Refer to Figure 5-5. Suppose the current market equilibrium ...

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Refer to Figure 5-5. Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality. The economically efficient output is Q2. In that case, diagram shows
 
  A) the effect of an excess demand in a market.
  B) the effect of a subsidy granted to producers of a good.
  C) the effect of a positive externality in the consumption of a good.
  D) the effect of a negative externality in the consumption of a good.

Question 2

Why does a monopoly firm not have a supply curve?
 
  What will be an ideal response?

[Moriaki]

Answer to Question 1

C

Answer to Question 2

Firms that are price takers will decide how much to produce based on the given market price. The quantity at which the marginal cost of producing the last unit of a good is equal to any given market price determines the firm's supply decisions. However, monopolists do not vary their production based on market price because they set the price; it is not relevant to ask how much of a good a monopolist will produce at a given price. Since a monopolist's production decision is based on demand, it cannot be depicted as an independent supply curve (keep in mind that the supply curve is willingness to sell at various prices, regardless of demand). A monopolist chooses both price and quantity.

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Excellent

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