CFA Practice Question
Suppose a fully employed economy had only two industries, one a monopoly and the other competitive. Assuming there are no economies of large-scale production, government action to break the monopoly into many competitive firms would lead to a(n) ______.
A. increase in output in the monopolized industry and a decrease in output in the competitive industry
B. increase in output for both industries
C. decrease in output in the monopolized industry and an increase in output in the competitive industry
Explanation: Since breaking up the monopoly in which there are no economies of scale would increase output and lower prices, resources would have to be diverted from the competitive industry. Thus, the increased output in the former monopoly would come at the expense of the competitive output. This is because a fully employed economy has no slack resources. Therefore, the increased usage of factors of production in the former monopoly must come from the competitive industry. So, the output in the competitive industry would fall.
User Contributed Comments 3
| User | Comment |
|---|---|
| eddeb | Output of the competite industry will decline only because economy is at full employment level. |
| chuong | Resource flow will move from competitive industry to monopoly industry |
| tomalot | Does the increased competition/ trade lead (in the long-run) to an expansion of GDP which would benefit the competitive industry? |