Chapter 11: Pure Monopoly

Question 1

What is a Pure Monopoly?

Answer 1

Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes.

Question 2

A pure monopoly has these characteristics:

Answer 2

Single seller: a sole producer.​

No close substitutes: unique product.​

Price maker: control over price.​

Blocked entry: strong barriers to entry.​

Non-price competition: mostly PR but can engage in advertising to increase demand.​

Question 3

What are some examples of Pure Monopolies?

Answer 3

In most cities, government-owned or government-regulated public utilities—natural gas and electric companies, the water company, and the cable TV company—are all monopolies.

Question 4

What are examples of Near Monopolies?

Answer 4

Intel​

Android​

Professional sports teams (Even professional sports teams may enjoy being a monopoly in their respective geographical area. Of course, there is almost always some competition even for these firms.)

Question 5

What are Barriers of Entry?

Answer 5

Barriers to entry are factors that prevent firms from entering the industry:

Question 6

What are examples of Barriers of Entry?

Answer 6

Economies of scale​
- Natural monopoly​

Network effects​

Legal barriers to entry like patents and licenses​

Ownership or control of essential resources​

Pricing and other strategic barriers

Question 7

What is Economies of Scale?

Answer 7

Economies of scale constitute one major barrier. This occurs where the lowest unit costs and, therefore, lowest unit prices for consumers depend on the existence of a small number of large firms or, in the case of a pure monopoly, only one firm. Because a very large firm with a large market share is most efficient, new firms cannot afford to start up in industries with economies of scale. Google and Amazon both enjoy economies of scale in their respective markets. Public utilities are often natural monopolies because they have economies of scale in the extreme case where one firm is most efficient in satisfying the entire demand. The government usually gives one firm the right to operate a public utility industry in exchange for government regulation of its power.

Question 8

What indicates extensive economies of scale? Economies of Scale: The Natural Monopoly Case​

Answer 8

A declining long-run average-total-cost curve over a wide range of output quantities indicates extensive economies of scale. A single monopoly firm can produce, say, 200 units of output at lower cost ($10 each) than could two or more firms that had a combined output of 200 units.​

Question 9

What are the three assumptions that the analysis of monopoly demand makes?

Answer 9

-The monopoly is secured by patents, economies of scale, network effects, or resource ownership.​

-The firm is not regulated by any unit of government.​

-The firm is a single‑price monopolist; it charges the same price for all units of output.

Question 10

In Monopoly Demand Overview…

1. The pure monopolist is…
2. Monopolist demand curve is…
3. The demand curve is…
4. Marginal revenue is less than…

Answer 10

1.the industry.​

2. the market demand curve.​
3. downward sloping.​
4. price.​

Question 11

Why is Marginal Revenue less than Price?

Answer 11

Price will exceed marginal revenue because the monopolist must lower the price to sell the additional unit. The lower price is applied to all of the units being produced, not just the last unit, thereby causing marginal revenue to be less than price. The added revenue will be the price of the last unit less the sum of the price cuts which must be taken on all prior units of output.​

Question 12

When is Marginal Revenue (MR) less than Price (P)?

Answer 12

MR is less than price after the first unit sold.

Question 13

What is a price maker?

Answer 13

A price maker is a firm with pricing power, which is the ability of the firm to set its own price.

Question 14

Is the Monopolist is a price maker?

Answer 14

Yes

Question 15

In what region does the Monoploist sets Price on the demand cure?

Answer 15

Monopolist sets prices in the elastic region of the demand curve.​

Question 16

Why does the monopolist sets the price in the elastic region of the demand curve?

Answer 16

The monopolist sets the price in the elastic region of the demand curve so that revenues will be higher and costs lower.

Question 17

Why does the monopolist avoids setting the price in the inelastic range of demand?

Answer 17

The monopolist avoids setting the price in the inelastic range of demand because doing so would reduce total revenue and increase costs.

Question 18

What rule does the Pure Monopolist follow in regard to Profit Maximization?

Answer 18

A monopolist seeking to maximize total profit will use the same rationale as a profit-seeking firm in a competitive industry. If producing is preferable to shutting down, it will produce the output at which marginal revenue equals marginal cost (MR = MC).

