Question from Past Microeconomics Qualifying ExamEdit
Spring 2000- Section I, Question one, George Mason University
True, False, Uncertain. Determine whether or not each of the following statements are true or false. Explain your reasoning briefly in a paragraph or two. (The explanation is often more important than the answer given). Include a carefully labeled diagram or game matrix if it helps to clarify your answer.
A monopolist does not have a supply curve (defined as the locus of points showing the minimum prices at which given quantities will be offered for sale).
True,There is no supply curve for a monopolist. The reason is that the monopolist is not a price taker, which means that there is no unique correspondence between price and marginal revenue when the market demand curve shifts. A supply curve indicates a unique given quantity for each given price. With a monopoly, however, the monopoly may produce different outputs at the same price following an increase in demand. The monopolist has a supply rule, which is to equate marginal revenue and marginal cost (See Frank p 414).
- A supply curve will show a given quantity for each given price. With a monopoly, however, the monopoly may produce the same output at different prices following an increase in demand. Thus, no such supply curve exists. See graph
Alternate answer: Uncertain. For a given price (say, for instance, because the government has set the price), the monopolist will produce along the MC curve above the AC curve, just as any price-taking firm will. In that sense, this curve does show the minimum prices at which a given quantity will be supplied. In the absence of price controls, however, the monopoly will follow its supply rule (MR=MC) and may produce different outputs at the same price as demand shifts.