ECON 2302 CHAPTER 12

natural monopoly

a monopoly firm is referred to as a natural monopoly if the market demand curve intersects the long-run ATC curve at any point where average total cost are declining.

rent-seeking expenditures

any activity designed to transfer income or wealth to a particular firm or resource supplier at someone else's, or even society's, expense

If a regulatory commission wants to provide a natural monopoly with a fair return, it should establish a price that is equal to:

average total cost

The monopolist does not have a

supply curve

marginal revenue

the additional income from selling one more unit of a good; sometimes equal to price

price discrimination

the business practice of selling the same good at different prices to different customers

If a regulatory commission imposes upon a non-discriminating natural monopoly a price that is equal to marginal cost and below average total cost at the resulting output, then

the firm must be subsidized or it will go bankrupt.

For an imperfectly competitive firm:

the marginal revenue curve lies below the demand curve because any reduction in price applies to all units sold.

One defining characteristic of pure monopoly is that:

the monopolist produces a product with no close substitutions.

pure monopoly

the only supplier of a unique product with no close substitutes

X-inefficiency

the production of output, whatever its level, at a higher average (and total) cost than is necessary for producing that level of output

simultaneous consumption

the same-time derivation of utility from some product by a large number of consumers

The monopolist maximizes profit (or minimizes loss) at the output

where MR = MC and charges the price that corresponds to that output on its demand curve.

fair-return price

For natural monopolies subject to rate (price) regulation, the price that would allow the regulated monopoly to earn a normal profit; a price equal to average total cost.

Under which of the following conditions would a profit-maximizing monopolist necessarily raise price?

If marginal cost was greater then marginal revenue.

The monopolist's demand curve is downward sloping, and its

MR curve lies below its demand curve.

socially optimal price

The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product.

To maximize profit, the monopolist operates in the

elastic region of demand.

barriers to entry

factors that make it difficult and costly for an organization to enter a particular task environment or industry

X-inefficiency refers to a situation in which a firm:

fails to achieve the minimum average total costs attainable at each level of output.

Monopoly price can be reduced and output increased through

government regulation.

network effects

increases in the value of a product to each user, including existing users, as the total number of users rises

Pure Monopoly Characteristics

single seller, no close substitutes, price maker, blocked entry, & nonprice competition.

For a pure monopolist the relationship between total revenue and marginal revenue is such that:

marginal revenue is positive when total revenue is increasing, but marginal revenue becomes negative when total revenue is decreasing.

downward sloping demand curve

means the monopolist is a price maker.

The conditions necessary for price discrimination.

monopoly power, market segregation, & no resale.

There is some evidence to suggest that X-inefficiency is

more likely to occur in monopolistic firms than in competitive firms.

One major barrier to entry under pure monopoly arises from:

ownership of essential resources.

Other things equal, a price-discriminating monopolist will

produce a larger output than a non-discriminating monopolist.

If marginal costs decrease and the MC curve shifts down, a typical monopolist will

reduce price and increase quantity of output.