10e_Essay_Test_Bank_Ch_14_FINAL

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1、Chapter14:MonopolyandMonopolisticCompetitionEssayQuestions1. Howandwhyarethedecisionsfacingamonopolistdifferentfromthecollectivedecisionsoffirmsinaperfectlycompetitivemarket? Answer:Sinceacompetitivefirmistoosmalltoaffecttheprice,itdoesnottakeintoaccounttheeffec

2、tofitsoutputdecisiononthepriceitreceives.Acompetitivefirm'smarginalrevenueisforallintentsandpurposesthegivenmarketprice.Amonopolisticfirmtakesintoaccountthatitsoutputdecisioncanaffectpriceandthatitsmarginalrevenueislessthantheprice.(Becauseanincreaseinoutputlowe

3、rsthepriceonallpreviousunits,amonopolist'smarginalrevenueisalwaysbelowitsprice.)Forindustrieswithinelasticdemand,increasingproductiondoesn'tmakethesuppliersbetteroff.Competitivefirmsare,however,unabletocollectivelyrestrictoutput.Eachindividualcompetitivefirm,res

4、pondingtoitsself-interest,doeswhatisnotinthecollectiveinterestofthefirms.Inmonopolisticmarkets,thefirmdoeswhatisinitsownbestinterest,whichisalsotheinterestoftheentiremarketsinceitcontrolsthemarket.Itrestrictssupply. 2. Whywillamonopolisticfirmmaximizetotalprofit

5、ifitproducesattheoutputlevelwheremarginalrevenueequalsmarginalcost? Answer:Themonopolistfollowsthegeneralrulethatanyfirmmustfollowtomaximizeprofit:toproducethequantityatwhichmarginalrevenueequalsmarginalcost.Ifmarginalrevenueisbelowmarginalcost,itmakessensetored

6、uceproduction.Doingsowoulddecreasemarginalcostandincreasemarginalrevenue,thusincreasingtotalprofit.Themonopolistshouldcontinuetoreduceproductionuntilmarginalcostequalsmarginalrevenue.Ifmarginalcostisbelowmarginalrevenue,themonopolistshouldincreaseproductionbecau

7、sebydoingsototalprofitwillrise.Thoughexpandingproductionwillraisemarginalcostandlowermarginalrevenue,themonopolistshouldcontinuetoincreaseproductionrightuptothepointwheremarginalcostequalsmarginalrevenue.Ifthemarginalrevenueequalsmarginalcost,themonopolistshould

8、notraiseorloweroutput.Todosowouldreduceprofit.Hencethemonopolyfirmwillmaximizeprofitonlyifitproducesanoutputwheremarginalcostequalsmarginalrevenue. 3. Howareamonopoli