Monopoly (Ch 15)

How and why does a monopolist chooses its production rates and price points?

Prices charged by a monopolist are higher than in a competitive market because of the market power of the firm. However, the quantity of output is lower because a monopoly produces at the point where the marginal revenue equals the marginal cost, while the socially efficient quantity is found where the demand curve and the marginal-cost curve intersect.

What is price discrimination?

The business practice of selling the same good at different prices to different customers based on things such as income, gender, age, etc.

When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, what happens?

(1) The regulated monopoly will experience a price below average total cost. (2) The regulated monopoly will experience a loss. (3) The regulated monopoly may rely on a government subsidy to remain in business.

Elaborate on natural monopoly.

A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. - A characteristic of a natural monopoly is that a firm's average-total-cost curve continually declines, meaning that it is always experiencing economies of scale.

What is perfect price discrimination?

A situation in which the monopolist is able to charge each customer precisely his willingness to pay.

Where can you find the socially-efficient quantity on a graph?

Is found where the demand curve and the marginal-cost curve intersect.

When a monopolist chooses the profit-maximizing level of output, he sets the marginal cost equal to:

Marginal revenue and reads the price from the demand curve at that quantity. Because demand is a downward-sloping for monopolist, price and marginal revenue are not equal.

How does monopoly that engages in perfect price discrimination compare to a competitive market?

The monopolist gets the entire surplus in every transaction and there are no unrealized trades, so deadweight loss is $0. Because a competitive market operates at the socially-efficient level of output, it also incurs no deadweight loss and maximizes total social welfare.

What is a arbitrage?

The process of buying a good in one market at a low price and selling it to another market at a higher price.