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CHAPTER 7
COMPETITION AND POLICIES TOWARDS
MONOPOLIES AND OLIGOPOLIES,
PRIVATIZATION AND DEREGULATION
SUGGESTED ANSWERS TO THE REVIEW QUESTIONS
I. Questions
1. Pure monopoly refers to the case where:
a) there is a single firm selling the commodity,
b) there are no close substitutes for the commodity, and
c) entry into the industry is very difficult or impossible.
If we further assume that the monopolist has perfect knowledge of
present and future prices and costs, we have perfect monopoly.
2. The firm may control the entire supply of raw materials required to
produce the commodity. For example, up to World War II, Alcoa (a U.S.
company) owned or controlled almost every source of bauxite the raw
material necessary to produce aluminum in the U.S. and thus had a
complete monopoly over the production of aluminum in the U.S.
The firm may own a patent which precludes other firms from producing
the same commodity. For example, when cellophane was first
introduced, Dupont had monopoly power in its production based on
patents.
A monopoly may be established by a government franchise. In this case,
the firm is set up as the sole producer and distributor of a good or service
but is subjected to governmental control in certain aspects of its
operation.
In some industries, increasing returns to scale may operate over a
sufficiently large range of outputs as to leave only one firm to produce
the equilibrium industry output. These are called natural monopolies and
are fairly common in the areas of public utilities and transportation. What
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Increase
Increase
Increase; firm will earn economic profit
Rise (compared with its initial level) if coffee is an increasing-cost
industry, but return to initial price if it is a constant-cost industry
e. Increase even more than it did in the short run
f. Economic profit will return to zero
12. a.
b.
c.
d.
Decline
Increase
Decline
Decline
13. If demand falls or prices go down, this may not necessarily put an end to
all the business firms in the industry. The closure of some firms may be
beneficial to the other firms because the latter can absorb the unfulfilled
orders of the former. The increase in volume of business could result to
profitable operations of the remaining firms.
14. Competition virtually forces firms to operate efficiently and produce
goods and services that consumers value highly relative to cost. Firms
that fail to do so will find it difficult to compete, and eventually losses
will drive them from the market.
15. Refer to page 120.
16. Refer to pages 121 and 122.
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C
A
D
A
B
6.
7.
8.
9.
10.
D
C
A
D
D
11.
12.
13.
14.
15.
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B
D
A
A
D