Week 9

A natural monopoly exists when

- increasing returns to scale provide a large cost advantage to a single firm that produces all of an industry's output - there is a large cost advantage to having all of an industry's output produced by a single firm - under such circumstances, average total cost is declining over the output range relevant for the industry - this creates a barrier to entry because an established monopolist has lower average total cost that any smaller firm

Firms in which of the following market structures have the most market power? A) Monopoly B) Duopoly C) Oligopoly D) Monopolistic competition

A

A firm that faces a downward-sloping demand curve is a: A) Price-setter B) Quantity-minimizer C) Quantity taker D) Price taker

A

A monopolist faces: A) a downward-sloping demand curve B) a perfectly elastic demand curve C) a perfectly inelastic demand curve D) a horizontal demand curve

A

Price discrimination is profitable when consumers differ in their sensitivity to the price

A monopolist would like to charge high prices to consumers willing to pay them without driving away others who are willing to pay less.

A monopolist is likely to _______ and________than a comparable perfectly competitive firm. A) Produce more; charge more B) Produce less; charge more C) Produce more; charge less D) Produce less; charge less

B

Most electric, gas and water companies are examples of: A) Unregulated monopolies B) Natural monopolies C) Restricted-input monopolies D) Sunk-cost monopolies

B

One government policy for dealing with a natural monopoly is to: A) Impose a price floor to eliminate the deadweight loss B) Impose a price ceiling to reduce economic profit C) Break it up into smaller firms D) Impose fines on the monopolist

B

A natural monopoly is one that: A) Monopolizes a natural resource such as a mineral spring B) Is based on control of something occurring in nature (such as diamonds) C) Has increasing returns to scale over the entire relevant range of output D) Typically has low fixed costs, making it easy and "natural" for it to shut out competitors

C

Marginal revenue for a monopolist is: A) Equal to price B) Greater than price C) Less than price D) Equal to average revenue

C

Market structures are categorized by the following two criteria: A) The number of firms and the size of the firms B) Whether or not products are differentiated and the extent of advertising C) The number of firms and whether or not products are differentiated D) The size of the firms and the extent of advertising

C

Suppose that a monopoly computer chip maker increases production from 10 microchips to 11 microchips. If the market price declines from £30 per unit to £29 per unit, marginal revenue for the eleventh unit is: A) £1 B) £9 C) £19 D) £29

C

The ability of a monopolist to raise the price of a product above the competitive level by reducing the output is known as: A) Product differentiation B) Barrier to entry C) Market power D) Patents and copyrights

C

The demand curve for the monopoly's product is A) more elastic than the market demand for the product B) more inelastic than the market demand for the product C) the market demand for the product D) undefined

C

The pricing in monopoly prevents some mutually beneficial trades. The value of these unrealized mutually beneficial trades is called: A) Sunk costs B) Opportunity costs C) Deadweight loss D) Inequities

C

A monopolist responds to a decrease in demand by _______ price and _______ output. A) Increasing; decreasing B) Increasing; increasing C) Decreasing; increasing D) Decreasing; decreasing

D

If your local government gave you the exclusive right to sell breakfast bagels in your community, your monopoly would result from: A) Control of a scarce resource or input B) Technological superiority C) Increasing returns to scale D) Government-created barriers

D

The demand curve for a monopoly is: A) The MR curve above the AVC curve B) The MR curve above the horizontal axis C) The entire MR curve D) Above the MR curve

D

A monopolist able to charge each consumer according to his or her willingness to pay for the good achieves perfect price discrimination and does not does not cause inefficiency because all mutually beneficial transactions are exploited

In this case, the consumers do not get any consumer surplus! The entire surplus is captured by the monopolist in the form of profit

Optimal output rule

The profit maximizing level of output for the monopolist is at MR=MC

A monopolist has market power

and as a result will charge higher prices and produce less output than a competitive industry (this generates profit for the monopolist in the short run and long run)

Government policies used to prevent or eliminate monopolies are known as

antitrust policies

Demand curve of an individual perfectly competitive firm

cannot affect the market price of the good it faces a horizontal demand curve DC, as shown in panel (a).

A monopolist can affect the price (sole supplier in the industry)

its demand curve is the market demand curve, DM, as shown in panel (b). To sell more output it must lower the price; by reducing output it raises the price.

