term 2 lecture 6: monopoly

Question 1

what is the key defining feature of a monopoly?

Answer 1

no threat of entry from any other firm, extreme market power
price maker
profit maximising

Question 2

what is the profit maximising output level?

Answer 2

the output for which the marginal cost is equal to the marginal revenue and the second order condition is marginal revenue differentiated to output is lower than marginal cost differentiated with respect to output

Question 3

what is the half way rule?

Answer 3

if p(y) = a - bY then TR=aY - bY^2 so MR = a - 2bY so when MR equal zero, at the half way point between zero and where the demand curve is euqla to zero

Question 4

what is the equation of the monopoly markup?

Answer 4

the monopoly mark up is equal to P-MC

Question 5

what is the lerner index?

Answer 5

it is a measurement of the degree of monopoly, it is given by the equation P-MC/P

Question 6

what are the two observations about the monopoly and elasticity?

Answer 6

output must be chosen from the elastic region of the demand curve ie the upper portion from the mid point.
the lower the magnitude of price elasticity ( but still above 1), the greater the degree of monopoly

Question 7

why is a monopoly inefficent?

Answer 7

monopolist produces at an output level for which the marginal willingness to pay ie the market price is strictly greater than the marginal cost of production. this will lead to a misallocation of resources so inefficiency when compared to perfect competition

Question 8

what is the quantitative size of the deadweight loss in a monopoly?

Answer 8

DWL = [P_m - MC(y_m)] * (Y_c - Y_m)/2

Question 9

what are natural monopolies?

Answer 9

natural monopolies are monopolies in industries which have huge fixed cost but very low marginal costs such as railways, water supplies and telecommunications etc. it only makes sense for one firm to be in the market due to them benefitting greatly from economies of scale

Question 10

what are the two options for regulation of the natural monopolies?

Answer 10

you could make it so the firm produces at AR=AC so there is zero porift but this does not maximise social welfare
you could make it so p=MC but then the firm will make a loss so the firm will need to be given a subsidy to cover its fixed costs