03. Monopoly Markup

Question 1

what is the monopoly markup?

Answer 1

difference between price and marginal cost (because with monopoly, in equilibirum the price is much higher than marginal cost)

Question 2

What increases the size of the monopoly markup? What can generally be said about the sensitivity of demand?

1.
2.
3.

Answer 2

• the “you cant take it with you” effect (eg people with serious illnesses are relatively insensitive to price of a life saving medicine
• the “others people money” effect (if third parties pay for medicine, people are less sensitive bc insurance might pay for their medicine)
• he less sensitive qty demanded is to price the higher the markup, ie the more inelastic the demand the higher the monopoly markup

Question 2

The more elastic the demand curve for a monopolis is, the closer the pricing decision…

Answer 2

…. to that of a competitive firm
(+ price will be closer to MC)

Question 2

PUZZLE | Why are flights sometimes much more expensive from an airport that is actually closer to the destination?

Answer 2

• often times there is one dominant airport in the middle of a country
• because there are less subsitutes from smaller airports, which means inelastic demand (higher markup)
• if they wanna fly from a bigger airport, they have many options and the demand is relatively elastic (lower markup)

Question 3

Why is it important to acknowledge the difference between market elasticity and firm elasticity?

Answer 3

• demand elasticity for single brand probably way more elastic bc consumers can easily substitute