Answer Questions

Answer question:(at least 100 words)

1. Compare the amount of consumers’ surplus received by buyers under a monopoly with the amount received under perfect competition.

2. State the three assumptions common to the different theories of oligopoly.

Comment:(at least 50 words)

#1: State three basic assumptions of monopoly.

The first assumption is that there is one seller. In effect, the firm is the industry. Contrast this situation with perfect competition, where many firms make up the industry. The second assumption is that the single seller sells a product that has no close substitutes. Because there are no close substitutes for its product, the single seller–the monopolist or monopoly firm –faces little, if any, competition. The third assumption is that the barriers to entry are extremely high. In the theory of perfect competition, a firm can enter the industry easily. IN the theory of monopoly, entering the industry is very hard (if not impossible). Extremely high barriers keep our new firms.

#2: Explain why the monopolistic competitor’s demand and marginal revenue curves are not the same.

 Unlike the perfectly competitive firm, whose demand curve is the same as the marginal revenue curve, the monopolistic competitor’s demand curve is not horizontal; it is downward sloping. This is because the monopolistic competitor’s rivals do not sell exactly the same product that the monopolistic competitor sells. Because its product has substitutes, but not perfect ones, the elasticity of demand for the monopolistic competitor’s product is not as great as that of the perfectly competitive firm. For the monopolistic competitor P > MR, while for the perfectly competitive firm P = MR.

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