It's just what you always wanted - a test on section 2.
You should be answering the question:
1. (a) Explain how a monopolist may be able to earn supernormal (abnormal) profits in the long run.
[10 marks]
(b) “Production by a monopolist will always be against the interests of consumers.” Discuss.
[15 marks]
The mark scheme is below for those of you who read this - the first part is the general description of grade boundaries for all the exams of this type. The second part is a guide for answering this particular question:
Part (a) [10 marks]
Level
0 Inappropriate answer. 0 Points
1 Limited knowledge but some basic points made. There may be significant errors and/or omission of important points. 1–4 Points
2 Evidence of familiarity with basic economic principles. Some ability to apply relevant theory and/or to analyse using relevant theory. 5–6 Points
3 Evidence of familiarity with basic economic principles. Clear ability to apply relevant theory or to analyse using relevant theory. 7–8 Points
4 Evidence of familiarity with basic economic principles. Clear ability to apply relevant theory and to analyse using relevant theory. 9–10 Points
Part (b) [15 marks]
Level
0 Inappropriate answer. 0 Points
1 Limited knowledge but some basic points made. There may be significant errors and/or omission of important points. 1–3 Points
2 Evidence of familiarity with basic economic principles. Some ability to apply relevant theory and/or to analyse using relevant theory. 4–7 Points
3 Evidence of familiarity with basic economic principles. Clear ability to apply relevant theory and/or to analyse using relevant theory. 8–12 Points
4 Evidence of familiarity with basic economic principles. Clear ability to apply relevant theory and to analyse using relevant theory. Evidence of ability to evaluate. 13–15 Points
1. (a) Explain how a monopolist may be able to earn supernormal (abnormal) profits in the long run.
• definition of monopoly
• definition of supernormal (abnormal) profits
• diagram to show supernormal (abnormal) profits
• supernormal (abnormal) profits would normally be competed away in a more competitive industry
• discussion of barriers to entry
• awareness of contestable markets
[10 marks]
(b) “Production by a monopolist will always be against the interests of consumers.” Discuss.
On the negative side, a monopolist may:
• charge a higher price for a lower level of output
• be productively and allocatively inefficient
• not produce at the socially optimal level of output
• have excessive political influence
• act as monopsonist.
A lack of competition may:
• result in complacency
• result in lack of innovation
• result in high unit costs.
On the positive side, a monopolist may:
• have lower unit costs because of economies of scale
• as a natural monopolist, exist in the public interest
• price discriminate to the benefit of some consumers
• invest in research and development (eg pharmaceuticals) leading to important innovations
• use predatory pricing, which will temporarily benefit the consumer.
[15 marks]
