Micro - Pure Monopoly

Not a characteristic of a monopoly

Continuous economic profits - losses are possible in the short runs

When a pure monopoly practices first-degree discrimination, the ________ curve becomes the marginal revenue curve

Demand

TR - (implicit cost and explicit cost)

Economic Profit

For a monopoly, the marginal revenue is below the demand curve because...

The monopoly has to lower the price on all units to sell more

if you live in a town or a city that has a single provider of electricity or natural gas, then that natural monopoly provider

may be subject to price regulation

loss

the level of profit that occurs when total revenue is less than total cost < 0

Natural monopoly

an industry in which economies of scale are so extensive that the market is better served by a single firm - rare and regulated by government

If a monopolist is able to increase the amount of product she sells from 400 to 420 units by lowering the price of that product from $50 to $45, her marginal revenue is:

$-55

The table below shows the marginal revenue and costs for a monopolist. Demand, Costs, and Revenues Price QD MR MC . ATC $130 200 $110 $25 $139.00 120 300 90 32 103.30 110 400 70 40 87.50 100 500 50 50 80.00 90 600 30 62 77.00 80 700 10 77 77.00 What is the monopolist's profit at the profit-maximizing level of output?

$10,000

Maximize profit

Produce output up to the point where marginal revenue = marginal cost Will charge consumers the price that they are willing and able to pay for the amount of output available - Q to demand curve ATC to determine whether making a profit or loss DO NOT always make economic profits

Productive efficiency

Producing output at the lowest possible ATC of production; using the fewest resources possible to produce a g/s - UNLIKELY

Demand phase by a pure monopoly...

downward sloping - higher quantities are demanded at lower prices and lower quantities are demanded at high prices change quantity demanded -> price -> total and marginal revenue

perfect price discrimination generates the best outcome for which of the following market structures

monopoly

allocative efficiency

producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost - DO NOT achieve this - they do not produce the amount of output that maximizes the sum of producer and consumer surplus

Monopoly power

the ability of a monopoly to influence prices by controlling the quantities that it produces in the market

economic profit

the level of profit that occurs when total revenue is greater than total cost > 0

first degree price discrimination

the practice of charging every consumer the price that she is willing and able to pay for something

unregulated monopoly price

the profit-maximizing price that will result from an unregulated monopolistic market

Normal profit

The level of profit that occurs when total revenue is equal to total cost. This level indicates that a firm is doing just as well as it would have if it had chosen to use its resources to produce a different product or compete in a different industry. Normal profit is also known as zero economic profit. = 0

Monopoly

A market structure characterized by a single seller, producing a g/s for which there are no close substitutes, in a market with barriers to entry - price maker - opposite of a perfectly competitive firm

Pure monopoly most likely results in productive inefficiency because at the maximizing level of output

ATC is not at its minimum level

Which of the following scenarios best represents the pricing behavior of a monopolist?

Our Drugs Inc. produces where its marginal revenue is equal to its marginal cost and prices on its downward-sloping demand curve, such that the market for its product clears knowing it will not face competition due to patents it holds on its products.

FORMULA: Profit

P = TR - TC P = Profit per Unit x Output Profit per Unit = Price - Average Total Cost

Price Discrimination

The practice of selling the same g/s to different consumers at different prices - seniors at movie theaters - demand more elastic

Characteristics of a Pure Monopoly

firms in utility industries or patents 1. Only seller in a market SINGLE SELLER 2. No close substitutes for product or service 3. price makers - control the amounts produced and prices (inverse - increases prices to decrease amounts produced) 4. Market entry is very difficult or even blocked 5. engage in non-price competition

Characteristics of a perfect competitive market

1. Large number of sellers 2. No control over price

Characteristics of a conestable firm

1. No real barriers to entry 2. A single firm

The PM extracts all surplus from consumers, yielding higher profits than any other pricing method when it employs...

1. Personal Pricing 2. First-degree price discrimination 3. Perfect price discrimination

Characteristics of monopoly

1. single seller 2. no close substitutes 3. high barriers to entry 4. significant price control

The table below shows the demand and total revenue for a monopolist. Fill in the "Marginal Revenue" column for the various prices and quantities. Demand and Revenues Price QD TR MR $250 0 $0 — 225 20 4,500 200 40 8,000 175 60 10,500 150 80 12,000 125 100 12,500 100 120 12,000

225, 175, 125, 75, 25, -25

Formula: Total Revenue

= P * Q

regulated competitive price

A regulated price that is equal to the marginal cost of production. The competitive price can be found where the marginal cost curve intersects the demand curve, and it is allocatively efficient. - where MR and D cross (consumers increase their purchases even more, creates dilemma for regulators - loss)

Which of the following suppliers is most likely to be a monopolist?

A water company

barriers to entry

Any impediments that prevent firms from entering a market or industry

Profit maximization implies that monopoly firms should expand production up to the point where the MR _________ the MC

Equals

to affect the quantity by consumers, as the only supplier in the market a _______ must change the _________ of its products, which also affects total revenue and marginal revenue

Monopoly: price

With a natural monopoly, the normal profit price is ______ and the competitive price is _______

Not allocativelt efficient, Allocatively efficient

Marginal revenue (MR) FORMULA

The change in a firm's total revenue that results from a 1-unit change in output produced and sold. extra or additional revenue associated with the production of an additional unit of output = Change TR/Change Q

deadweight loss

The value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium

To affect quantity demanded by consumers, a monopoly must change the price of its products, which also affects _______ revenue and _____ revenue

Total; Marginal

There are important exception in which monopolies are actually encouraged to incentivize positive outcomes

True

Economies of scale

a condition in which the long-run average total cost of production decreases as production increases

By charging consumers the highest price they are willing and able to pay, _____ extracts all surplus from consumers, yielding higher profits than other pricing method available to the firm

a pure monopoly

regulated normal profit price

a regulated price that is equal to the average total cost of production. The normal profit price can be found where the ATC curve intersects the demand curve - to ensure price ceilings on monopolies so consumers can enjoy lower prices - where ATC and demand connect (QD increases, P decreases)

Lucinda has written a new novel and has chosen to self-publish. Her copyright ensures that no one can legally copy her novel. The table below shows the demand for Lucinda's novel and her costs of publishing. Lucinda's Demand and Costs of Publishing Price Q MR MC ATC $45 0 — — — 40 4k $40 $5 $6.25 35 8k 30 3.75 5.00 30 12k 20 5.00 5.00 25 16k 10 10.00 6.25 20 20k 0 18.75 8.75 15 24k - 10 31.25 12.50 a. How many books should Lucinda publish in order to maximize profits? b. What price should Lucinda charge for her books in order to maximize profits? c. How much profit will Lucinda's books generate if she produces the profit-maximizing quantity and charges the profit-maximizing price?

a. 16000 books b. $25 per book c. $300,000

Marginal Revenue curve ...

lies below its demand curve - because if it wanted to sell more units if most lower its price for every unit sold - gives up some revenue on units it could have sold at a higher price

Due to the market inefficiencies created by ________, one if the roles of government is to limit their market power or even to eliminate them entirely

monopolies

Because monopolies have market power and can influence the price of the goods they sell, they tend to restrict ________ and charge a higher _______ than would prevail in a competitive equilibrium

output, price

As the market price ________, all else held constant, a profit-maximizing firm can afford to expand its production

rises