3.4 Monopoly

Question 1

What are the key features of a monopoly?

Answer 1

Price maker / quantity setter
Heterogeneous goods 
One dominant firm
High barriers to entry / exit
Economies of scale

Question 2

At what point do monopolies profit maximise?

Answer 2

MC = MR

As long as your marginal revenue is greater than your marginal cost, there is still extra profit to be made

Question 3

When do firms make supernormal/abnormal profit?

Answer 3

When AR > AC

Question 4

Where is a firm productively efficient?

Answer 4

At the lowest point on the AC curve

Question 5

When is a firm allocatively efficient?

Answer 5

P = MC

Question 6

How do firms make profit constantly in the short and long run?

Answer 6

In monopoly firms can make supernormal profits in the short run where AR > AC
In the long run there are barriers to entry stopping new firms entering the industry
Therefore, the firm makes supernormal profits in both the short run and the long run

Question 7

When does X-efficiency occur?

Answer 7

When a business is minimising waste, occurs anywhere on the AC curve - may not be large enough to achieve productive efficiency
Achieved by:
Cutting wages / reducing waste

Question 8

Why isn’t X-efficiency always achieved?

Answer 8

Not all firms are concerned about operating on the AC curve i.e public sector - maximising social welfare

Question 9

What is dynamic efficiency?

Answer 9

Reinvestment of long run supernormal profit into capital goods
Needs to be enough profit to finance this investment