EC215 Exam 2 Study Guide: Chapter 15

Does a monopolist have a supply​ curve? Briefly explain.

A monopolist does not have a supply curve because it is a price maker with one profit-maximizing price-quantity combination

What is the relationship between a​ monopolist's demand curve and the market demand​ curve?

A monopolist's demand curve is the same as the market demand curve

What is the relationship between a​ monopolist's demand curve and its marginal revenue​ curve?

A monopolist's marginal revenue curve has twice the slope of its demand curve, because to sell more output, a monopoly must lower its price

Define Colluding

Firms agreeing to charge the same price or otherwise not to compete

What are the four main reasons for barriers to entry?

1. Government restrictions on entry 2. Control of a key resource 3. Network externalities 4. Natural monopoly

What are the two reasons we study monopolies?

1. Some firms truly are monopolists, so it is important to understand how they behave. 2. Firms might collude in order to act like a monopolist; knowing how monopolies act helps us to identify these firms.

Define Network Externalities

A characteristic of a product where its usefulness increases with the number of consumers who use it. Ex: Auction sites like eBay or social networking sites like Facebook

Define Monopoly

A firm that is the only seller of a good or service that doesn't have a close substitute

Define Vertical Merger

A merger between firms at different stages of the production of a good

Define Horizontal Merger

A merger between firms in the same industry

Will a monopoly that maximizes profit also be maximizing​ revenue? Will it be maximizing profit?

A monopoly that maximizes profit is not also maximizing revenue because revenue is highest when marginal revenue equals zero. It is not also maximizing production because price must be reduced to sell additional output

Define Natural Monopoly

A situation in which economies of scale are so large that one firm can supply the entire market at a lower average cost than can two or more firms

What is the purpose of Antitrust Laws? Who is in charge of enforcing them?

Antitrust laws are intended to make illegal any attempts to form a monopoly or to collude. The Federal Trade Commission and the Antitrust Division of the US Department of Justice enforces them

Suppose a monopolist sells 3 units of a good at $20 per unit. If the monopolist want to sells 4 unit, it has to lower the price to $18. What is the marginal revenue of the fourth unit? A. $60 B. $12 C. $18 D. $52

B. $12

Which of the following is not true? A. Monopoly causes a reduction in consumer surplus. B. Monopoly causes a reduction in producer surplus. C. Monopoly causes a deadweight loss. D. Monopoly is not producing output at its minimum ATC.

B. Monopoly causes a reduction in producer surplus.

The demand curve faced by a monopolist is: A. identical to the marginal revenue curve. B. downward sloping and above the marginal revenue curve. C. downward sloping and below the marginal revenue curve. D. identical to the marginal cost curve.

B. downward sloping and above the marginal revenue curve.

A monopolist has less to gain from cost-saving measures in the production process when: A. the monopoly is unregulated. B. regulators use average cost pricing to set the monopolist's price. C. the demand for the product of the monopolist is inelastic. D. changes in the regulated price occur only after considerable delay.

B. regulators use average cost pricing to set the monopolist's price

Which of the following is an example of a natural monopoly? A. the trademark protecting Gatorade B. the local water company C. the patent on an Intel processor D. the talents of Tom Hanks

B. the local water company

If the government regulates a natural monopoly, the government typically: A. allows the firm to select what price it is going to charge. B. uses an average cost pricing rule so that the regulated firm earns a normal profit. C. forces new firms into the market as competitors because that policy expands quantity and lowers price. D. uses a marginal cost pricing rule so that consumers can benefit from more quantity produced.

B. uses an average cost pricing rule so that the regulated firm earns a normal profit

Assuming that firms maximize profits, how will the price and output policy of an unregulated monopolist compare with the competitive market? A. The output of the monopolist will be too large and its price too high. B. The output of the monopolist will be too large and its price too low. C. The output of the monopolist will be too small and its price too high. D. The output of the monopolist will be too small and its price too low.

C. The output of the monopolist will be too small and its price too high

Which one of the following is the best description of a monopolist? A. a firm that produces a single product B. a firm that is the sole producer of a narrowly defined product class, such as yellow, grade-A butter produced in Jackson County, Wisconsin C. a firm that is the sole producer of a product for which there are no good substitutes in a market with high barriers to entry D. a firm that is large relative to its competitors

C. a firm that is the sole producer of a product for which there are no good substitutes in a market with high barriers to entry

In enforcing Anti-trust laws, the government is most concerned with: A. conglomerate merger. B. diagonal merger. C. horizontal merger. D. vertical merger.

C. horizontal merger

A monopolist will maximize profits by: A. setting the price at the level that will maximize per-unit profit. B. producing the output where marginal revenue equals total cost and charging a price along the demand curve. C. selling at the price on the demand curve at the output level where marginal revenue equals marginal cost. D. producing at the output level where price equals marginal cost.

C. selling at the price on the demand curve at the output level where marginal revenue equals marginal cost

Suppose that a monopoly becomes a perfectly competitive industry. Describe the effects of this change on consumer surplus, producer surplus, and deadweight loss

Consumer surplus will increase, producer surplus will decrease, and deadweight loss will decrease

Why would it be economically efficient to require a natural monopoly to charge a price equal to marginal​ cost?

Economic efficiency requires the last unit of a good produced to provide an additional benefit to consumers equal to the additional cost of producing it

Explain why market power leads to deadweight loss. Is the total deadweight loss from market power for the economy large or small?

Firms with market power create deadweight loss because they charge a price that is greater than marginal cost to maximize profits. The total deadweight loss from market power for the economy is small

Which type of merger is more likely to increase the market power of a newly merged firm?

Horizontal

When a​ firm's demand curve slopes downward and the firm decides to cut​ price, what happens?

It sells more units but receives lower revenue per unit

What are the two ways governments block entry?

Patents/copyrights and public franchises

Draw a graph that shows a monopolist earning a profit. Be sure your graph includes the monopolist's demand, marginal revenue, average total cost, and marginal cost curves. Be sure to indicate the profit-maximizing level of output and price

Problem 3 on 15.3 practice problems

Why do most regulatory agencies require natural monopolies to charge a price equal to average cost​ instead?

Regulating price instead to equal marginal cost would result in the firm suffering a loss

Define Market Power

The ability of a firm to charge a price greater than marginal cost

Define Patent

The exclusive right to produce a product for a period of 20 years from the date the patent is filed with the government

Define Copyright

The exclusive right to produce and sell a creation, or a trademark, which grants a firm legal protection against other firms using its product's name

Define Public Franchise

The right to be the only legal provider of a good or service

If patents reduce​ competition, why does the federal government grant​ them?

To encourage firms to spend money on research to create new products

How do you compute total revenue? Marginal revenue? Marginal cost?

Total revenue: Price x Quantity Marginal revenue: Change in total revenue/Change in quantity Marginal cost: Change in total cost/Change in quantity

Why is a monopolist a price maker?

When a monopolist raises its prices, it loses some but not all customers

Will the deadweight loss due to monopoly be larger if the demand is elastic or if it is​ inelastic?

When a monopoly maximizes​ profit, deadweight loss will be larger if demand is inelastic because price will be farther from marginal cost

If you own the only hardware store in a small town, do you have a monopoly?

Yes. You would have a monopoly if your profits are not competed away in the long run