Chapter 17 and 18 Monopoly and Pricing Policies Flashcards
What gives a firm market power?
A firm is considered to have market power if it can profitably charge a price that is above its marginal cost
Describe a monopolist’s marginal revenue
A monopolist’s marginal revenue is determined by both output expansion and price reduction effects. Because of the price reduction effect, a monopolist’s marginal revenue is less than his price, except when his sales quantity is zero, where it equals price.
How does a monopolist identify the profit-maximizing sales quantity?
By first identifying the most profitable positive sales quantity at which MR = MC and then checking whether that sales quantity results in a greater profit than does shutting down.
What happens when a monopolist raises the price above marginal cost?
A monopolist increases profit but reduces consumers’ well being
What is the formula for marginal revenue?
MR = P(Q) + (derivative of P(Q))Q
What is rent seeking?
Rent seeking is effort devoted to securing a monopoly position
Why is there a deadweight loss from monopoly pricing?
Monopolies choose to produce at MR = MC which will always be lower than MC = D, resulting in a lower MC for producers and a higher P for consumers
Describe a monopsony
A market with a single buyer. In a monopsony, the profit maximizing quantity and price is determined by finding the ME which is found similarly to MR from Price except you use Wage as a function of quantity and setting it equal to MB (D)
What is perfect price discrimination?
A monopolist can engage in PPD if he knows a consumers willingness to pay for each unit he sells and can charge a different price for each unit. IMPORTANT: the monopolist produces exactly the same quantity, and each consumer consumes exactly the same quantity, as would occur in a perfectly competitive market
