chapter 24 monopolies

Question 1

what is a monopolist?

Answer 1

firm that is the only seller in the market

has great deal of market power

Question 2

what are profit maximization rules?

Answer 2

1. a firm shouldn’t produce if revenues are less than the TVC
2. if a firm does produce, it should produce the level of output where MR=MC

Question 3

what are the 3 characteristics of monopolies?

Answer 3

1. single seller
2. no substitutes
3. high barriers to entry

Question 4

can monopolies still incur losses?

Answer 4

YES, even if all else is true, monopolists can’t control demand so they can still have economic losses

Question 5

what are barriers to entry?

Answer 5

factors that keep firms from entering the market even though they can see that the monopoly is earning a profit
allows monopolists to maintain profits in the long run

Question 6

what is economies of scale?

Answer 6

when the cost of production goes down drastically as more is produces it is harder for small companies to compete w large monopolies bc the monopolies per unit cost is so much lower
doesn’t mean that the consumer can get the lowest price bc the monopolies have market power

Question 7

what are types of barriers to entry?

Answer 7

economies of scale
government licensing
patents
ownership of resources that do not have close substitutes

Question 8

what are ways the government legislation creates monopolies?

Answer 8

1. licenses and franchises
2. patents
3. tariffs
4. regulations
5. quality standards

Question 9

what are natural monopolies?

Answer 9

firm has decreasing ATC over large range of output
large firms are more efficient than small ones in this case
can drive out other firms by undercutting their prices
tend to occur in industries w high levels of fixed costs
electric companies

Question 10

what is a monopoly?

Answer 10

one firm is the entire market so the market demand curve is the firm’s demand curve
AR curve = demand curve

Question 11

what is perfect competition?

Answer 11

one firm’s output has virtually no effect on the market?

Question 12

how does a monopolist increase quantity?

Answer 12

it must crease price bc marginal revenue is always less than price

Question 13

why does a monopolist not have a supply curve?

Answer 13

don’t have a unique relationship between price and quantity supplied
uses its MR curve and its cost functions to determine the quantity is produces

Question 14

what are the steps to finding the revenue on a monopolist demand curve?

Answer 14

1. maximize profit where MR=MC

2. trace quantity up until you hit demand curve, that will give you price

Question 15

what are the steps to finding profit and TC on a monopolist demand curve?

Answer 15

1. maximize profit where MR=MC
2. trace quantity up until you hit demand curve, that will give you price
3. find quantity on ATC to separate profits and TC

Question 16

what is price differentiation?

Answer 16

different prices for similar products to reflect differences in the MC of providing the goods to different groups of buyers
the differences in MC result in the optimizing prices for the groups to be different

Question 17

what are reasons why firms price discriminate?

Answer 17

1. to increase profits

2. to attract consumers to the market who wouldn’t normally participate

Question 18

what are the 3 conditions needed to be able to price discriminate?

Answer 18

1. firm must face a downward sloping demand curve
2. firm must be able to easily and cheaply identify buyers or groups of buyer w predictably different elasticities of demand
3. firm must be able to prevent resale of the product or service