CHP 13- EXAM 3

what are the benefits of monopoly

incentives for R & D

can the firm mark up price more significantly

very inelastic. second weakest, constant market cost, direct marketing approach

Sherman Act

Prevent artificial increase of prices and artificial creation of monopoly through nefarious means; deemed practices harmful to consumers to be illegal

Monopolies are especially harmful if they control a good that is used to produce other goods.

The result is greater deadweight loss, and the "pie" shrinks.

Clayton Act

Update to Sherman Act; specified certain activities and clarifications

network effects

facebook, ebay, credit cards

markup=

price sold - MC (at some quantity)

the single seller of a good is the

"price setter"

profit is TR -TC

(P-AC )*Q

PROFIT

(P-AC)*Q

in a perfectly competitive industry

-firms will sell their good at market price -firms will produce where MR=MC -firms have a perfectly elastic MR curve(selling each good for the same price) -can make profit in the short run, but zero profits in the long run

The more inelastic the demand curve for a product is, the:

-higher is the monopolist's price markup.

what are the BENEFITS of monopoly

-incentives for research and development

what are examples of barriers to entry?

-ownership of an input that is difficult to duplicate -brands and trademarks -development of a relationship with the market

4 types of monopoly structures

-perfectly competitive -monopolistically competitive -oligopoly -monopoly

What are the 3 tools that the government uses to regulate monopolies?

-price controls -government ownership -antitrust law

Market power allows a firm to raise price: Above average cost. Above marginal cost. Above marginal revenue.

Above marginal cost.

TC=

FC+VC

patents example

GSK's patent on Combivir

Laws preventing entry of competitors

Indonesian clove monopoly, Algerian wheat monopoly, U.S. Postal Service

to maximize profit,firms produce at the level of output where

MC=MR

What is the profit-maximization condition for a monopolist? AR = MC MR = MC MR > MC AR = D

MR= MC

profit maximizing output

MR=MC

WTP=MAX WILLING TO PAY = PRICE

PERFECT PRICE DISCRIMINATION

mergers

Prices, technology, and market conditions are constantly changing. Firms grow, shrink, split, and merge. Mergers lead to efficiencies of scale but more market power. Authorities must try to balance lower costs with higher prices

AC

TC/Q

(P-AC)*Q

TR - TC

monopoly

a firm with exclusive control of a commodity or service in a particular market; full market power

which of the following is most likely to be a natural monopoly?

a railroad company

If arbitrage becomes extensive, a price-discriminating monopolist selling its patented drug in two markets will: increase the price in the inelastic market and lower the price in the elastic market. raise the price in both markets. begin to charge the same price in both markets. quit selling the product in the market with the inelastic demand.

begin to charge the same price in both markets.

what is an example of the costs of a monopoly

deadweight loss corruption & inefficiency

natural monopolies involve a trade-off between

deadweight loss and economies of scale

patent monopolies involve a trade-off between

deadweight loss and innovation

markup (in price)

difference between the price the good is sold for and the marginal cost of producing that good markup= price sold - MC(at some quantity)

for a monopolist, marginal revenue is less than

market price

perfectly competitive

market where there are many sellers, selling a nearly identical product

small markup

relatively elastic demand

examples of network effects

-Facebook has few competitors because everybody wants to use the site their friends use. There are only a few credit card companies. Customers want cards that are widely accepted. Firms want to accept cards that are widely used

what are examples of monopolies?

-Luxottica (glasses, sunglasses) -Utilities (Water, natural gas, electricity, etc.) -Oil in the Late 1800s (Rockefeller - Standard Oil) -U.S. Steel in the Late 1800s (Carnegie) -Trucking and Railroad in Late 1800s -Telephone services in Late 1900s (AT&T) -Apple Products (Apple) -Monsanto (Corn)

the laws give the federal government legal authority to prosecute monopolies or firms' attempts to monopolize

-can break up a monopoly -can prohibit a merger -can prevent acts that reduce competition

monopolies do 4 things:

-charge a higher price than competitive firms -reduce total surplus -create deadweight loss -use market power to earn above normal profits

what are the COSTS of monopoly?

