ECON TEST 2
Compared to a perfectly competitive market, the price in a monopoly market is _____ and quantity is _____
-higher -lower
Which of the following describes a monopolist's demand curve?
A y-intercept of $8 and downward-sloping with a slope of -1.
AFC
FC/Q
A monopolist stops increasing production when it reaches the point where
MC=MR
Edgar says that a single firm in the wind power industry is unlikely to have a significant degree of monopoly power for an extended period of time. Since the cost of producing an additional unit of wind energy is so low, a large number of firms can enter the market and compete away economic profits. Do you agree with this analysis?
No, Edgar's argument ignores potentially large fixed costs that will act as a barrier to entry.
TS
PS+CS
APL
Q/L
3 components of the seller's problem
part 1 - making the goods
Es = 0
perfectly inelastic
To say that a good has network effects means that the ____________.
value of the product increases as more people use it.
Exit point
where MC crosses ATC (min of ATC)
Es
% change in quantity/%change in price
The exclusivity laws in the form of patents and copyrights make ______ better off and consumers ______ worse off
-innovators -consumers
Assumptions of a perfectly competitive market
1. no buyer or seller is big enough to influence the market price 2. sellers in the market produce identical goods 3. firms have free entry and exit in the market
Both competitive firms and monopolies produce at the level where marginal cost equals marginal revenue. Then, other things remaining the same, why is price lower in a competitive market than in a monopoly?
Competitive markets face perfectly elastic demand and marginal revenue, while monopolies face downward-sloping demand and marginal revenue.
A monopoly chooses the optimal quantity for them to produce (Q*m) using the rule:
MC=MR
Which of the following equations calculates economic profits for a monopoly?
Profits= (P - ATC) x Q
Antitrust policy started with the ____________, which prohibited any agreements or actions that would put restraints on trade.
Sherman Act of 1890.
ATC
TC/Q or AFC+AVC
stay open in SR if
TR ≥ VC AR ≥ AVC MR=D=AR=P ≥ shut down point (min of ATC)
AR
TR/Q
TC
VC+FC
AVC
VC/Q
Which of the following is not likely covered by a copyright?
a new drug
MPL - slope of SR product function
change in Q/change in L
MC
change in TC/change in Q
MR
change in TR/change in Q
Eliminating a monopoly
increases market quantity
Es < 1
inelastic
Es=infinity
perfectly elastic
Legal market power is created by ___________, and arises due to ____________.
the government; patents
Stay open in LR if
π ≥ 0 TR ≥ TC AR ≥ ATC MR=D=AR=P ≥ exit point (min of ATC)
If a profit maximizing monopolist sells 100 paintings at a price of $1,300 each, having bought them from various artists for a total cost of $110,000, the monopolist has a profit of
$20,000
Which of the following factors can be considered as a bright side to those types of laws?
-Such laws do not provide permanent protection to innovators. -Such laws offer incentives to innovators.
If a monopolist loses its monopoly power, what happens to price and surplus? If the monopolist loses its monopoly power, price _____ , consumer surplus _____ , producer surplus _____ , and social surplus _____ .
-decreases -increases -decreases -increases
According to the Copyright Act of 1790, a copyright's life was limited to 28 years, including extensions. Today, copyrights are valid for the entire period of the author's life plus another 70 years. A copyright for a book that was published before 1923 is likely to have expired by now, but books published after 1923 are still under copyright protection. Research has shown that, of all the books that are in print today, a larger proportion were published before 1923. This is despite the fact that the number of books being published every year has been steadily increasing. What do you think could explain the fact that most of the books available today are from the period before 1923?
A copyright gives the owner an exclusive right to a piece of intellectual property, thus allowing them to act as a monopoly. Monopolists typically reduce quantity supplied to drive up the price of the good that they produce.
In a perfectly competitive market, the firm chooses the optimal quantity for them to produce (Q*) using the rule:
MC=MR -(P* comes from where S=D in the market)
When ____ the monopolist would decrease production.
MC>MR
Social surplus increases because ____________.
deadweight loss is eliminated
Some economists believe the threat of unfair monopolies is greater today than when the Sherman Act was first enacted. They argue that modern software can gain monopoly status and establish a barrier to entry through ____________.
network externalities.
Suppose the government grants an individual or company the sole right to produce and sell a good or service. In this case, the government is granting a _____.
patent
Market power relates to the ability of sellers to affect __________, and arises because of ____________.
prices;barrier to entry
Which of the following statements are true regarding the profit-maximizing price charged by a monopolist?
-It is greater than MC. -It occurs at the quantity where MR = MC. -It occurs along the elastic part of the demand curve. -It is greater than MR.
shut down if
TR<VC AR<AVC MR=D=AR=P < shut down point (min of AVC)
DWL
TS in efficient market - TS with market failure
Identify the legal source of market power for each of the following examples: Richard carves sculptures, for which he is granted an exclusive right. Lily is granted an exclusive right to the poems written by her late father. Mr. D'Souza invented product A and is granted an exclusive right to manufacture and sell it.
