Econ 202 Chapter 24
A firm can be the sole supplier of a good and still not be considered a monopoly if
there are very close substitutes for the good.
A major difference between a monopolist and a perfectly competitive firm is that
the monopolist's marginal revenue curve lies below its demand curve.
A monopolist does not necessarily earn a profit. If the average ______ cost curve lies entirely _______ the demand curve for a monopoly, no production rate will be profitable.
total; above
Monopoly profits are found by looking at average _____ costs compared to price per unit. This difference multiplied by the______ sold at that price determines monopoly profit.
total; quantity
A monopolist can sell 25 toys per day for $ 12.00 each. To sell 26 toys per day, the price must be cut to $ 11.50. The marginal revenue of the 26st toy is:
-$1.00
For each of the following examples, which group will pay the higher price (as a result of having less elastic demand)? 1. Air transport for business people and tourists 2.Serving food on weekdays to businesspeople and retired people. (Hint: Which group has less flexibility during a weekday to adjust to a price change and, hence, a lower price elasticity of demand? 3.A theater that shows the same movie to large families and to individuals and couples. (Hint: For which set of people will the overall expense of a movie be a smaller part of their budget, so that demand is less elastic?)
1.business people 2.business people 3. individuals and couples
Which case below best represents a case of price discrimination?
A major airline sells tickets to senior citizens at lower prices than to other passengers
Which of the following is not necessary for price discrimination to exist?
A perfectly elastic demand curve.
For the perfect competitor, price equals _____ revenue equals average revenue. For the monopolist, ______ revenue is always less than price because price must be reduced on all units to sell more.
Marginal; Marginal
If the price elasticity of demand for airline tickets is 1.4 for a leisure traveler and 0.7 for a business traveler, then a priceminus discriminating monopolist would charge
a higher price for the business traveler than the leisure traveler.
Three conditions are necessary for price discrimination: (1) The firm must face __________ -sloping demand curve, (2) the firm must be able to identify buyers with predictably different price ________ of demand, and (3) ___________ of the product or service must be preventable.
downward; elasticities; resale
The demand curve for the monopolist is ________ and the demand curve for the perfect competitor is ________.
downward sloping; horizonta
As opposed to other types of monopoly, a natural monopoly typically owes its monopoly position to
economies of scale.
In order to price discriminate, a firm must
face a downward-sloping demand curve.
Profit maximazation for a monopolist and a perfect competitor occurs where marginal revenue equals marginal cost. At this profit-maximizing output, the monopolist will charge a price ________ marginal revenue and a perfect competitor will charge a price ________ marginal revenue.
greater than; equal to
A natural monopoly
has decreasing long-run marginal costs over a very large range of output. has economies of scale over a very large range of output. has decreasing long-run average total costs over a very large range of output.
The marginal revenue curve for a perfectly competitive firm is _________ while the marginal revenue curve of the monopolist is _________.
horizontal, downward sloping
A manager of a monopoly firm notices that the firm is producing output at a rate at which average total cost is falling but is not at its minimum feasible point. The manager argues that surely the firm must not be maximizing its economic profits. The manager's argument is
incorrect, since profit maximization requires that marginal revenue equals marginal cost but does not require the average total cost to be at any particular level.
If a monopolist's marginal cost curve shifts upward, the monopolist's price will _____, the output rate will ____
increase; decrease
As the number of imperfect substitutes for a monopoly firm's product increases, the price elasticity of demand
increases.
If a monopolist wishes to increase its output and quantity sold,
it must reduce its price, so that its marginal revenue is less than its price
The use of a tariff provides monopoly protection since
it reduces competition from imports by raising the import price.
A monopoly will look for opportunities to price discriminate because the practice
leads to greater profits.
When the demand for a monopolist falls, the marginal revenue also shifts left and will intersect the marginal cost at a __________ output level. The output rate will ________ , and economic profits will likely ______
lower; decrease; decrease
The monopolist must choose the profit-maximizing price-output combination - the output at which ____ revenue equals ______ cost and the highest price possible as given by the ____ curve for that particular output rate.
marginal; marginal; demand
The costs of a purely competitive firm and a monopoly could be different because the
monopoly might experience economies of scale not available to the competitive firm
Price discrimination is the sale of a given product at ______ than one price with the price differences being _____ to differences in marginal cost
more; unrelated
A new competitor enters the industry and competes with a second firm, which had been a monopolist. The second firm finds that although demand is not perfectly elastic, it is now relatively more elastic. The second firm's marginal revenue will be _____________ and its profit-maximizing price will be ___________
more elastic; lower.
In the figure at right, if the firm is producing Upper Q 2 units at a price Upper P 2 , it should
not change output or price.
Profits can be maximized by equating MR = MC = Price,
only in perfectly competitive markets.