-deadweight loss -corruption and inefficiency

in a Perfectly Competitive Demand Curve:

-perfectly elastic (horizontal demand curve) -a monopolist however faces a downward sloping demand curve -the additional revenue per unit < current price or MR< P

incentives for R & D do what?

-prizes can reward research and development without creating monopolies -patent buyouts another alternative -you have to raise taxes to pay for the patent -it might be difficult to determine a price

what are the characteristics of monopoly markets?

-single seller of a good : price setter -high barriers to entry(high costs/corruption) one producer in market; is the market -can make a profit in both the long run and short run -produces less, sells higher than perfectly competitive firms

two effects make demand for pharmaceuticals inelastic

-the "you can't take it with you" effect: people with serious illnesses are relatively insensitive to the price of life-saving drugs -the "other people's money" effect: if third parties (like insurance companies, hospitals are paying for the medicine, people are less sensitive to price -the more inelastic the demand curve is, the more a monopolist will raise the price above MC

In a monopoly market:

-the lure of above-normal profits may give a firm an incentive to develop new products and technologies.

what are the goals of a Monopoly?

-to maximize profit -ensure other firms do not enter their market -maintain full control of the market (sole owner of the market share)

When comparing a monopoly with a competitive industry, monopoly quantity:

-will be lower, and monopoly price will be higher, than that of a competitive firm.

Rank the scenarios in terms of how much profit a monopolist will earn from each

1. Most Profit : the firm has the ability to perfectly price discriminate selling at the customers maximum willingness to pay 2. the firm can charge different prices to different consumers 3. the firm must charge all consumers the same price 4. the firm must charge a price that is equivalent to its marginal cost

what are the 3 questions that a monopolist will ask and answer?

1. What price to sell at? 2. What quantity to produce? 3. Will there be entry or exiting ?

What are the steps a monopolist will follow to maximize profit?

1. determine what quantity to produce ( where MR=MC) 2. Set the price of your good based on your Demand Curve at this level of quantity 3. Calculate profit =either TR-TC or (P-AC)*Q note: the difference between MC at this quantity and the price you set is your markup

what are the 4 sources of monopoly power?

1. economies of scale 2. barriers to entry 3. network effects 4. innovation

reducing monopoly prices does 2 things:

1. increases output AND consumer surplus 2. decreases incentive to innovate

so we know what monopolists will do now

1. produce where MR=MC 2. Set price based on Demand Curve at this quanitity

In which of the following scenarios will automobile prices be the lowest? A competitive automobile company buys its steel from a monopoly steel producer. A monopoly automobile company buys its steel from a competitive steel producer. A competitive automobile company buys its steel from a competitive steel producer. A monopoly automobile company buys its steel from a monopoly steel producer.

A competitive automobile company buys its steel from a competitive steel producer.

Which statement describes a monopoly? Many firms produce identical products with no control over the market price. Many firms produce differentiated products with control over market price. A single firm produces a product with no close substitutes and control over the market price. A single firm produces a product with many close substitutes and limited control over the market price.

A single firm produces a product with no close substitutes and control over the market price.

Bree's Bait Shop is a successful store that specializes in highly effective fishing tackle. Bree has employed a high‑tech computer tracking system that allows her to separate her customers into two different groups of consumers with differing price elasticities of demand. Bree is interested in increasing her profits through price discrimination and approaches your marketing firm for advice. Assuming her demand curve is downward sloping, you tell her there is one more crucial piece of information you must have in order to advise her. What do you ask Bree? What is your current price? What are your variable costs? Are you able to prevent the resale of your tackle? Are your profits greater than your costs?

Are you able to prevent the resale of your tackle?

