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Market structures and marginal analysis · Part 4 of 4
6 exam-style questions with model answers, plus 8 quick multi-choice questions — every question on this part of the standard, grouped by the 2 pages of notes they come from.
Write a full answer before you reveal the model one. That comparison is where the learning happens.
Explain why a natural monopoly has a downward sloping average cost curve.
Explain in detail why a government might not encourage competition in a natural monopoly market, despite the inefficiencies the natural monopoly creates. Refer to the characteristics of a natural monopoly.
Compare and contrast the cost structure and the efficiency of a natural monopoly with those of a perfectly competitive firm, and explain what this means for the kind of government intervention each market needs. Refer to cost and revenue models in your answer.
Explain which of the three pricing options for a natural monopoly makes consumers best off, and which makes the market most efficient.
Explain in detail why consumer surplus is largest under marginal cost pricing and smallest under profit maximising pricing for a natural monopoly.
A government is deciding how to regulate a natural monopoly supplying an essential service.
Compare and contrast the effectiveness of average cost pricing and marginal cost pricing as policies to improve the efficiency of this market, and make a justified recommendation. Refer to a cost and revenue model in your answer.