Essays and Practice
Essays and Practice Questions
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Market Structure (JPJC Prelim 2016)
- (a) Explain how barriers to entry affect the price and output determination of firms. [10]
- (b) Assess the extent to which market dominance reduces the negative impact of a recession on firms. [15]
Globalisation (NJC Prelim 2016)
- (a) Explain the impact of globalisation on the price and output determination of a dominant firm. [10]
- (b) In light of globalisation, assess the extent to which a firm might increase firm size or choose not to price discriminate. [15]
- Context: pharmaceutical tiered pricing and the WHO.
Model Answer Thesis: Market Structure
- Monopolistic competition and monopoly are both allocatively inefficient, but monopoly is more so.
- Allocative efficiency occurs at P = MC, where MC intersects AR at output Pe and price Qe.
- Profit maximisation sets MC = MR at output Qm and price Pm.
- Because a monopolist faces inelastic demand with no close substitutes, P sits well above MC.
- Both are productively inefficient in the long run.
- Monopolistic competitors produce to the left of minimum AC (underproduction) because of product differentiation and downward-sloping demand.
- Monopolies lack the incentive to keep costs low, for example overstaffing rather than automating.
- Evaluation: profit-motivated firms may still cut costs to raise profits, so inefficiency may be overstated.
Practice Question
- Is the free market efficient?
- Are you able to use macro concepts in micro questions and vice versa?