Question

1.

Governments create monopolies through intellectual property rights such as patents and copyrights because:

• they want firms to make profits.

• they encourage innovation.

• they do not create true monopoly power.

• they do not understand the losses due to monopoly.

2. In general, a monopolist:

• can select any price and quantity combination that is on the demand curve.

• is limited by the price and quantity that government regulations set.

• is a price taker.

3.

Economic profit in the long run is

Multiple Choice

• possible for both a monopoly and a perfect competitor.

• possible for a monopoly but not for a perfect competitor.

• impossible for both a monopolist and a perfect competitor.

• only possible when barriers to entry are nonexistent.

• can select any price and quantity that it wants.

Answer 1

1. The government gives copy right and patents to monopoly firm in order to encourage innovations. Every innovation brings better products at low cost. Thus to provide this benefit to consumers, the government encourage innovations in monopoly firms by giving them patent and copy rights.

Answer: B. they encourage innovation.

2. A monopoly firm is a single seller in a market and thus he is a price maker. He fixes the price above the marginal cost which is equal to the marginal willingness to pay for a consumer. A single price monopolist fixes one price by equating the price and marginal willingness to pay on the demand curve. But a discriminating monopolist fixes different prices on the demand curve according to the marginal willingness of different buyers. The government fixes the price of the monopolist only in certain circumstances.

Answer: A. can select any price and quantity combination that is on the demand curve.

3. A perfect competitor earns zero economic profit in longrun, but a monopolist earns positive economic profit even in longrun.

Answer: Possible for a monopoly but not for perfect competitor.