B2.01.11: Intro to Monopoly

Question 1

Define Monopoly

Answer 1

Only one firm that dominates the market

Question 1

4 features of monopolies

Answer 1

• Differentiated products
• Firms are price makers
• High barrier to entry / exit and there’s imperfect info which both keep other firms out of the market
• Firms are profit maximisers in the short run

Question 2

Draw monopoly diagram in the short and long run

Answer 2

• D1=AR1 curve drawn as a normal downwards sloping demand curve
• MR curve drawn twice as steep
• AC curve drawn as a positive parabola
• MC curve is a nike tick that goes through minimum point of the AC Curve
• point MR=MC is plotted vertically drawn upwards until first intersection with AC curve labelled B and horizontal line is drawn labelled C1 and also vertically drawn and labelled Q1. Vertical line drawn from B all the way to next intersection labelled A and line is drawn vertically labelled P1

Question 3

What do high barriers to entry /exit and imperfect competition allow to happen for monopolies

Answer 3

This allows for supernormal profits to persist in the long run thus, monopolies can re-invest these profits in the advancements in technology, innovating new products, R & D etc

Question 4

What is the relationship between product differentiation and monopoly power

Answer 4

• The greater the degree of product differentiation, the stronger the monopoly power hence, this allows them to be risk-bearing therefore allowing them to exploit economies of scale

Question 5

What are the 6 barriers to entry experienced by other firms due to monopolies

Answer 5

• Legal Barriers
• Sunk costs (also a barrier to exit)
• Capital costs
• Economies of scale
• Anti competitive practices (limit pricing - deliberately limits prices to prevent firms from entering)
• Marketing barriers (brand loyalty)

Question 6

Where is the Revenue Maximisation point (which only occurs in monopolies because there’s only one supplier that can set the price)

Answer 6

where MR = 0

Question 7

How to show deadweight loss

Answer 7

Area pointing towards social optimum point

Question 8

Monopoly VS Perfect Competition

Answer 8

Social Welfare:
Monopoly:
- Underproduction = Allocative Inefficiency thus a deadweight loss

Efficiency:
Monopoly:
- Neither productive nor allocative efficiency is achieved whereas in PC, both are achieved in the LR

Question 9

Pros of monopolies

Answer 9

• Able to finance large R&D (earned from supernormal profits in the LR)
• EOS (lower av. costs passed to consumers in the form of lower prices and greater outputs)
• Large amount of protection preventing potential competitors from entering the market due to extremely high BtE

Question 10

Cons of monopolies

Answer 10

• Allocative inefficiency
• Productive inefficiency
• Loss of consumer surplus and producer surplus
• Deadweight loss

Question 11

Reasons why should there be a regulation of monopoly abuse

Answer 11

• prevention of excessive prices
• ensure quality of services
• promote competition
• control of natural monopolies (as they will always exist)