(Complete) Ch. 8 Monopoly, Oligopoly, and Monopolistic Competition

Suppose the market for milk is perfectly competitive, and the equilibrium price of milk is $6 per gallon. If a firm that produces milk increases its output by 1 gallon, then its marginal revenue will be:

equal to $6

cost-plus regulation

a method of regulation under which the regulated firm is permitted to charge prices that cover explicit costs of production plus a markup to cover the opportunity cost of resources provided by the firm's owners

natural monopoly

a monopoly that results from economies of scale (increasing returns to scale)

Monopolistic competition is a market structure in which

a of firms sells products that are close but not perfect substitutes.

If a price discriminating monopolist uses a hurdle that completely separates buyers according to their reservation prices, while imposing no cost on those who jump the hurdle, then the monopolist is using ______.

a perfect hurdle

constant returns to scale

a production process is said to have constant returns to scale if, when all inputs are changed by a given proportion, output changes by the same proportion

Increasing returns to scale (or economies of scale)

a production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion

perfect hurdle

a threshold that completely segregates buyers whose reservation prices lie above it from others whose reservation prices lie below it, imposing no cost on those who jump the hurdle

The profit-maximizing price for a monopolist will ________ _ _____- than marginal cost.

always be greater

monopolistic competition

an industry structure in which a large number of rival firms sell products that are close, but not quite perfect, substitution.

Oligopoly

an industry structure in which a small number of large firms produce products that are either close or perfect substitutes

A natural monopoly that attempts to charge the socially desirable price will invariably suffer an economic loss because

average cost is usually higher than marginal cost

Network economies arise when products

become more valuable as more people use them.

The demand curve facing an imperfectly competitive firm is

downward sloping.

One problems with antitrust laws is that they may prevent companies from achieving:

economies of scale

What is the most widespread and enduring source of market power?

economies of scale and network economies

A firm that charges each buyer exactly his or her reservation price is a _______.

perfectly discriminating monopolist

The practice of charging different buyers different prices for essentially the same good is known as

price discrimination

One potential problem with state ownership of natural monopolies is that:

private natural monopolies are likely to face stronger incentives to cut costs than state-owned natural monopolies

When a perfectly competitive firm equates price with marginal cost, it is also equating marginal _____ with marginal _______.

revenue; cost

Marginal benefit of expanding output is

the additional revenue the firm will receive if it sells one additional unit of output

The marginal benefit to society of an additional unit of output is simply

the amount people are willing to pay for it.

Which of the following is the same for a monopolist and a perfectly competitive firm?

the calculation of marginal cost

Marginal Revenue (MR)

the change in a firm's total revenue that results from a one-unit change in output

The practice by which a seller offers a discount to all buyers who overcome some obstacle is known as

the hurdle method of price discrimination.

hurdle method of price discrimination

the practice by which a seller offers a discount to all buyers who overcome some obstacle

price discrimination

the practice of charging different buyers different prices for essentially the same good service.

If a monopolist can perfectly price discriminate, then

the socially optimal quantity will be produced.

pure monopoly

a market in which a single firm is the lone seller of a unique product

The most important strategic decision facing monopolistically competitive firms is

how to differentiate their products from those of their rivals.

market power

a firm's ability to raise the price of a good without losing all its sells.

Cost-plus regulation: (select all that apply)

- May give the regulated firm an incentive to increase rather than decrease costs - Can lead to costly administrative squabble about whether a regulated firm is able to recover certain costs

Suppose a monopolist faces the market demand curve shown below. What's the vertical intercept of this monopolist's marginal revenue curve?

$10

Suppose a monopolist faces the market demand curve shown below. What is this monopolist's marginal revenue as it expands output from 3 to 4 units per week?

$3

Suppose a monopolist faces the market demand curve shown below. What's the horizontal intercept of this monopolist's marginal revenue curve?

$5

If a firm's revenue increases from $1,150 to $1,200 when it the firm produces another unit of output, then the firm's marginal revenue is:

$50

Suppose a monopolist faces the market demand curve shown below. What's the highest price this monopolist can charge if wants to sell 4 units per week?

