Ch.10 Monopoly

Question 1

3 Barriers to Entry Monopolistic Industry

Answer 1

1. Technical barriers
   sole ownership of resource
   e.g. iOS
2. Legal barriers
   public franchise, license, patents, copyrights
   e.g. salmon fishing
3. Economic barriers
   economies of scale
   e.g. aircraft mfg.

Question 2

___ industry is $ maker
- who set whatever $ it wishes
- can set either $ or Qty sold

Answer 2

Monopoly

doesn’t guarantee profitability

Question 3

In Monopoly industry,
DD Curve is same w/ ___

Answer 3

AR Avg Revenue

Question 4

In Monopoly industry,
Relationship btw
Curves of AR & MR

Answer 4

MR Crv Drops 2x
to AR Crv

slope of MR = 2 x AR

Question 5

In Monopoly industry,
how to find
Max TR Total Revenue

Answer 5

Find where
Marginal Rev MR = 0

Question 6

In Monopoly industry,
how to find
Max Tπ Total Profit

Answer 6

Find OUTPUT where
MR = MC
or
slope of TR = TC
or
TR - TC is greatest

Question 7

In Monopoly industry,
how to find
Break-Even Output

Answer 7

AR = AC
TR = TC

Question 8

In the graph,
when AR > AC
means Tπ __ 0

Answer 8

Tπ > 0

Question 9

A Monopolist will
ONLY Produce More
when DD is
Elastic / Inelastic ?

Why?

Answer 9

Elastic

Monopolist can sell more only by lowering $
⇒ Elastic DD

Question 10

5 Criticisms of Monopoly

Answer 10

1. Make Economic Profits indefinitely
2. Productively Inefficient
   output of
   MR=MC<min. AC (econ. cap.)
   ⇒ Cost ↑
3. Allocatively Inefficient
   Limit Qty Supplied for Max Profit
   ⇒ Qty ↓
4. Unequal Income & Wealth
5. Price Discrimination

Question 11

How Producers attempt to capture Cx surplus by selling products to diff. ppl @ diff. $

Answer 11

Price Discrimination

Question 12

2 Forms of
Price Discrimination

Answer 12

Dicriminations among
1. Units Purchased
- law of dinimishing marginal utility buyers don’t value units equally
- Cx buy additional units for lower $
- not relevant to cost of prod
- e.g. BOGO
2. Buyer Groups
- diff. Cx groups, diff. dd & value, diff. elasticities
- no possibility of resale

Question 13

Compare to Perfect Competition, Monopoly

1. Charges __ $
2. Prod __ outputs (econ. cap.)
3. Make economic profits in __ run

Answer 13

1. Charges ↑ $
2. Prod ↓ outputs (econ. cap.)
3. Make economic profits in Long & Short runs

Question 14

What is
1. Consumer Surplus
2. Producer Surplus
3. Economic Surplus

Answer 14

1. Consumer Surplus
   Cx benefitted by
   Pay < highest willing
2. Producer Surplus
   Producer benefitted by
   Sell > lowest willing
3. Economic Surplus
   Cx Surp + Prod Surp

Question 15

Total Surplus Lost due to
Market Imperfections
e.g. tax, monopoly, over-/under- prod., $ ctrl

Answer 15

Deadweight Loss

Question 16

3 reasons of Defense of Monopoly

Answer 16

1. Large Economoies of Scale in Prod.
   e.g. natural monopoly
2. R&D into New Tech
   bigger barrier
3. High Qlty Staff, well paid & benefits

Question 17

When startup costs too high & market can support only 1 profitable firm
or
A Producer prod. at a lower cost than competing firms

Answer 17

Natural Monopoly

e.g. railroads, utilities

Question 18

3 Actions that
Gov regulates Monopolist

Answer 18

1. Tax
   lump-sum profits tax
   & monopoly sales tax
2. Price Setting
   socially optimum $
   & fair-return $
3. Nationalization

Question 19

Lump-Sum Profits Tax
is a fixed cost which
increases Monopolist’s __ Cost
and __ Total Profit
While Output & Price __
& Cx pay __

Answer 19

Average (Total) Cost ↑
Total Profit ↓
Output & Price unaffected
Cx pay 0

Question 20

Monopoly Sales Tax
is per unit sales tax
increases Monopolist’s __ Cost
and __ Total Profit
While Output & Price __
& Cx pay __

Answer 20

Marginal Cost MC ↑
Total Profit ↓
While Output ↓ & Price ↑
Cx pay partly

Question 21

Gov set price for Monopolist to produce the
Best Allocation of prod from Society’s viewpoint
is called ___

where Price = ___

Answer 21

Socially Optimum Price

P = MC =AR
(MC ╳ DD)
⇒ Allocative Efficiency
$ paid for last unit = $ of producing the unit
& match social DD

SOMA

Question 22

Gov set price for Monopolist to earn
Normal Profits only
is called ___

where Price = ___

Answer 22

Fair-Return Price

P = AC =AR
(AC ╳DD)
⇒ Productive Efficiency
unit produced @ lowest possible cost

FRAP

Question 23

State acquires Monopoly,
by compulsory uncompensated
or buyout, is called ___

Answer 23

Nationalization

may/may not make profit;
may/may not charge socially optimum $

Question 24

Why MR always < Price $
for Monopolist?

Answer 24

1. Monopolist ctrl either $ or Qty
2. DD curve is downward sloping
   ⇒ ↓ $ to sell more ⇒ ↓ Revenue
3. Selling additional unit earns
   less revenue than the previous unit
   ⇒ MR < $

Question 25

A Monopolist
prod more units if DD is __
& prod no units if DD is ___

Answer 25

When DD is
Elastic ⇒ Prod ↑
Inelastic ⇒ Prod x