Price discrimination

up to this point we have considered only the case of a single-price monopolist, one who charges all consumers the same price. In fact, many (if not most) monopolists find that they can increase their profits by charging different customers different prices for the same good: they engage in price discrimination.

Perfect price discimination

when a monopolist charges each consumer according to their willingness to pay - Probably never possible in practice. Common techniques are: - advance purchase restrictions - volume discounts - two-part tariffs

Profits will not persist in the long run unless there is a barrier to entry this can take the form of:

- control of natural resources or inputs - increasing returns to scale - technological superiority - successful branding - government-created barriers including patents and copyrights

How a monopolist maximizes profit

- price-taking firm's optimal output rule is to produce the output level at which the marginal cost of the last unit produced is equal to the market price - a monopolist in contrast is the sole supplier of its good. So its demand curve is simply the market demand curve, which is downward sloping. - this downward slope creates a "wedge' between the price of the good and the marginal revenue of the good- the change in revenue generated by producing one more unit.

Dealing with natural monopoly?

- public ownership but publicly owned companies are often poorly run. In public ownership of a monopoly, the good is supplied by the government or by a firm owned by the government. - a common response in the US is price regulation. A price ceiling imposed on a monopolist does not create shortages as long as it is not set too low.

The monopolist's demand curve and marginal revenue

- to emphasize how the quantity and price effects offset each other for a firm with market power, notice the hill-shaped total revenue curve - this reflects the fact that at low levels of output, the quantity effect is stronger than the price effect: as the monopolist sells more, it has to lower the price on only very few units, so the price effect is small.

A local community college charges lower tuition fees to local town residents than to non- residents. This pricing strategy increases the profits of the community college. Using this information, we can conclude that non-residents must have a ______ for attending the community college than residents. A) Less price-elastic demand B) Greater demand C) Lower demand D) More price-elastic demand

A

A monopolist's marginal cost curve shifts up, but the firm's demand curve remains the same and the firm does not shut down. Compared to the condition before the increase in marginal costs, the monopolist will _________ its price and _________its level of production. A) Raise; decrease B) Not change; decrease C) Raise; increase D) Lower; increase

A

A monopolist's profit maximizing price and output correspond to the point on a graph A) where marginal revenue equals marginal cost and charging the price on the market demand curve for that output B) where price is as high as possible C) where average total cost is minimized D) where total costs are the smallest relative to price

A

Price discrimination is the practice of: A) Charging different prices to buyers of the same good B) Paying different prices to suppliers of the same good C) Equating price to marginal cost D) Equating price to marginal revenue

A

Price discrimination leads to a ______ price for consumers with a ______demand. A) Higher; less elastic B) Higher; more elastic C) Higher; perfectly elastic D) Lower; less elastic

A

Which of the following is a characteristic of a monopoly? A) There is only one seller in the market B) The firm has no control over price C) The product is not unique D) It is easy for new firms to enter the market

A

An increase in production by a monopolist has two opposing effects on revenue

A quantity effect: one more unit is sold, increasing total revenue by the price at which the unit is sold. • A price effect: in order to sell the last unit, the monopolist must cut the market price on all units sold. This decreases total revenue.

If the government allowed only one airline to serve the entire market, there would be a ______ loss associated with ______ efficiency in the airline industry. A) Marginal; reduced B) Deadweight; reduced C) Total; increased D) Deadweight; increased

B

What causes deadweight loss?

reducing output and raising price above marginal cost, a monopolist captures some of the consumer surplus as profit and causes deadweight loss, to avoid that gov policy attempts to prevent monopoly behavior.

a monopolist is a firm

that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly. The ability of a monopolist to raise its price above the competitive level by reducing output is known as market power.

In contrast with perfect competition, a monopolist: A) Produces more at a lower price B) Produces where MR>MC, and a perfectly competitive firm produces where P=MC C) May have economic profits in the long run D) Earns zero economic profits in the long run

C

Monopolist's demand curve and marginal revenue

Due to the price effect of an increase in output, the marginal revenue curve of a firm with market power always lies below its demand curve. So, a profit-maximizing monopolist chooses the output level at which marginal cost is equal to marginal revenue - As a result, the monopolist produces less and sells its output at a higher price than a perfectly competitive industry would. It earns a profit in the short run and the long run.