Monopoly and Other Forms of Imperfect Competition
Answers to Text Questions and Problems
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
Such a firm can choose its price or its quantity, but it cannot choose both.
it chooses one, the other is determined.
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.
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.