Chapter 6
Essay questions
- With reference to the transport sector, explain four different forms of barrier to entry.
- “A producer that successfully uses first-degree price discrimination to transform all consumer surplus to producer surplus can be said to Pareto efficient and, therefore, economically desirable.” - Discuss.
- “It is better for an industry to have a market structure of perfect competition than that of pure monopoly.” - Discuss.
Exercises
1. A pure monopoly is faced with the following total cost and total revenue curves:
TC = 1/3 Q3 - 13Q2 + 170Q
TR = 250Q - 10Q2
(a) Derive the equations for the monopoly's marginal cost and average cost curves.
(b) Demonstrate that the marginal cost curve cuts through the average cost curve at the productively efficient point.
(c) Derive the equations for the monopoly's marginal revenue and average revenue curves.
(d) Demonstrate that the marginal revenue curve falls at twice the slope of the average revenue curve.
(e) Calculate the profit-maximising level of output.
(f) At the profit-maximising level of output, how much abnormal profit is being made?
(g) Is the monopoly productively and allocatively efficient?
(h) Calculate the value of consumer surplus when the monopoly is maximising profit.
(i) Assuming that the cost and revenue curves are the same under conditions of perfect competition as they are under those of pure monopoly, calculate the value of consumer surplus if the market was perfectly competitive.
