Tutorial 7

Section A: TRUE/FALSE
1. Monopolists can achieve any level of profit they
desire because they have unlimited market
power.(true)
2. Even with market power, monopolists cannot
achieve any level of profit they desire because
they will sell lower quantities at higher
prices.(false)
3. One characteristic of a monopoly market is
that the product is virtually identical to
products produced by competing firms.(false)
4. The fundamental cause of monopolies is
barriers to entry.(true)
5. The De Beers Diamond company advertises
heavily to promote the sale of all diamonds,
not just its own. This is evidence that it has a
monopoly position to some degree.(false)
6. The amount of power that a monopoly has
depends on whether there are close substitutes
for its product.(false)
7. If the ABC company owns the exclusive rights to
mine land in Afghanistan for Lapis Lazuli, a rare
stone used in jewelry which is found only in
Afghanistan, the company benefits from a
barrier to entry.(true)
8. Copyrights and patents are examples of
barriers to entry that afford firms monopoly
pricing powers.(true)
9. If the government deems a newly invented
drug to be truly original, the pharmaceutical
company is given the exclusive right to
manufacture and sell the drug for 50
years.(true)
10. A natural monopoly has economies of scale for
most if not all of its range of output.(true)
Section B: Multiple choice
Exhibit 1
1. Refer to Exhibit 1. The monopolist is
maximizing profits at
A. Q0 units and charging a price of P0.
B. Q0 units and charging a price of P1.
C. Q0 units and charging a price of P3.
D. Q0 units and charging a price of P2.
2. The monopoly firm may earn positive
economic profits in the long run because
A. it produces a homogeneous product.
B. it is the only firm that wishes to produce the
product.
C. of high barriers to entry.
D. a and c
 Section C: Essay
1. List and explain the Assumptions of Monopoly.

There are 3 Assumptions of Monopoly. Firstly, there is only one

seller. Next, the single seller will sells a product for which there
is no close substitute. Besides, there are extremely high barriers
to entry the market. There are 3 types of barriers to entry ,
which are legal barriers, Economies of scale, and Exclusive
ownership of a necessary resources. Example of monopoly are
Public Utilities which is Electricity, Water and Gas.
 2. Compare Monopoly and Perfect Competition.

Difference Perfect Monopoly

Competition
1.Price Price taker, Price maker,
P=MR P>MR
2.Product Homogenous No close
substittutes
3.Seller Many One
4.Enter & exit Free or easy High barriers
the market
3. Explain price discrimination.

Price Discrimination is the seller charges different prices for

the product it sells, and the price differences do not reflect
cost differences.
There are 3 types of price discrimination:
1) Perfect Price discrimination
• Known as discrimination among units.
• Seller charges the highest price each consumer would be
willing to pay for the product rather than go without it.
• Example:
Suppose a monopolist produces and sells 1000 units of good A. It
sells each units separately and charges the highest price each
consumer would be willing to pay for the good.

2) Second Degree Discrimination

• Known as discrimination among quantity.
• Seller charges a uniform price per unit for one specific quantity, a
lower price for an additional quantity, and so on.
• Example:
The monopolist might sell the first 10 units for RM10 each, the next
20 units at RM9 each and so on.
i.e. Parking Fee.
3) Third Degree Discrimination
• Known as discrimination among buyers.
• Seller charges a different price in different markets or charges
a different price to different segments of the buying
population.
• Example:
Bus Fare-Children and Adult, Air Ticket-Senior Citizen has 50%
Discount.