Question

1. Why can't a monopolist charge any price he wishes for his product? 2. The Government grants a single firm the right to sell food and drink in Yosemite National Park. What are thge tradeoffs associated with such a poicy? 3. Give two examples of natural monopolies. Should the government set price ceilings in natural monopoly markets? Why? 4. Monopolistic competition has some of the same characteristics as monopoly and some of the same characteristics as perfect competiton (hence the name "monopolistic competition"). List a few of these similarities. 5. Why do monopolistically competitive firms end up making zero economic profits? 6. Why does a monopolistically competitive firm choose the level of output where marginal cost equals marginal revenue? 7. Complete this statement by filling in the blanks with the words "increase" or "decrease": The entry of an additional firm in a mon. comp. market _____________ the profit per unit of output because entry _________ the price and _____________the average cost of production. 8. Consider the Utica Slappers, a hockey team that plays in an arena with 8,000 seats. The only cost associated with staging a hockey game is a fixed cost of $6,000: The team incurs this cost regardless of how many people attend a game. The demand curve for hockey tickets has a slope of $0.001 per ticket ($1 divided by 1,000 tickets): Each $1 increase in price decreases the number of tickets sold by 1,000. For example, here are some combinations of price and quantity: Price per ticket $4 $5 $6 $7......Quantity of tickets 8,000 7,000 6,000 5,000. The owner's objective is to maximize the profit per hockey game (total revenue minus the $6,000 fixed cost). a. What price will maximize profit? b. If the owner picks the price that maximizes profit, how many seats in the arena will be empty? c. Is it rational to leave some seats empty? 9. There are a wide variety of breakfast cereals on the marketin grocery stores, they usually take up an entire aisle. As a result, it is possible to purchase many cereals that are highly similar but have small distinguishing characteristics that differentiate them. a. List some cereals that are very close substitutes for one another b. What does society gain from having all of these varieties of breakfast cereal? c. What does society lose by having all of these varieties of breakfast cereal? 10. Briefly differentiate between collusion among firms in an oligopoly and an actual cartel. 11. Give a real world example of a duopoly and a cartel.

Answer 1

1.

Monopolist cannot charge any price, because the demand is elastic in nature. Hence, higher price, will reduce the quantity demanded. It will reduce the net profit earned by the monopolist if a very high price is charged. So, monopolist strategically puts price that cannot make many customers to go away and earn higher profit.

2.

By giving rights to one company, the government can earn higher tax, revenue or licensing money, but it will create monopolization in the park. People will be forced to pay the higher prices for the goods as it is only provided by one firm. So, the tradeoff is between profit coming to the government and loss of consumer welfare due to higher price.

3.

Two examples of natural monopoly, are:

A. Railroad company that builds, operates and maintains the railroad infrastructure.

B. Electricity provider company producing power, distributing and maintaining the power cable infrastructure

4.

Similarities between monopoly and monopolistic competition are as follows:

A. They both are price makers.

B. They both are inefficient in allocative and productive efficiency.

Similarities between perfect competition and monopolistic competition are as follows:

A. They both have free entry and exit of the firms in the market

B. They both earn zero economic profit in the long run.

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