monopoly

Question 1

what is a monopolist?

Answer 1

a monopolist is the sole supplier of a good in a market without close substitutes. they are a price setter because they have market power

Question 2

what are examples of barriers to entry#?

Answer 2

Monopoly resources.
Government regulation.
The nature of production (natural monopoly).
Business strategies
Switching costs suffered by consumers if they change supplier.

Question 3

what is a natural monopoly?

Answer 3

a natural monopoly where a market is suited best for when one firm is operating in it. this is usually due to high economies of scale, large sunk costs and investment needed to be productive

Question 4

what is the demand curve for the monopoly?

Answer 4

the monopolist is the only seller so faces the market demand curve- it is downward sloping os if more output is to be sold then the price must be reduced

Question 5

what are the two components that make up the marginal revenue for a firm with market power?

Answer 5

the increase in total revenue associated with an increase in sales
the decrease in total revenue associated with a fall in the market price for all previously produced units of output

Question 6

what is the lerner index?

Answer 6

it is a measure of the market power a firm has. it can range from 0 (perfect competition) to just under 1. the firm with the high lerner index has more market power than a firm with a low lerner index value

Question 7

what is the formula for the lerner index?

Answer 7

(P-MC)/P = - 1 / e(d) where the LHS is the firms mark up and the right hand side the lerner index

Question 8

what occurs to the lerner index when the demand becomes less elastic?

Answer 8

as demand becomes less elastic the e(d) becomes smaller in absolute value and the markup should be a larger fraction of the price

Question 9

if the demand is perfectly elastic, what will occur if they raise the price?

Answer 9

any effort to change to a higher price will lead to a loss of all sales. the demand curve is horizontal along a fixed price

Question 10

if the demand is perfectly elastic then what is the lerner index?

Answer 10

the lerner index becomes - infinity, this means the firm is a price taker

Question 11

is a monopoly efficient?

Answer 11

a monopoly is not efficient as the monopoly equillibrium price is greater then the marginal cost therefore it is not allocatively efficient and it is not productively efficient usually as it is not operating where the AC is equal to the MC curve. the total surplus is smaller compared to perfect competition. however it could be argued it is dynamically efficient as the ability of monopoly to produce supernormal profits allows funds for investment

Question 12

in what region of the demand curve will the monopolist choose to operate on and why?

Answer 12

the monopoly will choose to operate only in regions where the market demand curve is elastic. if it was on the inelastic part of the demand curve it would immediatly raise its prices thus gaining revenue

Question 13

what region of the demand curve is elastic?

Answer 13

the region where the marginal revenue is greater then 0

Question 14

what are policies to use on monopolies?

Answer 14

competiiton policies
regulation
public ownership

Question 15

what is first degree price discrimination?

Answer 15

the firm observes the consumers willigness to pay and the best pricing policy is to charge each customer their willingness to pay as long as its greater then the marginal cost

Question 16

is first degree price discrimination efficient?

Answer 16

the allocation is efficient as it maximises total surplus however all the surplus is producer surplus

Question 17

what is second degree price discrimination?

Answer 17

quantity discounts and similiar. this is for when consumers cannot be distingusihed directly but have different prefereces with respect to quantity or quality. you offer different consumption bundles and allow consumers to self select

Question 18

what is third degree price discrimination?

Answer 18

sell at different prices to different groups of consumers eg students or retired

Question 19

what are the requirements for third degree price discrimination?

Answer 19

market power (monopoly)
firms can identify groups of consumers with different preferences
groups cannot resell goods between them

Question 20

how does elasticity relate to third degree price discrimination?

Answer 20

different groups will have different price elasticities of demand. firms will sell at higher prices to consumers with lower price elasticity of demand