Microeconomics Topic 4 YR1

Question 1

What are examples of barriers to entry in monopolies?

Answer 1

Patents, economies of scale, government regulations, resource ownership.

Question 2

What is the difference between natural and legal barriers to entry?

Answer 2

Natural barriers arise from economies of scale; legal barriers include patents and licences.

Question 3

What are the characteristics of monopolistic competition?

Answer 3

Many buyers and sellers, differentiated products, low barriers to entry, some price-setting power.

Question 4

How do products differ in monopolistic competition?

Answer 4

Firm sell slightly varied products, such as through branding or quality differences.

Question 5

What happens to profits in monopolistic competition in the long run?

Answer 5

Supernormal profits are competed away, leaving only normal profits in the long run.

Question 6

What are examples of firms in monopolistic competition?

Answer 6

Examples: Restaurants, hair salons, clothing brands.

Question 7

What are the characteristics of an oligopoly?

Answer 7

Few large firms dominate, high barriers to entry, interdependence, non-price competition.

Question 8

What is the significance of interdependence in an oligopoly?

Answer 8

Firms must consider competitor’s actions when setting prices or output.

Question 9

What is non-price competition, and why is it important in oligopoly?

Answer 9

Non-price competition involves advertising, branding, and innovation to attract customers.

Question 10

What is a non-collusive oligopoly?

Answer 10

Firms cooperate to fix prices or output, often forming cartels like OPEC.

Question 11

What is a non-collusive oligopoly?

Answer 11

Firms compete but avoid price wars, often explained by the kinked demand curve.

Question 12

Explain the kinked demand curve model in oligopoly

Answer 12

The kinked demand curve shows price rigidity: elastic demand for price increases, inelastic demand for price cuts.

Question 13

What does Prisoner’s Dilemma illustrate in oligopoly?

Answer 13

The prisoner’s dilemma shows why collusion in oligopolies may fail due to incentives to cheat.

Question 14

Define productive efficiency

Answer 14

Productive efficiency is producing at the lowest average cost (AC = MC).

Question 15

Which market structure achieves productive efficiency in the long run?

Answer 15

Perfect competition achieves productive efficiency in the long run.

Question 16

Define allocative efficiency.

Answer 16

Allocative efficiency occurs when P = MC, maximising consumer and producer surplus.

Question 17

Which market structure achieves allocative efficiency?

Answer 17

Perfect competition achieves allocative efficiency in both short and long runs.

Question 18

What is dynamic efficiency?

Answer 18

Dynamic efficiency involves improvements in innovation and technology over time.

Question 19

Which market structures are most likely to achieve dynamic efficiency?

Answer 19

Monopolies and oligopolies may achieve dynamic efficiency due to supernormal profits.

Question 20

What is X-inefficiency?

Answer 20

Higher costs arising from lack of competitive pressure, common in monopolies.

Question 21

Why is X-inefficiency common in monopolies?

Answer 21

Monopolies face no competition, reducing incentives to minimise costs.

Question 22

What is market failure in perfect competiton?

Answer 22

Perfect competition can lack dynamic efficiency due to limited supernormal profits

Question 23

What is market failure in monopolies?

Answer 23

Monopolies restrict output, raise prices, and cause allocative inefficiency.

Question 24

What is market failure in monopolistic competiton?

Answer 24

Monopolistic competition may lead to excess capacity (productive efficiency).

Question 25

What is market failure in oligopolies?

Answer 25

Oligopolies may engage in collusion, reducing competition and harming consumers.

Question 26

Give a real-world example of perfect competiton

Answer 26

Agricultural markets like wheat farming.

Question 27

Give a real-world example of a monopoly

Answer 27

Google in the search engine market.

Question 28

Give a real-world example of monopolistic competition.

Answer 28

Local coffee shops or small clothing brands.

Question 29

Give a real-world example of an oligopoly.

Answer 29

Automotive industry e.g., Toyota, Ford, GM.

Question 30

Explain why the LRAC curve is U-shaped.

Answer 30

It shows economies of scale (downward slope) and diseconomies of scale (upward slope).

Question 31

What happens to supernormal profit in perfect competition in the long run?

Answer 31

Supernormal profits are eliminated as new firms enter the market.

Question 32

What is the significance of economies of scale in monopolies?

Answer 32

Economies of sale allow monopolies to reduce average costs and potentially lower prices.

Question 33

What are examples of non-price competition in monopolies?

Answer 33

Examples: Advertising, branding, and product differentiation.

Question 34

What are examples of industries benefitting from economies of scale?

Answer 34

Amazon in distribution, airlines, and large manufacturers.

Question 35

What are examples of industries experiencing diseconomies of scale?

Answer 35

Government organisations with large bureaucracies.

Question 36

What are the revenue curves in a monopoly?

Answer 36

AR is a downward-sloping, MR falls faster than AR.

Question 37

What happens to profits in perfect competition in the long run?

Answer 37

In the long run, supernormal profits are eliminated as new firms enter the market.

Question 38

What is the revenue curve in perfect competiton?

Answer 38

In perfect competition, AR = MR = Price (perfect elastic demand curve).

Question 39

What are market structures in economics?

Answer 39

Market structures describe the characteristics and organisation of a market, including the number of firms, type of products, and level of competition.

Question 40

Why do monopolies have price-making power?

Answer 40

Monopolies face no competition and control supply, allowing them to set prices.

Question 41

What happens to profits in perfect competition in the short run?

Answer 41

In the short run, firms can earn supernormal profits, normal profits, or make losses.

Question 42

What are the key characteristics of market structures?

Answer 42

1. Number of firms 2. Market share concentration 3. Barriers to entry and exit 4. Product differentiation 5. Information availability 6. Price-setting power

Question 43

List the main types of market structures.

Answer 43

Perfect competition, monopoly, monopolistic competition and oligopolies.

Question 44

What are the characteristics of perfect competiton?

Answer 44

Many buyers and sellers, homogenous products, perfect information, no barriers to entry or exit, price takers.

Question 45

Why are firms in perfect competition price takers?

Answer 45

Because no single firm is large enough to influence the market price.

Question 46

What are the characteristics of a monopoly?

Answer 46

Single seller, unique product, high barriers to entry, price maker.