All of the following barriers to entry can be categorized as government or legal restrictions except
ownership of essential resources
To maintain a monopoly, there must be barriers to entry. Barriers to entry include ______________ of resources without close substitutes; __________ of scale; legally required licenses, franchises, and certificates of convenience; patents; tariffs; and safety and quality regulations.
ownership; economies
Charging different prices for similar products that have different marginal costs is called
price differentiation.
Given the cost curves in the diagram, what market situation would you expect to occur?
A natural monopoly
If a public utility company is considered a monopolist, which of the following is not true?
The company's demand curve and supply curve are upward sloping
Economies of scale contribute to the creation of natural monopolies.
True
Evaluate the following statement. A profit maximizing monopolist will never operate in a price range in which price elasticity of demand is inelastic.
True
In a monopoly market structure, the firm and the industry are one and the same.
True
A monopolist is defined as
a single supplier of a good or service for which there is no close substitute
Price ___________________ should not be confused with price ___________, the latter of which occurs when differences in price reflect differences in marginal cost.
discrimination; differentiation
Marginal revenue for a monopolist is
downward sloping and always less than price.
The basic difference between a monopolist and a perfect competitor is that a monopolist faces ______ -sloping demand curve, and therefore marginal revenue is _______ than price.
downward; less
The price ______ of demand for the monopolist depends on the number and similarity of substitutes. The more numerous the imperfect substitutes, the greater the price _______ of the monopolist's demand curve.
elasticity; elasticity
For a monopolist, price is ________ marginal revenue.
greater than
The better the substitutes for a monopoly firm's product, the
greater the price elasticity of demand.
In the figure at right, if the firm is producing Upper Q 1 units at a price Upper P 1 , the firm should
increase output and decrease price.
If a monopolist is producing the quantity at which marginal revenue exceeds marginal cost, it should
increase output if it wants to maximize profits
You observe that the revenue of a monopolist varies directly with changes in price. This firm ______ maximizing its economic profits because a profit-maximizing monopolist will never operate in a price range in which demand is
is not; inelastic since this is range in which revenues are falling and the firm could raise revenues by raising the price into the elastic range of demand.
The demand curve of the monopolist
is the same as the industry demand curve.
In a monopoly market structure, the firm (the monopolist)
is the whole industry.
If a monopolist is producing at an output rate at which P = ATC, then
its economic profits will be zero
Which of the following would definitely not be an example of price discrimination?
An electric power company charges less for electricity used during off-peak hours when production costs are lower.
If a monopolist is producing the quantity at which price equals marginal cost, it should
reduce output if it wants to maximize profits.
Economists criticize monopolies because monopolies
restrict output and raise prices compared to a competitive situation.
All of the following are true about a monopolist EXCEPT
the demand curve for its product is perfectly elastic.
All of the following are necessary conditions for price discrimination except
the firm must be a price taker
Which of the following is not a barrier to entry into a market?
Diseconomies of scale.
In the long run, all of the following are true for a monopolist EXCEPT
P = MC.
If a firm sells 10 units of output at $100 per unit and 11 units of output when price is reduced to $99, its marginal revenue for the last unit sold is
$89
In the figure at right, at the firm's profit maximizing output, total revenue is rectangle
0P1AQ1.
Refer to the above figure. Which of the following statements is true about the demand curves for an individual firm in a perfectly competitive industry and a monopoly?
Panel C is the demand curve for a perfectly competitive firm and panel B is the demand curve for a monopoly.
Which of the following statements about price discrimination is true?
Successful price discrimination will provide the firm with more profit than if it did not discriminate.
Economies of scale will lead to only one firm in the industry because
by increasing output a firm is able to lower the cost per unit and change lower prices driving smaller firms out of business.
A monopolist is the single seller of a product or good for which there is no _________ substitute.
close
In the figure at right, if the firm is producing at Upper Q 3 and charging a price of Upper P 3 , it should
decrease output and increase price.
The demand curve faced by a purely monopolistic seller is
downward sloping, whereas that facing the purely competitive firm is perfectly elastic.
The demand curve faced by the monopolist
has greater price elasticity of demand as close substitutes for the monopoly product are developed.
Monopoly producers are faced with
no competitive producers of the same product.
For a monopoly,
price equals average revenue only.
The monopolist estimates its marginal revenue curve, where marginal revenue is defined as the _____ change percentage change in _______ average total revenues due to a one-unit change in quantity sold.
Change; total
Consider a price discriminating monopolist. Which of the following is true?
Charging different prices to different customers does not mean the monopoly is necessarily using price discrimination. A monopoly will engage in price discrimination whenever feasible to increase profits. The monopolist will sell some of its output at higher prices to consumers with less elastic demand.
A monopolist can charge any price it wants without experiencing a change in quantity demanded.
False
Because it faces a downward-sloping demand curve, a monopolist is a price taker.
False
Both perfect competitors and monopolists must lower prices to sell more output.
False
If a monopolist produces an output greater than the output where marginal revenue equals marginal cost, it will increase its profits.
False
The monopolist charges a price equal to the value where marginal revenue is equal to marginal cost.
False