Topic 8

Question 1

what are the 3 characteristics of a monopoly

Answer 1

1. only onf firms operating in mkt but many buyers
2. prohibitive barriers to entry
3. no close substitutes for the product (no comp)

Question 2

what are the 4 types of barriers to entry

Answer 2

1. Gov (patents/copyrights)
2. Resource Control (one firm buys all of non producable resource)
3. Network Externality (more people using it makes it hard to enter)
4. Monopolistic Efficiency (easier if only 1 firm)

Question 3

how do monopolists increase product

Answer 3

to increase product it must lower price for all additional units and all PREVIOUS UNITS. (this is why MR < D)

Question 4

what happens to monpolistic economic profits in the LR

Answer 4

irrelevant for monopolists because they can charge whatever although they are constrained by demand and cost

Question 5

on what 4 conditions can firms price discriminate

Answer 5

1. firms must have some degree of market power
2. consumers must have different elasticities of demand + willingness/ability to pay
3. firms must be able to identify different elasticities and be able to charge accordingly
4. resale by consumers not possible

Question 6

define first degree price discrimination

Answer 6

when consumers are buying credence services (highly specialised so reasonable value/quality is unknown) consumers pay their highest price willing to be paid and sellers convert all consumer surplus to PS so revenue increases

Question 7

define second degree price discrimination

Answer 7

firms offer a range of pricing schemes from which consumers choose revealing their elasticity of demand (type of airline ticket)

Question 8

define third degree price discrimination

Answer 8

seller can segment market in to elasticity group and firms identify who belongs to each, consumer has no choice (movie tickets concession, senior etc)

Question 9

draw the graphs for a monopoly and perf competition writing the PS, CS and DWL.

Answer 9

yes

Question 10

does a monopolist have productive, allocative and dynamic efficiency

Answer 10

product: no beause it has no need to produce at minimum ATC (produces to the left)
Allocative: no price >MC
dynamic: yes - only large firms can take on R+D so gov grants them patent to produce this which encourages such investment)

Question 11

what are the PRO and CON implications fo price discrimination

Answer 11

PRO: good for fimrs they can earn higher profit
CON: Bad for overall buyer as CS always decrease but student/aged care can benefit

Question 12

what are the PRO and CON implications of first degree price discrimination

Answer 12

PRO: overall good due to allocative efficiency because MC of last unit = price charged for that unit so no DWL
CON: rare, CS = 0 and no reason for firms to be productively efficient

Question 13

draw a diagram of a monopoly with no price discrimination and with price discrim (include CS, PS and DWL)

Answer 13

poo