Question

1. (a) What three assumptions do we make about a monopoly?
   
   
   
   
   (b) Is a monopolist a “price taker” or “price maker”?
   
   
   
   (c) What is meant by “X-inefficiency”?
   

Answer 1

Answer : a) Three assumptions of monopoly is :

(I) Only one seller exist in the market. But many buyers exist in the market.

(II) Strong barrier exist on entering new firms in the market.

(III) There exist no any close substitute in the market for monopoly products.

b) A monopolist is a price maker. Because monopolist has market power. Due to market power the monopolist charges higher price on limited quantity of good.

c) X-inefficiency means that the market is inefficient. The inefficiency occur in the market when competition is less or competition does not exist in the market. In inefficient market the average total cost is higher for production in compared to competitive market. Monopoly is an example of inefficient market.