Final exam - Lecture 1 Notes

Question 1

What are the 3 Assumptions of Monopolies?

Answer 1

1. One seller (one firm)
• Only one business
2. No close substitutes
• No other goods that ar the same.
 3. Total barrier to entry
• Keep competition from coming

Question 2

Monopoly

Answer 2

faces entire D curveq

Question 3

Why must a monopoly lower it’s price?

Answer 3

◦Must lower price to increase quantity - must lower price on ALL units, not just on last one (or
not?)
‣ Even if there is a monopoly like nv energy if the cost is too high no one would buy it and
buy solar panels

Question 4

Example
◦Sell 5 sofas a day for $1,000 each
◦Want to sell 6 a day, Lower price to $900
◦Revenue = 5 x $1,000 = $5,000

Answer 4

◦New Revenue = 6 x $900 = $5,400

◦Marginal Revenue = $400 from a $900 sofa!

Question 5

Marginal Revenue falls twice as faster than

Answer 5

Demand curve

Question 6

Profit maximization formula

Answer 6

MC = MR

Marginal Cost = Marginal Revenue

Question 7

Why do monopolies restrict the output?

Answer 7

to raise it’s price

Question 8

Why is monopoly bad ?

Answer 8

Price increases because there no competition.

Question 9

Rent

Answer 9

◦A payment in excess of opportunity cost is called a a”rent”

Question 10

◦Monopolies engage in

Answer 10

“Rent Seeking Behavior” Monopolies restrict output so they can price it more

Question 11

• Consumer Surplus

Answer 11

The difference between what you actually paid for something and the highest amount you
would have paid. It’s the consumer’s gain from trade

Question 12

• Perfect competition Consumer’s Surplus

Answer 12

= A

Question 13

Monopoly Consumer’s Surplus

Answer 13

= C

Question 14

Monopoly Producer takes what?

Answer 14

Producer takes B

Question 15

Deadweight Loss =

Answer 15

Deadweight Loss = A

Question 16

___ is how much the monopoly makes

Answer 16

B

Question 17

A

Answer 17

is people who would buy the product if there was competition but they dont buy it since they
price out of the market.

= Deadweight Loss

Question 18

Consumers lose

Answer 18

c and b

Question 19

___ just disappears since they dont buy it since the monopoly priced it too high.

Answer 19

A

since it’s deadweight loss

Question 20

If there was competition the consumers would get

Answer 20

a, b, and c.

Question 21

◦Deadweight

Answer 21

Deadweight loss is a loss to society because some consumers are priced out of the market.
Monopoly lowers the well being of society

Question 22

Why are monopolies bad?

Answer 22

Deadweight loss and not efficient.

Question 23

Why is no reason to be efficient and produce at the lowest cost in a monopoly?

Answer 23

because there is no incentive to be efficient and produce at the lowest cost since they control the prices.

Question 24

Above is what?

Answer 24

Single Price Monopoly.

Question 25

single price monopoly

Answer 25

charges the same price to everyone.

Question 26

What are good examples of single price monopolies?

Answer 26

Oil, electricity, natural gas, etc.

Question 27

Discriminating monopoly

Answer 27

Price discrimination = charging different prices to different customers

Question 28

What businesses that can price discriminate?

Answer 28

◦Any business not in perfect competition can do it (monopoly does it best)

Question 29

First degree of price discrimination

Answer 29

different prices to each customer

Question 30

Second degree of price discrimination

Answer 30

different prices for different quantities

Question 31

Third degree price discrimination

Answer 31

different prices in different markets/market segments.

Question 32

What are the 2 requirements of price discrimination

Answer 32

1. must be able to identify customers/groups

2. No arbitrage

Question 33

◦NOT Efficient:

Answer 33

Since P controlled, costs not that important

Question 34

◦NOT Efficient:

Answer 34

Monopoly gets more than it puts in, some people get less

Question 35

◦NOT Optimal:

Answer 35

Can improve society’s welfare hurting only the monopoly = Eliminating

Question 36

Monopoly is

Answer 36

Pareto Optimal.

Question 37

• The government sets the price for monopolies they set it

Answer 37

cost + %

Question 38

What do companies do when the government sets there price

Answer 38

they increase the cost since it’s cost + %