Pure Monopoly
A. Short-Answer, Essays, and Problems
1. What are the major characteristics of pure monopoly?
2. What are the major barriers to entry that explain the existence of monopoly?
3. What is the relationship between economies of scale and a natural monopoly?
4. Some economists argue that pure monopolists will purposely avoid the price-output combination that will maximize their profits. Explain how this less-than-maximum profit behavior could be rational.
5. In what ways, if any, do the demand schedules for a purely competitive firm and a pure monopolist differ? What significance does this have for the price-output behavior of each?
6. Why is marginal revenue less than price for every level of output except the first?
7. How does price elasticity affect the price-quantity combination and segment of the demand curve that the monopolist would prefer for price and output?
8. A pure monopolist determines that at the current level of output the marginal cost of production is $2.00, average variable costs are $2.75, and average total costs are $2.95. The marginal revenue is $2.75. What would you recommend that the monopolist do to maximize profits?
9. A pure monopolist sells output for $4.00 per unit at the current level of production. At this level of output, the marginal cost is $3.00, average variable costs are $3.75, and average total costs are $4.25. The marginal revenue is $3.00. What is the short-run condition for the monopolist and what output changes would you recommend?
10. The demand schedule for the product produced by a monopolist is given in the table below. Complete the table by computing total revenue and marginal revenue.
(a) What do the data in the table indicate about the relationship between total revenue and marginal revenue? Explain.
(b) What do the data in the table indicate about the elasticity of demand?
11. In the following table are demand and cost data for a pure monopolist. Complete the table by filling in the columns for total revenue, marginal revenue, and marginal cost. Answer these three questions: (a) What output will the monopolist produce? (b) What price will the monopolist charge? (c) What total profit will the monopolist receive at the profit-maximizing level of output?
12. Why is there a supply curve in pure competition but no supply curve in pure monopoly?
13. What conditions must exist in order for a pure monopolist to achieve economic profits? Is the profitability of a firm's operation a good index of the degree of monopoly power it possesses?
14. Do you agree or disagree with the statement that: "A monopolist always charges the highest possible price." Explain.
15. "Pure monopoly guarantees economic profits." Discuss whether this is a valid statement.