Chapter 10: Understanding Monopoly
Calculate the deadweight loss associated with the monopoly situation shown.
$120
Place in order the steps we can use to calculate a monopolist's profit using a graph.
1. Determine the marginal revenue curve from the market demand. 2. Find the quantity where the firm maximizes profits by finding where marginal revenue equals marginal cost. 3. Trace the profit-maximizing quantity to the demand curve to determine the price. 4. Calculate the difference between the price and average total cost, and multiply by the profit-maximizing output.
When old, large companies become monopolists, this _____ always deliberate. Entry into a market can become difficult due to a lack of funding for _____ companies. Also, _____ make it hard for a small, new firm to operate as efficiently as a large, established one.
1. IS NOT 2. NEW 3. ECONOMIES OF SCALE
Monopolists want to protect their market position by (1) potential competitors. A common tactic is to lobby for (2), such as (3). Such lobbying is a form of (4): use of political means to secure a (5) position.
1. denying entry to 2. trade restrictions 3. import tariffs 4. rent seeking 5. monopoly
How was each monopoly situation successfully eliminated? Note that all labels may not be used.
AT&T: government breakup Air India: market regulation Microsoft: natural market forces
Because suppliers in natural monopolies, such as public utilities, enjoy economies of scale, they can work with lower production costs than can a large number of smaller companies. At the same time, monopolists may charge very high prices, and as result, the government often regulates these firms. Match each regulatory environment to the graph depicting the resulting level of production.
Left graph: prices regulated by the marginal cost pricing rule, Right graph: no price regulation
Which of the following are example of natural barriers to entry?
Lenders are hesitant to provide funding for new firms that will complete with a large, well-established firm, Over time, a firm takes control of 85% of the world's supply of a chemical used in the production of plastic, Smaller companies with smaller production processes have higher per unit costs than larger companies.
What are some problems a monopoly may cause?
Limited choice, Political lobbying, Deadweight loss, Inefficient output
Which of the following methods would help society deal with a monopoly?
METHOD: - Regulate the socially efficient price and subsidize any loss to the firm. - Prevent the firm from buying all possible competitors in the market. NOT A METHOD: - Shut down the firm. - Increase tariffs on monopoly firms in other countries. - Require the firm to lower the costs so the market price will fall.
Which of the following traits describe a competitive market, and which describe a monopoly?
Many firms, Seller has no market power, Cannot earn long-run economic profits, Price equals seller's marginal revenue
The economy is generally better off when monopolies are broken up. Why is it hard for governments to do this?
Monopolists have a lot of money to fend off antitrust lawsuits, Monopolies often have laws to protect them, Sometimes keeping a monopoly intact is the best option.
Which of the following are examples of natural barriers to entry?
NATURAL BARRIER TO ENTRY: - Lenders are hesitant to provide funding for new firms that will compete with a large, well-established firm. - Smaller companies with smaller production processes have higher per unit costs than larger companies. - Over time, a firm takes control of 85% of the world's supply of a chemical used in the production of plastic. NOT A NATURAL BARRIER TO ENTRY: - A local government gives a construction company the exclusive right to build all the town's future buildings. - BioCorp develops a new skin cancer drug for which they receive a patent.
Is there any way for a monopoly to operate more efficiently than a competitive market? Why or how?
No: the equilibrium point in a competitive market is the point of optimal market efficiency.
Perfectly competitive firms and monopolies have different price and output structures, but both types of firms operate using the profit-maximizing rule. Drag the following labels to the appropriate places on the graph to show each firm's profit-maximizing output and price.
P2: price monopoly P3: price competitive Q2: quantity monopoly Q3: quantity competitive
Consider the following graph for a monopoly. Regardless of the firm's marginal cost of production, it will never increase its production to serve more than 5,000 customers.
True
The following is a table showing the quantity of customers to the price of a product that a monopolist is selling. Based on this information, at what price does the monopolist first see negative marginal revenue?
$15
Based on the following graph, how much should the monopolist charge for its product?
$30
Calculate the amount of consumer surplus transferred to the monopolist in the monopoly situation shown.
$300
Lisette's laptop needs a unique battery, and a local computer parts company is the only place that sells it. Given the demand function table below, what is the marginal revenue if the parts company chooses to drop the price of the battery from $50 to $40?
-5,000
Large public water and sewer companies often become _____ monopolies because they benefit from economies of scale. Although the company faces high start-up costs, the firm experiences _____ average _____ as it expands and adds more customers. Smaller competitors would experience _____ average costs and would be less _____.
