economics chapter 12
in a monopoly price exceeds
MR and MC
single price monopoly
MR is related to the elasticity of demand of its good
2 forces that operate in most markets
market power and competition
the more perfectly the monopoly can price discriminate,
the closer its output gets to the competitive output and the more efficient is the outcome
When natural or legal forces work to protect a firm from potential competitors, the market is said to have _______.
barrier to entry
A monopoly that can perfectly price discriminate has a marginal revenue curve that is steeper than the demand curve for the good that the monopoly produces.
false
Which of the following firms is most likely to be a monopoly?
local distributor of electricity
a profit-maximizing monopoly
never produces an output in the inelastic range of its demand curve. IF it did so, it could charge a higher price, produce a smaller quantity, and increase its profit
Average cost pricing rule
pricing to cover cost including normal profit means setting price equal to average total cost
If a monopoly can perfectly price discriminate, it produces no deadweight loss and is more efficient than a single-price monopoly.
true
A profit-maximizing monopoly never produces output in the _______ range of its _______ curve.
inelastic; demand
to be able to price discriminate a monopoly must:
-identify and separate different buyer types -sell a product that cannot be resold
firms discriminate in 2 ways
-among units of a good -among groups of buyers
rent seekers pursue their goals in 2 ways
-buy a monopoly -create a monopoly
the main reasons why monopolies exist
-incentives to innovation -economies of scale and economies of scope
monopoly damages social interest
-produce less -increases cost of production -increases price
deadweight loss formula
.5 * (P2 - P1) * (Q1 - Q2).
monopoly 2 key features
1.no close substitutes 2.barriers to entry: legal or natual constraints that protect a firm from potential competitors
rent seeking
any attempt to capture a consumer surplus, a producer surplus or an economic profit
smaller output and higher price drive a wedge between marginal social benefit and marginal social cost and creates
a deadweight loss
single price
a firm that must sell each unit of its output for the same price to all its customers
Regulation that results in the efficient output and price is _______.
a marginal cost pricing rule
legal monopoly
a market in which competition and entry are restricted by granting of a public franchise, government license, patent,copyright
natural monopoly
an industry in which one firm can supply the entire market at a lower average total cost than two or more firms can
monoply
an industry that produces a good or service for which no close substitute exists and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms
A price cap regulation is often combined with _______ in case the regulator sets the cap too high.
earnings sharing regulation
perfect price discrimination
extracts the entire consumer surplus
a single-price monopoly
restricts its output and charges a higher price
MC pricing rule
sets price equal to MC. It maximizes total surplus in the regulated industry
market power
that ability to influence the market, and in particular the market price, by influencing the total quantity offered for sale
price discrimination
the discrimination of selling different units of a good or service for different prices
a monopoly doesn't set the price at
the maximum possible price at the maximum possible price, the firm would be able to sell only one unit of output