Chapter 16- Monopoly

Question 1

Arises when there are no close substitutes

Barriers for another firms to enter same market

Answer 1

Monopoly arises when

Question 2

Barrier to entry- any constraint that protects a firm from competitors is a barrier to entry
Natural
Ownership
Legal

Answer 2

Three type of barrier to entry

Question 3

Exists when the technology for producing a good or service enables one firm to meet the entire market demand at a lower price than 2 or more firms could
Ex: PSE&G can meet the demand for electricity at a lower price than other distributors of electricity

Answer 3

Natural monopoly

Barrier to entry

Question 4

OWNING a natural resource so other firms can’t buy it

Answer 4

Ownership

Barrier to entry

Question 5

Creates legal monopoly
Legal monopoly- a market in which other competitors are restricted to make the same product by granting of a public franchise, government license, patent, or copyright

Answer 5

Legal

Barrier to entry

Question 6

An exclusive right granted to a firm to supply a good or service
Ex: U.S.P.S exclusive right to deliver first class mail

Answer 6

Public franchise

Question 7

Controls entry into particular occupations, professions, and industries

Answer 7

Government license

Question 8

Exclusive right granted to the inventor of a product or service
Valid for 20 years

Answer 8

Patent

Question 9

An exclusive right granted to the author or composer of a literary, musical, dramatic, or artistic work

Answer 9

Copyright

Question 10

Monopoly faces a tradeoff between price and quantity sold
To sell a larger quantity, monopolist must set a lower price
Two price setting possibilities that create different tradeoffs
Single price
Price discrimination

Answer 10

Price setting strategies

Question 11

A firm that must sell each product (unit) at the same price to all its customers
DeBeers sells diamonds to all its customers at the same price
Produces smaller output and charges a higher price than perfect competition firms

Answer 11

Single price monopoly

Question 12

Firms sell different units of the same good for different prices
Ex: airlines offer offer different prices for the same trip

Answer 12

Price discriminating monopoly

Question 13

If a price fall increases total revenue, demand is elastic
If a price fall decreases total revenue, demand is inelastic
Marginal revenue=0 demand is unit elastic
A monopoly never has a profit in the inelastic range of the demand curve

Answer 13

Marginal revenue and elasticity

Question 14

If Percentage change in the quantity demanded exceeds the percentage change in price, the demand is…

Answer 14

Elastic demand

Question 15

If percentage change in the quantity demanded equals the percentage change in price

Answer 15

Demand is unit elastic

Question 16

If the percentage change in quantity demanded is less than the percentage change in price

Answer 16

Demand is inelastic

Question 17

Vertical distance(difference) in between total cost and total revenue curves is the economic profit
Profit maximizing price determined by demand curve
Resources are used efficiently when marginal benefit equals marginal cost

Answer 17

Monopoly’s profit maximizing output and price

Question 18

Monopoly is inefficient creates a deadweight loss

Producer gains, consumers lose

Answer 18

Is monopoly unfair

Question 19

Act of obtaining special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others
Always restricts competition
Consumer surplus- price consumers willing to pay and what they actually pay. They are willing to pay higher than the market price. Consumer surplus is above the market price on a graph

Answer 19

Rent seeking

Question 20

Rent seeking costs are fixed costs that add to TFC AND ATC
Shifts ATC curve upward until it hits the profit maximizing price
Exhaust economic profit, consumer surplus shrinks, deadweight loss increases and might consume all profit

Answer 20

Rent seeking costs

Question 21

Selling a good or service at a number of different prices
Ex: haircut for children is cheaper than haircut for adults
Key idea is to convert consumer surplus into economic profit

To be able to price discriminate, a firm must
Identity and separate different types of buyers
Sell a product that cannot be resold

Answer 21

Price discrimination

Question 22

Firm offers different prices to different types of buyers, based on things like age, employment status, etc
Works when each group has a different average willingness to pay for the good or service

Answer 22

Price Discriminating among groups of buyers

Question 23

Firm charges the same price to all customers, but offers a lower price for a larger number of units bought
Ex: $3 for one carton of juice, but $5 for two cartons of juice

Answer 23

Price discriminating among units of a good

Question 24

To find economic profit, draw a rectangle connecting the points on the ATC and demand curve points where profit is maximized to the Y axis

Answer 24

To find economic profit

Question 25

Removes the entire consumer surplus by charging the highest price that consumers are willing to pay for each unit
Demand curve becomes the marginal revenue curve
Price equals marginal cost in perfect price discrimination(efficient regulation of natural monopoly)
Rent seeking becomes profitable

Answer 25

Perfect price discrimination

Question 26

Regulation achieves an efficient allocation of resources

Answer 26

Social interest theory

Question 27

Regulation serves the self interest of the producer and results in maximum profit, underproduction, and deadweight loss

Answer 27

Capture theory

Question 28

Average cost pricing

Government subsidy

Answer 28

Monopoly can avoid an economic loss through

Question 29

Sets price equal to average total cost (ATC)

Answer 29

Average cost pricing

Question 30

Direct payment to the firm, raised by the government by taxing some other activity, which will create a deadweight loss

Answer 30

Government subsidy