L15 - Monopoly

Question 1

What is a monopoly?

Answer 1

When there is one large seller of a particular good or service with market share of 25% or more

Question 2

What are the assumptions?

Answer 2

1) Monopolist is a price maker:
A seller sells more when its price is lower: its
demand curve slopes downwards

    The seller’s output choice does not trigger a reaction 
    from competitors (if there are any)

2) High barriers to Entry/Exit

3) Its product is unique
That is, it is differentiated so much so that it has no
close rivals

4) Many buyers who are are price takers & buyers and sellers have complete information

Question 3

Where does a Monopolist achieve supernormal profits?

Answer 3

Where AC = AR

Question 4

What is Producer and Consumer Surplus?

Answer 4

CONSUMER SURPLUS:
the difference between the amount consumers are willing to pay for the good and what they actually pay

PRODUCER SURPLUS:
The difference between the price of a good
and what price producers are willing to supply it

Question 5

What happens in Monopoly when MR is positive?

Answer 5

Then TR rises with extra unit of output.

SEE DIAGRAM

Question 6

What happens in Monopoly when MR is negative?

Answer 6

Then TR falls with extra unit of output

SEE DIAGRAM

Question 7

What happens in a monopoly when producing an extra unit of output?

Answer 7

1) Increases the amount of units sold

2) Lowers prices which units are sold (Indicating why MR below AR)

Question 8

What does total welfare in a monopoly look like

Answer 8

LOOK AT DIAGRAM