Monopoly (easy)

Question 1

Monopoly

Answer 1

Only supplier of good with no close substitute

Question 2

Use inverse demand function P(Q). So P on Y axis

Profit expression

Answer 2

π = P(Q)Q - C(Q)

Question 3

What is the inverse elasticity rule

B) Learn final equation pg 22-24

Answer 3

The mark-up (over MC) is dependent on elasticity.

final equation
P(Q) = C’(Q)/1-1/ε

Question 4

Dominant firms - when more than 1 firm, but only 1 dominates.

What happens (in comparison to a pure monopoly)

Answer 4

Little change from pure monopoly outcome.

As long as combined compacity of competitors is small, price is only slightly lower than pure monopoly

Question 5

Pg 27 shows dominant firm vs monopoly outcomes

Answer 5

Lower demand curve to show a slightly lower price for dominant firm compared to a pure monopoly; monopolist now receives residual price (Pd)

Question 6

Welfare expression

Pro and con of using this

Answer 6

Consumer surplus + profits

B) Recognises some consumers are producers

However suggests distribution of welfare is unimportant (fix by giving a greater weighting to CS)

Question 7

CS formul a

Profit formula

Note using these equations only works for linear demand function P=v-q

Answer 7

1/2(v-p)Qm
Or 1/2 (v-p)²

Qm (monopoly quantity)

b) Π = (p-c)Qm
Or (p-c)(v-p)

Question 8

With linear costs
p(Q) = v-Q
C(Q) = cQ + f

What do we get for Q and P

Answer 8

Q = v-c/2
P = v+c/2

Working on pg 24