Chapter 9.1: Monopoly

Question 1

Conditions of a Monopoly

Answer 1

• One large firm (firm is market)
• Unique product (no close substitutes)
• High barriers to entry (no competition)
• Price makers
• Inefficient (creates DWL)

Question 2

Barriers to Entry

Answer 2

Legal, technological, and market forces that discourage or prevent potential competitors from entering the market, so that monopolies can sustain economic profit in the long run.

Question 3

Natural monopoly

Answer 3

Occur when the barriers to entry are due to economies of scale or control of physical resource.

Question 4

Legal Monopoly

Answer 4

Occurs when there are legal barriers against competition, such as regulation and intellectual property protection.

Question 5

Natural monopoly: Economies of Scale, examples

Explain fig. 9.1

Answer 5

Happens in industries where the MC of adding another customer is very low when the FC on overall systems are in place (ie. electric and water company), so it is natural for only one firm to produce bc they can produce at the lowest cost.

Question 6

Natural monopolies can arise . . .

Answer 6

• In industries where the marginal cost of adding customer is very low, when the fixed costs of the overall system are in place.
• When a company has control of scarce physical resource.
• In smaller local market for products that are difficult to transport.

Question 7

Intellectual property (IP)

Answer 7

The body of law including patents, trademarks, copyrights, and trade secrets that protect the right of inventors to produce and sell their inventions.

Question 8

Patent, Trademark

Answer 8

Patent: gives inventor exclusive legal rights to make, use , or sell the invention for a limited time.
Trademark: an identifying symbol or name for a particular good.

Question 9

Copyright, Trade secrets

Answer 9

Copyright: Legal protection to prevent copying of original works for commercial purposes.
Trade secrets: methods of production kept secret by producing firm.

Question 10

Predatory Pricing

Answer 10

A firms uses the threat of price cuts to discourage competition.

Question 11

How do demand curves of perfectly competitive firms and monopolies differ?

Question 12

Relationship between demand (AR) and MR

Answer 12

Perceived demand is market demand bc the firm is the market. MR is always less than demand (price line) for imperfectly competitive firms because to sell another unit, they need to lower the price for all units, including the units they could’ve sold for a higher price.

:) monopoly gang sign

Question 13

Total revenue and MR

Answer 13

Since monopolists face a downward-sloping demand curve, the only way to sell more output is by reducing its price. Selling more raises revenue, but lowering price reduces it. Therefore, TR for a monopolist has the shape of a hill: first rising to a maximum then falling.

Question 14

What will happen to a monopoly that makes profit in the long-run?

Answer 14

Nothing, no firms will try to compete because there are high barriers to entry, meaning the firm is able to sustain econ. profit in the long-run. For this reason the short-run and long-run graphs are one and the same.

Question 15

To maximize TR, monopoly should. . .

Answer 15

produce where MR is 0.

Question 16

Elasicity of demand

Answer 16

split where MR is 0 or TR is maximized. Left side is elastic, right is inelastic. Monopolies always produce where demand is elastic.

Question 17

To maximize profit, monopolies should produce at. . .

Answer 17

where the difference of TR and TC is largest. Or where MR=MC.

Question 18

Are unregulated monopolies allocatively efficient?

Answer 18

No, allocative efficiency is where D = mc. Monopolies produce at MR = MC, but P > MC = MR.

Question 19

Price discrimination

see GD

Answer 19

Firm charges each consumer what they’re willing and able to pay, so that price charged per consumer varies.

Question 20

If a monopoly saw an increase in fixed costs (ie. a lump-sum tax), how will profit-maximizing q and profit be affected?

Answer 20

A change in fixed costs shifts ATC but not MC. So, the profit maximizing price and q (where MR = MC) will stay the same, but profit would be decreased.

Question 21

How to determine profit-maximizing quantity and price

Answer 21

1. Determine q where MR = MCA
2. Draw line straight up to demand curve. This is the price.
3. Calculate TR, TC, and profit and average profit.

Question 22

*

Why do neither monopoly nor monopolistic competition achieve productive efficiency in the long-run?

Answer 22

Because price is always higher than min. ATC for price setters.

Question 23

Requirements to apply price discrimination

Answer 23

• Have monopoly power (must be price maker)
• Must be able to segregate the market.
• No resale

Question 24

What would happen if there was a per unit tax?

Answer 24

MC curve would shift up.

Question 25

Why do underegulated monopolies generate DWL?

Answer 25

Bc they produce where MR = MC, but set their prices high.