Question

Question 2 a. With the aid of a diagram, explain why monopoly is regarded inefficient compared to perfectly competitive market. [5 marks b. hat are the FOUR (4) ways that government policymakers can respond to the problem of monopoly firm? 4 marks] c. What characteristics does monopolistic competition have in common with monopoly and perfect competition? 4 marks] d. How does the long-run equiibrium in monopolistic competition differ from the long-run equilibrium in perfect competition? Is the long-run equilibrium in monopolistic competition efficient? Explain. 4 marks] e. Explain TWO (2) benefits that might arise from the existence of brand name. 3 marks] TOTAL: 20 MARKS]

Answer 1

1)

For perfect competition output will be set at P=MR=MC

for PC MR=AR=Demand

price is Ppc

for monopoly MR is not equal to Demand

output is set where MC = MR

The monopoly output is less than the the perfectly competitive output.

Demand 3 0 Pc

Demand 3 0 Pc

2)

• In many countries, the government chooses to internalize the monopoly by owning monopoly providers of goods and services.
• Trying to make monopolized industries more competitive.
• Regulating the behavior of monopolies.
• Turning some private monopolies into public enterprises.

3)

The two market situations have the following similarities.

• The number of firms is huge under perfect competition and monopolistic competition.
• The freedom of entry and exit of firms is there in both the firms.
• Firms compete with each other.
• The breakeven point is established, where marginal cost and marginal revenue are equated.
• In both the market conditions, firms can earn super normal or abnormal profits and can also incur short run loses. Whereas in the longrun, firms earn only normal profits.

4)

• In the long run, firms in monopolistic competitive markets are highly inefficient and can only break even. In the long-run, the demand curve of a firm in a monopolistic competitive market will shift so that it is tangent to the firm’s average total cost curve. As a result, this will make it impossible for the firm to make economic profit; it will only be able to break even.
• In the Perfect Competition Long Run, the loss-making firms will exit the industry, and new firms will enter the market. Losses are the key to establishing Long Run equilibrium. In the long run, with the entry of new firms in the industry, the price of the product will go down as a result of the increase in supply of output and also the cost will go up as a result of more intensive competition for factors of production. The firms will continue entering the industry until the price is equal to average cost so that all firms are earning only normal profits.

5) Memorability, Loyalty, Familiarity etc can be gained through a brand name.