Question

a. Explain what is meant by a pure monopoly?

b. List four types of barriers to entry.

c. Explain why it is true that at every level of output except the first unit, a monopolist firms marginal revenue (MR) is below the selling price?

Answer 1

a)A pure monopoly is a market structure where one company is the single source for a product and there are no close substitutes for the product available.In order for a provider to maintain a pure monopoly, there must be barriers preventing competitors from entering the market

b)These barriers include:

1) economies of scale that lead to natural monopoly; control of a physical resource;

2)legal restrictions on competition;

3) patent, trademark and copyright protection;

4)practices to intimidate the competition like predatory pricing.

c)For a monopoly there is a price effect. It must reduce price to sell additional output. So the marginal revenue on its additional unit sold is lower than the price, because it gets less revenue for previous units as well (it has to reduce price to the same amount for all units).