$6

Two car manufacturers, Saab and Volvo, have fixed costs of $1 billion and marginal costs of $15,000 per car. If Saab produces 200,000 cars per year and Volvo produces 100,000 cars per year, calculate the average production cost for each company. 1.Average production cost for Saab: $ 2.Average production cost for Volvo: $ 3.On the basis of these costs, which company's market share do you think will grow in relative terms?

1.Saab: 1 billion/200,000 + 15,000= 20,000 2.Volvo: 1 billion/100,000 + 15,000= 25,000 3. Saab, cost of production is less so they can produce more cars

Two car manufacturers, Saab and Volvo, have fixed costs of $1 billion and marginal costs of $15,000 per car. If Saab produces 50,000 cars per year and Volvo produces 200,000 cars per year, calculate the average production cost for each company. 1.Average production cost for Saab: $ 2.Average production cost for Volvo: $ 3.On the basis of these costs, which company's market share do you think will grow in relative terms?

1.Saab: 1 billion/50,000 + 15,000= 35,000 2.Volvo: 1 billion/200,000 + 15,000= 20,000 3. Volvo, cost of production is less so they can produce more cars

Suppose the table below shows the demand for a good produced by a monopolist. What's the monopolist's marginal revenue from increasing output from 3 to 4? Quantity Price 2 $8 3 $7 4 $6

3

Price setter

A firm with at least some latitude to set its own price

Note: The deadweight loss from Monopoly

A loss in economic surplus results because the profit-maximizing level of output (8 units per week) is less than the socially optimal level of output (12 units per week). This deadweight loss is the area of the pale blue triangle. $4 per week.

A single-priced, profit-maximizing monopolist:

Always charges a price above the marginal cost of production.

Note: The demand and marginal cost curves for a monopolist

At the current output level of 12 units per week, price equals marginal cost. Because the monopolist's price is always greater than marginal revenue, marginal revenue must be less than marginal cost, which means this monopolist should

Note: Marginal revenue in graphical form

Because a monopolist must cut price to sell an extra unit not only for the extra unit sold but also for all existing units, marginal revenue from the sale of the extra unit is less than its selling price.

Note: The marginal Revenue curve for a Monopolist with a straight-line demand curve

For a monopolist with the demand curve shown, the corresponding marginal revenue curve has the same vertical intercept as the demand curve, and a horizontal intercept only half as large as that of the demand curve.

Which of the following factors give rise to market power?

Economies of scale Government licenses or franchises Network economies Patents and copyrights

True or false: Price discrimination always hurts consumers.

False >Both consumer and producer surplus can increase as a result of price discrimination.

True or False? In a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is downward-sloping.

False >The demand curve for an individual competitive firm is horizontal, while the demand curve for the competitive industry as a whole is downward-sloping (just as it is downward-sloping for a monopoly). An individual competitive firm is small in relation to the market, so any change in quantity has little effect on market price. Since a monopolistic firm is big in relation to the market, changes in production quantity do have an effect on market price. Not surprisingly, the monopolist's downward-sloping demand curve is similar to an industry's demand curve because, by definition, a monopoly is as big or almost as big as an entire industry.

True or false: A monopolist will always earn an economic profit.

False >A monopolist will only earn an economic profit if price exceeds average total cost at the profit-maximizing level of output.

Note: Total and Average Total Costs for a Production Process with Economies of Scale.

For a firm whose total cost curve of producing Q units of output per year is TC = F+ MxQ, total cost (a) rises at a constant rate as output grows, while average total cost (b) declines. Average total cost is always higher than marginal cost for this firm, but the difference becomes less significant at high output levels

The additional revenue a monopolist receives from selling an additional unit of output is

LESS than the price of the product

The profit-maximizing rule for a monopolist is to choose the level of output such that _________.

MR=MC

I f a firm controls an input essential to the production of a given product, that firm will have ________ ________.

Market power

Is price discriminations automatically bad?

