Perfect Monopoly

Question 1

What is the shape of the demand curve for a firm in a perfect monopoly?

Answer 1

Downward sloping (and, since the firm is the only firm in the industry, it is also the industry demand curve).

Question 2

Describe the point of short-run profit maximization for a firm in perfect monopoly.

Answer 2

Short-run profit is maximized where marginal revenue is equal to rising marginal cost. The price charged at that quantity will depend on the level of the demand curve.

Question 3

In the long-run, how may a monopoly firm increase its profit?

Answer 3

A monopoly firm may increase its profits in two ways:

1. Reduce cost by changing the size of its operations;
2. Increase demand through advertising, promotion, etc.

Question 4

List examples of reasons why monopolies exist.

Answer 4

1. Control of raw materials or processes;
2. Government granted franchise (i.e., exclusive right);
3. Increasing return to scale (i.e., natural monopolies).

Question 5

List the characteristics of a perfect monopoly.

Answer 5

1. A single seller
2. A commodity for which there are no close substitutes
3. Restricted entry into the market