Econ Chapter 9

Question 1

Competition

Answer 1

A market with only one seller of a product that has no close substitute and there are natural and legal barriers to entry that prevent competition

Question 2

Where do we see Pure Monopolies?

Answer 2

Normally pretty rare

Present in Government programs

Question 3

What is a natural monopoly

Answer 3

When a firm that can produce at a lower cost than a number of smaller firms could

Question 4

What are the three sources of Monopoly Power?

Answer 4

1) Legal Barriers
2) Economies of Scale
3) Control over an Important Input

Question 5

What does the demand curve of a monopolist and a perfectly competitive firm look like

Answer 5

Monopolist: Downward sloping curve

Perfectly Competitive: Perfectly Elastic, horizontal line

Question 6

Where on the linear demand curve is unit elastic, elastic, inelastic

Answer 6

Elastic Above midpoint, Unit elastic at midpoint, Inelastic below midpoint

Question 7

Three steps for determining the profit maximizing output for monopolists

Answer 7

1) Find Q* where MC=MR
2) Find P* by following Q* up the to the demand curve, then you can find total revenue
3) Find total costs, go straight up from Q* to ATC curve and then left to find ATC per unit. Find TC by TC = ATC x Q

Question 8

Monopolists in the long run

Answer 8

Can make a profit because no other firms can enter the industry

Question 9

How can a monopolist have a loss?

Answer 9

Because consumers don’t demand the product

Question 10

What is a patent

Answer 10

When the government puts its police powers behind the patent holders exclusive rights to make a product for a period of time
- Allows a product to be sold at a higher price

Question 11

What are some objections to monopolies?

Answer 11

1) They are not fair

2) They lead to lower output and higher prices

Question 12

Welfare Loss in Monopoly

Answer 12

Monopolists produce at an output where price is greater then marginal costs
- Leads to not enough production which leads to deadweight, or welfare loss

Question 13

Anti Combine Laws

Answer 13

• Laws designed to prevent monopoly, promote competition, and enhance economic efficiency

Question 14

Competition Bureau

Answer 14

Looks at complaints including price fixing, bid-rigging, and predatory pricing, and often prevents competition reducing activities

Question 15

2 Ways to deal with monopolies

Answer 15

1) Anti Combine Laws

2) Government Regulation

Question 16

Marginal Cost Pricing

Answer 16

Decision to set price where the price of a good equals marginal costs

Question 17

What happens when a monopolist is forced to sell at a non profitable price

Answer 17

Governments subsidize them

Question 18

Average Cost Pricing

Answer 18

Production where the price of a good equals the average total cost

Question 19

3 Difficulties in Average Cost Pricing

Answer 19

1) Accurate Calculation of Costs
2) No Incentive to Keep Costs Down
3) Special Interest Groups

Question 20

Price Discrimination

Answer 20

The practice of charging different consumers different prices for the same good or serve when the cost of providing that good or service is not different for different consumers

Question 21

3 Conditions for Price Discrimination to exist

Answer 21

1) Monopoly Power
2) Market Segregation
3) No Resale

Question 22

Quantity Discounts

Answer 22

When firms charge less when people buy in bulk