Chapter 16

Question 1

What is a monopoly?

Answer 1

A firm that is the sole seller of a product without close substitutes

Question 2

characteristics of a monopoly?

Answer 2

• Has market power: Price maker
• The ability to influence the market price of the product it sells
• A competitive firm has no market power
• Arise due to barriers to entry
• Other firms cannot enter the market and compete with it

Question 3

How do monopolies arise?

Answer 3

Due to barriers to entry

Other firms cannot enter the market and compete with it

Question 4

Main sources of barriers to entry

Answer 4

• Monopoly resources
• Government regulation
• The production process

Question 5

Monopoly Resources

Answer 5

A single firm owns a key resource required for production

(Although exclusive ownership of a key resource is a potential cause of monopoly, in practice monopolies rarely arise for this reason.
Economies are large, and resources are owned by many people.)

Question 6

Government-Created Monopolies

Answer 6

Government gives a single firm the exclusive right to sell a good or service

Question 7

Patent and copyright laws: Have both benefits and costs.

Answer 7

Lead to higher prices and higher profits
Encourage some desirable behavior (provides incentives for creative activity)
When a pharmaceutical company discovers a new drug, it can apply to the government for a patent for 20 years.

Question 8

Natural Monopolies (The production process)


Answer 8

A type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms

Question 9

There are economies of scale over the relevant range of output

Answer 9

Distribution of water, electricity, etc.
Club goods (excludable, not rival in consumption)

Question 10

When a firm’s average-total-cost curve continually declines…

Answer 10

the firm has what is called a natural monopoly

Question 11

Monopoly versus Competition
(monopoly)

Answer 11

Sole producer
Price maker, market power
Faces the entire market demand: Downward sloping demand

Question 12

Monopoly versus Competition
(competitive firm)

Answer 12

Small, one of many
Price taker
Faces individual demand at P: Perfectly elastic demand

Question 13

Increasing quantity has two effects on revenue: TR= P*Q

Answer 13

Output effect: Higher output increases revenue
Price effect: Lower price decreases revenue

Question 14

Marginal revenue < Price (MR< P)
To sell a larger Q…

Answer 14

the monopolist must reduce the price on all the units it sells

Question 15

Marginal revenue < Price (MR< P)
Is negative if …

Answer 15

price effect > output effect

Question 16

Like a competitive firm, a monopolist maximizes profit by

Answer 16

producing the quantity where MR = MC

Question 17

If MR > MC:

Answer 17

Increase production

Question 18

If MC > MR:

Answer 18

Produce less

Question 19

Maximize profit

Answer 19

-Produce quantity where MR = MC
-Price is found on the demand curve

Question 20

For a monopoly firm:

Answer 20

P > MR = MC

Question 21

As with a competitive firm, 
the monopolist’s 
profit equals

Answer 21

(P – ATC) x Q

Question 22

Profit-Maximizing Rules for a Monopoly Firm

Answer 22

1. Derive the MR curve from the demand curve
2. Find Q at which MR = MC
3. On the demand curve, find P at which consumers will buy Q
4. If P > ATC, the monopoly earns a profit

Question 23

A competitive firm takes P as given

Answer 23

Has a supply curve that shows how its Q depends on P

Question 24

A monopoly firm is a “price-maker” where…

Answer 24

• Q does not depend on P
• Q and P are jointly determined by MC, MR, and the demand curve
• Hence, no supply curve for monopoly

Question 25

The socially efficient quantity is found where

Answer 25

the demand curve and the marginal-cost curve intersect

Question 26

The monopolist chooses to produce and sell the quantity of output at which

Answer 26

MR=MC Produces less than the socially efficient quantity of output Charges P > MR = MC The value to buyers of an additional unit (P) exceeds the cost of the resources needed to produce that unit (MC)

Question 27

Deadweight loss

Answer 27

Triangle between the demand curve and MC curve

Question 28

Price discrimination

Answer 28

- Sell the same good at different prices to different buyers - A firm can increase profit by charging a higher price to buyers with higher willingness to pay - Rational strategy to increase profit - Requires the ability to separate customers according to their willingness to pay - Can raise economic welfare

Question 29

Lessons About Price Discrimination

Answer 29

1. Price discrimination is a rational strategy for a profit-maximizing monopolist 2. Seller must be able to separate customers according to their willingness to pay 3. Price discrimination can raise welfare as measured by total surplus

Question 30

Perfect price discrimination

Answer 30

- Charge each customer a different price - Exactly his or her willingness to pay - Monopoly firm gets the entire surplus (Profit) - No deadweight loss - a price-discriminating monopolist charges each customer a price closer to her willingness to pay than is possible with a single price.

Question 31

arbitrage..

Answer 31

the process of buying a good in one market at a low price and selling it in another market at a higher price to profit from the price difference.

Question 32

Can price discrimination raise economic welfare?

Answer 32

yes

Question 33

Government policymakers can deal with the problem of monopoly in several ways:

Answer 33

- By trying to make monopolized industries more competitive - By regulating the behavior of the monopolies - By turning some private monopolies into public enterprises - By doing nothing at all

Question 34

Antitrust laws:

Answer 34

- Promote competition - Prevent mergers - Break up companies - Prevent companies from colluding to reduce competition

Question 35

Regulating the behavior of monopolists

Answer 35

regulates the price

Question 36

Problems arise with marginal-cost pricing

Answer 36

- When ATC is declining, MC < ATC - No incentive to reduce costs

Question 37

Public Ownership

Answer 37

Government unit can run the monopoly Ownership of firm affects costs of production Private owners have an incentive to minimize costs Public employees may become a special-interest group and bend political system to their advantage