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Unformatted text preview: Pure Monopoly ANSWERS TO END-OF-CHAPTER QUESTIONS 22-1 “No firm is completely sheltered from rivals; all firms compete for the consumer dollars. If that is so, then pure monopoly does not exist.” Do you agree? Explain. How might you use Chapter 18’s concept of cross elasticity of demand to judge whether monopoly exists? Though it is true that “all firms compete for the dollars of consumers,” it is playing on words to hold that pure monopoly does not exist. If you wish to send a first-class letter, it is the postal service or nothing. Of course, if the postal service raises its rate to $10 to get a letter across town in two days, you will use a courier, or the phone, or you will fax it. But within sensible limits, say a doubling of the postal rate, there is no alternative to the postal service at anything like it at a comparable price. The same case can be made concerning the pure monopoly enjoyed by the local electricity company in any town. If you wish electric lights, you have to deal with the single company. It is a pure monopoly in that regard, even though you can switch to oil or natural gas for heating. Of course, you can use oil, natural gas, or kerosene for lighting too—but these are hardly convenient options. The concept of cross elasticity of demand can be used to measure the presence of close substitutes for the product of a monopoly firm. If the cross elasticity of demand is greater than one, then the demand that the monopoly faces is elastic with respect to substitute products, and the firm has less control over its product price than if the cross elasticity of demand were inelastic. In other words, the monopoly faces competition from producers of substitute products. 22-2 Discuss the major barriers to entry into an industry. Explain how each barrier can foster monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable? Economies of scale are a barrier to entry because of the need for new firms to start big to achieve the low production costs of those already in the industry. However, not all industries need techniques of production that require large scale. In many industries the minimum efficient scale is only a small percentage of domestic consumption. Recall Chapter 20’s discussion on MES. Natural monopolies give rise to monopoly that is socially justifiable. The economies of scale are sometimes such that having two or more firms serving the market would increase costs unreasonably. Two telephone companies, or gas companies, or water companies, or electricity companies in the same city would be highly inconvenient and costly as long as transmission requires wires and pipes. In such instances, it makes sense for government to grant exclusive franchises and then regulate the resulting monopoly to ensure the public interest is protected....
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