Answers to Problem Set 10
Answers to Review Questions
1. The pure monopolist, the oligopolist, and the monopolistically competitive firm all face downward-
sloping demand curves.
2. A firm with market power is one that faces a downward-sloping demand curve for its product.
firm can choose its price or its quantity, but it cannot choose both.
Once it chooses one, the other is
3. Without patent or copyright protection, firms would have little incentive to incur the costs needed to
develop new products.
The gains from encouraging new product development generally outweigh the
temporary inefficiency of higher prices.
4. The monopolist must cut price on all units in order to expand sales, whereas the perfectly competitive
firm can sell any number of additional units at the market price.
5. The natural monopolist, like any other monopolist, sets price above marginal cost.
But since marginal
cost for the natural monopolist is less than average cost, average cost may exceed price at the profit-
maximizing level of output, in which case the monopolist would experience an economic loss.
Answers to Problems
1. As shown in the following table, Volvo’s greater production volume gives it substantially lower average
production cost, and this advantage helps explain why Volvo’s market share has in fact been growing
relative to Saab’s.
Average cost per car
demand curve is downward sloping in both cases, but from the individual perfectly
competitive firm’s point of view, the demand curve is horizontal.
Because the individual firm is too
small to affect the market price, it can sell as many units as it wishes at that price.