Unit 7: Monopolies

Question 1

A monopoly is a…

The price charged by a monopoly is…than MC

Answer 1

Price maker

Price is greater than mc

Question 2

Why can’t monopolies charge very high prices for their products?

Answer 2

Demand will go down, and they won’t make a profit

Question 3

Is there an invisible hand for monopolies?

Answer 3

No

Question 4

Are there barriers to entry?

Answer 4

Yes because they are the only seller in the market, other firms can’t enter and compete

Question 5

3 main sources of barriers to entry?

Answer 5

1. Key resource is owned by a single firm
2. Government gives single firm exclusive rights to produce good/service
3. Cost of production makes single producer more efficient than a large number of producers

Question 6

What gives a monopoly a greater market power?

Answer 6

Owning a key resource

Question 7

Natural monopoly

When do they arise?

Answer 7

Monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than two or more firms
Arises when economies of scale are over the range of output

Question 8

Why is entering a market with a natural monopoly unattractive?

Answer 8

Other firms know they can’t achieve as low costs as Monopolists because entry means a firm would have a smaller price if the market

Question 9

Monopoly vs. PC firm

Answer 9

MONOPOLY: only producer, demand curve slopes down, if prices rise, demand goes down, demand curve puts a constant strain in monopolys ability to profit from its market power

FIRM: small, price take, horizontal demand curve, products have perfect substitutes

Question 10

Economies of scale as a cause of monopoly

Answer 10

Continually declining ATC curve leads to natural monopoly. When production is divided among more firms, each firm produces less and ATC rises. A firm can produce any amount at a small cost

Question 11

Why does the demand curve slope down for a monopoly?

Answer 11

They are the only producer in the market and have to accept a low price if they want to sell more output

Question 12

Where does a monopoly maximize profit?

Answer 12

At a Q where MR=MC. Then they use the demand curve to find a price where customers will buy that quantity

Question 13

How would a government create a monopoly?

Answer 13

They would give one person or firm exclusive rights to sell a good or service
They might create a monopoly for public interest

Question 14

Monopolys revenue

Answer 14

MR is always less than the price of a good

Question 15

What are the two effects on total revenue when Q sold increases?

Answer 15

1. Output effect: As more output is sold, Q increases

2. Price effect: price falls

Question 16

Is there a price effect? Why/why not?

Answer 16

No, since a PC firm can sell any quantity at market price

Question 17

What is the relationship between the demand curve and the MR curve?

Answer 17

They start at the same place, but MR deviates. MR is less than the price of the good, so MR lies below demand

Question 18

AR curve

Answer 18

AR curve=demand curve

Question 19

Where is the profit maximizing quantity?

Relationship between MR and price

Answer 19

Intersection of MR and MC curve

MR<p></p>

Question 20

Why is there deadweight loss in a monopoly?

What does the triangle represent?

Answer 20

Because monopolies charge a price above MC and not all customers value that good at the same price, and won’t buy it. Q produced and sold will go down, below the socially efficient level
Monopolies produce less than the efficient quantity of output
Represents the surplus lost due to monopoly’s pricing

Question 21

In a natural monopoly, what is the relationship between ATC and MC?

Answer 21

ATC curve declines and MC is less than ATC

Question 22

Price discrimination

Answer 22

Charging different prices for the same good to different customers.

Question 23

What can the government do as a response to monopolies?

Answer 23

1. Try to make monopolies more competitive
2. Regulate behavior of monopolies
3. Turn private monopolies into public enterprises
4. Do nothing

Question 24

Anti-trust laws

Answer 24

Give the government ways to promote competition. Break up companies and prevent them from doing things that make it less competitive

Question 25

How will governments regulate monopolies?

Answer 25

Subsidize or let monopolists charge at a price higher than MC

Question 26

Who do government’s take public ownership of monopolies?

Answer 26

They will run the monopoly themselves.

Question 27

How will a government do nothing with a monopoly?

Answer 27

No fix the inefficiencies

Question 28

Socially optimal price
Demand=?
Is it above or below ATC?
What does it require?

Answer 28

Price where there is no deadweight loss
Exists when price=cost of producing the next unit of output
Demand=MC
Also called ALLOCATIVELY EFFICIENT
Below ATC
Requires a subsidy from the government to cover all costs so P=MC of producing one more unit of output

Question 29

Fair market price

Answer 29

Exists where P=ATC or where D=ATC

also know as fair rate of return or break even price

Question 30

Does the difference in a products price reflect the costs of production?

Answer 30

No

Question 31

In a price discrimination, Demand curve=

Is there DWL or CS?

Answer 31

Demand curve=MR, they do NOT deviate

No DWL or CS

Question 32

1st, 2nd and 3rd degrees of price discrimination

Answer 32

1st degree (aka perfect): willingness to pay
2nd degree(bulk items): how much the consumer buys
3rd degree(illegal!): location or attribute of the customer

Question 33

?=?

Socially optimal

Answer 33

MC=Demand

Question 34

?=?

Maximizing revenue

Answer 34

MR=0

Question 35

?=?

Profit maximizing

Answer 35

MC=MR

Question 36

?=?

Natural monopoly

Answer 36

ATC=demand

MC=demand

Question 37

?=?

Unregulated

Answer 37

MR=0

MC=MR

Question 38

?=?

Regulated monopoly

Answer 38

MC=demand

ATC=demand