chp 12 instructor manual

chp 12 instructor manual - Chapter 12 MONOPOLY AND...

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Chapter 12 MONOPOLY AND MONOPSONY QUESTIONS AND ANSWERS Q12.1 Describe the monopoly market structure and provide some examples. Q12.1 ANSWER Monopoly is a market structure characterized by a single seller of a highly differentiated product. Because a monopolist is the sole provider of a desired commodity, the monopolist is the industry. Although the producer of every product faces at least some competition in the sense of competing for a share of the consumer's overall market basket of goods, monopolists face no effective competition from either established or potential rivals able to offer the same product. This allows the monopolist to simultaneously determine price and output levels for the firm (and the industry). Substantial barriers to entry or exit are often present, thereby deterring potential entrants and offering both efficient and inefficient monopolists the opportunity for excess profits, even in the long-run. Examples of monopoly markets include: local telephone service (or basic hook-up); municipal bus companies; and gas, water and electric utilities, among others. Q12.2 From a social standpoint, what is the problem with monopoly? Q12.2 ANSWER The problem with monopoly from a social standpoint is that it leads to an inefficient allocation of productive resources and an inequitable allocation of income. From an efficiency perspective, monopolies produce too little output at too high a price. As a result, the demands of consumers are only partially met. Because P > MC, the marginal value of output (P) exceeds marginal production costs, and social welfare would rise with an increase in production. From an equity perspective, the excess profits that can arise due to unregulated monopoly are often criticized as unwarranted and thus unfair. Q12.3 Why are both industry and firm demand curves downward sloping in monopoly markets? Q12.3 ANSWER
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115 Chapter 12 In monopoly, the firm is the industry. Thus, firm and industry demand and supply curves are identical. The monopoly demand curve will be downward sloping, like all industry demand curves, because this output must, to a greater or lesser degree, compete with all goods and services for a share in the consumer's market basket. The diminishing marginal utility associated with the consumption of all goods and services will ensure that the industry demand curve is downward sloping for all products. Q12.4 Give an example of monopoly in the labor market. Discuss such a monopoly's effect on wage rates and on inflation. Q12.4 ANSWER With industrialization came a growing concentration on the purchase of labor services, and in some instances, this growing concentration was sufficient to create buyer (monopsony) power. Labor laws in the United States granted workers the right to unionize in order to create countervailing seller (monopoly) power in the market for labor services. The advantage of countervailing power is that markets characterized by monopsony-monopoly confrontation can sometimes lead to more
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chp 12 instructor manual - Chapter 12 MONOPOLY AND...

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