ECON 2010 chapter 12 pure monopoly
Assume that a pure monopolist and a purely competitive firm have the same unit costs. In this case, determine what is true with respect to (a) price, (b) output, and (c) profits. 1.PMonopoly > PCompetition2.PMonopoly < PCompetition3.PMonopoly = PCompetition4.QMonopoly > QCompetition5.QMonopoly < QCompetition6.QMonopoly = QCompetition7.ProfitMonopoly > ProfitCompetition8.ProfitMonopoly < ProfitCompetition9.ProfitMonopoly = ProfitCompetition -Which of the combinations above are accurate? - Assume that a pure monopolist and a purely competitive firm have the same unit costs. In the case of a pure monopolist, resources will be allocated -Even though both monopolists and competitive firms follow the MC = MR rule in maximizing profits, there are differences in the economic outcomes because - The costs of a purely competitive firm and a monopoly may be different because - If a monopoly can experience economies of scale, it can
- 1, 5, and 7 - inefficiently, because the monopolist does not produce at the point of minimum ATC and does not equate price and MC. - pure competitors are small with no market power. - monopolies might experience economies of scale not available to competitive firms - reduce the price below a pure competitor and improve resource allocation explanation-explanation- a. With the same costs, the pure monopolist will charge a higher price, have a smaller output, and have higher economic profits in both the short run and the long run than the pure competitor. As a matter of fact, the pure competitor will have no economic profits in the long run even though it might have some in the short run. The correct combination is: 1.PMonopoly > PCompetition5.QMonopoly < QCompetition7.ProfitMonopoly > ProfitCompetition b. Because the monopolist does not produce at the point of minimum ATC and does not equate price and MC, its allocation of resources is inferior to that of the pure competitor. Specifically, resources are underallocated to monopolistic industries. Since a pure monopolist is more likely than the pure competitor to make economic profits in the short run and is, moreover, the only one of the two able to make economic profits in the long run, the distribution of income is more unequal with monopoly than with pure competition. c. In pure competition, MR = P because the firm's supply is so insignificant a part of industry supply that its output has no effect on price. It can sell all that it wishes at the price established by demand and the total industry supply. The firm cannot force the price up by holding back part or all of its supply. d. The monopolist, on the other hand, is the industry. When it increases the quantity it produces, price drops. When it decreases the quantity it produces, price rises. In these circumstances, MR is always less than price for the monopolist; to sell more the monopolist must lower the price on all units, including those it could have sold at the higher price had it not put more on the market. When the monopolist equates MR and MC, it is not selling at that price: The monopolist's selling price is on the demand curve, vertically above the point of intersection of MR and MC. Thus, the monopolist's price will be higher than the pure competitor's price. e. Economies of scale may be such as to ensure that one large firm can produce at lower cost than a multitude of small firms. This is certainly the case with most public utilities. And in such industries as basic steel-making and car manufacturing, pure competition would involve a very high cost. On the other hand, monopolies may suffer from X-inefficiency, the inefficiency that a lack of competition allows. Monopolies may also incur nonproductive costs through "rent-seeking" expenditures. For example, they may try to influence legislation that protects their monopoly powers.
A new production technology for making vitamins is invented by a college professor who decides not to patent it. Thus, it is available for anybody to copy and put into use. The TC per bottle for production up to 100,000 bottles per day is given in the following table. Output TC ATC 25K 50K 2 50K 70K 1.4 75K 75K 1 100K 80K .8 -What is ATC for each level of output listed in the table? -Suppose that for each 25,000-bottle-per-day increase in production above 100,000 bottles per day, TC increases by $5,000 (so that, for instance, 125,000 bottles per day would generate total costs of $85,000 and 150,000 bottles per day would generate total costs of $90,000). Is this a decreasing-cost industry? - Suppose that the price of a bottle of vitamins is $1.33 and that at that price the total quantity demanded by consumers is 75,000,000 bottles. How many firms will there be in this industry? -Suppose that, instead, the market quantity demanded at a price of $1.33 is only 75,000. How many firms do you expect there to be in this industry? -Review your answers to parts b, c, and d. Does the level of demand determine this industry's market structure?
- Look at table under ATC - yes -1 -1 -no
Assume that the most efficient production technology available for making vitamin pills has the cost structure given in the following table. Note that output is measured as the number of bottles of vitamins produced per day and that costs include a normal profit. output: TC: MC: ATC: 25000 100K .5 4 50000 150K 1 3 75000 187.5K 2.5 2.5 100000 275.5K 3 2.75 -What is ATC per unit for each level of output listed in the table? -is this a decreasing-cost industry? -Suppose that the market price for a bottle of vitamins is $2.50 and that at that price the total market quantity demanded is 75,000,000 bottles. How many firms will there be in this industry? -Suppose that, instead, the market quantity demanded at a price of $2.50 is only 75,000. How many firms do you expect there to be in this industry? -Review your answers to parts b, c, and d. Does the level of demand determine this industry's market structure?
