ECON101 Unit 10

Question 1

What is a monopoly?

Answer 1

A market where there is one supplier protected from competition by barriers preventing entry

• Produces a good/service where no substitutes exist
• ex. gas, water (gov owned), isolated grocery store

Question 2

What is a monopoly the opposite of?

Answer 2

Polar opposite of perfect competition

It not only dominates, but it IS the market

Question 3

What are the three types of barriers to entry in a monopoly?

Answer 3

Natural= economies of scale enable 1 firm to supply the entire market at lowest possible cost

Ownership = occurs if 1 firm owns significant portion of key resource

Legal = entry is restricted by granting of a public franchise, government licence, or patent/copyright

Question 4

What are the two price setting strategies?

Answer 4

1) Single price monopoly = must sell each unit for the same price to all customers
2) Price discrimination = practice of selling different units of a good for different prices

Question 5

Why is a monopoly a price setter?

Answer 5

Demand for output is the market demand

- To sell more, monopoly must set lower price

Question 6

Why does a monopoly always have an elastic demand?

Answer 6

Never produces an output where demand is elastic b/c if it did a firm could increase total revenue, decrease cost, and increase economic profit by decreasing output

Question 7

Monopoly produces quantity that …

Answer 7

maximizes total revenue - total cost

Question 8

What is price discrimination?

Answer 8

Getting buyers to pay a price for a good closest to their willingness to pay = taking advantage of different elasticities of demand

Question 9

What are the two ways of price discriminating?

Answer 9

1) Among a group of buyers
- Higher price to ppl willing, lower to ppl who are not
- ex. (airline.. business vs. economy)

2) Among units of a good
- ex. quantity discouts

Question 10

What is perfect price discrimination?

Answer 10

If a firm is able to sell each unit of output for the highest price someone is willing to pay

• MR now equals price
• The more perfectly a monopoly can do this, the closer its output is to the competitive output
• Most efficient outcome

Question 11

What is the inefficiency of a monopoly?

Answer 11

Price exceeds MSC
MSB exceeds MSC
= deadweight loss

Question 12

What is rent seeking?

Answer 12

The pursuit of wealth by capturing economic rent

- occurs when someone pursues a monopoly status

Question 13

Outcome of price discrimination differences from perfect competition:

Answer 13

• Monopoly captures entire consumer surplus, all surplus in market
• Increase in profit attracts more rent seeking leading to inefficiency

Question 14

Compared to perfect comp, monopoly produces smaller …

Answer 14

output and charges higher price

Question 15

What is regulation in a monopoly?

Answer 15

Rules administrated by a government agency to influence prices, quantities, entry etc.

Question 16

Two theories on regulation:

Answer 16

Social interest theory: political and regulatory process relentlessly seeks out inefficiency and regulates to eliminate deadweight loss.

Capture theory: regulation serves the self-interest of the producer, who captures the regulator and maximizes economic profit.

Question 17

Government regulations imposed to address monopoly inefficiency:

Answer 17

Marginal cost pricing rule: sets the price equal to the monopoly’s marginal cost. The quantity demanded at a price equal to marginal cost is the efficient quantity.

Average cost pricing rule: government regulators to permit the monopoly firm to produce the quantity at which price equals average cost and to set the price equal to average cost
- USES: price cap and rate of return regulation