Monopoly

Question 1

What is a Monopoly?

Answer 1

A firm with Total Market Power

-Price Setter

Question 2

What is the main Constraint to a Monopoly?

Answer 2

Market Demand- still Downward Sloping

Question 3

What are the 3 main causes for a Monopoly?

Answer 3

• Single owner of a Crucial Resource
• Gov. Policy - e.g. Nationalisation or Patents
• Natural Monopolies - E.o.S

Question 4

For a Monopoly, where is MR in relation to AR?

Answer 4

MR < AR

MR is 2x as Steep as AR

Question 5

Why is P = AR > MR?

Answer 5

To sell an extra unit, Monopoly must lower Price for ALL Previous units as well
=> Loses Revenue on ALL units they were already selling

Question 6

What type of Profit does a Monopoly gain?

Answer 6

Supernormal Profits

Question 7

What is the equation for MC in terms of P and PeD?

Answer 7

MC = P( 1 + 1/e )

Question 8

What is the PeD equation?

Answer 8

e = (P/Q)(dQ/dP) < 0 –> Because Consumers are more Flexible
Price Elasticity of Demand

Question 9

What happens to Price as Demand becomes Perfectly Elastic? (e –> 0)

Answer 9

P –> MC

Monopoly chooses Perfectly Competitive Price

Question 10

Under a monopoly, P > MR. What does this cause?

Answer 10

Deadweight Loss to Society

Question 11

What is the DWL to Society?

Answer 11

Units with Value > CoPs that are lost because Supply is restricted
Market Failure

Question 12

How does a Monopoly affect the Market Equilibrium?

Answer 12

Increased Price

Decreased Quantity

Question 13

Where is the Efficient Market Price?

Answer 13

D = S

Question 14

How does Perfect Comp. and Monopoly differ?

Answer 14

PC: D = S = Sum of MC curves
Pc - Efficient Market Price --> Maximised Surplus
Monopoly: Increased Price to Pm
Decreased Quantity to Qm
--> Produces DWL

Question 15

What are some Public Policies that can be used to prevent Monopolies?

Answer 15

Increase Competition–> CMA
Nationalisation- Public Ownership
Regulation- Max. Prices etc.
Do Nothing- prevent Gov. failure