week 7 (GPT)

Question 1

What are the main features of perfect competition?

Answer 1

Many buyers and sellers,
identical products,
firms are price takers,
free entry and exit,
no externalities.

Question 2

What does it mean to be a price taker?

Answer 2

A firm that cannot set its own price and must accept the market price.

Question 3

What is market power?

Answer 3

The ability of a firm to influence the price of a good or service.

Question 4

What is a monopoly?

Answer 4

A market with only one dominant firm, which has significant market power.

Question 5

Why does a monopolist face a downward-sloping demand curve?

Answer 5

Because to sell more, it must lower the price, unlike a firm in perfect competition.

Question 6

Why does marginal revenue lie below the demand curve in monopoly?

Answer 6

Because lowering price to sell one more unit reduces revenue on all previous units.

Question 7

Where does a monopoly maximize profit?

Answer 7

Where marginal revenue (MR) equals marginal cost (MC).

Question 8

How does a monopoly choose price?

Answer 8

It uses the demand curve to set price at the quantity where MR = MC.

Question 9

What is the result of monopoly pricing on output?

Answer 9

Monopolies restrict output below the socially optimal level.

Question 10

What is deadweight loss in monopoly?

Answer 10

lost value to society when a market doesn’t produce at the efficient level, meaning some buyers and sellers miss out on gains from trade.

Question 11

What is allocative efficiency?

Answer 11

The point where price equals marginal cost (P = MC), representing optimal output for society.

Question 12

Why do monopolies cause allocative inefficiency?

Answer 12

Because they set P > MC, underproducing the good.

Question 13

What is a natural monopoly?

Answer 13

A monopoly that exists due to economies of scale making it most efficient for one firm to serve the market.

Question 14

Why do natural monopolies have decreasing average total cost?

Answer 14

Because high fixed costs are spread over more output, lowering ATC.

Question 15

What is marginal cost pricing?

Answer 15

A regulation method where the monopoly must set price equal to marginal cost (P = MC).

Question 16

What is the downside of marginal cost pricing in natural monopoly?

Answer 16

It can cause losses since price may fall below average total cost.

Question 17

What is average cost pricing?

Answer 17

A regulation where the firm sets price equal to average total cost to earn normal profit.

Question 18

What is the effect of average cost pricing?

Answer 18

It reduces price and increases output while allowing the firm to break even.

Question 19

What is price discrimination?

Answer 19

Charging different prices to different consumers for the same product.

Question 20

What is first-degree price discrimination?

Answer 20

Charging each customer their exact maximum willingness to pay (reservation price).

Question 21

What is the result of first-degree price discrimination?

Answer 21

No consumer surplus remains; all surplus goes to the firm.

Question 22

What is second-degree price discrimination?

Answer 22

Charging different prices based on quantity or bundle (e.g. bulk discounts, loyalty cards).

Question 23

What is third-degree price discrimination?

Answer 23

Charging different prices to different groups based on observable traits (e.g. students, seniors).

Question 24

How does price discrimination affect output and efficiency?

Answer 24

It increases output and can reduce deadweight loss compared to single-price monopoly.

Question 25

Why is price discrimination common in transport or entertainment?

Answer 25

Because it's easy to separate consumers by age, income, or usage (e.g. student fares, senior discounts).

Question 26

What does the demand curve look like for a firm in perfect competition?

Answer 26

Perfectly horizontal, reflecting that the firm is a price taker.

Question 27

What does the demand curve look like for a monopoly?

Answer 27

Downward-sloping, because the firm has market power.

Question 28

How does marginal cost curve typically behave in a natural monopoly?

Answer 28

It is flat or gently upward-sloping due to low variable costs.

Question 29

What is the relationship between demand and marginal revenue in monopoly?

Answer 29

MR falls twice as steeply as demand.

Question 30

Why can't a monopoly set both price and quantity independently?

Answer 30

Because setting one determines the other based on the demand curve.

Question 31

How is profit shown on a monopoly graph?

Answer 31

As the vertical difference between price and ATC, multiplied by quantity.

Question 32

How is deadweight loss shown on a monopoly graph?

Answer 32

As the triangle between demand and MC between monopoly and socially optimal output.

Question 33

Why might the government regulate a monopoly?

Answer 33

reduce prices, increase output, improve social welfare.

Question 34

What are the two main regulation methods for monopolies?

Answer 34

Marginal cost pricing and average cost pricing.

Question 35

What are the risks of regulating monopolies too strictly?

Answer 35

It may cause the firm to operate at a loss, discouraging investment or service.

Question 36

Why does average cost pricing allow a monopoly to survive?

Answer 36

Because it lets the firm cover both fixed and variable costs while limiting excess profit.