CFA Practice Question

There are 539 practice questions for this study session.

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?
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