Week 10: Monopoly and Price Discimination

Question 1

Assumptions in Monopoly

Answer 1

Only 1 firm
Many buyers
prohibitive barriers to entry for entrants
Monopolist aims to maximise profits
No close substitutes to this product
Market information is limited

Question 2

Revenue and the Monopolist

Answer 2

Market demand curve = demand curve faced by monopolist, as it is sole supplier

Has implications on revenue, as needs to lower price on all units

e.g. gain in revenue cos sell more, but loss in revenue cos lowered price

Question 3

Economic Profit

Answer 3

Profit maximising rule is same, where MR = MC

Profit maximising quantity found when MR=MC, then draw Quantity up to demand for price, ATC where Quantity intersects.

Economic profit = (P-ATC)*Quantity

Question 4

Economic Profit in the Long Run

Answer 4

Due to barriers of entry, monopolists can enjoy positive economic profits indefinitely,
Short run and long run is not as relevant

Question 5

Does Monopoly Reduce Economic Efficiency

Answer 5

Compare with perfect competition

Compare the total economic surplus under perfect competition and monopolies

Looking at the three different types of efficiency (productive, allocative, dynamic)

Question 6

Productive and Allocative Efficiency

Answer 6

Does not occur in monopoly

Productive efficiency: the monopolist has no need to produce at min ATC, therefore produces to the left of ATC

Allocative Efficiency: In a monopoly, Price > MC and a DWL

Question 7

Does Monopoly Reduce Economic Efficiency

Answer 7

Monopoly is not an economically efficient market structure
Can be dynamically efficient if heavy investment in R&D
This allows for more innovation that would be possible from the public sector

Question 8

Patents

Answer 8

Given as a reward for undertaking R&D

Physical production costs are usually very low, no patent = money is lost on investment