TUTORIAL 9 - TUTORIAL 9 WEEK 10 MONOPOLY AND OTHER FORMS OF...

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TUTORIAL 9 WEEK 10 MONOPOLY AND OTHER FORMS OF IMPERFECT COMPETITION Reading : Text: Ch10 Review Questions: 4 and 5 4 Marginal revenue is the change in total revenue that occurs as a result of selling an extra unit of output. Given that it faces a downward-sloping demand curve, the single price monopolist must cut price on all units in order to expand sales by a unit. Consequently, the resulting increase in total revenue will be less that the price. Since the perfectly competitive firm faces a perfectly elastic demand curve, they can sell any number of additional units at the market price. Hence, marginal revenue equals price for this firm. 5 False. It is true that the natural monopolist, like any other type of monopolist, sets price above marginal cost. However, this does not guarantee the monopolist a positive economic profit. At the level of output where marginal cost equals marginal revenue, average total cost may exceed, be equal to or be less than price. If average total cost exceeds price the monopolist will experience an economic loss. Problems: 1, 2, 3, 4, 6, 8 and 9 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 2 a True. The market demand curve slopes downward in both cases, reflecting
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