No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eight: Market Structure: From competition to monopoly 194 CHAPTER EIGHT: QUESTIONS FOR REVIEW 1. Evaluate the following critiques of monopoly as either true or false. a. T/F: Monopolists exploit consumers by restricting quantity and charging higher prices. b. T/F: Monopolists have no incentive to innovate. c. T/F: Monopolists do not consider consumer desires in their production decisions. d. T/F: Government is usually the best way to prevent monopoly. e. T/F: The key determinant of monopoly power is barriers to entry. 2. While monopolies do capture consumer surplus, they also provide a valuable social purpose. Describe that purpose and provide two examples. 3. Do monopolies have to compete? How do they compete? What happens if they don’t? 4. Monopoly production is not allocatively efficient since consumers value additional output more than it costs the monopolist to produce it. Why doesn’t the monopolist produce this additional output? 5. Why won’t a firm in a perfectly competitive market be able to make long-run profits? Can it make short-run profits? Show both a short-run profit and a long-run zero profit condition on an appropriate diagram. 6. The theory of contestable markets suggests that markets can be competitive even if there is only one firm. The only requirement is for this market to be contestable. What criteria should we use to assess if a market is contestable? 7. Coke and Pepsi are monopolistically competitive; they usually compete via product differentiation. Production differentiation can include all of the following except: a. Quality b. Safety c. Price d. Convenience e. Style 8. True or False. a. Cartels cannot work with government regulation. b. Cartels benefit from government enforcement of production (output) decisions. c. Cartels have low barriers to entry. d. Cartels have more than 20 firms but less than 100.