Ch. 11
The price is the ____ the firm receives
average revenue
The effect of a shift in demand on a monopoly's output depends on the shape of ____
both the marginal cost curve and the demand curve
Market power is the ability of a firm to
charge a price above marginal cost and earn a positive profit.
Two important causes of monopoly are
cost factors and government actions that restrict entry, such as patents.
By setting its price above marginal cost, a monopoly creates a ___
deadweight loss
a profit-maximizing monopoly is economically inefficient because it wastes potential surplus, resulting in ____
deadweight loss, DWL.
A firm's marginal revenue curve depends on its _____ curve
demand
In general, the relationship between the marginal revenue and demand curves depends on the shape of the _____ curve
demand
If the monopoly sets its price, the ______ determines how much output it sells. If the monopoly picks an output level, the _____ determines the price
demand curve, demand curve
A monopoly's marginal revenue curve lies below its ______ curve at any positive quantity because its _____.
demand, demand curve is downward sloping
What is the shape of a Monopoly's market demand curve?
downward-sloping
a monopoly's profit is maximized in the _____ portion of the demand curve
elastic
The competitive firm can sell another unit of output without dropping its price because of its _______. As a result, the marginal revenue it receives from selling the last unit of output is the _____.
horizontal demand curve, market price
The marginal revenue curve is _____ for a competitive firm, and ______ for a monopoly
horizontal, downward sloping
A tax ____ the deadweight loss in a monopolized market.
increases
market failure
inefficient production or consumption, often because a price exceeds marginal cost
A profit-maximizing monopoly never operates in the _______ portion of its demand curve
inelastic
Marginal revenue is negative where the demand curve is ___
inelastic
A monopoly can set its price meaning:
its not a price taker
The market failure from a monopoly occurs because
its price is greater than its marginal cost.
Because a monopoly's price is above its ______, too little output is produced, and society suffers a deadweight loss.
marginal cost
The monopoly sets its price above _____ to maximize its profit
marginal cost
In a competitive market, the effect of a shift in demand on a competitive firm's output depends on the shape of the ____
marginal cost curve
How much the monopoly's price is above its _____ depends on the shape of the _____ curve it faces
marginal cost, demand
The more elastic the demand the monopoly faces at the quantity at which it maximizes its profit, the closer its price to its _____ and the closer the Lerner Index or price markup, (p - MC)/p, to ____, the competitive level.
marginal cost, zero
the monopoly's ______ curve lies below the demand curve at every positive quantity.
marginal revenue
Like all firms, a monopoly maximizes its profit by setting its price or output so that its ____
marginal revenue equals its marginal cost
The _______ curve is a straight line that starts at the same point on the vertical (price) axis as the demand curve but has twice the slope of the demand curve, so the _______ curve hits the horizontal (quantity) axis at half the quantity as the demand curve
marginal revenue, marginal revenue
The monopoly is constrained by the ______
market demand curve
If its current sales affect a monopoly's future demand curve, a monopoly that maximizes its long-run profit may choose not to
maximize its short-run profit.
Where demand curve is inelastic, the MR=
negative -1 < ε ≤ 0
Where the demand curve hits the price axis (Q = 0), the demand curve is ______, so the marginal revenue equals price: MR = p.
perfectly elastic
The greater the difference between ___ and ___, the larger the Lerner Index and the greater the monopoly's ability to set price above marginal cost.
price and marginal cost
natural monopoly
situation in which one firm can produce the total output of the market at lower cost than several firms could
market power (monopoly)
the ability of a firm to charge a price above marginal cost and earn a positive profit
The demand curve shows
the average revenue or price per unit of output sold
A firm's marginal revenue, MR, is
the change in its revenue from selling one more unit.
What causes the monopoly's marginal revenue to be less than its price?
the downward slope of its demand curve
The welfare loss of a monopoly can be reduced or eliminated if
the government regulates the price the monopoly charges or allows other firms to enter the market.
If a good has a positive network externality, its value to a consumer grows as ___
the number of units sold increases
monopoly
the only supplier of a good that has no close substitute
A firm's demand curve shows
the price, p, it receives for selling a given quantity, q.
Lerner Index (Price Markup)
the ratio of the difference between price and marginal cost to the price: (p - MC)/p
network externality
the situation where one person's demand for a good depends on the consumption of the good by others
Where the demand elasticity is _____, ε = -1, marginal revenue is ____
unitary, zero
Demand Curve aka
Average Revenue curve
A monopoly shuts down to avoid making a loss in the short run if its price is below its _____ at its profit-maximizing (or loss-minimizing) quantity
Average variable cost
Why doesn't it matter if we use q or Q for a monopoly when describing both the firm's and the market's output?
Because a monopoly is the only firm in the market
Why is marginal profit zero where marginal revenue equals marginal cost?
Because marginal profit is marginal revenue minus marginal cost
the monopoly's marginal revenue is:
MR = p + Δp/ ΔQ (Q)
When the demand curve is perfectly elastic, MR=____
MR = p.
If the firm sells exactly one more unit, Δq = 1, its marginal revenue is
MR = ΔR
A firm that earns ΔR more revenue when it sells Δq extra units of output has a marginal revenue of
MR = ΔR/Δq
Does a monopoly have a supply curve?
No.
a firm's revenue is R=
R=pq
Table 11.1
Use with figure 11.2 p = 24 − Q line
Can a monopoly have more than one optimal price at the same given quantity?
Yes
the most commonly used approach to regulating monopoly pricing is to impose a price ceiling is called a
a price cap
In the long run, the monopoly shuts down if the price is less than its __
average cost
The monopoly makes a positive profit if its ____ is less than the price at the profit-maximizing output
average cost
Other terms for Q
-number of units of output a firm sells q, -the output of all the firms in a market -or market output, Q
What is the Lerner Index for a competitive market?
0 because a competitive firm cannot raise its price above its marginal cost and its demand curve is perfectly elastic
Where the demand elasticity is unitary, MR=
zero, MR = p[1 + 1/(-1)] = 0