Question 1

The Marginal Revenue curve of a monopoly firm lies below the demand curve because:

in order to increase output the firm must lower its price, which means it receives less for the units already sold

as output increases the firm will need to sell to those who have a lower willingness to pay

monopolies are often regulated by governments that put limits on market prices

the monopoly must lower its price in order to discourage new firms from entering the market

Question 2

There are about 1,500 small dairy farms in Western Victoria and the dairy industry is characterised as being perfect competition. Suppose that a giant multinational company steps in and acquires all the dairy farms, which turns the dairy market into a monopoly one. What will happen to the dairy market as a result?

Price and quantity will stay the same as there is no change to market demand and market supply. There is simply a change in the ownership model in the market.

The new monopoly firm, charged with large market power, will increase the price while quantity will stay the same.

The new monopoly firm will reduce quantity and raise the price.

The new monopoly firm operates more efficiently than small individual dairy farmers. Thus, the firm has rooms to reduce price, thanks to a lower cost, and increase quantity produced.

Question 3

All of the following are examples of oligopoly markets EXCEPT:

Aircraft manufacturing

Banking services

Supermarket chains

Seafood restaurant chains

Question 4

Oligopolies exist and do not attract new rivals because

The current level of competition in any oligopoly market is already very high

Barriers to entry are substantially high which prevent new entrants

The firms keep profits and prices so low that no rivals are attracted

There can be no product differentiation

Question 5

Suppose there are only two banks in Victoria: Commonwealth Bank (CBA) and National Australia Bank (NAB). Both CBA and NAB are considering whether to reduce the interest rates charged on the mortgage loans for their customers.

The table below presents the pay-off matrix for CBA and NAB.

- - Keep rates the same Reduce the rates NAB earns $500 mil NAB earns $550 mil Keep rates the same CBA earns $500 mil CBA earns $200 mil NAB earns $350 mil NAB earns $400 mil Reduce the rates CBA earns $600 mil CBA earns $400 mil Cost and benet (thousands of dollars per concert) I 00 80 60 40 20 0 5 lo IS 20 25 Quantity (concerts per year)