An Introduction to Monopoly


The following diagram relates to questions 1 and 2 below. The numbers represent areas that depict outcomes in comparing perfect competition with monopoly.

1. Which of the following statements correctly summarises the outcome for area 5.
a) The resource cost under monopoly.
b) The welfare loss to society resulting from monopoly.
c) The consumer surplus under monopoly.
d) The additional customer service obtained because of monopoly.

2.Which of the following statements does not correctly summarise the outcome for area 4.
a) Abnormal profit under monopoly.
b) Producer surplus obtained through market power rather than factor markets.
c) The input cost of monopoly.
d) Income transferred from consumers to producers because of the existence of monopoly.

3. Area 3 is best described as _______________ _____________ under monopoly. Fill in the missing word from the following choices: input costs, abnormal profit, normal profit, consumer surplus.

4. Areas 1 and 2 are best described as _______________ _____________ under perfect competition. Fill in the missing word from the following choices: input costs, abnormal profit, normal profit, consumer surplus.

5. In the following diagram the areas depict outcomes comparing a high cost monopoly with the lower costs of perfect competition (PC).

In such circumstances which of the following statements is true.
a) Perfect competition results in productive efficiency but allocative inefficiency.
b) Monopoly results in productive efficiency but allocative inefficiency.
c) Perfect competition results in productive and allocative efficiency.
d) Monopoly results in productive and allocative efficiency.

6. In the following diagram the areas depict outcomes comparing a low cost monopoly with the higher costs of perfect competition (PC).

In such circumstances which of the following statements is true
a) Perfect competition results in productive and allocative inefficiency.
b) Perfect competition results in productive efficiency but allocative inefficiency.
c) Monopoly results in productive efficiency but allocative inefficiency
d) Monopoly results in productive and allocative inefficiency.

7. What is meant by normal profit?
a) profit earnt because of market power.
b) the profit earned where the distance between total revenue and total cost is greatest.
c) profit earned in normal times.
d) the profit that keeps the owner from exiting the industry.


8. Assuming that an industry has a linear downward sloping demand curve and all firms face the same constant marginal cost, which of the following statements is true when comparing a monopolistic market structure with that of perfect competition?
a) the price under monopoly is half that of perfect competition.
b) the output under perfect competition is twice that of monopoly.
c) the perfectly competitive firm will earn abnormal profit.
d) the price under monopoly is equal to that of perfect competition.

9. Which of the following best describes allocative efficiency?
a) Resources are allocated optimally over time.
b) Inputs are allocated efficiently.
c) Prices are equal to marginal cost
d) Output is maximised and inputs are minimised.

10. A natural monopoly occurs
a) when the firm's marginal cost begins to rise
b) where it is cheaper for one firm than for two or more firms to produce a good or service.
c) where a firm is protected by a patent.
d) where a second firm could never enter an industry