EMI1- Monopolies Flashcards
Do Monopolies cause market faliure?
Yes
What is the first thing we should assume about monopolists?
That they seek to maximise profit
What does P(Q) represent?
Price as a function of quantity
How do you calculate profit (π) in a monopoly?
π= P(Q)Q-C(Q)
What is the formula for Price Elasticity of Demand?
PED= dQ/dP x P/Q
What is the equation for the Lerner Degree of Monopoly?
(P-MC)/P= -1/PED
What is our equilibrium relationship?
MC=MR= P(1+1/PED)
What is a problem of monopolies?
Monopolies lead to allocative inefficiencies → P>MC so we lose Pareto efficiency.
For Lerner would did a bigger wedge between P and MC mean?
Greater monopoly power
What is the most important limitation of the Lerner Index?
The Index doesn’t recognise that some of the deviation of P from MC comes from either efficient use of scale or the need to cover fixed costs.
What did Scitovsky observe about the Lerner Index?
“The Lerner Index… measure market imperfection rather than monopoly or oligopoly power.”
Why would a monopolist operate at -1 PED?
If MC=0
On the Monopoly graph, what are the 2 lines and which is on top?
The Demand (AR) curve starts at the same point on the y axis as MR curve but is half as steep
Which shape does DWL look like on the Monopoly graph?
It is a triangle
If there is linear demand and constant marginal cost, what does DWL= according to Mueller?
Monopoly Profit/2
What did Harberger (1956) calculate?
That DWL in all industries only accounted for 0.1%> of American GDP.
What are 2 problems with Hallberg’s study?
He ignored the manufacturing industry (a huge proportion of the economy), and assumed PED was -1, so basically assumed away the monopoly power!!
What did Jolian McHardy calculate?
DWL/SV = 1/2xPED
What is rent seeking?
When an entity seeks to gain wealth without any reciprocal contribution in productivity.
What are 2 examples of rent seeking?
Corporations lobbying governments for subsidies. Making donations but writing them off on your tax form
In which cases do rent seeking not cause a DWL?
If no resources are put into the expenditure (eg a bribe), or if the resources have zero value, as say if a park is built to win over a community, there is value in a park!
What is X-Inefficiency?
When a firm lacks an incentive to control costs, causing the average cost of production to be higher than necessary.
In which case could X-Inefficiency not be a problem?
If the increases in costs lead to utility gains, ie getting bigger offices.
What is Schumpeter’s “creative gale of destruction”?
Where the existence of monopoly profit acts an incentive for others to revolutionise and innovate an industry in order to “steal” it.