfectly elastic.

Answer 1

1. Option b

Marginal costs are not uniformly decreasing even in the monopoly market. After a point it is persistently increasing. Monopolists maximize profit on the increasing part of the marginal cost curve where it equals marginal revenue. So decreasing marginal costs are not a source of monopoly.

2. Option b: In a particular city normally there is a single provider of electricity. This is because if there are multiple providers there market share would be too less to operate with such large costs and they would not be enjoying economies of scale.

3. Option b:

Natural monopolies arise due to their ability to produce and make a good available in the market at a cost lower than its probable competitor or sometimes lower than the cost faced by more than one probable competitor. Thus, the firm facing the lowest cost of production becomes the monopolist.