1. NATURAL 2. FALLING 3. COSTS 4. HIGHER 5. EFFICIENT
The monopoly demand curve is (1), while the perfectly competitive firm's demand curve is (2). This is because a monopoly is the only producer in an industry, so the monopoly firm's (3) curve is the same as the market demand curve, while the perfectly competitive firm produces in a market with (4) competitors.
1. downward sloping 2. horizontal 3. demand 4. many
Natural monopolies can develop due to (1). In this case, breaking up a monopolist may lead to higher (2) due to inefficiency. Instead, governments can seek to remove the output inefficiency of a monopoly by capping prices at a level beneficial for (3) but not for (4).
1. economies of scale 2. prices 3. society 4. the monopolist
When old, large companies become monopolists, this (1) always deliberate. Entry into a market can become difficult due to a lack of funding for (2) companies. Also, (3) make it hard for a small, new firm to operate as efficiently as a large, established one.
1. is not 2. new 3. economies of scale
Large public water and sewer companies often become (1) monopolies because they benefit from (2). Although the company faces high start-up costs, the firm experiences (3) average (4) production costs as it expands and adds more customers. Smaller competitors would experience (5) average costs and would be less (6).
1. natural 2. economies of scale 3. falling 4. per-unit 5. higher 6. efficient
Middletown, U.S.A., has been dealing with several monopoly firms, making it difficult for new firms to enter. Match each company to the best description of the particular "barrier to entry" it is benefitting from.
1. problems raising capital: - Marvin's Mining Company runs 100 different pieces of large equipment and trucks in daily operations. 2. licensing: - Larry's Lawn Care has exclusive rights to mow the grass for all city government property in town for the next 5 years. 3. economies of scale: - Wanda's Water Park adds a new water slide or ride each year to the already large park, and can do it fairly cheaply due to volume discounts from the firm that produces the slides. 4. patents and copyright law: - Burt's Brass Band gets a royalty from every download of a song. 5. control of resources: - Lucinda's Lake Condos owns all the property around Middletown Lake, the only lake for 200 miles.
A monopolist follows the same (1) rule as a firm in a competitive market: produce until marginal cost equals marginal revenue. As prices go (2), the monopolist gains more customers. At the same time, this (3) the revenue from each individual customer, including the existing ones. However, up to a certain point the increased sales volume (4) the revenue loss from the price decrease.
1. profit-maximizing 2. down 3. lowers 4. offsets
A monopolist follows the same _____ rule as a firm in a competitive market: produce until marginal cost equals marginal revenue, but the monopoly firm must decide what price to charge. As prices go _____, the monopolist gains more customers. At the same time, this _____ the revenue from each individual customer, including the existing ones. However, up to a certain point the increased sales volume _____ the revenue loss from the price decrease.
1. profit-maximizing 2. down 3. lowers 4. outweighs
Place the businesses in order from the least to the greatest amount of monopoly power.
1. vegetable stands at a very large local farmers' market 2. restaurants in a small town 3. cable television in an area where there is a single provider
Calculate the deadweight loss associated with the monopoly situation shown.
120
Calculate the amount of consumer surplus transferred to the monopolist in the monopoly situation shown.
300
The graphs below show the price effect (pink) and output effect (pale green) when a certain monopolist changes the price that it charges. Based on the price effect and output effect, which two of these price changes would be beneficial to the monopolist?
A and D
Which of the following are monopolists?
A large company that has bought out all the competition
Based on the given information, which of the following are places where a monopoly might easily spring up?
A port city where owning a dock requires a government license, A desert town with a single well.
Match the appropriate barrier to entry with the correct scenario.
ECONOMIES OF SCALE: - A large rail shipping company lays down new railroad tracks in an area. LICENSING: - A law student passes the state bar exam. PROBLEMS RAISING CAPITAL: - A family-owned hardware store tries to break into the market. CONTROL OF RESOURCES: - A company buys up all of the world's copper mines.
Monopolists are price makers. Which of the following explains why this does not apply to competitive markets?
EXPLANATION: - Even if one or more firms in a competitive market go out of business, other competitors will appear. - Other sellers sell products that are similar if not identical. - A competitive firm's product makes up only a small portion of the market's total product. NOT AN EXPLANATION: - Price controls prevent firms in a competitive market from pricing their products as they think best.
Monopolists are price markers. Why is this not the case for firms in a competitive market?
Even if one or more of their competitors goes out of business, other competitors will appear, Other sellers sell products that are similar if not identical, Their product only makes up a small portion of the market's total product.
A monopoly has complete control over the market price of a product, and therefore always makes a profit.
