Unit 7: Monopolies Flashcards

1
Q

A monopoly is a…

The price charged by a monopoly is…than MC

A

Price maker

Price is greater than mc

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2
Q

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

A

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

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3
Q

Is there an invisible hand for monopolies?

A

No

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4
Q

Are there barriers to entry?

A

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

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5
Q

3 main sources of barriers to entry?

A
  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
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6
Q

What gives a monopoly a greater market power?

A

Owning a key resource

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7
Q

Natural monopoly

When do they arise?

A

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

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8
Q

Why is entering a market with a natural monopoly unattractive?

A

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

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9
Q

Monopoly vs. PC firm

A

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

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10
Q

Economies of scale as a cause of monopoly

A

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

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11
Q

Why does the demand curve slope down for a monopoly?

A

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

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12
Q

Where does a monopoly maximize profit?

A

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

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13
Q

How would a government create a monopoly?

A

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

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14
Q

Monopolys revenue

A

MR is always less than the price of a good

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15
Q

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

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

2. Price effect: price falls

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16
Q

Is there a price effect? Why/why not?

A

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

17
Q

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

A

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

18
Q

AR curve

A

AR curve=demand curve

19
Q

Where is the profit maximizing quantity?

Relationship between MR and price

A

Intersection of MR and MC curve

MR<p></p>

20
Q

Why is there deadweight loss in a monopoly?

What does the triangle represent?

A

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

21
Q

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

A

ATC curve declines and MC is less than ATC

22
Q

Price discrimination

A

Charging different prices for the same good to different customers.

23
Q

What can the government do as a response to monopolies?

A
  1. Try to make monopolies more competitive
  2. Regulate behavior of monopolies
  3. Turn private monopolies into public enterprises
  4. Do nothing
24
Q

Anti-trust laws

A

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

25
How will governments regulate monopolies?
Subsidize or let monopolists charge at a price higher than MC
26
Who do government's take public ownership of monopolies?
They will run the monopoly themselves.
27
How will a government do nothing with a monopoly?
No fix the inefficiencies
28
Socially optimal price Demand=? Is it above or below ATC? What does it require?
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
29
Fair market price
Exists where P=ATC or where D=ATC | also know as fair rate of return or break even price
30
Does the difference in a products price reflect the costs of production?
No
31
In a price discrimination, Demand curve= | Is there DWL or CS?
Demand curve=MR, they do NOT deviate | No DWL or CS
32
1st, 2nd and 3rd degrees of price discrimination
``` 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 ```
33
?=? | Socially optimal
MC=Demand
34
?=? | Maximizing revenue
MR=0
35
?=? | Profit maximizing
MC=MR
36
?=? | Natural monopoly
ATC=demand | MC=demand
37
?=? | Unregulated
MR=0 | MC=MR
38
?=? | Regulated monopoly
MC=demand | ATC=demand