No Because we are so conditioned to think of discrimination as bad, that we may be tempted to conclude that price discrimination must run counter to the public interest. But in many cases, both consumer surplus and producer surplus were actually enhanced by the monopolist's use of the hurdle method of price discrimination.

The profit-maximizing level of output for a monopolist is inefficient because at the profit maximizing level of output:

P >MC >At a monopolist's profit-maximizing level of output, P>MC, implying that the benefit to consumers of the last unit produced is greater than the cost of producing it.

If the formula for a monopolist's demand curve is P=a-bQ, then the formula for the monopolist's marginal revenue curve is

P=a-2bQ

examples of price discrimination

Senior citizens' and children discounts on movie tickets Supersaver discounts on air travel rebate coupons on retail merchandise

A market in which there is only one supplier of a unique product with no close substitutes is a(n)_______

Pure monopoly

Prior to November 2011, Pfizer had the exclusive right to sell atorvastatin (brand name, Lipitor), a highly effective drug to treat high cholesterol that has no close substitutes. Prior to November 2011, the market for atorvastatin was an example of

Pure monopoly

If a monopolist has a straight-line demand curve whose vertical intercept is a and whose horizontal intercept is Q0, then the marginal revenue curve will have a horizontal intercept of _____.

Q0/2

The existence of inefficiency means

The economic pie is smaller than it might be

Deadweight Loss

The loss of consumer and producer surplus caused by disparity between price and marginal cost

If a monopolist could perfectly price-discriminate:

The marginal revenue curve and the demand curve would coincide. Explanation: If a monopoly could perfectly discriminate, then it's possible that MC will be equal to demand curve as it will be able to satisfy all customers at their own reservation price

Even a Monopolist May Suffer an Economic Loss.

The monopolist in (a) maximizes its profit by selling 20 million minutes per day of calls but suffers an economic loss of $400,000 per day in the process. Because the profit maximizing price of the monopolist in (p) exceeds ATC, this monopolist earns an economic profit.

What is the socially desirable price for a natural monopoly to charge?

The price at which the marginal benefit to the consumer equals the marginal cost of production

The Monopolist's Profit-Maximizing Output Level.

This monopolist maximizes profit by selling 8 units per week, the output level at which marginal revenue equals marginal cost. The profit maximizing price is $4 per unit, the price that corresponds to the profit-maximizing quantity on the demand curve.

More generally, consider a monopolist with a straight-line demand curve whose vertical intercept is a and whose horizontal intercept is Q0. (Can't figure out how to add a subscript to the Q)

This monopolist's marginal revenue curve also will have a vertical intercept of a, and it will be twice as steep as the demand curve. Thus, its horizontal intercept will be not Q0. but Q0/2.

Why do price discrimination and the existence of slightly different variants of the same product tend to go hand in hand?

To charge different prices to different customers for essentially similar products with similar costs of production, the seller must separate customers according to their reservation prices. This hurdle often involves a minor difference in quality or some other product characteristic.

True or False? Patents and copyrights are a source of market power.

True

True or False? Perfectly competitive firms have no control over the price they charge for their product.

True >Perfectly competitive firms' product is identical to their competitors' product. Thus, they cannot raise their price because all customers would buy the same product elsewhere. Thus, competitive firms are "price takers." Alternatively, imperfectly competitive firms are able to differentiate their product from their competitors' product. Thus, they can raise their price without losing all their customers, because some customers won't want to buy a slightly different good from another producer. Thus, imperfectly competitive firms are, at least to some degree, "price-makers."

True or false: Both monopolists and perfectly competitive firms choose the level of output such that marginal revenue equals marginal cost.

True > The distinction is that whereas marginal revenue equals price for a perfectly competitive firm, marginal revenue is less than price for a monopolist.

For a natural monopoly, average cost declines as the number of units produced increases over the relevant output range.

True. Fixed costs are spread over more units as output increases, so average cost per unit (fixed + variable cost per unit) declines as output increases.

