Outline TWO reasons why market power might be beneficial for consumers
Economies of scale of natural monopolies, innovation
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20
Briefly explain WHY market power results in market failure.
Rational firms maximize profits, and the profit-maximizing condition + price-setting ability causes firms to underproduce relative to allocative efficiency.
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15
Identify THREE ways in which governments can respond to abuses of market power.
Legislation and regulation, government ownership, fines
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10
All firms maximize profits by producing at a quantity where...
MC = MR
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10
For firms to be allocatively efficient, they produce where...
P or AR = MC (i.e. MB = MC)
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15
Provide a real-life example of a government fine to punish a monopolist for its anti-competitive behavior.
Chinese government imposes $2.8mm fine on Alibaba for restricting sellers from selling on other platforms
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10
All firms maximize productive efficiency by producing at a quantity where...
MC = ATC
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15
Identify THREE risks associated with firms having market power.
Lower output, higher prices, reduced choices
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10
True or false: Monopolistic competitive firms can only make a normal profit in the long run.
True - insignificant barriers of entry.
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15
Provide a real-life example in which a monopolist abuses its market power
Amazon to prioritise their own products over that of its partners, which could lead to restricted consumer choice
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15
Identify TWO similarities and ONE difference between perfect vs. monopolistic competition
Similarities: many firms, no/insignificant barriers to entry, Differences: differentiated products
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10
True or false: monopolists can make economic losses in the long run.
