Microeconomics: Perfect Competition vs Monopoly

Questions and Answers

What defines perfect competition?

There is a single firm serving the entire market.

Firms have individual pricing power.

All firms earn zero economic profits. (correct)

Firms can influence market prices.

What is a monopoly?

A market structure where a single firm serves an entire market for a good with no close substitutes.

Which of the following are sources of monopoly power? (Select all that apply)

Increased competition

Legal barriers (correct)

Economies of scale (correct)

Patents (correct)

Define economies of scale.

Exists whenever long-run average costs decline as output increases. Signup and view all the answers

What are economies of scope?

Exists when the total cost of producing two products within the same firm is lower than when produced separately. Signup and view all the answers

What is cost complementarity?

Exists in a multiproduct cost function when the marginal cost of producing one output is reduced by increasing the output of another product. Signup and view all the answers

What are patents and other legal barriers?

Government may grant an individual or a firm a monopoly right. Signup and view all the answers

Shutdown if: P < ______

AVC Signup and view all the answers

Study Notes

Perfect Competition

Characterized by independent actions of buyers and sellers with no influence on market prices.
Firms are price-takers in both input and output markets.
All firms are identical in size, production techniques, and resources utilized.
Firms earn zero economic profits in equilibrium.

Monopoly

A market structure dominated by a single firm that serves the entire market for a good without close substitutes.

Sources of Monopoly Power

Economies of scale: Long-run average costs decrease as production increases.
Economies of scope: Lower total production costs for two products when produced together within a single firm compared to separate firms.
Cost complementarity: Decreased marginal cost of one product when output of another product increases.
Patents and legal barriers: Exclusive rights granted by the government that can prevent competition, such as local utility monopolies.

Economies of Scale

Exist when long-run average costs decline with increased output.

Economies of Scope

Occur when producing two products together is cheaper than producing them separately.

Cost Complementarity

Found in multiproduct cost functions, where an increase in the output of one product reduces the marginal cost of another.

Patents and Legal Barriers

Government may grant monopoly rights, which can shield firms from competition, exemplified by regulations blocking other utility companies.

Shutdown Condition

A firm should shut down if the market price (P) is less than the average variable cost (AVC), despite still having fixed costs to pay.

Description

This quiz explores the concepts of perfect competition and monopoly in microeconomics. It covers the characteristics of both market structures, sources of monopoly power, and the impact of economies of scale. Test your understanding of these fundamental economic principles!