Monopoly

Question 1

What is a monopoly?

Answer 1

A market with only one producer:

1. Producer has market power & can set prices (downward sloping demand curve for its product)
2. Actions of the producers competitors don’t really affect the demand for its products

Question 2

What does market power mean?

Answer 2

It means the power to set prices and create barriers to entry:

• Product differentiation: goods are imperfectly substitutable
• Switching costs: its costly for users to switch to another good/service
• Govt. Regulation: legal restrictions on competitor production
• Control of key inputs: other firms can’t produce without them
• Absolute cost advantages: exclusive access to better technology
• Economies of scale: Production technology so that larger firms then have a cost advantage

Question 3

What does the demand curve of a firm in a perfectly competitive market look like versus a firm that is a monopoly?

Answer 3

Perfect Competitive: Perfectly Elastic Straight horizontal line

Monopoly: downward sloping

Question 4

What is a monopolists goal and how do they achieve that?

Answer 4

A monopolist’s goal is to create maximum profits and they do so by setting the price that will allow them production till MB = MC.
MB= MR from producing another unit
MC= per unit cost of production

Question 5

How to find marginal revenue

Answer 5

• Assume the firm can only produce integer quantities & track changes in revenue as output increases unit by unit (how does revenue change when you increase Q unit by unit)
• Assume continuous quantized and produce and equation through calculus

Question 6

What is the quantity effect?

Answer 6

The amount of revenue gained from selling one more unit or one additional unit

Question 7

What is the Price Effect?

Answer 7

The amount of revenue lost by lowering the price on all units.
(P1-P0)Q0

Question 8

How do you determine your marginal revenue equation?

Answer 8

MWTP(Q) = P(Q) = A-BQ
TR(Q)= Q x P(Q) = AQ-BQ^2
MR(Q)= A - 2BQ

MR is the derivative/slope of TR(Q)
MR curve is the same P-intercept (Q=0) as the MWTP curve but is just twice as steep

Question 9

How do monopolists maximize their profits?

Answer 9

Monopolist chooses the largest quantity such that
MR(Q) >\ MC(Q)
MC is constant(K) & Demand is linear
MR=MC
Profit maximizing price PM is exactly where QM(largest quantity such that MR>=MC) is demanded
A-2BQM=K
PM=MWTP(Q)=A-BQM

Question 10

What are the implications of monopoly profit maximization?

Answer 10

Short run profits can be positive or negative and the profit maximizing price/quantity must be on the elastic part of the demand curve

Question 11

What is efficiency with monopolies?

Answer 11

Producing till MWTP=MC

Question 12

What are the assumptions we should make with monopolies?

Answer 12

1. Assume that all benefits and costs are private

Question 13

What is the relationship between QM and Qefficient?

Answer 13

Based on the assumption that monopolists can only charge a single price to consumers for their goods and so to maximize they produce till MR=MC but if they wanted to be efficient they would have to produce till MWTP=MC

We know that QM

Question 14

How do governments monitor monopolies with policy options?

Answer 14

1. Improving competition with rules & laws
2. Direct Regulation
3. Public Ownership
4. Do nothing

Question 15

What are examples and pitfalls of governments trying to improve competition?

Answer 15

Competition Act in Canada & Antitrust in US

• Provides rules for when firms can merge
• Prohibits the abuse of market power
  - Conditions for break-up companies

Pitfalls are that mergers decrease competition and may lead to cost savings

Question 16

What are examples and pitfalls of direct regulation?

Answer 16

Examples:
-Regulate prices &or quantities
Regulate profit margins
Require natural monopolists to provide access

Pitfalls:
What are the appropriate prices and quantity then and would regulated firms have the proper incentives to innovate?

Question 17

What are the downsides of public ownership?

Answer 17

Pitfalls:

How would we encourage innovation then with public ownership and how would we incentivize proper management?

Question 18

How does total surplus differ under a monopoly?

Answer 18

Total surplus under a monopoly is less than with perfect competition because it’s essentially better to have a good sold as a monopoly than not to have it at all.

Question 19

What is the problem with monopolies?

Answer 19

-They restrict supply so they can charge a super high price and
-since QM0
But society would benefit more if there were more surplus of more was produced and competition would achieve that

Question 20

What are the responses that believers of monopolies have to those who don’t believe?

Answer 20

The problem is that monopolists don’t get to keep all the surplus they create so if we could get a greater share then we would produce more but the sucky part is we would have to Charge the same price for every unit sold.