Question 19

What are the Steps for Graphically Determining the Profit-Maximizing Output, Profit-Maximizing Price, and ​Economic Profit (if Any) in Pure Monopoly?

Answer 19

Step 1.​
Determine the profit-maximizing output by finding where MR = MC.​

Step 2.​
Determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist’s demand curve.​

Step 3.​
Determine the pure monopolist’s economic profit by using one of two methods:​

​

Method 1. ​
Find profit per unit by subtracting the average total cost of the profit-maximizing output from the profit-maximizing price. Then multiply the difference by the profit-maximizing output to determine economic profit (if any).​

Method 2. ​
Find total cost by multiplying the average total cost of the profit-maximizing output by that output. Find total revenue by multiplying the profit-maximizing output by the profit-maximizing price. Then subtract total cost from total revenue to determine the economic profit (if any).​

Question 20

Why doesn’t the pure monopolist have a supply curve?

Answer 20

because there is no unique relationship between price and quantity supplied. The price and quantity supplied will always depend on the location of the demand curve.​

Question 21

The monopolist does not charge the highest possible price because…

Answer 21

the monopolist can’t sell much output at that price and profits are too low. The monopolist is interested in total profit, not per unit profit. There is always the possibility that the monopolist will earn losses. Monopolists are not protected from changes in demand nor from changes in costs.​

Question 22

Is the monopolist interested in total profit or per unit profit?

Answer 22

The monopolist is interested in total profit, not per unit profit.

Question 23

Is there is always the possibility that the monopolist will earn losses?

Answer 23

Yes

Question 24

True or False? Monopolists are not protected from changes in demand nor from changes in costs.​

Answer 24

True

Question 25

What is the only reason the monopolist will only produce in the short run?

Answer 25

to minimize losses if it perceives that market conditions will change or that it will be able to earn a profit in the future.

Question 26

Like Profit Maximization, does the Pure Monopolist prevent Loss Minimization at MR=MC

Answer 26

yes

Question 27

What will the government do when monopoly power results in an adverse effect upon the economy?

Answer 27

Either….

1. Enact Antitrust laws: Break up the firm.​ the government may choose to intervene on a case-by-case basis using antitrust laws.
2. Regulate it: Government determines price and quantity.​ If the government feels that it is more beneficial to society to have a monopoly, then the government will regulate it.
3. Ignore it: Let time and markets get rid of monopoly.

Question 28

When monopoly power results in an adverse effect upon the economy, will that monopoly become a natural monopoly?

Answer 28

yes

Question 29

What is the dilemma faced by the government when a monopoly becomes a natural monopoly?

Answer 29

Choosing between….

1. Socially optimal price:
2. What is Fair return price:​

Question 30

Wha is Socially optimal price: P=MC

Answer 30

When Set price equal to marginal cost.​

Question 31

What is a Fair return price? P= ATC

Answer 31

Set price equal to average total cost.​

Question 32

What is the result of the Socially Optimal Price found where D and MC intersect, on a monopolist?

Answer 32

will result in an efficient allocation of resources but may entail losses to the monopoly.

Question 33

What is the result of the Fair-Return Price on a monopolist?

Answer 33

will allow the monopolist to breakeven but will not fully correct the under allocation of resources.​

Question 34

What is Price Discrimination?

Answer 34

• Price discrimination is defined as charging different prices to different buyers when such price differences are not justified by cost differences.

Question 35

What are examples of Price Discrimination?

Answer 35

Business travel​

Movie theaters​

Golf courses​ (price depending on time of day)

Railroad companies​

Coupons​

International trade​

Question 36

what is Monopoly Power?

Answer 36

Monopoly power means that the firm must have some pricing power.

Question 37

What is Principal Power?

Answer 37

Pricing power is the ability of a firm to set its own price. Therefore we find price discrimination in all types of markets except perfect competition.

Question 38

What is Market Segregation?

Answer 38

Market segregation means that you have identified your different buyers and can separate your market based on their willingness to pay.

Question 39

What is No Resale mean?

Answer 39

No resale means that a low-price buyer is prevented from buying at the low price and reselling the good to a high price buyer. Otherwise, the price discrimination scheme would break down.​