Chapter 10 Flashcards
What kind of slope does the demand curve of a monopoly have?
It has a negatively sloped demand curve
What kind of tradeoff does a monopolist face as a consequence of its negatively sloped demand curve?
A tradeoff between the price it charges and the quantity it sells
What is the total revenue equal to if a monopolist charges the same price for all units sold?
TR = p x Q
What is average revenue?
It is total revenue divided by quantity
What is the equation for average revenue?
AR = TR/Q = (p x Q)/Q = p
What is the monopolist’s average revenue curve?
The monopolist’s demand curve
What is marginal revenu?
It is the revenue resulting from the sale of one more unit of the product
What is the equation for marginal revenue?
MR = ΔTR/ΔQ
What must a monopolist do in order to sell one extra unit?
It must reduce the price that it charges on all units
What is not the price received for one extra unit sold for a monopolist?
It is not the firm’s marginal revenue because by reducing the price of all previous units, the firm loses some revenue
What is marginal revenue equal to?
It is equal to the price minus this lost revenue
What is the marginal revenue for the monopolist?
It is less than the price that the monopolist receives for that unit so the monopolist’s MR curve lies below the demand curve
Where is the profit-maximizing output for the monopoly?
When MC = MR
When does the monopolist make an economic profit?
When p > ATC
What determines the price in the monopoly?
The demand curve
Why doesn’t the monopolist have a supply curve?
Because it is not a price taker
How does the monopolist choose its profit-maximizing price-quantity combination?
From among the possible combinations on the market demand curve
The level of output in a monopolized industry is [less/more] than the level of output that would be produced if the industry were perfectly competitive
less
For a monopoly, p is what?
p > MC
In a monopoly, the marginal value to society of extra units, as reflected by price, [is less than/is greater than] the marginal cost of producing the extra units
is greater than
When would more economic surplus be generated for society?
If the monopolist increased its level of output
What does the monopolist’s profit-maximizing decision to restrict output below the competitive level create?
It creates a loss of economic surplus for society - a deadweight loss
What does a monopoly lead to?
It leads to market inefficiency
For monopoly profits to persist what needs to be prevented?
The entry of new firms
How can the entry of new firms be prevented?
An entry barrier - natural vs created
A natural monopoly
Network effects
How are many entry barriers created
By conscious government actions
In the very long run, what kind of changes can circumvent effective entry barriers?
Technological changes and innovations
What is creative destruction?
It is the elimination of one product by a superior one
What does technological progress act as?
It acts as an agent of a change and economic growth that comes with periodic loss of privileged positions on the part of the displaced firms and their workers
What are cartels?
Cartels are a type of illegal monopoly that tend t be unstable because members have incentive to cheat
What happens when all firms cheat?
The price falls back toward the competitive level, and joint profits will not be maximized
What must a successful cartel do?
It must prevent the entry of new producers
They are also often able to license the firms in the industry and to control entry by restricting the number of licenses
What is price discrimination?
It is the sale by one firm of different units of a product at two or more different prices for reasons not associated with differences in cost
If price differences reflect cost differences, then they are not ____
discriminatory
When price differences are based on different buyer’s valuations of the same product, they are ____
discriminatory
When is price discrimination possible?
Market Power
Different Valuations of the Product
Prevent Arbitrage
What is price discrimination among units of output
A firm captures consumer surplus by charging different prices for different units sold
What is price discrimination among market segments?
It is a more common form of price discrimination thant price discrimination among units because it is easier for firms to distinguish between different market segments than it is to detect an individual consumer’s willingness to pay for different units of that product
What is close to perfect price discrimination?
When each unit sold is at each client’s personal value
Can price discrimination be based on quantity and quality?
Yes it can
When does hurdle pricing exist?
When firms create an obstacle that consumers must overcome to get a lower price
What can consumers do when hurdle pricing exists?
They can assign themselves to various market segments - those who don’t want to jump the hurdle are willing to pay the high price, and those who choose to jump the hurdle to benefit from the low price
What does the most profitable system of discriminatory prices for any given level of output provide to the firm?
Higher profits than the profit-maximizing single price
What will a monopolist that price discriminates among units produce?
They will produce more output thant will a single-price monopolist
