LC9: LearningCurve: Ch. 9: Market Power and Monopoly

Trash collection is ___________ (likely/unlikely) to be a natural monopoly.

LIKELY

In 1876, Henry Wickham stole 70,000 rubber seeds for the British, who then planted them in concentrated plantations in what is now Malaysia. The innovation of planting the trees close together in a place with no leaf-blight fungus gave the British _____. Britain's market power from controlling a key input is an example of a _____. a source of product differentiation; monopoly an absolute cost advantage; natural monopoly a source of product differentiation; natural monopoly an absolute cost advantage; monopoly

an absolute cost advantage; monopoly > Because Britain were able to plant the trees close together, they were able to produce rubber with an absolute cost advantage, which led to Britain having a monopoly

Bauxite is the key mineral used to make aluminum. Starting in 1894, Alcoa bought or leased the rights to all major bauxite deposits in the United States. By 1920, Alcoa owned the rights to enough bauxite to supply 500 years of aluminum production. (Alcoa was broken up in an antitrust case decided in 1945.) This is an example of a monopoly created by: scarcity of resources. network economies of scale. product differentiation. control of a key input.

control of a key input. > This key input has given Alcoa the absolute cost advantage.

Which of these industries are natural monopolies? bottled water and milk electricity transmission and trash collection electric repair services and plumbing services fast-food restaurants and supermarkets

electricity transmission and trash collection > Electricity and trash collection are typically managed by one firm (or by the government) in each city or town, because there are high fixed costs in these industries.

Barriers to entry are: - factors that keep entrants out of a market despite the existence of a large producer surplus. - gates that prevent people from entering a stadium. - factors that prevent entry into markets with small producer surpluses. - factors that prevent entry into markets with large consumer surpluses.

factors that keep entrants out of a market despite the existence of a large producer surplus. > This is, in fact, the definition used for barriers to entry.

*If the government decides that a firm has too much monopoly power, it could implement price regulation, causing _____ prices and a[n] _____ quantity sold. lower; increase in raised; increase in lower; decrease in raised; decrease in

lower; increase in > When a firm exercises monopoly power, it increases price and reduces output quantity. When the government reduces this power, the opposite occurs.

Setting MR = MC allows the calculation of the _____, which is used to determine the profit-maximizing price. - quantity that maximizes a firm's profit - the degree of product differentiation in a market - markup - Lerner index

quantity that maximizes a firm's profit > Profit is maximized at the quantity where marginal revenue is equal to marginal cost. When this quantity is found, it can be substituted into the equation for demand to determine the corresponding price.

Intellectual property protection tends to lead to the kind of innovations that people like the most, since _____ demand curves tend to be those with the _____ consumer surplus and largest monopoly profits. steeper; highest flatter; lowest steeper; lowest flatter; highest

steeper; highest > Goods with steeper demand curves tend to be those that result in the highest producer and consumer surplus.

When a firm has market power, consumer surplus is the area: under the demand curve and above marginal cost. under price and above the marginal cost, out to the quantity sold. under the demand curve and above marginal cost, past quantity sold. under the demand curve and above the price.

under the demand curve and above the price. > This area does, in fact, represent the consumer surplus. https://www.google.com/url?sa=i&url=http%3A%2F%2Fmilkandcookieseconomics.blogspot.com%2F2014%2F04%2Fapple-as-monopolistic-industry.html&psig=AOvVaw1SLj0YH8alce42UktXEv3z&ust=1666883519321000&source=images&cd=vfe&ved=0CAwQjRxqFwoTCJDBjJOX_voCFQAAAAAdAAAAABAH

A monopoly firm sets its profit-maximizing price at $14. At that price, it sells 570 units. Marginal cost and marginal revenue are $8. The firm's price elasticity of demand is: −1.5. −2.33. −0.4. −0.6.

−2.33. We know that -1/(ED) = (P - MC)/P. By plugging in the values we have and solving for ED, we find -2.33.

[[Review] Kermit finds himself in the fortunate position of being the monopoly supplier of houseflies. He knows the demand curve for houseflies is Q = 2,100 − 10P. The marginal cost of catching houseflies is MC1 = 0.1Q. (Remember, Kermit is a frog. He presumably has a comparative advantage at catching houseflies.) Kermit's goal is to maximize profits. A new technology has become available that makes Kermit's tongue stickier. His new marginal cost curve is MC2 = 0.1Q − 30. By how much will Kermit's profit-maximizing output change as a result of the new, lower cost? decreases by 1,800 decreases by 200 increases by 200 increases by 1,800

(Got 700 and 800, so first calc was off somewhere) increases by 200 > After finding the inverse demand curve and the marginal revenue curve, we see that the optimal quantity before the change was 600 and after was 800, a change of positive 200.

