5.8 Monopoly Power Flashcards
What is a monopoly?
A monopoly exists when there is one dominant firm producing in a given industry.
What is the market share required for a firm to have monopoly power?
To have monopoly power, a firm must have a market share of at least 25%.
What is the profit-maximizing behavior of monopolies?
Profit-maximizing monopolies would use their power to exploit consumers by charging excessively high prices (price beyond marginal cost) resulting in a deadweight loss of both consumer and producer surplus.
What does the triangle in the diagram above represent?
The triangle in the diagram above represents the deadweight loss of both consumer and producer surplus.
Where do monopolies produce to maximize profits?
A profit-maximizing monopolist would produce where MC=MR at quantity Qm and reading the price off the AR curve, Pm results.
What is the competitive price taken at allocative efficiency?
The competitive price taken at allocative efficiency where demand (AR) meets supply (MC) is Pc.
What is the quantity in the market when a monopoly produces at Qm?
Quantity in the market is below the social optimum at Qm rather than Qc indicating a misallocation of resources, allocative inefficiency, and a welfare loss to society.
Monopoly Power Diagram
