EMI1- Monopolies

Question 1

Do Monopolies cause market faliure?

Answer 1

Yes

Question 2

What is the first thing we should assume about monopolists?

Answer 2

That they seek to maximise profit

Question 3

What does P(Q) represent?

Answer 3

Price as a function of quantity

Question 4

How do you calculate profit (π) in a monopoly?

Answer 4

π= P(Q)Q-C(Q)

Question 5

What is the formula for Price Elasticity of Demand?

Answer 5

PED= dQ/dP x P/Q

Question 6

What is the equation for the Lerner Degree of Monopoly?

Answer 6

(P-MC)/P= -1/PED

Question 7

What is our equilibrium relationship?

Answer 7

MC=MR= P(1+1/PED)

Question 8

What is a problem of monopolies?

Answer 8

Monopolies lead to allocative inefficiencies → P>MC so we lose Pareto efficiency.

Question 9

For Lerner would did a bigger wedge between P and MC mean?

Answer 9

Greater monopoly power

Question 10

What is the most important limitation of the Lerner Index?

Answer 10

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.

Question 11

What did Scitovsky observe about the Lerner Index?

Answer 11

“The Lerner Index… measure market imperfection rather than monopoly or oligopoly power.”

Question 12

Why would a monopolist operate at -1 PED?

Answer 12

If MC=0

Question 13

On the Monopoly graph, what are the 2 lines and which is on top?

Answer 13

The Demand (AR) curve starts at the same point on the y axis as MR curve but is half as steep

Question 14

Which shape does DWL look like on the Monopoly graph?

Answer 14

It is a triangle

Question 15

If there is linear demand and constant marginal cost, what does DWL= according to Mueller?

Answer 15

Monopoly Profit/2

Question 16

What did Harberger (1956) calculate?

Answer 16

That DWL in all industries only accounted for 0.1%> of American GDP.

Question 17

What are 2 problems with Hallberg’s study?

Answer 17

He ignored the manufacturing industry (a huge proportion of the economy), and assumed PED was -1, so basically assumed away the monopoly power!!

Question 18

What did Jolian McHardy calculate?

Answer 18

DWL/SV = 1/2xPED

Question 19

What is rent seeking?

Answer 19

When an entity seeks to gain wealth without any reciprocal contribution in productivity.

Question 20

What are 2 examples of rent seeking?

Answer 20

Corporations lobbying governments for subsidies. Making donations but writing them off on your tax form

Question 21

In which cases do rent seeking not cause a DWL?

Answer 21

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!

Question 22

What is X-Inefficiency?

Answer 22

When a firm lacks an incentive to control costs, causing the average cost of production to be higher than necessary.

Question 23

In which case could X-Inefficiency not be a problem?

Answer 23

If the increases in costs lead to utility gains, ie getting bigger offices.

Question 24

What is Schumpeter’s “creative gale of destruction”?

Answer 24

Where the existence of monopoly profit acts an incentive for others to revolutionise and innovate an industry in order to “steal” it.

Question 25

In a symmetric oligopoly, what are the “n” firms?

Answer 25

They are all substitutes whom make the same goods.

Question 26

What is the inverse demand foruma in symmetric oligopoly?

Answer 26

P= 1-Q

Question 27

How do we work out sum of individual firm’s output in a monopoly?

Answer 27

Q= qi + Σqj

Question 28

How do we work out the change in equilibrium extra output as a new firm comes into a symmetric oligopoly?

Answer 28

dQ*/dn = 1/(1+n)² > 0

Question 29

How do we work out total price of the package in a complimentary monopoly?

Answer 29

P=pi+Σpj

Question 30

How do you show that adding another component to aconplimentary monopoly increases total price?

Answer 30

dP*/dn = 1/(1+n)² > 0

Question 31

So why should we be wary of increasing the number of agents in a complimentary monopoly?

Answer 31

Because it will increase price

Question 32

Which leads to a higher deadweight loss, complimentary monopolies, or monopolies?

Answer 32

Complimentary monopolies

Question 33

What is third degree price discrimination?

Answer 33

When different prices are set in different markets and the monopolist charges the higher price in the market with less elastic demand. Eg trains having peak and off peak times.

Question 34

Which degree of price discrimination is often known as “perfect” price discrimination?

Answer 34

First degree

Question 35

What is first degree price discrimination?

Answer 35

Where the monopolist is able to charge a price each unit equal to the margin valuation of the person buying it. Eg if one person values a product at £15 and the other person values it at £80, charge 1 £15 and the other £80.

Question 36

What is consumer surplus under first degree price discrimination?

Answer 36

0

Question 37

Which form of price discrimination is often known as “non-linear pricing”?

Answer 37

Second degree price discrimination

Question 38

What is the price represented by on a second degree price discrimination graph?

Answer 38

An area

Question 39

What is special about non-linear pricing?

Answer 39

Instead of charging a price per unit, we charge an entry fee, and then a price per unit.

Question 40

In 2nd degree price discrimination, what do suppliers charge per unit?

Answer 40

MC, then make profit on the entry fee.

Question 41

Which is the only degree of discrimination in which everyone is charged the same price?

Answer 41

2nd degree

Question 42

What does price discrimination eliminate?

Answer 42

DWL

Question 43

What does a seller have to do if people don’t buy the bundles which maximises the sellers profit?

Answer 43

Design a menu of bundles and prices such that each type self-selects to the bundle which provides the seller with the highest profit.