Kermit finds himself in the fortunate position of being the monopoly supplier of houseflies. He knows the demand curve for houseflies is Q = 2,100 − 10P. The marginal cost of catching houseflies is MC = 0.10Q. Kermit's goal is to maximize profits. In equilibrium, how many units of output will this firm produce? 1,050 700 2,100 1,909

700 > Using the demand curve, you find that MR = 210 - 0.2Q. Set this equal to MC to find the equilibrium quantity for 700 units.

[Review] Kermit finds himself in the fortunate position of being the monopoly supplier of houseflies. He knows the demand curve for houseflies is Q = 2,000 − 10P. The marginal cost of catching houseflies is MC1 = 0.15088Q. (Remember, Kermit is a frog. He presumably has a comparative advantage at catching houseflies.) Kermit's goal is to maximize profits. A new technology has become available that makes Kermit's tongue stickier. His new marginal cost curve is MC2 = 0.15088Q − 20Q. Kermit's profit-maximizing output will change by _____ as a result of the new, lower cost. Enter your answer as an integer and include the + or - sign.

?

Gasha owns the only flower shop in a small town. The marginal cost of a bouquet of flowers at her store is a constant $8, and her demand is given by Q = 400 - 10P. At the profit-maximizing quantity, what will the price of a bouquet be? $32 $24 $8 $160

$24 The inverse demand is P = 40 - Q ÷ 10, meaning that the marginal revenue is 40 - Q ÷ 5. Setting marginal revenue equal to marginal cost, it can be determined that the profit-maximizing quantity is 160. >> Substituting this value into the inverse demand equation yields 24.

Suppose the demand curve is Q = 32 - 0.50P. Calculate marginal revenue when Q = 10. Calculate marginal revenue when Q = 15. $32; $32 $44; $34 $24; $4 $27; $24.5

$24; $4 > The inverse demand curve is P = 64 - 2Q, so marginal revenue is 64 - 4Q. Substituting for Q yields $24 and $4.

[Review] Yoselyn finds herself in a perfectly competitive smartphone market where each firm has a marginal cost of $150, and the inverse demand faced by the market is P = 750 - 4Q. At equilibrium, consumer surplus for this market is: $90,000. $45,000. 70,312.5. 56,250.

$45,000.

An inverse demand curve of a firm with market power is P = 800 - 7.5Q (where Q is in millions). Suppose there's an increase in the price of one key input, causing the firm's marginal cost to increase from $200 to $230. What would be the new price of the good and by how much does the firm increase its price in response to the $30 increase in marginal cost? $515; $15 $631; $281 $340; $60 $475; $275

$515; $15 Using MR = MC, the old price would be $500 and the new price would be $515. remember: start by getting inverse D curve ALWAYS then derive MR curve > then set equal to price to get profit max quantities for each MC

*** The marginal revenue of a firm with market power is calculated by MR = P + (ΔP/ΔQ) × Q. Which of these statements describes the marginal revenue of a firm INCORRECTLY? - ΔP/ΔQ is a measure of how steep the demand curve is. - Having a steeper demand curve tends to reduce a firm's profit-maximizing output level. - The marginal revenue of a firm with market power will always be more than the market price. - The second component in the marginal revenue formula represents a loss in revenue.

The marginal revenue of a firm with market power will always be more than the market price. > Since the second component is negative, the marginal revenue will always be less than the market price. ΔP/ΔQ IS a measure of how steep the demand curve is A steeper demand curve tends to reduce a firm's profit-maximizing output level. The second component in the marginal revenue formula represents a loss in revenue.

Which of these describes the impact of intellectual property rights on the economy? They cause lower prices and a decreased variety of goods. They cause higher prices and a decreased variety of goods. They cause lower prices and an increased variety of goods. They cause higher prices and an increased variety of goods.

NOT They cause higher prices and a decreased variety of goods. > Intellectual property rights do generate a benefit to consumers. NOT They cause lower prices and a decreased variety of goods. > Intellectual property rights create barriers to entry in certain markets. *They cause HIGHER prices and an INCREASED VARIETY of goods. >> Intellectual property rights protect the market power of some firms, meaning higher prices, but also meaning that some goods are produced that would not be produced otherwise.

When a firm is deemed to have too much market power, government intervention occurs in order to: reduce deadweight loss. move the market toward a less competitive outcome. lower consumer surplus. reduce quantity of output.

NOT reduce quantity of output. > Firms reduce output quantity when they exercise market power. When reducing market power, the government indirectly increases output. reduce deadweight loss. >> Government intervention occurs in these situations to create a more competitive and efficient outcome with less deadweight loss.