Econ 2010: Ch 24
In a monopoly market structure, the firm and the industry are one and the same
True
Economies of scale contribute to the creation of natural monopolies All of the following barriers to entry can be categorized as government or legal restrictions except
True; ownership of essential resources
In order to price discriminate, a firm must
face a downward-sloping demand curve
The better the substitutes for a monopoly firm's product, the
greater the price elasticity of demand
Consider the figure to the right. Suppose that Qm is 8.2 units per week, that Pmis $5.00 per unit, and that the average total cost of producing the 8.2 units is $2.70 per unit. What is the dollar amount of maximized monopoly profits?
$18.86 ((Pm - ATCm)*Qm = (5.00 - 2.70)*8.2))
Suppose that in the figure to the right, a monopolist knows that if it produces 1111 units of output, its total revenues equal $63.80. If it were to reduce the price of its product to $5.60 per unit, the quantity demanded, and hence its output, would rise to 12 units per week. What would be the marginal revenue that the monopolist would derive from producing and selling a 12th unit? Since total revenues for 1111 units equal $63.80, marginal revenue from the production and sale of the 12th unit would be
$3.40 (TR of 12th (12*5.60) - TR of 11th (63.80))
A monopolist's maximized rate of economic profits is $500 per week. Its weekly output is 500 units, and at this output rate, the firm's marginal cost is $23 per unit. The price at which it sells each unit is $33 per unit - At these profit and output rates, the firm's average total cost is - At these profit and output rates, the firm's marginal revenue is
- $32 (P-ATC = profit/quantity) - $23 (MR=MC)
The marginal revenue curve of a monopoly crosses its marginal cost curve at $44 per unit, and an output of 5 million units - What is the profit maximizing (loss-minimizing) output? The price that consumers are willing to pay for this output is $50 per unit. If it produces this output, the firm's average total cost is $55 per unit, and its average fixed cost is $66 per unit. - What are the firm's economic profits (or economic losses)?
- 5 million units - $-25 million (economic profits = (average revenue(price)-average total cost)*output = 50-55*5)
Use the graph - What is the monopolist's profit-maximizing output? - At the profit-maximizing output rate, what is the average total cost? - At the profit-maximizing output rate, what is the average revenue? - At the profit-maximizing output rate, what is the monopolist's total cost? - At the profit-maximizing output rate, what is the monopolist's total revenue? - What is the maximum profit?
- 5,000 - $5.25 - $6.00 - $26,250 (5.25*5,000) - $30,000 (6.00*5,000) - $3,750 (30,000-26,250)
- Consider a price discriminating monopolist. Which of the following is true? For each of the following examples, which group will pay the higher price (as a result of having less elastic demand)? - Air transport for business people and tourists - Serving food on weekdays to businesspeople and retired people - A theater that shows the same movie to large families and to individuals and couples
- All of the above are true (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, charging different prices to different customers does not mean the monopoly is necessarily using price discrimination) - business people - business people - individuals and couples
Consider the diagram with the demand, MR, ATC, and MC curves. - For a monopoly, the profit-maximizing levels of output and price will be shown by the point - Suppose that the marginal cost and average total cost curves also illustrate the horizontal summation of the firms in a perfectly competitive industry in the long run. In a perfectly competitive industry, the equilibrium output and price levels will be shown by the point - A society faces economic cost by allowing monopolies to exist because monopolies
- G - E - charge a price higher than marginal cost and produce less than what society wants
- The marginal revenue curve for a perfectly competitive firms is - While the marginal revenue of the monopolist is
- horizontal - downward sloping
Consider the figure to the right. Suppose that Qm 7.7 units per week, that Pm is $5.50 per unit, and that the average total cost of producing the 7.7 units is initially $3.00 per unit. Then an increase in fixed costs occurs causing the ATC curve to shift upward and the average total cost of producing 7.7 units of output to rise to $3.90 per unit. - Does the monopolist's profit-maximizing weekly output rise, fall, or remain the same? - What is the new amount of maximized weekly economic profits?
