1.Refer to the diagram above. At output level Q 2 : 2.An unregulated pure monopo

Question

1.Refer to the diagram above. At output level Q2:

2.An unregulated pure monopolist will maximize profits by producing that output at which:

3.The kinked-demand curve of an oligopolist is based on the assumption that:

4.If a regulatory commission wants to establish a socially optimal price for a natural monopoly, it should select a price:

a. resources are overallocated to this product and productive efficiency is not realized. b. resources are underallocated to this product and productive efficiency is not realized. c. productive efficiency is achieved, but resources are underallocated to this product. d. productive efficiency is achieved, but resources are overallocated to this product MC ATC 0 MR a, QQ2 Quantity

Explanation / Answer

1)At output level Q2 resources are overallocated to this product and productive efficiency is not realised.At output level Q2 , ATC is greater than its minimum level.Thus point of optimum allocation of resources is exceeded .Productive efficiency is achieved at the minimum point of ATC ,thus over here productive efficiency is not achieved and resorces are overallocated.

2)An unregulated monopolist maximses its profits by equating MARGINAL REVENUE with MARGINAL COST.(MR = MC) such that additional revenue from each additional unit is equal to additional cost from producing each additional unit.

3)Kinked demand curve is based on the assumption that competitors will follow a price cut but ignore an increase in price.Under oligopoly due to interdependency between firms the demand curves faced by firms have a kink .This is because of varying elasticities.At price above the point of kink demand curve is more elastic as above the kink when firms increase prices other firms do not follow hence an increase in price by the firm brings about a large change in firm's share.However when the firms reduce prices other firms also tend to follow hence the market share of individual firms do not change so much , thus below the kink the demand curve is less elastic.

4)Socially optimal price for a natural monopoly corressponds to the point where:

a)at which marginal cost curve intersects the demand curve.When the government regulates the natural monopoly the government sets the price at which efficient quantity is produced ,according to demand curve.

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