Monopoly Possible Essay Questions

Syllabus Points

Definition - Describe, using examples, the assumed characteristics of a monopoly:

 a single or dominant firm in the market;
 no close substitutes;
 significant barriers to entry.

Barriers to entry - Describe, using examples, barriers to entry including

 economies of scale,
 branding
 legal barriers.
AND Explain the role of barriers to entry in permitting the firm to earn economic profit.

Diagram

 Explain that the average revenue curve for a monopolist is the market demand curve, which will be
downward sloping.
 Explain, using a diagram, the relationship between demand, average revenue and marginal revenue
in a monopoly.
 Explain why a monopolist will never choose to operate on the inelastic portion of its average
revenue curve.
 Explain, using a diagram, the short- and long-run equilibrium output and pricing decision of a profit
maximizing (loss minimizing) monopolist, identifying the firm’s economic profit (or losses).
 Explain, using a diagram, the output and pricing decision of a revenue maximizing monopoly firm.
 Compare and contrast, using a diagram, the equilibrium positions of a profit maximizing monopoly
firm and a revenue maximizing monopoly firm.

Natural Monopoly

 With reference to economies of scale, and using examples, explain the meaning of the term “natural
monopoly”.
 Draw a diagram illustrating a natural monopoly.

Disadvantages
Explain, using diagrams, why the profit maximizing choices of a monopoly firm lead to:
 allocative inefficiency (welfare loss)
 productive inefficiency.

Advantages
Explain why, despite inefficiencies, a monopoly may be considered desirable for a variety of reasons,
 the ability to finance research and development (R&D) from economic profits
 the need to innovate to maintain economic profit
 and the possibility of economies of scale.

Evaluate the role of legislation and regulation in reducing monopoly power.

compare and contrast a monopoly market with

a perfectly competitive market, with reference to factors including efficiency, price and output, research
and development (R&D) and economies of scale."
Exam Questions

10 marks

(a) Using an appropriate diagram, explain how a monopolist might be able to make supernormal
(abnormal) profits in the short-run, and why these profits might continue to be earned in the long-run. (4)
(a) Explain how welfare loss may result from monopoly power.
(a) Explain the economic factors which may encourage the formation of a monopoly.

15 marks
(b) Evaluate the view that monopoly is an undesirable type of market structure (15 marks) (3 times)
(b) Evaluate the reasons why a government might allow a competitor into an industry that was previously a
monopoly.
(b) Evaluate the view that monopolies, despite their inefficiencies, may often be considered desirable.[15]

Government intervention
Explain two possible government responses to the abuse of monopoly power. [10]
(a) Discuss the effectiveness of government policies (legislation and regulation) to reduce monopoly
power.
(b) Discuss the view that governments should always try to prevent a monopoly from occurring in a
market. [15]

Compare
- Using diagrams, compare and contrast the market structure of monopoly with that of perfect
competition.
OR
- Evaluate the view that greater economic efficiency will always be achieved in perfect competition as
compared to monopoly.
- Evaluate the view that monopolistic competition is a more economically desirable market form than
monopoly.
- Evaluate the view that natural monopoly is a more desirable market structure than perfect competition