chapter 20: monopoly

Question 1

A monopoly

Answer 1

is an industry structure with only one firm in the market. When there is only one firm in the market, that firm is very unlikely to take the market price as given. A monopoly chooses the price and output that maximize
profits.

Question 2

A monopolized industry operates where

Answer 2

price is greater than marginal cost. In
general, the price will be higher and the output lower than in perfect competition and is therefore Pareto inefficient..

Question 3

A natural monopoly

Answer 3

is an industry with large fixed costs and small marginal costs.

• Natural monopolies are often operated by governments.
• The government could force the company to operate at P = AC such that profits are zero. It is still producing too little output relative to the efficient level of output.

Question 4

The minimum efficient scale (MES)
(def+ causes)

Answer 4

is the level of output that minimizes average costs.

• If demand is relatively large relative to the MES, a competitive market is likely to result.
• If demand is relatively small relative to the MES, a monopolistic structure is possible.

Question 5

reason why monopoly might occur

Answer 5

Another reason why monopoly might occur is that firms collude by restricting output to raise prices and form a cartel. An industry may also have one dominant firm purely by historical accident.