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.
If they try to charge a higher price they will lose all their business; if they try to charge a lower
price, they will not be maximizing profit.
This is the essential feature of natural monopoly.
3. The answer is c.
The monopolist chooses the output level at which marginal revenue equals marginal
cost and then charges a price consistent with demand at that level of output. Since price always exceeds
marginal revenue, price is greater than marginal cost. There is no shortage: at the output chosen, demand
and supply coincide.
And the monopolist has no reason to maximize marginal revenue (which would