Why one baker cannot overcharge but a water firm can

Civics & Economics · Economics · ages 15-16

Name ______________________ Date ____________

Which market has a few large sellers watching each other?
- Perfect competition
- Monopoly
- Oligopoly, like phone networks
One baker in a big city tries to quadruple bread prices. What happens?
- Buyers pay it, since bakers set prices alone
- Rivals take the sale, since the baker takes the market price
- Bread stops being food
Which is a legal barrier to entry?
- A drug patent that keeps rivals out for years
- A cafe printing a new menu
- A stall selling the same potatoes as fifty neighbours
Why does a monopoly sell less at a higher price than competition?
- It stops expanding once extra revenue no longer beats extra cost
- It runs out of paper for menus
- It gives most output away for free
Why can one water company charge close to what it likes?
- Because water falls as rain
- Because one grid costs less than rival pipe systems, blocking entry
- Because pipes never leak
Antitrust law punishes any firm that succeeds by being better.
Circle one: True False
Two drug firms merge into the only seller, then raise prices. What should the referee do?
- Block or undo the merger that killed rivalry
- Fine the patients for buying medicine
- Ban all patents everywhere at once
Who pays for the gap between the monopoly price and the competitive cost?
- Nobody, the gap is imaginary
- Buyers, partly as profit and partly as lost trades helping nobody
- Only the government

Answer key

For grown-ups. Fold this page away before handing over the rest.

Oligopoly, like phone networks · A few big players define oligopoly, watching every rival move.
Rivals take the sale, since the baker takes the market price · Crowded sellers of the same thing cannot hold a price above the rest.
A drug patent that keeps rivals out for years · Patents and licences block entry by law, which builds market power.
It stops expanding once extra revenue no longer beats extra cost · Restricted output supports the higher price buyers then pay.
Because one grid costs less than rival pipe systems, blocking entry · Scale is the barrier: big is simply cheaper, so rivals stay out.
False · It protects rivalry, and a firm that wins by being better is left alone.
Block or undo the merger that killed rivalry · Antitrust guards the process of rivalry, not any single price tag.
Buyers, partly as profit and partly as lost trades helping nobody · Buyers fund the profit and also lose the trades that never happen.