Chapter 15- Monopoly and Antitrust Policy
A monopoly is a market structure that is characterized by Using the broader definition of monopoly, in which of the following cases could we argue that Microsoft has a monopoly in computer operating systems?
a single seller of a good or service that does not have a close substitute. If Apple's computer operating system and the Linux operating system were not considered close substitutes for Windows.
Monopolies are recognized to create deadweight loss. How large are the efficiency losses due to monopoly? Economists generally agree that efficiency losses due to monopolies in the economy are
small because true monopolies are very rare. Economists seem to agree that the loss of economic efficiency due to monopoly is small primarily because true monopolies are very rare. In most industries, competition keeps price much closer to marginal cost than would be the case in a monopoly.
What is the firm's profit when it sells six subscriptions per month?
$72
A patent gives its holder the exclusive right to a product for a period of __________ from the date the patent is filed with the government.
20 years
Suppose a market has twenty firms, each with 5 percent market share. What is the Herfindahl-Hirschman Index (HHI) of concentration for this market? The HHI is _____ Higher HHI values correspond to _________ market concentration.
500, greater. Explanation: The Herfindahl-Hirschman Index (HHI) of concentration squares the market shares of each firm in the industry and adds up the values of the squares. For example, if a market has twenty firms, each with 5 percent market share, then HHI=20×5^2 HHI=20×25 HHI=500.
A monopoly is a market structure that is characterized by:
A single seller of a good or service that does not have a close substitute.
Price discrimination is the practice of:
Dividing consumers into two or more groups and charging different prices to each group.
What is a merger between firms in the same industry called?
Horizontal merger
Which of the following is most likely to increase market power?
Horizontal mergers
In which of the following market structures is the firm's demand curve the same as the market demand for the product?
Monopoly
Which of the following is an effect of a monopoly?
Monopoly causes a reduction in consumer surplus
Which of the following statements regarding natural monopoly is true?
Natural monopoly is most likely to occur in markets where fixed costs are large relative to variable costs.
Which point on this graph corresponds to a natural monopoly serving this market and breaking even?
Point A
What point on the graph represents the price and output level that a monopolist will choose?
Point B
Which of the following laws prohibited charging buyers different prices if the result would reduce competition?
The Robinson-Patman Act
Which of the following laws outlawed monopolization?
The Sherman Act
What is the definition of market power?
The ability of a firm to charge a price greater than marginal cost.
Which of the following rights is given to the holder of a patent?
The exclusive right to a new product
In which of the following situations can a firm be considered a monopoly?
When a firm can ignore the actions of all other firms. Other firms must not be producing any close substitutes if the monopolist can ignore their actions.
Laws aimed at promoting competition among firms are known as:
antitrust laws
Which area(s) in the graph to the right show the reduction in consumer surplus that results from this industry being a monopoly rather than being perfectly competitive? Which of the following are effects of monopoly? A. Monopoly causes a reduction in consumer surplus. B. Monopoly causes an increase in producer surplus. C. Monopoly causes a reduction in economic efficiency. D. All of the above are effects of monopoly.
area A + area B D. All of the above are effects of monopoly.
Natural monopoly happens when the:
average total cost curve is decreasing
What is the difference between a horizontal merger and a vertical merger? A horizontal merger is a merger Which type of merger is more likely to increase the market power of a newly merged firm? _________ mergers are more likely to increase market power.
between firms in the same industry, while a vertical merger is a merger between firms at different stages of the production of a good. horizontal
The late Nobel Laureate economist George Stigler wrote: "[The] purely "economic" case against monopoly is that it reduces aggregate economic welfare... When the monopolist raises prices above the competitive level in order to reap his monopoly profits, customers buy less of the product, less is produced, and society as a whole is worse off." Indicate the price that is at what Stigler refers to as "the competitive level." Compare this price to the price which earns the firm "monopoly profits." The perfectly competitive price and output level occur where ____ A monopoly produces output up to the point where ____ Explain why society is worse off when a monopolist charges a price that earns monopoly profits rather than when price is set at the "competitive level."
demand equals marginal cost. marginal revenue equals marginal cost and charges the price indicated by the demand curve. Economic surplus is reduced.
Does a monopolist have a supply curve? Briefly explain. (Hint: Look again at the definition of a supply curve in Chapter 3 and consider whether this applies to a monopolist.) A monopolist
does not have a supply curve because it is a price maker with one profit-maximizing price-quantity combination.
The only legal restriction concerning price discrimination is that firms cannot use it to:
drive rivals out of business
In China, the government owns many more firms than in the United States. A former Chinese government official argued that a number of government-run industries such as oil refining were natural monopolies. Oil refining would be a natural monopoly in a country if An industry is a natural monopoly when
having multiple firms would be highly inefficient. one firm can satisfy the entire market at the lowest cost.
The monopolist charges a price that is __________ the perfectly competitive industry.
higher than
The monopolist produces an output that is __________ the perfectly competitive industry would produce.
less than
A monopolist will maximize profit at the level of output where:
marginal cost equals marginal revenue
Why was De Beers worried that people might resell their old diamonds? If people resell their old diamonds, then How did De Beers attempt to convince consumers that used diamonds were not good substitutes for new diamonds? How did De Beers' strategy affect the demand curve for new diamonds? The demand for new diamonds has How were De Beers' profits affected? De Beers ________ profitable.
market competition would increase, decreasing profits. De Beers developed the slogan "a diamond is forever" to increase sentimental value. remained unchanged. has remained
Consider the natural monopoly shown in the figure on the right. Assume that the government regulatory agency sets the regulated price, PR, at the level of average total cost at which the demand curve intersects the ATC curve. With price set equal to average total cost,
the natural monopoly has no incentive to keep its average cost down in the future. Explanation: At P=ATC, the natural monopolist will break even and therefore has no incentive to keep its cost down in the future. Generally a monopolist produces its profit-maximizing output where MR=MC and sets a much higher price on the demand curve. Try Again
Because the monopolist faces a downward sloping demand curve:
there will be deadweight loss
Governments deal with natural monopolies by:
using regulation to protect consumers
In the long run, the monopolist can earn:
zero or positive economic profit