If a monopolist has a straight-line demand curve whose vertical intercept is a and whose horizontal intercept is Q0, then the marginal revenue curve will have a vertical intercept of

a

perfectly discriminating monopolist

a firm that charges each buyer exactly his or her reservation price

A price setter is

a firm with at least some latitude to set its own price.

Antitrust laws are designed to encourage competition by:

breaking up large companies and discouraging mergers between companies in the same industry

If a firm doubles all of its inputs and output exactly doubles, then the production process exhibits

constant returns to scale

A method of regulation under which the regulated firm is permitted to charge prices that cover the explicit costs of production plus a markup to cover the opportunity cost of resources provided by the firm's owners is known as:

cost-plus regulation

fixed costs

costs that remain constant as output changes

variable costs

costs that vary directly with the level of production

For a firm in a perfectly competitive market, marginal revenue

equals price.

The cost benefit principle says that the monopolist should continue to expand output as long as the gain from doing so ______ the cost

exceeds

To achieve social efficiency, the monopolists should

expand production until the marginal benefit to society equals the marginal cost.

A firm that has market power:

faces a downward-sloping demand curve can raise the price of its good without losing all of its sales

If a production process exhibits economies scale, then the average cost of production, _________ as the number of units produced increases.

falls

At a monopolist's profit-maximizing level of output, the benefit to consumers of the last unit produced is _______ the marginal cost of producing it.

greater than >At a monopolist's profit-maximizing level of output P>MC, implying that the benefit to consumers of the last unit produced is greater than the cost of producing it.

At a monopolist's profit-maximizing level of output, the benefit to consumers of the last unit produced is ________ the marginal cost of producing it.

greater than >At a monopolist's profit-maximizing level of output P>MC. implying that the benefit to consumers of the last unit produced is greater than the cost of producing it.

One advantage of ______ is that it maintains firms' incentives to keep costs low.

having private companies bid for right to operate as natural monopolist

All else equal, a monopolist that price discriminates will tend to have ________ that does not. profits than one.

higher

If firms in a monopolistically competitive industry are earning a positive economic profit, then______.

in the long run, entry into the market will drive economic profit to zero

If a firm doubles all of its inputs and output more than doubles, then the production process exhibits

increasing returns to scale

When start-up costs are high relative to marginal cost, the production process is likely to exhibit which of the following?

increasing returns to scale

To a monopolist, the marginal benefit of selling an additional unit is strictly ___ than the market price.

less

A monopolist's profit-maximizing level of output is inefficient because the marginal cost of the last unit produced is _______ than the marginal benefit to society of the last unit produced.

less than

Monopolists produce ______ the socially optimal level of output.

less than

Suppose Big Dairy Inc. has a monopoly in the market for milk and currently sells 1,000 gallons of milk a day at a price of $6 per gallon. Big Dairy Inc.'s marginal revenue from producing its 1,000th gallon of milk is:

less than $6

Which of the following are examples of price discrimination?

mail in rebates Discounted airfare for passengers who purchase their tickets 21 days in advance

The marginal benefit is called the firm's

marginal revenue

In San Diego, which is close to the border with Mexico, taquerias (inexpensive Mexican fast food restaurants) are everywhere. They all have similar menus, but differ somewhat in their specialties, atmosphere and location. In light of this, the taqueria market in San Diego is an example of

monopolistic competition

Suppose that in your town there are a large number of gas stations that sell similar grades of gasoline, but that differ in terms of their exact location. This is an example of_____.

monopolistic competition

All else equal, a monopolist that price discriminates will tend to produce ______ one that does not.

more than

A monopoly that arises from increasing returns to scale is a _______ monopoly.

natural

An industry structure in which a small number of firms produce products that are either close or perfect substitutes is a(n).______

oligopoly

Compared to private natural monopolies, state-owned natural monopolies are likely to face _______ incentives to cut costs.

weaker

When is profit maximized?

when marginal revenue precisely equals marginal cost

If a single firm controls an input essential to the production of a given product, then that firm

will have market power

For oligopolists, entry and exit

will not push economic profit to zero in the long run.