-copyright -copyright -patent
When compared to competition, monopoly prices are ______ and quantity produced is ______ . The purpose of antitrust policy is to ______ this situation.
-higher -lower -reverse
Compared to a perfectly competitive market, consumer surplus is _____ , producer surplus is _____, and deadweight loss is _____
-lower -higher -higher
Which of the following are properties of a monopoly?
-price maker -there are high barriers to entry -there is only one seller
a monopoly has one ____ and ____ buyers. Price is ____ than marginal cost
-seller -many -greater
A social planner would choose the same outcome as that which results in ___________ equilibrium, because that outcome ___________ social surplus.
-the perfectly competitive -maximizes
A social planner would choose the same outcome as that which results in ___________ equilibrium, because that outcome maximizes social surplus.
-the perfectly competitive -maximizes
In a perfectly competitive market, the following equations all represent the same horizontal line, determined by the market price:
MR=D=AR=P
How does a natural monopoly differ from a firm that becomes a monopoly due to network effects?
Natural monopolies result from economies of scale, while network effects come from the benefits to consumers from having many people use a service.
Janet knows a lot of people who do not like Marmite®, a yeast extract that is used as a spread on toast. She says that Marmite is so unpopular that Unilever, the company that manufactures Marmite®, cannot possibly have any monopoly power. Do you agree with this analysis?
No, monopoly power is based on whether a good has any close substitutes, not whether your friends like the product.
π
TR-TC PxQ-ATCxQ (P-ATC)xQ
As this chapter explains, a monopoly is an industry structure where only one firm provides a good or service that has no close substitutes. This question explores the last part of this definition further. In 1947, the United States government charged the DuPont Company with a violation of the Sherman Act. The government argued that DuPont was monopolizing the cellophane market. At trial, the government showed that DuPont produced nearly 75 percent of all of the cellophane sold in the United States each year. Nonetheless, the U.S. Supreme Court ruled in favor of DuPont and dismissed the case. Which of the following is a likely argument used by DuPont to convince the Supreme Court that it did not violate the Sherman Act?
There are many close substitutes for cellophane such as aluminum foil and waxed paper, so DuPont did not have significant market power.
Sirius XM Satellite Radio and XM Satellite Radio were the only two satellite radio providers in the United States. The Department of Justice (DOJ) and the Federal Communications Commission (FCC) approved the merger of the two companies in 2008 even though Sirius-XM would then control 100 percent of the satellite radio market. Which of the following arguments do you think Sirius and XM used to convince the DOJ and the FCC to allow the merger to proceed?
There are many close substitutes for satellite radio; therefore, Sirius-XM would not exercise market power.
Consumer Surplus
area of the shape above the price and below the demand curve, out to the quantity produced
Producer Surplus
area of the shape below the price and above the MC/Supply curve, out to the quantity produced (usually a triangle, but not always)
People who need life-saving drugs cannot do without them and surely will be willing to pay very high prices for them. So why can't producers of life-saving drugs charge any price that they wish to?
a monopolist, such as one selling life-saving drugs, still faces downward-sloping demand curves.
A significant difference between monopolies and competitive firms is that
a monopoly's demand curve is the industry's demand curve, while the competitive firm's demand curve is perfectly elastic.
A monopolist should continue to increase production until marginal
cost is equal to marginal revenue.
When a firm exercises its monopoly power, the cost to society is the ____________.
deadweight loss
Es > 1
elastic
A monopoly is selling workbooks to students in a college town and is currently maximizing profits by charging $70.00 per book. The marginal cost of textbooks
is less than $70
The two types of market power that arise from barriers to entry are ____________.
legal market power and natural market power.
When a firm exercises its monopoly power, social surplus is _____ when compared to a perfectly competitive market.
lower
For a market to be characterized as perfectly competitive, there must be __________
many sellers, where the price of the good is determined by the market.
Suppose you are an "all-knowing" government planner. Your goal is to regulate a monopolist's price and quantity in order to maximize social welfare but still allow the monopolist to produce. To accomplish your goal, you would have the monopoly produce where ____________. (Assume costs are such that the firm would not incur a loss)
marginal cost equals demand, and you would price the good at marginal cost.
Natural market power is created by ___________, and arises due to ____________.
market forces; controlling a key resource
The Department of Justice filed a lawsuit against Microsoft claiming it was engaging in unfair practices by ____________.
monopolizing the market by bundling its operating system with its Internet Explorer browser.
The corresponding optimal price (P*m) is given by:
the demand curve at Q*m
Shut down point
the point where MC crosses AVC (min of AVC)
Exit if
π < 0 TR < TC AR < ATC MR=D=AR=P < exit point (min of ATC)
