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Which of the following is true regarding profit maximization by a pure monopolist?

Monopolists maximize profits at the quantity where marginal revenue is equal to marginal costs.

Given that monopoly power allows firms to profit at the expense of consumers and creates market inefficiencies, why does the government grant monopoly power to firms in the case of (a) local utility companies and (b) patents?

(a) to encourage innovation. If the ability to earn profits were not protected, then there would be little incentive to engage in research and development... firms would spend money on R&D (incur large costs) only to have their ideas and inventions stolen by another firm. (b)To minimize costs of providing the good or service to consumers. With utilities and other natural monopolies, it is more efficient to have a single firm providing the entire market supply.

Explain the different types of barriers to entry that allow monopolists to maintain their market power. Give an example of each.

1. Economic Barriers to Entry -ownership of the entire supply of a given resource (eg: DeBeers) - large scale cost advantages in an industry where the region of increasing returns to scale is large, and those RTS result in low operating costs - a firm that gets into the market first and grows (moves down the LRATC curve) will keep other firms out of the market because they cannot compete with the existing firm. Eg: AT&T = "NATURAL MONOPOLY" = when economies of scale are so great that the good or service can be provided at the lowest cost if only one firm provides it. Most local public utilities are "local natural monopolies" by gov't regulation. - its more efficient to have only one phone company and one cable company and one water company in a given area. 2.Legal barriers to entry. - Gov't licenses (eg: liquor sales in NC) - Patents = exclusive rights to produce and market their product for 17 years. this protect the inventor who did all the work and encourages R&D/innovation (eg: Xerox corp. Patent on photocopying) 3. Technological Barriers to entry a single firm may have technological superiority over other firms or use technology to create a monopoly (eg: Microsoft with software IBM (20 years ago) with hardware)

Starting from a point of long-run competitive equilibrium where minimum average total costs are $10.00, show graphically and describe the effects of a decrease in market demand. What happens in the short run? What price will result in the long run? Explain, and use at least two graphs to answer this question.

A decrease in Demand implies that market Price will fall. Therefore each firm must accept the new lower price. Now we have a price that is less than minimum ATC, so profits are less than 0 in the short-run (note: if price falls below minimum AVC, firms will shut down in the short-run). In the long-run, the negative profits will cause some firms to leave the market, which shifts the market supply curve to the left, causing market price to rise again. This takes place until profits again = 0 at P = min ATC.

Which of the following are barriers to entry that may lead to monopoly power?

A. Patents B. Government licenses C. Large scale cost advantages D. Technological superiority E. Ownership of resource supply

Which of the following cases is the best example of a "natural monopoly"?

Carolina Power and Light Company (suppliers of electric power in much of North Carolina)

Duquense Light, an unregulated monopolist, determines the price it will charge by

Finding the point on the demand curve that corresponds to the profit-maximizing level of output.

a monopolist will not produce

In the inelastic portion of its demand curve

Assume that the current (short-run) market price of a good sold in a PC market is $10. At this price, all firms earn more than the normal profit. Which of the following is true?

In the long-run, price will be less than $10

Through the issue of a patent, Carol's super road bike company tm has a monopoly over the production of a specialized lightweight wheel for bicycles. Carol's company will find it profitable to increase output of the wheel as long as marginal revenue

Is greater than marginal cost.

Which of the following is true regarding marginal revenue for a monopolist?

Marginal revenue is lower than price for all units other than the first.

What are the circumstances under which a perfectly competitive firm will produce zero output ("shut-down") in the short-run? What determines whether a PC firm will continue to operate in the long-run? Use words and a graph to explain.

PC firms will shut down in the short-run if price falls below minimum AVC, because marginal revenue is not sufficient to even cover the variable costs of production, hence the profit-maximizing quantity is zero (and profits are negative in the amount of fixed costs). PC firms will stay in the market in the long-run only if profits are greater than or equal to zero. Hence, only if price is greater than or equal to minimum ATC.

Which of the following best describes the profit maximizing condition for a perfectly competitive firm?

Produce output up to the point where price = marginal cost.

In general terms, state the profit maximizing condition for a perfectly competitive firm.

Profit maximization occurs at the quantity where MR = MC. Since for a PC firm P = MR, we can write this as the quantity where P = MC.

Which of the following comparisons between monopoly and a perfectly competitive (PC) market is correct?

The monopolist will sell fewer units than a PC market, charge a higher unit price and earn larger profits.

A PC firm's supply curve is:

The portion of its marginal cost curve that is above minimum average variable costs

For a monopolist to sell more units of output,

The price of the output must be reduced

In a monopoly, the market demand curve is

The same as the demand curve facing the firm.

A pure monopolist can earn positive economic profits in the short-run, but not in the long-run. t or f

f

Monopoly markets are always more efficient than any other market type.

f

Since the monopolist is the sole producer of a good, it can never incur a loss

f

In a perfectly competitive market, if market price is less than minimum average total cost but greater than minimum average variable cost then firms in the market are earning positive economic profits.

false

Assume soybeans are produced in a perfectly competitive industry. A soybean farmer is currently maximizing his profits. If the market price of soybeans falls then, after the farmer adjusts to the new price, he will be producing __________ bushels of soybeans and his profit will be __________.

fewer; lower

Wheat is produced in a perfectly competitive market. Market demand for wheat increases. This will cause the individual wheat farmer's marginal revenue to __________ and their profit maximizing level of output to __________.

increase; increase

A profit-maximizing monopolist always operates in the elastic portion of its demand curve.

t

Because the marginal revenue curve for a monopolist lies below its demand curve, the profit maximizing price of the monopolist will be above marginal cost.

t

For a monopolist, price is always greater than marginal revenue.

t

If marginal revenue exceeds marginal cost, then the firm is operating at a quantity less than the profit maximizing quantity. t or f

true