Monopoly

Question 1

Monopoly

Answer 1

A single seller of a product with no close substitutes serves the entire market

Question 2

Factors that lead to a monopoly / Sources of a monopoly

Answer 2

• Exclusive control over important inputs
• Economies of Scale
• Patents
• Network economies
• Government licences of franchising

Question 3

Natural Monopolies

Answer 3

Markets characterized by declining long run average cost curves

If more than one company in the market, each firm’s average cost would be higher

Question 4

Profit maximization

Answer 4

• Max profit where MR = MC

- Never operates on the inelastic part of the demand curve

Question 5

Marginal Revenue

Answer 5

• dTR/dQ
• P0 - (dP/dQ)*Q0
• P(1 - 1 / |E| )

Question 6

Profit maximizing markup

Answer 6

(P-MC)/P = 1 / |E|

Question 7

Measuring monopoly power

Answer 7

Lerner index:

L = (P - MC) / P

L = -1 / |E| between 0 & 1

Question 8

Monopolist’s shutdown condition

Answer 8

AR < AVC at every level of output

Question 9

Monopolist supply curve

Answer 9

Does not exist

Monopoly is a price maker and not a price taker

Question 10

Price discrimination

Answer 10

Charging different prices to different buyers

Only feasible when it is impossible or impractical for buyers to trade among themselves (Arbitrage)

Question 11

Third degree price discrimination

Answer 11

Charging different prices to people in completely different markets

Question 12

Arbitrage

Answer 12

The purchase of something for costfree risk-free resale at higher price

Question 13

Intertemporal price discrimination

Answer 13

Your market price is split into two: Initially you ask a high price, then you lower it

2 Different demand curves: one inelastic for those not willing to wait, and one elastic for those willing to wait

Question 14

Peak-load pricing

Answer 14

Less of an effort to capture consumer surplus and more of a means of increasing efficiency

Question 15

First degree price discrimination

Answer 15

The largest possible extent of market segmentation

Ask the reservation price

Question 16

Points of comparison between the perfectly price discriminating monopolist and the monopolist who cannot discriminate at all

Answer 16

• The perfect discriminator has a higher level of output, because he need not be concerned with the effect of a price cut on the revenue from output produced so far
• No consumer surplus under the perfect discriminator

Question 17

Second degree price discrimination

Answer 17

Different prices according to blocks

Price discrimination along a schedule which price declines with the quantity bought

Question 18

Hurdle model of price discrimination

Answer 18

The seller sets up a hurdle of some sort, and makes a discount price available to those buyers who elect to jump over it

The logic is that those buyers who are most sensitive to price will be more likely than others to jump the hurdle

With a perfect hurdle, none of the people who pay the discount price has a reservation price greater than or equal to regular price, which mean all of them would have been excluded from the marker had only bee the regular price available

Question 19

Allocative efficiency

Answer 19

P = MC

Question 20

Productive efficiency

Answer 20

Minimum value of ATC where ATC & MC intersect

Question 21

Monopoly deadweightloss

Answer 21

Study graph 10.21 on p 322

Question 22

Public Policy Toward Natural Monopoly

Answer 22

• State ownership and management
• State regulation of private monopolies
• Exclusive contracts
• Vigorous enforcement of antitrust laws
• A Laissez-faire policy

Question 23

X-inefficiency

Answer 23

A condition in which a firm fails to obtain maximum output from a given combination of inputs

Question 24

Rate of return regulation

Answer 24

Prices are set to allow the firm to earn a predetermined rate of return on its invested capital

Question 25

Gold-plated water cooler effect

Answer 25

The regulated monopolist has the incentive to purchase more capital equipment than is actually necessary to produce any given level of output

Question 26

Cross-subsidiary effect

Answer 26

A monopolist who serves more than one separate market has an incentive to sell below cost in the more elastic market, and cross-subsidise the resulting losses by selling above cost in the less elastic market

Economic profit = (required rate of return - actual cost of capital) * Total capital stock

Graphs p 325

Question 27

Advantages and disadvantages of monopolies

Answer 27

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