3050 Ch 9
the lerner index formula or price markup
(p-MC)/p
what is the potential surplus that is wasted because less than competitive output is produced?
DWL
A monopolist sets its price _________ its MC (market power) and creates a ________ ____________ ___________ or market failure due to monopolistic pricing
above, DWL
To increase profits a monopoly can use ____________ and charge an initial low price to create a long run ____________ ____________
advertising, network effect
in the long run the monopoly shuts down if price is less than its _________ __________
average cost
If price is below _________ _________ _________ the firm will shut down
average fixed costs
a person places greater value on a good as more and more other people possess it..effect?
bandwagon effect
Which of the following is most likely the most beneficial form of monopoly advantage? A. decreasing returns to scale B. input hoarding C. better production methods D. government protection
better production methods
governments create monopolies how?
by making it difficult for new firms to obtain a license to operate or by granting a monopoly right
MR is __________ to price as demand becomes more elastic
closer
superior technology, better way of organizing production, control of an essential facility, or control of a scarce resource are examples of what?
cost advantage
what is a firm that may have substantially lower costs than potential rivals?
cost avantage
managers should consider intially selling a new product at a low introductory price to obtain a _________ _________
critical mass
for a network to succeed, it has to acheive what?
critical mass users
A monopoly that is maximizing profits operates in the ________ portion of the demand curve. A. inelastic B. horizontal C. unitary elastic D. elastic
elastic
if the demand curve is very ____________ at the quantity, the monopoly would lose substantial sales from raising its price by the same amount
elastic
when better substitutes are introduced into the market, the demand becomes more _____________
elastic
when firms that provide the same service locate closer to this firm, the demand becomes more
elastic
when more firms enter the market, people have more choices, the demand becomes more
elastic
example of network externalities?
facebook, twitter
Which of the following statements about natural monopolies is true? A. for natural monopolies, average cost is always increasing B. natural monopolies cannot be regulated C. for natural monopolies, marginal cost is always below average cost D. natural monopolies are in the markets for natural resources (like crude oil and coal)
for natural monopolies, marginal cost is always below average cost
when just one firm is the cheapest way to produce any given output level, governments often do what?
grant monopoly rights to ultities of water, gas,
if a good has positive network externality, its value to a consumer ________ as the number of units sold increases
grows
The MR at any given quantity depends on the demand curves __________ (the price) and __________
height, shape
in natural monopoly each firm has a __________ fixed cost, which make small scale production not as cost efficent as large scale production
high
more inelastic demand = ________ market power for the firm
high
The monopolist that maximizes profit: A. does not impose a cost on society because price is equal to marginal cost B. imposes a cost on society because the selling price is above marginal cost C. does not impose a cost on society because the selling price is above marginal cost D. imposes a cost on society because the selling price is equal to marginal cost
imposes a cost on society because the selling price is above marginal cost
an __________ _________ from complementary goods that are offered when a product has a critical mass of users
indirect benefit ex: high speed interest service
a profit maximizing monopoly never operating in the ________ portion of the demand curve
inelastic
if the monopoly faces a very ___________ demand curve at the profit maximizing quantity, it would lose few sales if it raises its price
inelastic
If the inverse demand curve a monopoly faces is p=100-2Q, and MC is constant at 16, then profit maximization A. is achieved when 21 units are produced B. is achieved only by shutting down in the short run C. is achieved by setting price equal to 21 D. cannot be determined solely from the information provided
is achieved when 21 units are produced
only slightly elastic means what for market power?
its very high
a monopoly sets p > MC causes consumers to buy _______ than the competitive level of the good
less
governments grant what?
license, monopoly rights, or patents
elastic demand = _________ market power
little
a low-cost firm is a monopoly if it sells at a price so low that other potential competitors would...
lose money & no other firm enters the market
a monopoly shuts down to avoid making a _________ in the short run if its price is below __________- _________ __________ at its profit maximizing quantity
loss, average variable cost
The monopolist MR function is _________ than P because the last term is __________
lower, negative
the effect of a shift in demand on a competitive firm's output depends only on the shape of the ___________ __________ ____________
marginal cost curve
what is the non-optimal allocation of goods and services with economic inefficiences called?
market failure
the lerner index meaures a firm's __________ ___________
market power
introductory pricing does what to the long run and short run?
maxmizes long run, reduces short run
a monopoly that faces a downward sloping market demand and change in quantity = 1 can sell _________ if price goes down
more
what is a firm that may produce any given output at lower cost than two or more firms?
natural monopoly
where the demand curve is inelastic, MR is _____________
negative
With respect to monopolies, deadweight loss refers to, A. net loss in consumer and producer surplus due to a monopolist's pricing strategy/policy B. lost consumer surplus from monopolistic pricing C. socially unproductive amounts of money spent to obtain or acquire a monopoly D. the amount that total cost exceeds total revenue
net loss in consumer and producer surplus due to a monopolist's pricing strategy/policy
a good has _______ _________ if one person's demand depends on the consumption of a good by others
network externality
two steps to maximize profit?