Suppose that the government decides to regulate this natural monopolist by requiring the firm to charge a price of P2. Which is true if the government takes this approach? A socially optimal quantity of the good will result. The firm will earn a higher profit because it is selling a larger quantity. The firm will earn a negative economic profit. Consumer surplus will increase

Consumer surplus will increase

Two months after Apple introduced the iPhone in 2007, the company reduced the price from $600 to $400. How is this drop of price an example of price discrimination? Early adopters have a more elastic demand curve than late adopters. It's not an example of price discrimination. Early adopters have a higher demand than late adopters. Early adopters are less sensitive to price than late adopters.

Early adopters are less sensitive to price than late adopters.

GlaxoSmithKline owns the patent on Combivir. A patent gives exclusive rights to make, use, or sell the product.

GSK's patent prevents competition. This gives GSK market power.

Patent laws create a dilemma. The idea behind patent protection is to provide inventors, entrepreneurs, and firms an incentive to innovate and develop new products and ideas. However, the incentive provided is to reward the innovator with the temporary ability to earn monopoly profits, which creates deadweight losses. Which policy is most likely to preserve socially desirable incentives to innovate while also reducing inefficiencies? Varying patent protection according to the significance of the good. For products associated with public health, like potentially life-saving medications, patents would not be enforced as strictly. Patents for products with only commercial uses would be enforced as usual. Introducing a system of patent buyouts. The government would purchase most patents from inventors and then "rip up" the patents so that others could immediately use the ideas; thus, prices would fall. Reducing the duration of patent law protection. This would allow firms to recover the costs associated with developing a new product but prevent firms from earning outlandish profits. Eliminating patent protection altogether. Many existing firms make profits without the benefit of patent law protection, implying that firms would be able to discover other ways to profit from their innovations.

Introducing a system of patent buyouts. The government would purchase most patents from inventors and then "rip up" the patents so that others could immediately use the ideas; thus, prices would fall.

Which of the following statements is TRUE? Monopolies are always inefficient since they create higher prices for consumers. Monopolies decrease consumer surplus but increase total surplus in an economy. Consumers typically lose less than producers gain in monopoly markets. Monopolies create incentives for additional research and development.

Monopolies create incentives for additional research and development.

Which firm is most likely to be a natural monopoly? a firm that owns nearly all the diamond mines in the world Municipal Power Light, the local supplier of electricity a pharmaceutical company that has the exclusive right to sell a patented drug a restaurant that is unable to practice price discrimination and must charge all consumers the same price

Municipal Power Light, the local supplier of electricity

What may happen if a monopolist doesn't believe they will make a profit?

Patents are one way of rewarding research and development (R&D). Without patents firms would not spend on R&D, and fewer new drugs would be developed.

Connor argues that video game consumers are harmed by the fact that a relatively small number of studios produce video games. The marginal cost of producing additional copies of popular video games is almost always extremely low, relative to the price these firms charge. This causes a deadweight loss. Connor wants the government to stop enforcing video game patents so that prices will be more closely aligned with the marginal cost. Duncan thinks that consumers would be worse off if the government were to adopt this approach. Which most strongly supports Duncan's thinking that patents are necessary? Patent enforcement varies by country. Nations with strong patent protection are associated with lower levels of per capita GDP. Strong patent enforcement can lead to higher profits, which are directly related to lower wages. The government should never be involved in the provision of a good or service. Anarchy is often a result of nations not enforcing patents. Patents give firms an incentive to spend money on research and development.

Patents give firms an incentive to spend money on research and development.

Consider a case of possible price discrimination: lunch specials at restaurants. Some restaurants may offer a soup and salad for five dollars during lunch hours and offer the same dish for eight dollars during dinner hours. Suppose that the soup and salad is the cheapest dinner option, and that the restaurant, although usually only half full during lunch hours, is often full enough during dinner hours that people end up choosing to eat elsewhere because of the wait. In what way might this difference in prices not be price discrimination?

People that come in and order the soup and salad for dinner might cause customers who would have ordered a more expensive meal to instead eat elsewhere because of the wait. As such, the marginal costs of the two meals to the restaurant are different; thus, this is not necessarily price discrimination.

