chapter 10

Question 1

pure monopolist

Answer 1

• firm that is the only supplier of a unique product with no subs

Question 2

why do monopolies occur

Answer 2

• single firm owns a key resource
• gov gives a single firm rights to produce a good
• network economies (ex. microsoft used in 80% of computers)
• natural monopoly: single firm can produce the entire market Q at a cost lower than could several firms

Question 3

revenue concepts for single price monopolist

Answer 3

• negatively sloped demand curve
• trade off between price charged and quantity sold
• to sell more, lower price
• if monopolist charges same price for all units, TR = P x Q

Question 4

average revenue for monopolist

Answer 4

• total revenue / Q
• (p x q)/ q = p
• demand curve is also AR curve

Question 5

Marginal revenue

Answer 5

• revenue resulting form sale of one more unit of product
• delta TR/deltaQ
• bc downward sloping demand, must reduce price that it charges on all units to sell an extra unit
• price received for extra unit is not the marginal revenue because some revenue lost by reducing price

Question 6

marginal revenue curve

Answer 6

• the same vertical intercept as the demand curve and horizontal intercept only half as large as that of the demand curve

Question 7

short run profit maximization

Answer 7

• maximizing output Q where MR = MC
• price determined by demand curve
• positive profits if price exceeds ATC
• no supply curve because not a price taker
• chooses profit maximizing quantity price combinations from possible combos on demand curve

Question 8

competitive vs monopoly: output and price

Answer 8

• level of output of monopoly industry is less than level of output of competitive
• for competitive price = MC
• for monopoly price > MC

Question 9

competitive vs monopoly: economic surplus

Answer 9

• • mroe economic surplus if monopolist increases level of output
• monopolists profit maximizing decision to restrict output below competitive level creates loss of economic surplus - DWL
• leads to market inefficiency

Question 10

the very long run and creative destruction

Answer 10

• technological changes and innovations in the vlr can create entry barriers
• schumpeter: monopoly provides incentives to innovate
• replacement of monopolists through innovation
• sometimes gov help needed to break monopolies

Question 11

cartel

Answer 11

• coalition of firms that agree to restrict output for purpose of gaining economic profit
• normally involve several firms
• agreements not legally enforceable and can be unstable
• temptation to cheat

Question 12

cartel problems

Answer 12

• any one firm has incentive to cheat
• if all firms cheat, price falls to competitive level and joint profits wont eb maximized
• cartels must be able to prevent entry
• cartels are often able to control entry by restricting number of licences in industry

Question 13

price discrimination

Answer 13

• charging different buyers different prices for the same good or service

Question 14

how is price discrimination possible

Answer 14

• separate markets into submarkets, each with a different demand curve and charge a different price in each submarket
• prevent buyers from buying at a low price in one submarket and reselling at a higher price in another submarket

Question 15

price discrimination among units of output

Answer 15

• firm captures consumer surplus by charging different prices for different units sold

Question 16

price discrimination among market segments

Answer 16

usually easier for firms to distinguish between different groups fo consumers (market segments) than to detect individuals willingness to pay for different units of product - more common

Question 17

perfect price discrimination

Answer 17

• monopolist charges each customer exactly what they are willing to pay
• production level the same as a perfectly competitive market (p=mc) but consumer surplus vanishes
• all economic surplus becomes producer surplus
• no DWL

Question 18

hurdle pricing

Answer 18

• when firms create obstacle that consumers must overcome to get lower price
• consumers assign themselves to diff segments
• those who want to jump hurdle to benefit and those who dont want to jump and are willing ot pay

Question 19

consequences of price discrimination

Answer 19

• monopolist that price discriminates will produce more output than a single price monopolist
• if price discrimination leads to increase in total output, total economic surplus will increase and outcome will be more efficient