- unaffected - old amount: $32.19 (6.40-2.70*8.7) new amount: $13.05 (6.40-4.90*8.7)
A monopolist can sell 25 toys per day for $10 each. To sell 26 toys per day, the price must be cut to $9. The marginal revenue of the 26th toy is:
-$16.00 (26*9 - 25*10)
Price for Monopoly
> Marginal Cost
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
Given the cost curves in the diagram, what market situation would you expect to occur?
A natural monopoly
Which of the following is not necessary for price discrimination to exist?
A perfectly elastic demand curve
Monopoly has social costs because
All of the above (a monopoly produces less and charges a higher price than a perfectly competitive firm would producing the same product or service, too few resources are being used in the monopoly industry and too many are used elsewhere, P is greater than MC and this implies economic inefficiency)
A natural monopoly
All of the above (has decreasing long-run average total costs over a very large range of output, has economies of scale over a very large range of output, has decreasing long-run marginal costs over a very large range of output)
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
Which of the following is not a barrier to entry into a market?
Diseconomies of scale
A monopolist can charge any price it wants without experiencing a change in quantity demanded
False
Consumer surplus is the sum of the total amount that consumers would have been willing to pay and the total amount that they actually pay, given the market clearing price that prevails in the perfectly competitive market
False
Both perfect competitors and monopolists must lower prices to sell more output The demand curve for the monopolist is ________ and the demand curve for the perfect competitor is ________
False; downward sloping and horizontal
The demand curve faced by the monopolist
Has greater price elasticity of demand as close substitutes for the monopoly product are developed
The demand curve of the monopolist
Is the same as the industry demand curve
In the graph, the profit-maximizing price for a monopoly is
P1
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
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
What's necessary for a firm to practice price discrimination?
The firm must be able to prevent resale of the product
Evaluate the following statement. A profit maximizing monopolist will never operate in a price range in which price elasticity of demand is inelastic
True
Why is there a social cost of monopoly?
Too few resources are being used in a monopoly
Because a monopolist produces a smaller quantity and charges a higher price than it would as a perfect competitor, a portion of the consumer surplus experienced under perfect competition becomes deadweight loss
True
Because a monopolist produces a smaller quantity and charges a higher price than it would as a perfect competitor, total consumer surplus under a monopoly is less than it is under perfect competition
True
Because a monopolist produces output at a point where price is greater than marginal cost, underproduction occurs
True
A monopolist is defined as
a single supplier of a good or service for which there is no close substitute
A monopoly is socially inefficient because it
charges a price greater than marginal cost
Marginal revenue for a monopolist is
downward sloping and always less than price
The demand curve faced by a purely monopolistic seller is
downward sloping, whereas that facing the purely competitive firm is perfectly elastic
As opposed to other types of monopoly, a natural monopoly typically owes its monopoly position to
economies of scale
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 firms product increases, the price elasticity of demand
increases
As the number of imperfect substitutes for a monopoly firm's product increases, the price elasticity of demand
increases
Consider the figure to the right. Suppose that Q1 is equal to 30 units of output per week. If the vertical distance to point A is $12 per unit and the vertical distance to point B is $22 per unit, then by how much does producing the 30th unit of output affect the firm's economic profits?
increases; $10 (12-2)
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
In a monopoly market structure, the firm ( the monopolist)
is the whole industry
If we were to compare the amount produced by firms in a competitive industry to the output produced by a monopoly, the monopolist will produce
on the elastic portion of the demand curve and charge a higher price
For a monopolist, marginal revenue is
less than price (MR supply curve starts at the same point as MR demand curve but is twice as steep)
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 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
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
Monopoly producers are faced with
no competitive producers of the same product
For a monopoly,
price = average revenue only
Charging different prices for similar products that have different marginal costs is called
price differentiation
As compared to a perfectly competitive industry, a monopoly industry with identical cost curves will
produce less and set a higher price
The monopolist sets prices by
producing the quantity where marginal cost = marginal revenue and charging the price that corresponds to that quantity
All of the following are necessary conditions for price discrimination except
the firm must be a price taker
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