economic

Question 2

2(a)

Is the following statement True or False?  Explain in a few sentences:

“The main problem with the Monopoly market structure is that it always results in the firm having a perfectly inelastic demand curve, causing higher prices.”

2(b)

What is the main condition required in order for a monopoly firm to be classified as a Natural Monopoly?  Explain in a few sentences by providing an example. 

2(c)

Draw a diagram to support your answer for 2(b). 

 

What is the main condition required in order for a monopoly firm to be classified as a Natural Monopoly?  Explain in a few sentences by providing an example. 

2(d)

Is it possible for a natural monopoly to have ‘type 2’ cost vulnerability? Yes or no? Explain by providing an example. 

2(e)

What is an economic implication of this result from the point of view of the Monopoly firm’s profitability? 

PART B: QUESTION 3 CASE

Consider the following case and answer questions 3a to 3d.

Is Perfect Best?

 ‘Perfect’ competition refers to competition that is total. But Perfect does not mean ‘best’ in this context.

       Just because it is at the extreme end of the competition spectrum, it does not follow that perfect competition is desirable. You could have a perfect storm – i.e. one that causes severe damages and losses. You could have a perfect killer virus – i.e. one that is totally immune to drugs, and against which humans have no natural protection at all. Such things, though perfect, are hardly desirable!      

       To say that perfect competition is desirable and that it is a goal towards which government policy should be directed are judgement-based statements. The danger is that by using perfect competition as a yardstick, and by using the word ‘perfect’ rather than ‘total’, it may be believed that perfect competition is a goal we ought to be striving to achieve.

       At the other end of the competition spectrum is Monopoly.  In between these two extreme cases, several industries with big businesses resemble an Oligopoly market structure.  Examples of Monopolies and other forms of big business can be seen across countries.       

       Economic analysis does not try to make such judgements, but it can identify the effects of perfect competition and other types of market structure.

 (This case is an adapted version of the case presented in Sloman, et al (2019). Economics for Business).

3(a)

Why is the market price of firms in Perfectly Competitive markets perfectly elastic? How does this feature benefit consumers?

3(b) 

It is generally agreed that in many markets perfect competition is desirable from an economic point of view.   

Note two exceptions to the argument above as to why perfect competiton may not be desirable for a pharmaseutical market. Explain each reason in a few sentences.

3(c)

Explain why a budget ‘low cost model’ is suitable as a strategy for some firms operating in the airline industry for maintaining economic profits in the long run.

3(d)

Note why and how price elasticity of demand for airline travel is important for the low cost strategy, as in part c, to be successful.  

Explain and justify your answer in a few sentences.