Question

A fundamental feature of a monopolistic market is that the firm

• Must produce on its supply curve
• Faces the price and the quantity tradeoff dictated by market demand
• Faces a perfectly inelastic demand curve
• Can obtain any price for any quantity of output
• Can sell any quantity it desires at the current market price

Compared to a perfectly competitive industry with the same cost curves, a monopoly

• Creates market inefficiency and less economic surplus
• Creates less economics surplus
• Creates less deadweight loss
• Creates market inefficiency
• Is less profitable because it produces less output

A cartel increases the industry’s profits by

• Agreeing to sell all current output at an agreedon price
• Ceasing all active competitive bahaviour with respect to price
• Agreeing to produce more but to sell at a higher price
• Fully capturing all economies of scale
• Decreasing industry output and thereby increasing market price

Which of the following does not present an enforcement problem for a successful cartel?

• Convincing other firms to join the cartel
• Entry of new firms
• Government restrictions on output
• Monitoring the output of cartel members
• Preventing cartel members from violating the agreedon production level

Which of the following is NOT a barrier to entry?

• Economies of scale
• Patent laws
• Licensing
• Large setup costs
• Longrun increasing average costs

Since the profit-maximizing monopolist produces that output where marginal cost equlas marggnial revenue, we conclude that

• P = MR
• P = MC
• P<MR
• P>MC
• P > ATC

Answer 1

(1) (b)

Monopolist faces downward sloping demand curve, so to increase (decrease) price, output must be decreased (increased).

(2) (a)

Total surplus is maximized in perfect competition, and monopoly creates inefficiency loss.

(3) (e)

Cartel members agree to produce a quantity that is lower than competitive quantity, at a higher price.

(4) (c)

Government imposed output restriction is not a cartel enforcement problem.

(5) (e)

Increasing long run average cost reflects diseconomies of scale and is not an entry barrier.

(6) (d)

Since MR = MC and also since Price > MR, it means Price > MC.