Microeconomics Chapter 10
Microsoft likely has to spend billions of dollars building and developing an operating system, but once it is produced, the cost to get the software to each customer is almost zero. When Microsoft sells more units, their average total costs decrease. This means Microsoft is said to have ____________________.
economies of scale
Which of the following is considered a natural barrier?
economies of scale
A monopolist charges a price that is on the_____ portion of the demand curve.
elastic
Compared to perfect competition, monopoly results in...
fewer units produced and sold.
A natural monopoly exists when a single seller experiences _________ costs than any potential competitor.
lower
A natural monopoly exists when a single seller experiences ____________ average total costs than any potential competitor.
lower
Monopolies choose their profit maximizing....
output level and price.
Monopoly power measures the ability to set the ________ for a good.
price
In 1911, the U.S. government sued Standard Oil, a U.S. company, for violation of antitrust laws. The company broke up into 34 smaller companies. This is an example of...
promoting competition.
The Water and Electric Board in Eugene, Oregon, is a monopolist in the supply of electricity. The city government must approve the rates the company charges for its electricity. This is an example of...
regulating markets.
The year is 2278, and the starship Enterprise is running low on dilithium crystals, which are used to regulate the matter/antimatter reactions to propel the ship across the universe. Without the crystals, space-time travel is not possible. If the crystals are government owned or regulated, and the government wants to create the greatest welfare for society, the government should set the price...
using the marginal-cost-pricing rule.
Which of these statements regarding the differences between monopoly and a competitive market are true?
-A monopolist will produce less than the output produced in a perfectly competitive market. -There are more firms in a competitive market than in a monopoly. -A monopolist can earn profits in the long run, but a firm in a perfectly competitive market cannot. -A monopoly is a price maker, while a competitive firm is a price taker.
What are the solutions to the problems of a monopoly?
-Breaking up the monopoly -Reducing trade barriers -Regulating markets -Caveat about government oversight
What are natural barriers?
-Control of resources -Problems in raising capital -Economies of scale
What are the problems with a monopoly?
-Inefficient output and price -Few choices for consumers -Rent Seeking
What are government created barriers?
-Licensing -Patents and copyright laws
What are the characteristics of a competitive market?
-Many firms -Cannot earn long-run economic profits -Price taker -Produces an efficient level of output (P=MC)
What are the characteristics of a monopoly?
-One firm -May earn long-run economic profits -Price maker -Produces less than the efficient level of output (P>MC)
What are some examples of trade barriers?
-Tariffs -Quotas -Prohibition
Which statements are true regarding economies of scale?
-When a firm has a natural monopoly, it has that type of monopoly because of economies of scale. -When a firm has a natural monopoly, it has that type of monopoly because of economies of scale. -A firm that has economies of scale sees its average total costs decrease when production increases.
What are the benefits of competition?
-Wider access to innovation -More sellers
Price Maker
A firm with some control over the price it charges.
Market Failure
Condition occurring where there is an inefficient allocation of resources in a market.
Output Effect
How the lower price affects the number of customers.
Price Effect
How the lower price affects the revenue.
Monopoly Power
Measure of a monopolist's ability to set the price of a good.
Barriers To Entry
Restrictions that make it difficult for new firms to enter the market.
Tariff
Taxes on imported goods
How does the monopolist's decision compare to the efficient price and output?
The monopolist charges more and produces less.
Natural Monopoly
The situation that occurs when a single large firm has lower costs than any potential smaller competitor.
Rent Seeking
Using resources to secure monopoly rights through the political process.
Compared to perfect competition, monopolies charge...
a higher price.
Suppose there was only one producer of an expensive heart medication. The source of that producer's monopoly would most likely come from...
a patent to produce the drug.
Suppose an unregulated natural monopoly becomes regulated using marginal-cost pricing. As a result, the firm's profits would...
become negative.
Over the long run, a monopolist...
can continue to make economic profits if it can maintain a monopoly and keep competitors from entering the market.
Suppose that at the current level of production, the price of a monopolist's product is equal to $15 per unit. Marginal revenue is equal to $10 per unit, and marginal cost is equal to $15 per unit. This monopoly...
can increase its profit by producing and selling fewer units of its product.