slide 9

Question 1

what are the characteristics of a monopoly

Answer 1

• single seller
• no close substitute
• price-maker
• extreme entry barriers

Question 2

What are the three types of barriers of entries a monopoly can have

Answer 2

• natural, fixed costs are so large that firms naturally can’t enter
• legal, patient protection
• ownership, the monopoly controls the materials needed for production

Question 3

what is a natural monopoly

Answer 3

a market where one firm is able to supply the entire market at the lowest possible cost in comparison to multiple firms

This is typically due to large fixed costs.

Question 4

how do legal barriers create a monopoly

Answer 4

various ways
- public franchise, like canada post

• government license to operate, like law/medicine license
• government allows monopoly power
• patent or copy rights

Question 5

There are two types of monopoly price-setting strategies.

what are they and briefly describe them

Answer 5

1. single price monopoly: sell each unit of good at the same price to all the customers
2. price discrimination: selling units of good at different prices to different demographics (ie. movie tickets: child, elder, adult)

Question 6

how can a monopoly sell a larger output?

keep in mind that the demand for the monopoly is equivalent to the demand of the market, since it is the only supplyer

Answer 6

they must lower the price

Question 7

if a monopoly is single price, what is the relationship between its marginal revenue and price

Answer 7

MR is the change in total revenue from one more good sold

price is the amount a good is sold for

for a single-price monopoly the MR < P at each level of output

Question 8

does marginal revenue in a monopoly = price?

Answer 8

no, it is not the same as in a perfectly competitive market

Question 9

true or false, the MR curve is always less than the D curve

Answer 9

true

Question 10

how does the TR of a single price monopoly change depending on the elasticity vs inelasticity of a graph

Answer 10

if demand is elastic (upper portion of the demand curve), a cut in price will increase demand and total revenue.

if demand is inelastic (bottom portion of the demand curve), a cut in price will decrease total revenue

Question 11

when will a single price monopoly make the most money

Answer 11

when it is operating at the unit elastic portion of demand,

if we are in elastic, we will make more by lowering price

if we are inelastic we will make more by increasing prices

therefore the total revenue is max when MR = 0

Question 12

will a firm every produce at an output where demand will be inelastic? why?

Answer 12

no, because they could increase total revenue by just decreasing output

Question 13

what is the profit maximizing quantity for a monopoly

Answer 13

where MR = MC

Question 14

what are the pros and cons of having a monopoly

Answer 14

cons
- consumers face higher prices

pros
- monopolies have incentive for product innovation

Question 15

true or false: the profit maximizing point it equal to the market equalibrium

Answer 15

false: the profit maximizing point will produce less output for a higher price than the actual market equalibrium

Question 16

true or false: monopolies will not have a dead weight loss

Answer 16

false, they will always have a deadweight loss

Question 17

what are the two ways for find the profit maximizing point

Answer 17

using TC vs TR
using MR vs MC

Question 18

a monopoly can price discriminate

what two things must a monopoly do to price discriminate

Answer 18

1. identify and separate different buyer types
2. sell a product that cannot be resold

Question 19

why would a monopoly want to price discriminate

Answer 19

it will increase profits by converting consumer surplus to producer surplus

Question 20

how does natural monopolies usually get regulated

Answer 20

a public board will usually set the prices for natural monopolies and subside the loss the firm incurred to encourage them to produce at the equilibrium amount

but typically these subsides will come from taxations

Question 21

explain the second-best regulation of a natural monopoly

Answer 21

we don’t impose a taxation for the subsides like before, instead we allow a monopoly to produce an inefficient quantity, namely where P = ATC

the product will be more expensive and we will have less but we can avoid the issues that come along with taxations