Chap. 8 - Monopolies Flashcards

1
Q

When there is only one seller in the market it is called a _______, but when there is only one buyer in the market it is called a ______.

A

Monolpoly, Monospsony

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2
Q

Does a monopoly have an incentive to advertise?

A

Since the firm is also the market demand curve, it has one hundred percent of the market share; however, monopolies may advertise to increase overall market demand or to improve goodwill or public relations.

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3
Q

What are the five barriers to entry for a monopoly?

A

Legal Barriers (Patents, copyrights), Control of Necessary Inputs (oil, diamonds), Network Externalities (Software), Economies of Scale, Strategic Behavior

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4
Q

What is marginal revenue and what is the equation? Where is MR in relation to demand?

A

The additional revenue received by selling one more unit of output.
Change in TR/Change in Q
MR is twice as steep as the demand line.

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5
Q

Where should a monopolist produce? What price and quantity should the monopolist charge and produce?

A

Where MR = MC, then drawing a line up from where MR = MC to the demand line is the price that should be charged, and drawing a line down where MR = MC to quantity.

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6
Q

Give an example of why MR falls at twice the rate as demand.

A

Let’s assume that a monopolist can sell 1 barrel of oil for $80 or 2 barrels for $79 each. To sell two barrels, price must drop by $1. But MR for the second one is change in TR divided by change in quantity or (158 – 80) / (2-1) = $78. So MR fell by $2 ($80-78) – twice the rate as price!!

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7
Q

Total revenue is maximized at unit elasticity which occurs where _______ ______ is zero.

A

MR is zero

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8
Q

Why does a monopolist only produce in the elastic portion of the demand curve?

A

Because we would expect marginal cost to be positive and a monopolist chooses to produce where MR=MC. MC would never be 0 for a producer, exceptions to a few cases, so we can conclude that a monopolist would only produce in the elastic region of the demand curve.

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9
Q

In comparing monopoly to pure competition, in pure competition supply is obtained by horizontally adding the MC curves of the firm. By doing this with monopoly, only one firm, we see that the monopoly MC crosses the demand line below or above optimal price? And produces more or less than the optimal quantity?

A

Below the optimal price for the monopoly. Produces less. Thus, monopolies always charge a higher price and produce less than what a normal equilibrium would allow.

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10
Q

Describe the economic surplus of the monopoly.

A

MC acts as the supply curve of the monopoly, and the monopolist will only produce where MR = MC, which has a higher price and lower quantity than the natural equilibrium. By restricting output and raising price, the single price monopolist captures a portion of the consumer surplus. Since output is restricted, a portion of both the consumer and producer surplus is lost. This loss of economic surplus is known as deadweight loss, that neither the consumer nor the producer enjoy.

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11
Q

Monopolies are allocative or productive efficient?

A

They are neither allocative or productive efficient since P > MC, compared to perfect competition. And they don’t produce at the minimum of ATC.

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12
Q

If a firm wants to price discriminate what are some of the conditions that need to be met?

A

First, a firm must be able to set the price (i.e. it must have some market power). Second, the firm must be able to segment the market into groups based upon either their willingness to pay or their different elasticities of demand. Third, the firm must be able to prevent resale of the item from one market segment to another.

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13
Q

What is the First degree or perfect price discrimination? How does it relate to economic surplus?

A

When a firm charges each consumer their maximum willingness to pay, which is reflected by the demand curve. The Demand curve = MR, and since MC is equal to a monopoly supply curve, the producer catches all the economic surplus.
(Law Firms, Car Salesman)

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14
Q

What is Third degree price discrimination?

A

When the firm cannot identify individual demands, but can identify groups of consumers that have similar demands and can segment them based upon some easily identifiable characteristic such as age, time of purchase, residency, or location.
(Movie Theaters, Disney Parks)

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15
Q

What is Second degree price discrimination?

A

When the monopolist knows that there are two or more groups of consumers with different willingness to pay, but she cannot identify which consumers belong to each group.
(Buying larger quantities of items/Bulk)

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16
Q

What is a two part tariff? What is the point of price discrimination?

A

The two-part tariff charges individuals an upfront membership fee then also charges them a per use fee. (Golf Clubs, Health Clubs)
The point of discrimination is so that producers can capture as much of consumer surplus as possible.

17
Q

What is horizontal, vertical, and conglomerate mergers?

A

Merger or consolidation of two or more producers of the same product or service.
When firms at different stages of production of a product merge.
Merging firms produce unrelated products

18
Q

In a natural monopoly, where one firm can produce output at a lower per unit cost than several firms such as a local utility company, what could the government do to make the industry allocative efficient?

A

Make the firm charge the price and quantity where MC = Demand or Price. This usually makes the firm incur a loss since ATC is above the point where MC = Demand.
They could make the firm produce and charge at where MC = Demand, and then subsidize the losses, although this is difficult.
They could make the firm charge and produce where ATC = Demand, thus earning a zero economic profit.