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

Chapter Eight: Market Structure: From competition to monopoly 195 CHAPTER EIGHT ANSWERS 1. A. Can be true or false; however most monopolists tend not to exploit consumers as much as they could lest new competitors enter the market. B. Generally false; certainly so in monopoly markets that are not by virtue of a government edict. Where there are no legal barriers to entry, monopoly profits are ephemeral and depend upon having a superior product than what could come on the market. A new and more innovative competitor could wipe out a complacent monopolist. C. False; there is no guarantee that a monopolist will not make a loss—while they can reduce consumer surplus, monopolists must satisfy consumer needs to survive. D. False. Most long-lasting monopolies are aided by government restrictions or regulations. E. True 2. The answer depends on a caveat—IF the monopoly is by the superior nature of the product and not a government restriction, then the social function is increased innovation and higher quality/lower priced goods. This could be an Apple iPhone 5C. If the monopoly is due to a government restriction such as patent laws, we again see innovation incentivized (to a degree; it’s not clear always what the appropriate length of time should be for a patent, and almost everyone agrees that in today’s rapidly changing technology world we need to reform our patent laws). Examples of the 2nd kind include biotechnology patents for new medical treatments. 3. Monopolies do generally compete, but the dimension is more on quality and less on price. Recall our discussion that because every purchase has an opportunity cost, monopolists are always competing against someone. 4. Because changing the price to meet the additional demand would lower the price to every other customer. While the monopolist would make additional profit on that sale, every previous sale would lose profit, such that on net the monopolist’s profit falls once they produce beyond MR=MC. 5. Firms in perfectly competitive markets (price takers) cannot make long-run profits because there are no barriers to entry in these markets. Should they be expected to make higher than normal profits, then additional competitors will leave other markets and deploy their capital in higher profit industries. A firm can make short- run profits for any number of reasons (reduction in expected input costs, technology change in production, increased consumer demand for the market, etc.). Figure 8.2 has a diagram that can show this. 6. A market is contestable if there are no significant barriers to entry. Thus a contestable market would have no legal restrictions on competition, and it would also be more contestable the less capital is required to come in. However, even capital intensive markets may be contestable, if the outside firms believe the above normal profits are likely to remain.