Chapter 12: Monopoly

Question 1

Average Cost Pricing Rule

Answer 1

Rule that sets price to cover cost including normal profit, which means setting the price equal to average total cost.

Question 2

Barrier to Entry

Answer 2

A natural or legal constraint that protects a firm from potential competitors.

Question 3

Capture Theory

Answer 3

Theory that regulation serves the self-interest of the producer, who captures the regulator and maximizes economic profit.

Question 4

Deregulation

Answer 4

Process of removing regulation of prices, quantities, entry, and other aspects of economic activity in a firm or industry.

Question 5

Economic Rent

Answer 5

Any surplus—consumer surplus, producer surplus, or economic profit.

Question 6

Legal Monopoly

Answer 6

Market in which competition and entry are restricted by the granting of a public franchise, government licence, patent, or copyright.

Question 7

Marginal Cost Pricing Rule

Answer 7

Rule that sets the price of a good or service equal to the marginal cost of producing it.

Question 8

Monopoly

Answer 8

Market structure in which there is one firm, which produces a good or service that has no close substitutes and in which the firm is protected from competition by a barrier preventing the entry of new firms.

Question 9

Natural Monopoly

Answer 9

Market in which economies of scale enable one firm to supply the entire market at the lowest possible cost.

Question 10

Perfect Price Discrimination

Answer 10

Price discrimination that occurs when a firm sells each unit of output for the highest price that anyone is willing to pay for it. The firm extracts the entire consumer surplus.

Question 11

Price Cap Regulation

Answer 11

Rule that specifies the highest price that the firm is permitted to set—a price ceiling.

Question 12

Price Discrimination

Answer 12

Practice of selling different units of a good or service for different prices.

Question 13

Rate of Return Regulation

Answer 13

Regulation that requires the firm to justify its price by showing that its return on capital doesn’t exceed a specified target rate.

Question 14

Regulation

Answer 14

Rules administered by a government agency to influence prices, quantities, entry, and other aspects of economic activity in a firm or industry.

Question 15

Rent Seeking

Answer 15

Lobbying for special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others. The pursuit of wealth by capturing economic rent.

Question 16

Single-price Monopoly

Answer 16

Monopoly that must sell each unit of its output for the same price to all its customers.

Question 17

Social Interest Theory

Answer 17

Theory that the political and regulatory process relentlessly seeks out inefficiency and introduces regulation that eliminates deadweight loss and allocates resources efficiently.