Monopoly Quiz review (A32-A39) Flashcards
Equation to find TR (Total Revenue)
P x Q (price x quantity); OR Current TR - Previous TR
Equation for MR (Marginal Revenue)
Change in TR/Change in Quantity
Firms will only produce…
in the elastic portion of the demand curve where marginal revenue is positive
Why does MR fall faster than DARP in imperfect competition?
because they must reduce prices for all sales in order to increase the quantity sold
What is P in relation to MC in imperfect competition? (greater than, less than, equal to?)
P > MC (so imperfect competition is allocatively inefficient)
What is P in relation to MR in imperfect competition? (greater than, less than, equal to?)
P > MR
Marginal revenue (MR) is positive where the demand curve is…
elastic. (Left half of curve).
Where do you draw the MR curve on the X axis (in a monopoly graph?)
From the demand curve to the midpoint of the x axis
Monopolies will never operate on the _____ portion of the demand curve
inelastic (it always HAS to be elastic…like a rubber band or something)
If the curve is inelastic, how does a monopoly get the curve to become elastic?
They will keep reducing output. This is where MR is positive (MR > 0)
Total Revenue is at its maximum where…
MR = 0
In the short run, the shapes of the ATC and MC result from…
diminishing marginal productivity of their resources
In the long run, the shape of the ATC results from…
economies and diseconomies of scale
Equation to find Average Revenue (AR) =
Total Revenue / Quantity
The most profitable output (quantity) is where…
MC = MR. (think: Where MR = MC, produces most profit see…) This is the same for monopolies AND regular producers
Monopolists will charge the demand curve price at…
the quantity above where MC = MR (think: see price above at demand, quantity right down again)
How to calculate economic profit or loss for one unit
P - ATC`
How to calculate TOTAL economic profit or loss
(P - ATC) x Quantity
Why are monopolies allocatively inefficient?
They are producing less and charging more than MC (they also charge more than MR)
Where do you shade a profit or a loss?
Shade the rectangle between price and ATC
Where do you shade total costs?
Shade the rectangle in between ATC and the X axis
Where do you shade fixed costs?
Shade the rectangle between ATC and AVC
Where do you shade Consumer Surplus (for imperfect comp.)?
Area between price and demand curve (consumer surplus should be lower for imperfect comp.)
Where do you shade Producer Surplus (for imperfect comp.)?
Area between price and supply curve (should be greater for imperfect comp)
Where do you shade Deadweight Loss?
Triangle formed by the supply curve, demand curve, and the quantity
Deadweight loss occurs where P is in what relation to MC?
When P > MC
What are the distinguishing characteristics of a Monopoly? (hint: there are 6)
Single producer; No close substitutes; Barriers to entry; Economies of Scale; Control of Key Resources; Market Power
Single producer
only one supplier in the industry
No close substitutes
Consumers cannot find similar products in other markets
Barriers to entry
Something prevents rival firms from entering the market. This reduces competition and makes long-term economic profits or losses possible.
Legal Barriers
government gives a single firm the exclusive right to produce a good. (ex: public franchise, patents, trademarks, copyrights, etc.)
Economies of Scale
A natural monopoly exists where ATC continually declines at least to the quantity demanded by the market. Allows at most one firm to exist in the market.
Control of Key Resources
Least important factor, but if a firm controlled most of the available resources, then it’s difficult for competitors to enter the market
A monopolist is a price ______-
seeker. It controls the output to maintain the price it wants.
To find the portion of consumer surplus that is transferred to the imperfect competitor…
area of transferred surplus / total consumer surplus in perfect comp.
The monopolist’s demand curve is…
downward sloping, and price is higher than marginal cost and marginal revenue
Monopolies are…
productively inefficient AND allocatively inefficient
Refer to page 19 in the study guide packet for some cool graphs
Did ya do it? It also has steps for graphing a monopoly!
Price discrimination (definition)
is selling the same good at different prices to different consumers
What are the 3 conditions of price discrimination?
- Identify and separate groups of consumers by their willingness to pay 2. Cannot be resold 3. Inelastic demand
Positives of Price Discrimination
raises economic welfare by producing a greater quantity (same amount as perf. comp); Allocatively efficient
Negatives of Price Discrimination
consumer surplus decreases as profits increase (maybe even zero consumer surplus
Unregulated monopolies
where Price is above MC = MR
Fair Return Price (price = ATC)
output is higher and price is lower than unregulated; firm is not operating @ its most efficient output; no gov’ subsidy
Socially optimal price (price = MC)
allocatively efficient (equilibrium); gov’ must subsidize if the price is below ATC
Price regulation is positive from a social point of view because:
it reduces price, increases output, and reduces the economic profits of monopolies
Look on page 22 of study guide for a graph of the different types of monopolies!
srsly go look
