Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Micro Economics > chapter 10: Monopoly > Flashcards

chapter 10: Monopoly Flashcards

1
Q

Marginal revenue

A

delta R / delta Q

MR = Change in total revenue obtained by selling on more unit

if total revenue begins to decline, then MR becomes negative

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Total revenue

A

TR = P*Q

where TR is at max, MR (marginal revenue) becomes negative at higher outputs

TR is at max of mid point of demand

if TR becomes to decline, then additional revenue becomes negative

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What happens to the marginal revenue if the total revenue stats to decline

A

then MR becomes negative

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Average revenue

A

price per unit sold

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Marginal cost

A

MC = change in total cost obtained by producing one more unit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Profit

A

total revenue – total cost = TR - TC

in a graph, profit per unit is AB

total profit is AB * Qe (number of units sold)

total profit = PeABCe

B is the intersect between ATC and Qe

A is intersect between Qe and Pe on the demand curve

Pe is equilibrium price

Ce is equilibrium cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

where does the monopolist maximize profits

A

at the mid point of demand

profit maximization will always also lie at unit elasticity of the demand curve

where difference between revenue and costs is greatest

where on the graph, TR curve hits peak and vertical difference with TC is biggest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what is the profit maximization rule to find optimal output

we assume demand is strictly a straight line

A

If MR > MC, increase output

If MR < MC, reduce output

If MR = MC, output is optimal (where difference between revenue and costs is greatest)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Scale of output in a natural monopoly and the costs

How do they evolve

A

the Average Cost of producing any output declines with the scale of operation (economies of scale)

Increasing returns to scale, even at very high output levels

the ATC curve continue to decline in the long run

ex: Hydro Qc

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

national policy

A

a deliberate government policy to protect a domestic monopoly

they can be costly to tax payer

e.g. a “national” carrier in the airline industry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

how to maintain barriers to entry

reason for monopolies to survive

A

Patents, granted by government for research and development

Predatory pricing, intended to drive out potential competition (Illegal)

Lobbying government for subsidies as a means of preventing entry

Excess production capacity

Network goods that are utilized almost universally

  • ->
    ex: Microsoft operating systems, Winzip
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what is the difference between a perfect competition and a monopoly regarding goods produced

A

Perfect competition: Homogenous products

Monopoly: unique product with close substitute

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what is the difference between a perfect competition and a monopoly regarding sellers and buyers

A

Perfect competition: large number of buyers and sellers

Monopoly: one seller and large number of buyers with downwards sloping demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

what is the difference between a perfect competition and a monopoly regarding price control

A

Perfect competition: price taker

Monopoly: price maker

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

what is the difference between a perfect competition and a monopoly regarding profit maximization

A

perfect competition: Average revenue = P = Marginal Cost

AR = P = MC

Monopoly: MR = MC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what is the difference between a perfect competition and a monopoly regarding entry and exit from firms

A

Perfect competition: free entry and exit

Monopoly: barriers to entry

17
Q

what is the difference between a perfect competition and a monopoly regarding decisions taken

A

Perfect competition: quantity to be produced

Monopoly: either price or quantity to be produced

18
Q

what is the difference between a perfect competition and a monopoly regarding maximized profit in long run

A

Perfect competition: normal profits

Monopoly: abnormal profits

19
Q

what is the difference between a perfect competition and a monopoly regarding technology’s effect

A

Perfect competition: still zero profit because, usually, price goes down and output goes up

Monopoly: generate higher profits and output is not undermined

20
Q

are the curves gonna be linear in real life?

A

nah bpy

they non linear

21
Q

A monopolist’s choice of plant size in long run

A

Monopolist is free to choose whatever plant size is best

Profit max rule is always MR = MC, whether long run or short run

LAC = LMC due to constant returns to scale (cost of producing each unit will remain constant)

–> this means doubling of output = doubling of costs

To establish Quality of output we need the MR curve, to generate constant profits, it must lie above LMC curve

In the short run with plant size smaller, it can be beneficial

in long run, must adapt plant size to the change in demand

must consider profits made with different plant sizes

22
Q

where could there be losses?

A

when the ATC (average total cost) curve is anywhere above the demand curve

23
Q

difference between monopoly and perfect competition regarding allocation of ressources

A

a perfect competition, resources are used up to the point where MC = P

demand curve reflects the true marginal value and if the MC represents true social cost

the profit maximization outcome represents a social optimum

true cost = true benefit

Monopolist will inefficiently allocate resources as long as MC = MR as the profit maximizing output

24
Q

why is monopoly inefficient in allocating ressources

A

it is inefficient because output is increased above this quantity, the additional benefits exceeds additional cost of producing it exceeds

additional benefit is measured by willingness of buyers to pay (market demand curve)

additional cost is the long run MC curve under assumption of constant returns to scale

there is deadweight loss in ABF*

monopolist produces less and charges higher prices

25
Q

allocative inefficiency

A

when ressources are not properly allocated and result in deadweight loss

26
Q

What is the ABF in a graph

A

efficiency loss associated with having monopoly rather than perfect competition

Dead Weight Loss arises because value > MC for units QPC - QM

QPC = perfect market optimum

QM = monopoly optimum

27
Q

price discrimination

A

charging different prices of identical products to different consumers in order to increase profit

The seller must be able to screen or segregate the market into those willing to pay more and those willing to pay less

Resale must be impossible or impractical

may actually reduce the deadweight loss in the case of monopoly – because more may be sold in total

28
Q

efficient output with price discrimination

A

output where every customer demand is met

29
Q

case of where the producer could charge a different price to each buyer, implying D = MR

what would happen

A

supplier has more information about buyers, and can segregate them

his profit max choice comes closer to producing the efficient output Q*

Q* is where MC = D = MR

Q* is now the profit maximizing output – it is also the social optimum

30
Q

cartels acting like monopolist

A

group of producers who co-operatively reduce output with the aim of increasing profits
It behaves like a monopolist

Cartels within individual economies are almost universally illegal

If MC is the joint supply curve of the cartel, market price is higher and less is produced than under perfect competition

31
Q

cartel instability

A

there is an incentive for firms to break the collusive agreement and sell more

at the Quantity output of the monopoly (Qm): the MC is less than the price

profit could be increased for an individual firm if other firms do not also increase output

32
Q

rent seeking

A

activity that uses productive resources to redistribute rather than create output and value

Lobbying the government to reduce competition

has a resource cost or time cost

The work of lobbyists does not result in more output

33
Q

who pays for rent seeking?

A

It gets incorporated into the cost structure of firms who have a degree of market power

Consumers also pay in the form of higher prices

34
Q

what will monopolist seeing to maintain monopoly do with his ressources

A

devotes ressources to restricting competition

it will increase firm’s cost

While it may reduce his profits in the short run, it helps maintain the monopoly status in the long run

35
Q

invention

A

the discovery of a new product or process through research

36
Q

innovation

A

introduction of a new product or process

37
Q

Do monopolies have a greater tendency to invent and innovate?

A

Monopolists say yes, but empirical evidence does not support this claim

38
Q

patent laws

A

designed to foster innovation by granting monopoly production rights for a period of 10-15 years

39
Q

Is MR curve half of the demand curve in a monopoly?

A

Ye boyyy

Micro Economics (13 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions