CHAPTER 7 Answer
Chapter 7
Competition and Policies towards
Monopolies and Oligopolies,
Privatization and Deregulation
Suggested Answers to the Review Questions
I. Questions
1. Pure monopoly refers to the case where:
a) there is a single firm selling the commodity,
b) there are no close substitutes for the commodity, and
c) entry into the industry is very difficult or impossible.
If we further assume that the monopolist has perfect knowledge of present and future prices and costs, we have perfect monopoly.
2. The firm may control the entire supply of raw materials required to produce the commodity. For example, up to World War II, Alcoa (a U.S. company) owned or controlled almost every source of bauxite – the raw material necessary to produce aluminum in the U.S. and thus had a complete monopoly over the production of aluminum in the U.S.
The firm may own a patent which precludes other firms from producing the same commodity. For example, when cellophane was first introduced, Dupont had monopoly power in its production based on patents.
A monopoly may be established by a government franchise. In this case, the firm is set up as the sole producer and distributor of a good or service but is subjected to governmental control in certain aspects of its operation.
In some industries, increasing returns to scale may operate over a sufficiently large range of outputs as to leave only one firm to produce the equilibrium industry output. These are called natural monopolies and are fairly common in the areas of public utilities and transportation. What the government usually does in these cases is to allow the monopolist to operate but subjects him to government control.
3. a. Monopolistic competition refers to the market organization in which there are many sellers of a differentiated product. Monopolistic competition is very common in the retail and service sectors of our economy. Examples of monopolistic competition are the numerous barber shops, gasoline stations,
Competition and Policies towards
Monopolies and Oligopolies,
Privatization and Deregulation
Suggested Answers to the Review Questions
I. Questions
1. Pure monopoly refers to the case where:
a) there is a single firm selling the commodity,
b) there are no close substitutes for the commodity, and
c) entry into the industry is very difficult or impossible.
If we further assume that the monopolist has perfect knowledge of present and future prices and costs, we have perfect monopoly.
2. The firm may control the entire supply of raw materials required to produce the commodity. For example, up to World War II, Alcoa (a U.S. company) owned or controlled almost every source of bauxite – the raw material necessary to produce aluminum in the U.S. and thus had a complete monopoly over the production of aluminum in the U.S.
The firm may own a patent which precludes other firms from producing the same commodity. For example, when cellophane was first introduced, Dupont had monopoly power in its production based on patents.
A monopoly may be established by a government franchise. In this case, the firm is set up as the sole producer and distributor of a good or service but is subjected to governmental control in certain aspects of its operation.
In some industries, increasing returns to scale may operate over a sufficiently large range of outputs as to leave only one firm to produce the equilibrium industry output. These are called natural monopolies and are fairly common in the areas of public utilities and transportation. What the government usually does in these cases is to allow the monopolist to operate but subjects him to government control.
3. a. Monopolistic competition refers to the market organization in which there are many sellers of a differentiated product. Monopolistic competition is very common in the retail and service sectors of our economy. Examples of monopolistic competition are the numerous barber shops, gasoline stations,