False
Due to the frequent occurrence of illegal file sharing and pirating, copyright holders in the music and movie business always lose more than they gain from the copyright protections.
False
The lack of competition in a monopoly leads to a horizontal demand curve, as shown, for the market as a whole.
False
Place in order the steps we can use to calculate a monopolist's profit using a graph.
Model the demand curve and marginal revenue curve, Find the quantity where the firm maximizes profits by finding where marginal revenue equals marginal cost, Trace the ideal output level to the demand curve to determine the price, Calculate the difference between the price and cost, and multiply by the profit-maximizing output.
Apply the appropriate label to each characteristic of a small-town veterinarian that tends to make him a monopolist.
Sole seller: he is the only vet in town. Barrier to entry: he is known and liked by all the ranchers and pet owners in town. Unique service without close substitutes: animals need health care.
Based on the given information, which of the following are places where a monopoly is more likely to spring up?
TO HAVE A MONOPOLY: - a port city where owning a dock requires a government license - a desert town with a single well, and no ability to drill more TO NOT HAVE A MONOPOLY: - a city where there is only one drive-thru coffee shop for morning commuters - a large town with a single furniture store
Which of the following statements are true regarding tariffs?
Tariffs bolster the power of monopolies by reducing competition, Tariffs impose high barriers to entry.
A small-town monopolist determines that lowering prices will bring in more customers. Following the price drop, however, the firm discovers that even though the number of customers increased as hoped, the firm's total profit is falling. What could have gone wrong?
The new price and output level are at a point where MR < MC, The loss in revenue due to the price effect exceeds the gain in revenue due to the output effect.
A monopoly has the following pricing and revenue structure. If the firm's marginal cost per customer is $30, and the firm wants to follow the profit-maximizing rule, what would be the firm's quantity of customers and price charged per customer?
The quantity of customers is 4000, and the price is $60.
A monopoly has the following pricing and revenue structure. If the firm's marginal cost per customer is $30, and the firm wants to follow the profit-maximizing rule, what would be the firm's quantity of customers and price charged per customer?
The quantity of customers is 4000, and the price is $60.
Drag the labels below to the appropriate positions on the monopoly graph to show the firm's profit-maxinmizing combination.
Top box on the outside of the graph: price, Bottom box on the outside of the graph: average total cost, Dotted line box: economic profit, The box on the bottom outside the graph: quantity
Match each label to the situation it describes.
Bundling: a monopoly sells products grouped together rather than separately, Deadweight loss: the total surplus in a market is lower than it could be, Regulation: the government caps the prices a company can charge, Rent seeking: a group seeks to restrict the number of government-issued licenses.
According to the graphs of the possible outcomes of a competitive firm and a monopoly in the same market, which of the following is a correct statement?
CORRECT - Competitive firms and monopolies attempt to maximize profits. - When firms merge into a monopoly, the market price will rise. NOT CORRECT - When firms merge into a monopoly, the market output will rise. - Multiple monopolies in this market would reduce the output even more than shown. - In a competitive industry, firms do not have a MC function.
A monopoly has complete control over the market price of a product, and therefore always makes a profit.
FALSE
Why would it be beneficial for patents to be temporary?
Patents give firms the incentive to innovate in the short run, but patents' expiration encourages more competition in the long run.
Match the appropriate barrier to entry with the correct scenario.
Problems raising capital: a family-owned hardware store tries to break into the market. Economies of scale: a large rail shipping company lays down new railroad tracks in an area. Licensing: a law student passes the state bar exam. Control of resources: a company buys up all of the world's copper mines.
Which of the following statements is correct?
Regulating a monopoly leads to cost inefficiencies.
A city has several small taxicab companies that compete against one another in the market. Eventually, these small companies agree to merge and take over the market as a monopoly. Which areas on the graphs below represent loss to consumers as a result of the newly formed monopoly?
Right chart: The box between Pm and Pc and the triangle in front of it.
What are the pros and cons of patents and copyrights for society?
They generate high profits, giving firms money to invest in research and development of new products, They expire after a period of time, allowing competitors to develop lower-priced versions in the long run, They serve as a form of property rights, which creates incentives to innovate.
If a cable company is a monopolist in a certain town, then it can restrict the bundles of channels it offers, and therefore force consumers into making limited choices.
TRUE
If a cable company is a monopolist in a certain town, then it can bundle its channels together in any way it wants, and therefore force consumers into making limited choices.
True
Order the following businesses from the least to the greatest amount of monopoly power.
Vegetable stands at a very large local farmers' market, Restaurants in a small town, Cable television in an area where there is a single provider.
