Perfect Competition, Imperfectly Competitive Markets and Monopoly

Question 1

What is the main ability that comes with monopoly power?

Answer 1

The ability to set prices.

Question 2

What are entry barriers?

Answer 2

Obstacles that make it difficult for a new firm to enter a market.

Question 3

What are exit barriers?

Answer 3

Obstacles that make it difficult for a firm to leave a market.

Question 4

What is a sunk cost?

Answer 4

Start up costs that have already been incurred and cant be recovered (resold). Sunk costs are a barrier to exit.

Question 5

What are the two types of barriers?

Answer 5

Natural and Artificial

Question 6

Explain the difference between natural and artificial barriers.

Answer 6

Natural barriers result from inherent features of the industry (i.e high R&D costs or economies of scale). However, artificial barriers are erected by firms themselves (i.e a patent).

Question 7

What is the minimum efficient scale (MES)?

Answer 7

The lowest output at which a firm can operate at the lowest possible long run average costs (productive efficiency). A high MES is a barrier to entry.

Question 8

What is a key assumption to make when talking about the divorce of ownership and control?

Answer 8

All private limited companies are short run profit maximisers. Shareholders want their dividends more than anyone else.

Question 9

Describe the principal agent problem.

Answer 9

The principal (owner) appoints an agent (manager) to perform tasks on their behalf, but they have different incentives and therefore conflicting objectives (long run vs short run profit maximisation).

Question 10

Give 3 ways to get around the principal agent problem.

Answer 10

• employee share ownership schemes
• delist the firm (come of the stock exchange)
• shareholder activism