Quiz 12: Monopoly and Monopsony


(A) The answer is True. The Justice Department concerns itself with significant or flagrant offenses under the Sherman Act, as well as with mergers for monopoly covered by Section 7 of the Clayton Act. (B) The answer is False When a single buyer and not the seller is confronted in a market by many smaller sellers, monopsony power enables the buyer to obtain lower prices than those that would prevail in a competitive markets. (C) The answer is False. A natural monopoly occurs when, Price =Marginal Cost ( MC ). It occurs at an output level where long-run average costs are declining. (D) The answer is True Downward sloping demand curves follow from the law of diminishing marginal utility and characterize both competitive markets. (E) The answer is True A decrease in the price elasticity of demand means less flexibility in changing products. Thus a monopolist can charge any prices for its product. This increases his monopoly power.

Monopoly is a market structure characterized by a single seller of a highly differentiated product. A monopolist sells a unique product. There is imperfect dissemination of information in this market structure. Unlike perfect competition there is barriers to entry and exit. Since there is only one seller in the market, a monopolist can charge any prices for its products. That is why it is called as price maker. Examples of monopoly markets includes public utilities like local telephone service, municipal bus companies, and gas, water and electric utilities, among others.

(a) Natural monopoly exists due to economies of scale of production enjoyed by them. Monopoly naturally evolves in markets subject to overwhelming economies of scale of production created by extremely large capital requirements, scarce inputs, and insufficient natural resources and so on. In such instances, the market dominant firm is called a natural monopoly because the market clearing price where P=MC occurs at a point at which long run average total costs are still declining. A single monopolist can produce the total market supply at a lower total cost than could any number of smaller firms and vigorous competition naturally eliminates competitors that are too small and hence inefficient, until only a single monopoly supplier remains. This is what happened in Denver. Until 2001, the cost of a daily newspaper in Denver was only 25 each weekday and 50 on Sunday at the newsstand, and even less when purchased on an annual subscription basis. The smaller News had much higher unit costs and simply couldn't afford to compete with the Post at such ruinously low prices. (b) Following the joint operating agreement, a natural monopoly will increase its prices. However, due to increase in its prices its production will fall.