Ch010_text_answers - Monopoly and Other Forms of Imperfect...

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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 product. Such a firm can choose its price or its quantity, but it cannot choose both. Once 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. 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. Saab Volvo annual production 50,000 200,000 fixed cost $1,000,000,000 $1,000,000,000 variable cost $500,000,000, $2,000,000,000 total cost $1,500,000,000 $3,000,000,000 Average cost per car $30,000 $15,000 2a. False. The industry 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. b. True.
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This note was uploaded on 12/26/2009 for the course ECON ECON 2 taught by Professor Hamilton during the Spring '09 term at UCSD.

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Ch010_text_answers - Monopoly and Other Forms of Imperfect...

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