Ch15 Monopolies

Question 1

Monopoly defn

Answer 1

A firm that is the sole seller of a product without close substitutes

Question 2

How can a firm become a monopoly? (3)

Answer 2

1. Monopoly resources - key resource required for production is owned by a single firm
2. Government regulation - government gives a single firm the exclusive right to produce some good or service
3. Production process - single firm can product output at a lower cost than can a larger number of firms

Question 3

Why would a government grant monopoly? (Think patent and copyright writers)

Answer 3

Drives innovation and research (ex. Pharmaceutical companies own patent for 20 years, or author)

Question 4

Natural monopoly def and water ex.

Answer 4

A monopoly that arises because a single firm can supply a goods or service to an entire market at a SMALLER COST than could two or more firms. Ex. Distributing water —> must build a network.

If 2+ firms compete, each pays the fixed cost of building a new network… total cost of water is lower if a single firm serves the entire market

Question 5

What is the difference between a competitive firms demand curve and a monopolistsdemand curve?

Answer 5

Competitive —> firms are price takers, so the demand curve is flat.
Monopoly —> sole producer, so can change the quantity of output to maximize profit. Looks like normal demand curve.

Question 6

What are output and price effect (thing that happen in response to a monopoly increasing the amount it sells)

Answer 6

Output effect : more output it sol so Q increases and total revenue increases
Price effect: price falls so price decreases and total revenue decreases (doesn’t affect competitive firms bc they can sell all they want)