Some vending machines on college campuses sell identical items, such as the same bags of potato chips, for two different prices. The low-priced chips generally sell out by the end of the day, leaving the more expensive chips for late-night visitors to the vending machines. What must the vending machine operators think about the demand of people who visit the machine at night relative to those who visit the machine during the day? Why might they think this? People who buy snacks at night have less elastic demand than people who buy snacks during the day. People who buy from the vending machines at night are more likely to bring food from home and thus not need food from a vending machine. People who buy snacks at night have more elastic demand than people who buy snacks during the day. People who are in the building late at night are likely to have an office in which they can store food. People who buy snacks at night have more elastic demand than people who buy snacks during the day. People buying snacks at night have probably already eaten three full meals. People who buy snacks at night have less elastic demand than people who buy snacks during the day. People buying snacks at night have fewer substitutes from which to choose, since a lot of restaurants and other stores are likely to be closed.

People who buy snacks at night have less elastic demand than people who buy snacks during the day. People buying snacks at night have fewer substitutes from which to choose, since a lot of restaurants and other stores are likely to be closed.

Monopolies reduce/ increase total surplus

Reduce, due to deadweight loss

Which of the following represents the nature of a monopolist's deadweight loss? It is a fact that people are willing to spend a lot of money for small improvements in quality. Unlike competitive markets, there are consumers with unsatisfied wants. It is not possible to equate price with marginal cost when demand is inelastic. Some consumers are willing to pay more than the monopolist's marginal cost of production, but the monopolist does not produce these units.

Some consumers are willing to pay more than the monopolist's marginal cost of production, but the monopolist does not produce these units.

economies of scale

Subways, cable TV, electricity transmission, major highways

What is a natural monopoly? a market in which there is only one firm a monopoly resulting from one firm's exclusive ownership of a natural resource required to produce a good a monopoly that results when one firm is able to produce at a lower cost than multiple firms, giving large firms with higher levels of output an advantage over smaller competitors a monopoly that results from government issuing patents

a monopoly that results when one firm is able to produce at a lower cost than multiple firms, giving large firms with higher levels of output an advantage over smaller competitors

When a single firm can supply the entire market at lower cost than two or more firms, we say that the industry is: a natural competitor. profit maximizing. a bilateral monopoly. a natural monopoly.

a natural monopoly.

antitrust laws are

antimonopoly laws

innovation

apple's iphone, wolfram's mathematica software, ebay

Josefina is the only seller of sopapillas in town. Last week, she sold 200 sopapillas, and the marginal revenue of the 200th sopapilla was $1.50 and the marginal cost was $1. Is Josefina maximizing her profit? a) Yes, Josefina is maximizing her profit. b) No, Josefina is producing less than the optimal quantity. c) No, Josefina is producing more than the optimal quantity. d) No, Josefina is not maximizing her profit despite producing the optimal quantity.

b) No, Josefina is producing less than the optimal quantity. she needs to make more in order to get her MC = MR because right now marginal rev is greater

monopolists cannot stay in business if MC exceed revenue

cannot stay in business if MC exceed revenue

marginal revenue is the same as the

change in total revenue total revenue= price * quantity

Monopolies, relative to competitive firms

charge a higher price produce less -they reduce total surplus (consumer surplus+producer surplus) -consumers are worse off

When looking at a firm's behavior, you know it is engaging in price discrimination when it charges customers more than they would prefer to pay. asks about personal information such as race, genderefore offering services. charges a different price to different customers that is not reflective of the firm's costs. does not accept payment with a smartphone.

charges a different price to different customers that is not reflective of the firm's costs.

Perfect price discrimination is characterized by charging customers a different price, depending on their income. prices that are different from competitors' prices. different prices to customers based on when they purchase the good or service. customers a different price, depending on their gender. each customer a price equal to his or her maximum willingness to pay.

each customer a price equal to his or her maximum willingness to pay.

