Ch. 11

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The price is the ____ the firm receives

average revenue

The effect of a shift in demand on a monopoly's output depends on the shape of ____

both the marginal cost curve and the demand curve

Market power is the ability of a firm to

charge a price above marginal cost and earn a positive profit.

Two important causes of monopoly are

cost factors and government actions that restrict entry, such as patents.

By setting its price above marginal cost, a monopoly creates a ___

deadweight loss

a profit-maximizing monopoly is economically inefficient because it wastes potential surplus, resulting in ____

deadweight loss, DWL.

A firm's marginal revenue curve depends on its _____ curve

demand

In general, the relationship between the marginal revenue and demand curves depends on the shape of the _____ curve

demand

If the monopoly sets its price, the ______ determines how much output it sells. If the monopoly picks an output level, the _____ determines the price

demand curve, demand curve

A monopoly's marginal revenue curve lies below its ______ curve at any positive quantity because its _____.

demand, demand curve is downward sloping

What is the shape of a Monopoly's market demand curve?

downward-sloping

a monopoly's profit is maximized in the _____ portion of the demand curve

elastic

The competitive firm can sell another unit of output without dropping its price because of its _______. As a result, the marginal revenue it receives from selling the last unit of output is the _____.

horizontal demand curve, market price

The marginal revenue curve is _____ for a competitive firm, and ______ for a monopoly

horizontal, downward sloping

A tax ____ the deadweight loss in a monopolized market.

increases

market failure

inefficient production or consumption, often because a price exceeds marginal cost

A profit-maximizing monopoly never operates in the _______ portion of its demand curve

inelastic

Marginal revenue is negative where the demand curve is ___

inelastic

A monopoly can set its price meaning:

its not a price taker

The market failure from a monopoly occurs because

its price is greater than its marginal cost.

Because a monopoly's price is above its ______, too little output is produced, and society suffers a deadweight loss.

marginal cost

The monopoly sets its price above _____ to maximize its profit

marginal cost

In a competitive market, the effect of a shift in demand on a competitive firm's output depends on the shape of the ____

marginal cost curve

How much the monopoly's price is above its _____ depends on the shape of the _____ curve it faces

marginal cost, demand

The more elastic the demand the monopoly faces at the quantity at which it maximizes its profit, the closer its price to its _____ and the closer the Lerner Index or price markup, (p - MC)/p, to ____, the competitive level.

marginal cost, zero

the monopoly's ______ curve lies below the demand curve at every positive quantity.

marginal revenue

Like all firms, a monopoly maximizes its profit by setting its price or output so that its ____

marginal revenue equals its marginal cost

The _______ curve is a straight line that starts at the same point on the vertical (price) axis as the demand curve but has twice the slope of the demand curve, so the _______ curve hits the horizontal (quantity) axis at half the quantity as the demand curve

marginal revenue, marginal revenue

The monopoly is constrained by the ______

market demand curve

If its current sales affect a monopoly's future demand curve, a monopoly that maximizes its long-run profit may choose not to

maximize its short-run profit.

Where demand curve is inelastic, the MR=

negative -1 < ε ≤ 0

Where the demand curve hits the price axis (Q = 0), the demand curve is ______, so the marginal revenue equals price: MR = p.

perfectly elastic

The greater the difference between ___ and ___, the larger the Lerner Index and the greater the monopoly's ability to set price above marginal cost.

price and marginal cost

natural monopoly

situation in which one firm can produce the total output of the market at lower cost than several firms could

market power (monopoly)

the ability of a firm to charge a price above marginal cost and earn a positive profit

The demand curve shows

the average revenue or price per unit of output sold

A firm's marginal revenue, MR, is

the change in its revenue from selling one more unit.

What causes the monopoly's marginal revenue to be less than its price?

the downward slope of its demand curve

The welfare loss of a monopoly can be reduced or eliminated if

the government regulates the price the monopoly charges or allows other firms to enter the market.

If a good has a positive network externality, its value to a consumer grows as ___

the number of units sold increases

monopoly

the only supplier of a good that has no close substitute

A firm's demand curve shows

the price, p, it receives for selling a given quantity, q.

Lerner Index (Price Markup)

the ratio of the difference between price and marginal cost to the price: (p - MC)/p

network externality

the situation where one person's demand for a good depends on the consumption of the good by others

Where the demand elasticity is _____, ε = -1, marginal revenue is ____

unitary, zero

Demand Curve aka

Average Revenue curve

A monopoly shuts down to avoid making a loss in the short run if its price is below its _____ at its profit-maximizing (or loss-minimizing) quantity

Average variable cost

Why doesn't it matter if we use q or Q for a monopoly when describing both the firm's and the market's output?

Because a monopoly is the only firm in the market

Why is marginal profit zero where marginal revenue equals marginal cost?

Because marginal profit is marginal revenue minus marginal cost

the monopoly's marginal revenue is:

MR = p + Δp/ ΔQ (Q)

When the demand curve is perfectly elastic, MR=____

MR = p.

If the firm sells exactly one more unit, Δq = 1, its marginal revenue is

MR = ΔR

A firm that earns ΔR more revenue when it sells Δq extra units of output has a marginal revenue of

MR = ΔR/Δq

Does a monopoly have a supply curve?

No.

a firm's revenue is R=

R=pq

Table 11.1

Use with figure 11.2 p = 24 − Q line

Can a monopoly have more than one optimal price at the same given quantity?

Yes

the most commonly used approach to regulating monopoly pricing is to impose a price ceiling is called a

a price cap

In the long run, the monopoly shuts down if the price is less than its __

average cost

The monopoly makes a positive profit if its ____ is less than the price at the profit-maximizing output

average cost

Other terms for Q

-number of units of output a firm sells q, -the output of all the firms in a market -or market output, Q

What is the Lerner Index for a competitive market?

0 because a competitive firm cannot raise its price above its marginal cost and its demand curve is perfectly elastic

Where the demand elasticity is unitary, MR=

zero, MR = p[1 + 1/(-1)] = 0


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