Which one among the following pairs of type of firm and feature is not correctly matched?

Correct — C, the pair 'Monopoly firm' with 'Produces an efficient level of output'. That is the mismatch, because a monopoly does the opposite. A monopolist faces the whole market demand curve, which slopes downward, so to sell one more unit it must lower the price on every unit; its marginal revenue therefore lies below its price. Profit is maximised where marginal revenue equals marginal cost, and at that quantity the price consumers are willing to pay exceeds marginal cost. Every unit between the monopolist's output and the point where price equals marginal cost is a unit worth more to a buyer than it costs to make and is nonetheless not produced. That gap is the deadweight loss of monopoly, and it is why monopoly output is called restricted rather than efficient. The other three pairs are the textbook definitions. Interdependence is what makes oligopoly a distinct case: with a few large sellers, each one's best move depends on what the others will do, which is why oligopoly is analysed with game theory and kinked demand curves rather than with a simple profit-maximising rule. A monopolistic competitor sells a differentiated product, so it too faces a downward-sloping demand curve and chooses its price — it is a price setter, even if a weak one, unlike the price-taking competitive firm. And a perfectly competitive firm, facing a horizontal demand curve at the market price, produces where price equals marginal cost, which is exactly the condition for allocative efficiency, so its output is the socially optimum one.

• (a)Oligopoly firm : Interdependence in decision-making — Correctly matched, so not the answer. Mutual interdependence is the standard defining feature of oligopoly — a market with few sellers in which each firm must anticipate its rivals' reactions before changing price or output.
• (b)Monopolistic firm : Firm is a price setter — Correctly matched, so not the answer. Under monopolistic competition each firm sells a differentiated product and so faces its own downward-sloping demand curve; it sets a price rather than accepting one, which is what price setter means.
• (d)Perfectly competitive firm : Produces socially optimum output — Correctly matched, so not the answer. In equilibrium a perfectly competitive firm produces where price equals marginal cost, and that equality is the condition for allocative efficiency — the socially optimum level of output.

Market structures are classified by the number of sellers, the nature of the product and the ease of entry. Perfect competition has many sellers, a homogeneous product and free entry, and every firm is a price taker. Monopoly has one seller, no close substitute and blocked entry, so the firm is the industry. Monopolistic competition has many sellers of differentiated products with free entry, which gives each firm a little pricing power but no long-run profit. Oligopoly has a few sellers, high entry barriers and, above all, interdependence.

An item of this shape is answered fastest by looking for the claim that is normative rather than descriptive. Three of the four pairs describe how a firm behaves — it is interdependent, it sets a price, it produces where price equals marginal cost. The monopoly pair instead makes an efficiency judgement, and efficiency is the one thing monopoly is never credited with in the standard treatment. A second check is the pairing with option (d): if perfect competition is the benchmark that produces the socially optimum output, then monopoly, its opposite pole, cannot also be efficient. Note that the paper uses 'monopolistic firm' where the textbooks say monopolistic competition, but the feature offered holds under either reading, since a pure monopolist is a price setter too.

• A monopolist maximises profit where marginal revenue equals marginal cost, and at that output price exceeds marginal cost.
• The output a monopolist withholds relative to the price-equals-marginal-cost point is the source of the deadweight loss of monopoly.
• A perfectly competitive firm faces a horizontal demand curve, so price equals marginal revenue, and in equilibrium price equals marginal cost.
• Under monopolistic competition, product differentiation gives each firm a downward-sloping demand curve, and free entry erodes profit in the long run.
• Oligopoly is distinguished by interdependence in decision-making, which is why it is modelled with game theory rather than a single equilibrium rule.

• Reading 'not correctly matched' too quickly and marking the pair that is best remembered rather than the one that is wrong.
• Assuming a monopolist can charge any price it likes; it is still bound by the market demand curve and only chooses a point on it.
• Treating monopolistic competition as a form of monopoly; the two differ in the number of sellers and in freedom of entry.

As a not-correctly-matched pairs item, as a match between market structures and their characteristics, or as a statements item on the equilibrium condition of one structure.

• practice — not a real PYQ

  In which one of the following market structures is the firm a price taker?

  • (a)Monopoly
  • (b)Perfect competition
  • (c)Monopolistic competition
  • (d)Oligopoly

  Answer(b) Perfect competition — the firm faces a horizontal demand curve at the market price and can sell any quantity at that price, so it accepts the price rather than setting it.

• practice — not a real PYQ

  The deadweight loss associated with monopoly arises because

  • (a)the monopolist earns supernormal profit in the long run
  • (b)output is restricted to the point where price exceeds marginal cost
  • (c)average cost is higher than under perfect competition
  • (d)entry into the industry is free

  Answer(b) output is restricted to the point where price exceeds marginal cost — the units between that output and the price-equals-marginal-cost quantity are worth more to buyers than they cost to produce, and are not made.