Monopolies can arise naturally when:

economies of scale A single large firm can produce at lower cost than other small firms utilities such as : -water -natural gas -cable television

Barriers to entry

factors that increase the cost to new firms of entering an industry

oligopoly

few sellers selling a unique product

many monopolies are the result of

government corruption

monopolies tend to dominate industries with high ________

high fixed costs

A monopolist's price is: Lower than a competitive firm's. Higher than a competitive firm's. The same as a competitive firm's.

higher than a competitive firm

government ownership and regulation of electricity provided the United Stateswith cheap power without competition or a profit motive , there is a tendency to become ____

inefficient

the markup price over marginal cost is smaller/larger the more inelastic the demand

larger the more inelastic demand

a firm with market power must ________ its price to sell an additional unit

lower

For a firm with market power, marginal revenue is: Higher than price. Equal to price. Lower than price.

lower than price

Which of the following would be an effective method for firms to ensure profit from price discrimination when the possibility of arbitrage exists?' set a single price for all markets make products sold to each market have an exclusive feature supply products only to one market request law enforcement to eliminate the possibility of arbitrage

make products sold to each market have an exclusive feature

competitive markets

many firms produces efficient output level no long run economic profits

monopolistically competitive

many sellers each selling a product that is somewhat different from one another

network effects make a product

more valuable the more users there are

copyright

nplevels, movies musical compositions, computer software

hard to duplicate inputs

oils,diamonds, rolex watches

monopoly**

only seller selling a unique service for his small town

sources of monopoly/market power

patents laws preventing entry of competitors economies of scale hard-to-duplicate inputs innovation copyright network effects

many monopolies are created to transfer wealth to

politically powerful elites

the market piower only extends to where this market power is_______________

recognized

big markup

relatively inelastic demand

when monopolies rreduce total surplus , there implies a deadweight loss which means

sales that do not occur because the monopoly is above the competitive price

monopoly

single firm produces inefficient output level price maker

2 important U.S antitrust laws are

the Sherman Act and the Clayton Act

economies from scale

the advantages of large scale production that reduce average cost as quantity increases ; firm's marginal costs of production decrease ex, producing tap water , specialization (car production) , stores buying in bulk

Antitrust initiatives come with both benefits and costs. Of the following, which best summarizes the tradeoffs for society when firms want to merge, or when the government wants to challenge the merger? The main tradeoff is between: the benefits of higher efficiency versus the costs of increased market power. the benefits of increased market power versus the costs of higher efficiency. the benefits of product differentiation versus the costs of greater economies of scale. the benefits of increased profits versus the costs of higher wages.

the benefits of higher efficiency versus the costs of increased market power.

marginal cost

the change in total cost from selling an additional unit

marginal revenue

the change in total revenue from sellling an additional unit lower than price

market power

the power to raise price above marginal cost without fear that other firms will enter the market

Monopolies often charge prices that exceed their marginal cost, which allows them to earn profits. Among monopolies though, the degree to which firms can mark up prices varies. Differences in what characteristic explains the extent to which monopolies can mark up prices? how strictly patents are enforced in the relevant country the price elasticity of demand for the firm's output the firm's cost structure the firm's approach to marketing their product

the price elasticity of demand for the firm's output

Price discrimination is defined as selling: different products at different prices to the same customers. different products at the same prices to different customers. the same products at the same prices to the same customers. the same product at different prices to different customers.

the same product at different prices to different customers.

the practice of regulation is much more complicated than

the theory

when price decreases, more units of the product are bought so

therefore MR will not always equal price

innovation can lead to products that other firms can't immediately duplicate and innovation involves a

tradeoff; iPhones are priced higher than if there were stronger competitors. But Apple would have less incentive to innovate if it didn't expect monopoly profits.

t/f a price control on a monopoly can increase output

true

t/f price is lower in competitive markets than monopoly markets

true

if the economies of scale are large enough, price can be lower under a natural monopoly than

under competition

natural monopoly

when a singe firm can supply the entire market at a lower cost than two or more firms natrual monopolies exist for a good that is too often costly to produce/ provide (electric utilities)

consumers are worse off or better off because of monopoly?

worse off

do monopolists face a downward sloping demand curve?

yes