output decision, shutdown decision
profit maximizing price formula:
p= MC/(1+1/e)
what is an exclusive right granted to the inventor of a new and useful product, process, substance, or design for a specified length of time?
patent
A _________ is one form of creating a monopoly, the other is _________
patent, cost
The ability of a monopoly to charge a price that exceeds marginal cost depends on: A. slope of the demand B. shape of the marginal cost curve C. the price elasticity of supply D. price elasticity of demand
price elasticity of demand
The shape of the demand curve at a particular quantity is described by the ____________-- _____________ ___ _____________
price elasticity of demand
a single seller that sets ____________ or _________ ___________ to ____________ profit where MC=MR
price, output level, maximize
a monopoly can adjust its _______ or its ___________ to maximize profit
price, quantity
the monopoly faces a trade-off between a higher _______ and a lower __________
price, quantity
if a firm uses introductory pricing, it is likely ____________ short run profit and ___________ long run profit A. maximizing, reducing B. reducing, maximizing C. maximizing, maximizing D. minimizing, maximizing
reducing, maximizing
All of the following government actions create barriers to entry EXCEPT: A. granting a patent to a drug company B. giving a power company exclusive use of the city's transmission lines C. requiring a pizza parlor to get a business license D. limiting the number of airlines that may operate at an airport
requiring a pizza parlor to get a business license
a firm's marginal revenue is the change in its ___________ from selling __________ more unit
revenue, one
the effect of a shift in demand on a monopoly's output depends on the _________ of both the _______ ________ _________ and the ________ ________
shape, marginal cost curve, demand curve
Which of the following is NOT associated with a high degree of monopoly power? A. significant barriers to entry B. a small number of firms in the market C. significant price competition among the firms in the market D. a relatively inelastic demand curve for the firm
significant price competition among the firms in the market
a person places greater value on a good as fewer and fewer people possess it..effect?
sob effect
the MR curve is a __________ ____________ that starts at the same point on the __________ ___________ (price) as the demand curve but has ____________ the slope
straight line, vertical axis, twice
monopoly: the sole supplier of a good which there is no close ____________
substitute
the is no ________ curve in a monopoly market
supply
For a monopoly, marginal revenue is less than price because: A. the firm has no supply curve B. the demand for the firm's output is downward sloping C. the firm can sell all of its' output at any price D. the demand for the firm's output is perfectly elastic
the demand for the firm's output is downward sloping
The more elastic the demand facing a firm, A. the less monopoly power it has B. the higher its profit C. the lower the value of the Lerner Index D. the higher the value of the Lerner Index
the lower of the value of the Lerner Index
perfectly elastic means what for market power?
there is none
For network externalities to occur: A. there must be a positive benefit to society B. there must be a critical mass of users C. the government has to create new laws D. deadweight loss must be minimized
there must be a critical mass of users
when a monopoly sets p > MC how does this affect society?
they suffer a DWL
AC=
total cost/q
Which of the following products benefits from network externalities: A. fashion clothing B. twitter C. fash food restaurant chains D. high-speed trains
A market failure occurs when: A. when price equals marginal cost B. when a firm shuts down C. when there is a non-optimal allocation that leads to an inefficient market D. when deadweight loss is minimized
when there is a non-optimal allocation that leads to an inefficient market
The more elastic the demand curve, a monopoly A. will face a lower marginal cost B. will earn more profit C. will lose more sales as it raises its price D. will have larger Lerner Index
will lose more sales as it raises its price
profit is maximized where marginal profit equals ?
zero
where the demand curve is unitary, e=-1, MR is _________
zero
A monopoly incurs a marginal cost of $1 for each unit produced. If the price elasticity of demand equals -2.0, the monopoly maximizes profit by charging a price of: A. $1.50 B. $2.00 C. $1.00 D. $3.00
$2.00
If the inverse demand function for a monopoly's product is p=100-2Q, then the firm's marginal revenue function is: A. 200-2Q B. -2 C. 100-4Q D: 200-4Q
100-4Q
If the inverse demand curve a monopoly faces is P=100-2Q, and MC is constant at 16, then profit maximization is achieved when the monopoly sets price equal to: A. 21 B. 25 C. 58 D. 16
58
Marginal revenue formula?
MR = change in revenue / change in quantity
any firm maximizes profit where its _________-__________ and ____________ _____________- are equal
MR and MC
rule for monopoly maximization:
MR(Q)=MC(Q)
MR & Elasticity relationship formula:
MR=p(1+1/e)
long run shut down if:
P < AC
short run shut down if:
P < AVC
AVC=
VC/q
whether the monopoly sets its price or its quantity, the other variable is determined by the __________ ___________ market demand curve
downward sloping