Chapter 15 - Monopoly

Question 1

Define Monopoly.

Answer 1

A firm that is the sole seller of a product without close substitutes.

Question 2

What are the 3 main sources of barriers to enter?

Answer 2

1. Monopoly Resources - a key resource is owned by a single firm.
2. Government Regulation - The government gives a single firm the exclusive right to produce some good or services.
3. The production process - A single firm can produce output at a lower cost than a larger number of firms.

Question 3

Define Natural Monopoly.

Answer 3

A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

Question 4

What is the key difference between a competitive market and a monopoly?

Answer 4

A firm in a competitive market is relatively small compared to the market, therefore they act as price takers for its output given by market condition. In contrast, because a monopoly is a sole producer in it’s market it can alter the price of its good by adjusting the quantity it supplies to the market .

Question 5

Describe the demand curves for competitive and monopoly firms.

Answer 5

1. Competitie firm - Horizontal; because they can sell as much or as little as it wants at a fixed price.
   - > Many perfect substitutes = the demand curve the any one firm faces is perfectly elastic.
2. Monopoly Firm - Downward sloping. The monopoly has to accept a lower price if it wants to sell more output.

Question 6

Explain the marginal-revenue curves for a monopoly.

Answer 6

As the firm produces more, the marginal revenue (cost to make the good) becomes less and so does the price of the good sold.