SOLUTIONS TO SELF-CHECK QUESTIONS

8.1 How Monopolies Form: Barriers to Entry

1. 1. 1. A government-enforced barrier to entry
      2. No barrier to entry
      3. No barrier to entry
      4. A non-government barrier to entry
      5. A non-government barrier to entry
2. 1. 1. A government-enforced barrier to entry
      2. A government-enforced barrier to entry
      3. A government-enforced barrier to entry
      4. A non-government barrier to entry
      5. A non-government barrier to entry
3. Because of economies of scale, each firm would produce at a higher average cost than before. (They would each have to build their own power lines.) As a result, they would each have to raise prices to cover their higher costs. The policy would fail.
4. Shorter patent protection would make innovation less lucrative, so the amount of research and development would likely decline.

8.2 How a Profit-Maximizing Monopoly Chooses Output and Price

1. If price falls below AVC, the firm will not be able to earn enough revenues to cover its variable costs. In such a case, it will suffer a smaller loss if it shuts down and produces no output. By contrast, if it stayed in operation and produced the level of output where MR = MC, it would lose all of its fixed costs plus some variable costs. If it shuts down, it only loses its fixed costs.
2. This scenario is called “perfect price discrimination.” The result would be that the monopolist would produce more output, the same amount in fact as would be produced by a perfectly competitive industry. However, there would be no consumer surplus since each buyer is paying exactly what they think the product is worth. Therefore, the monopolist would be earning the maximum possible profits.