2 - Monopoly

Question 1

What is a monopoly

Answer 1

A single seller in the market, therefore is a price maker

Question 2

What creates a natural monopoly

Answer 2

Increasing returns to scale

• ATC (Average total costs) falls because every additional unit produced, unit costs are spread out over more units, therefore gain from economies of scale

Question 3

Describe the demand curves for perfectly competitive firms and monopolies

Answer 3

Perfectly competitive = Straight horizontal line because P = MR = MC =D. If you increase or decrease price slightly, quantity goes to 0

Monopolies = Normal downward sloping demand curve. D = P. However, MR is less than P in monopolies

Question 4

Profit maximisation for perfect competitive firms and monopolies

Answer 4

Perfectly competitive = P = MR = MC = D

Monopoly = MR = MC

Question 5

What does a monopoly not have

Answer 5

A supply curve

Question 6

What’s the shut down rule

Answer 6

Firm must compare its average revenue with its average cost. If it’s making a loss, they will exit the market

Question 7

If TR is less than VC; or if P is less than AVC then what

Answer 7

Then firm is making a loss, and should exit the market in the long run (shut down rule)

Question 8

Why are monopolies inefficient

Answer 8

• Because they want to sell at a high price whilst producing less quantity
• Producing less causes productive inefficiency
• This causes a much smaller consumer surplus compared to perfectly competitive firms
• Also, causes a deadweight loss (cost to society), people want to consume but can’t due to price. P is above MC causing locative inefficiency

Question 9

Because of inefficiencies of monopolies what happens

Answer 9

Public policy towards monopolies - time, effort and resources spent blocking creation of monopolies

Question 10

What happens when monopolists get taxed

Answer 10

• Their MC increase
• Causes them to increase price and produce less
• Still lose revenue and profit

Question 11

What happens when government regulates monopolies by setting a maximum price

Answer 11

• Government will set it at a price where the monopoly will make a loss, and will have to exit the market in the long run, which the government will not want as they’re the only or main company selling that good or service
• Result of this monopoly will misreport (lie) there cost, so they can get their price regulated to profit maximisation price

Question 12

3 things Government have to consider when regulating monopolies

Answer 12

• Monopoly must be allowed to earn non-negative profits
• Monopoly will use private information to its advantage (asymmetric information)
• Regulatory controls may have unintended consequences

Question 13

Main thing that gives monopolies power

Answer 13

• Patents

Question 14

What’s price discrimination

Answer 14

Firm that charges different prices for the same good to different consumers

Question 15

3 conditions must be met to price discriminate

Answer 15

• Firm must be a price maker (monopoly)
• Firm must identify which consumer is which
• Consumers must not be able to engage in arbitrage (purchase at a lower price, sell it on for higher price)

Question 16

What’s first degree price discrimination

Answer 16

Selling each unit of output at a price equal to buyers maximal willingness to buy

• In this’s Case, the MR curve merges into the Demand curve
• 0 consumer surplus
• Profit is maximises

Question 17

Second degree price discrimination

Answer 17

Involves charging different prices depending upon the choices of consumers , or when there’s spare seats for things

• Firms willing to sell as long as its above MC
• E.g. Hotels, cinemas, airline

Question 18

Third degree price discrimination

Answer 18

Involves charging different prices to different groups of people

• Student discounts, peak travel/off-peak travel, happy hours in bars