Topic 4 - Monopoly

Question 1

What is a monopoly?

Answer 1

1 = Large barriers to entry
2 = No close substitutes
3 = A single firm supplies the whole market

They are price makers.

Question 2

What can the barriers to entry be?

Answer 2

Natural, Ownership Barrier, Legal

Question 3

What are the 2 monopoly price-setting strategies?

Answer 3

Single Price = A firm that must sell each unit of its output for the same price to all its customers.
Price Discrimination = A firm sells different units of a good/service for different prices.

Question 4

What is the demand curve?

Answer 4

The markets demand curve, and MR is less than price

Question 5

How does a monopoly maximise profit?

Answer 5

Producing the output at which MR = MC and by charging the max price consumers are willing to pay.

Question 6

How do monopolies and perfectly competitive markets compare?

Answer 6

Monopolies charge a higher price and produces a smaller quantity than a perfectly competitive market. A single-price monopoly restricts output and creates a deadweight loss.

Question 7

How are monopolies regulated?

Answer 7

P = MC achieves efficiency but results in economic loss
P = AC enables the firm to cover costs but its inefficient.

Question 8

What is consumer and producer surplus?

Answer 8

CS = total amount in excess of the market price that consumers would have been willing to pay for a good.
PS = total amount of revenue in excess of MC of production that firms get at the market price.

Question 9

What is perfect price discrimination?

Answer 9

If a firm is able to sell each unit of output for the highest price anyone is willing to pay for it. When this happens, the market demand curve becomes the marginal revenue curve.

Question 10

When does a monopolist maximise revenue?

Answer 10

When MR = 0