Chapter 10 : Monopoly

Question 1

Slope of the monopoly demand curve

Answer 1

Negative demand curve.

Question 2

TR equation for a monopolist

Answer 2

TR = p x Q, if it charges the same price for all units sold.

Question 3

AR equation for a monopolist

Answer 3

AR = TR/Q = (p x Q)/Q = p

Question 4

True or False? The monopolist demand curve is also the average revenue curve.

Answer 4

True, since demand also shows the price of the product, and AR = p

Question 5

Difference in the MR of competitive markets vs monopoly

Answer 5

Competitive market : MR = p
Monopoly : MR < p

Question 6

True or False? MR curve lies below the demand curve or the AR curve

Answer 6

True.

Question 7

Why is the MR <p for a monopoly?

Answer 7

Because the demand curve is negatively sloped. The monopolist must reduce the price of all of his units in order to sell one more unit.

Question 8

What do zones 1 and 2 show?

Answer 8

Zone 1 : the 50$ gain in TR because of selling 5 extra units at 5$ each.

Zone 2 : the 40$ loss in revenue because of selling the first 40 units at 1$ less.

MR = deltaTR/deltaQ

Question 9

MR equation

Answer 9

MR = deltaTR/deltaQ

Question 10

Is a monopolist a price taker?

Answer 10

No, therefore, it does not have a supply curve.

Question 11

When, and only when, should the firm only produce?

Answer 11

If the price is above the AVC

Question 12

In a monopoly, where is profit maximized (at which Q*)?

Answer 12

When MC(Q) = MR(Q)

Question 13

How to determine the economic profit of a monopoly from a graph?

Answer 13

The area of : quantity x (price - costs)
Green area in the graph

Question 14

Is the level of output in a monopolized industry more or less than the level of output in a perfectly competitive industry?

Answer 14

In monopoly : less than in industry

Question 15

Compare the relationship between the price and the MC in a perfectly competitive market vs in a monopoly

Answer 15

Monopoly : p>MC
P. Competitive : p = MC

Question 16

Explain why there is a deadweight loss to society with monopolies.

Answer 16

The Quantity supplied will be less despite the market demand.

Question 17

Two types of entry barriers

Answer 17

1. Natural
2. Created

Question 18

Why are entry barriers important?

Answer 18

To prevent the entry of new firms in the market, and allow monopolies to remain monopolies.

Question 19

Example of created entry barriers

Answer 19

Conscious government actions.

Question 20

Modern examples of monopolies

Answer 20

Facebook, eBay, Microsoft

Question 21

What is a cartel?

Answer 21

A group of firms agreeing to act as a single seller in order to maximize joint profits by eliminating the competition.

Question 22

When cartels form, profits can be ________ by ______ the output.

Answer 22

Increased, decreasing

Question 23

Explain the graph of the effects of cartelizing a competitive industry.

Answer 23

Initially, the Equilibrium in the perfectly competitive industry is set by the intersection of the supply and demand curves. This is Qc.

Then, when cartels form, the graph switches to the behavior of monopolies, who are maximize their profits by MR = MC, which is at a lower output (Qm), for a higher price.

Qm < Qc

Question 24

Why are cartels unstable?

Answer 24

Because their members have an incentive to cheat, by producing more output than agreed.

They want to produce until price = MC.

Question 25

What is one way that cartels prevent the entry of new producers?

Answer 25

Successful cartels are often able to license the firms in the industry and to control entry by restricting the number of licenses

Question 26

What is price discrimination?

Answer 26

The sale by one firm of different units of a same product at 2+ prices for reasons not associated with differences in cost.

Question 27

Is a price discriminatory if it reflects cost differences?

Answer 27

No. It is only discriminatory if the differences are based on different buyers’ valuations of the same product.

Question 28

Why is price discrimination possible? (3)

Answer 28

Price discrimination is possible because of :
1. Market power
2. Different valuations of a same product
3. To prevent arbitrage

Question 29

What is arbitrage?

Answer 29

The action of buying a product and reselling it, at a higher price.

Question 30

What are 3 forms of price discrimination?

Answer 30

1. Price discrimination among units of output.
2. Price discrimination among market segments
3. Hurdle pricing

Question 31

Explain how price discrimination among units of output works.

Answer 31

Charging different prices for different units sold.

Dark green : extra profit with price discrimination
Light green : profit without price discrimination.

Question 32

Why is price discrimination among market segments preferable to firms than price discrimination among units of output?

Answer 32

Because it is easier for markets to distinguish between different market segments than to detect individual consumers’ willingness to pay for different units of a same product.

Question 33

In price discrimination among market segments, the firms charge more to the market segment with the ______ elastic price. Why?

Answer 33

Less. Because the consumers will be ready to buy the product “no matter what”

Question 34

Explain what hurdle pricing is.

Answer 34

Hurdle pricing exists when firms create an obstacle that consumers must overcome to get a lower price.

Ex. Coupons for discounts at grocery stores.

Question 35

What are the consequences of price discrimination?

Answer 35

More output produced by monopolists. Increased total economic surplus, outcome is more efficient.