- look at table under ATC -no -1000 -1 -yes explanation- No, the ATC does not decline for all levels of output. c. Since $2.50 is minimum ATC, firms will produce at this level of output. Any firm that deviated from this level would incur a higher ATC and would be unprofitable at the market price of $2.50. The total number of firms can be found by dividing the market quantity demanded by output produced by a firm at the ATC of $2.50, which is 75,000. Number of firms = market quantity demanded/output minimum ATC = 75,000,000/75,000 = 1,000. d. The total number of firms under this assumption is: Number of firms = market quantity demanded/output minimum ATC = 75,000/75,000 = 1. e. Yes, high demand will result in a competitive industry while very low demand can result in a monopoly industry.
Suppose you have been tasked with regulating a single monopoly firm that sells 50-pound bags of concrete. The firm has fixed costs of $10 million per year and a variable cost of $1 per bag no matter how many bags are produced. -If this firm kept on increasing its output level, would ATC per bag ever increase? -this is a -If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge? -At that price, what would be the size of the firm's profit or loss? -Would the firm want to exit the industry? -You find out that if you set the price at $2 per bag, consumers will demand 10 million bags. How big will the firm's profit or loss be at that price? -If consumers instead demanded 20 million bags at a price of $2 per bag, how big would the firm's profit or loss be? -Suppose that demand is perfectly inelastic at 20 million bags, so that consumers demand 20 million bags no matter what the price is. What price should you charge if you want the firm to earn only a fair rate of return? Assume as always that TC includes a normal profit.
- no - decreasing cost industry -$1 per bag - loss of 10 million -yes -$0 - profit of 10 million - $ 1.50 per bag
Determine if true or false: -Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will pay. -The pure monopolist seeks the output that will yield the greatest per-unit profit. -An excess of price over marginal cost is the market's way of signaling the need for more production of a good. -The more profitable a firm, the greater its monopoly power. -the monopolist has a pricing policy; the competitive producer does not. - With respect to resource allocation, the interests of the seller and of society coincide in a purely competitive market but conflict in a monopolized market.
-false -false -true -cannot be determined -true -true . The statement is false. If the monopolist charged the highest price consumers would pay, it would sell precisely one unit! (Conceivably, it might sell a little more than one if more than one consumer made matching bids for the first unit offered.) It is highly unlikely that the sale of one unit (or a very few) would cover the very high AFC of one or a very few units. And even a monopolist that does produce sensibly where MR = MC may still suffer a loss: P can be below ATC at all levels.b. The statement is false. The monopolist seeks the output that will yield the greatest profit. The profit equation is Q(P - ATC). It is not (P - ATC). If the monopolist sells one unit for $100 when ATC is $60, then its profit per unit and total profit is $40 (= $100 - $60). Nice, but if the same monopolist can sell 1,000 units for $40 when ATC is $39, then, though its per-unit profit is a mere $1 (= $40 - $39), its total profit is $1,000 (= 1,000($40 - $39)). This is much better than $40.c. The statement is true. Price is the value society sets on the last item produced. Marginal cost is the value to society of the alternative production forgone when the last item is produced. When P > MC, society is willing to pay more than the opportunity cost of the last item's production.d. This statement can be true and probably is in many cases. Large profits allow expansion to gain economies of scale and thus prevent the late entry of smaller rivals. Large profits also enable the firm to price below cost, to engage (illegally) in a price war. Moreover, large profits in the short run are often associated with monopoly power. In the long run, only a firm with monopoly power can gain economic profits; in pure competition such profits would invariably be competed away by new entry.e. The statement is true. The monopolist must equate MR and MC. Having determined at what quantity this equality occurs, the monopolist simultaneously sets price. This price differs at each output because the demand curve is downsloping. The pure competitor accepts the price given by total industry supply and demand. Knowing this externally given price, the competitor then equates it with the firm's MC and produces the amount determined by this equality.f. The statement is true. In pure competition, P = MC. This means that the value society sets on the last item produced (its price) is equal to the cost of the alternative commodities that are not produced because of producing the last item of the commodity in question (its MC). In monopoly, P > MC. This means that society values the last item produced more than its cost.
Suppose that a monopoly has costs for the various levels of output shown below. - output total cost ATC 100 1000 10 500 4000 8 1500 8000 5.33 6000 24000 4 30000 48000 1.6 - this is
-find values for ATC IN TABLE - a natural monopoly
Which of the following is not a major barrier to entry into an industry?
Diminishing marginal returns
The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially optimal price:
May be so low that the regulated monopoly can't break even
Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a text. Which of the following statements is true?
The author would prefer a lower price than the publisher.
Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two different prices. In order to maximize profit, the monopolist should charge a higher price to the group that has:
The lower elasticity of demand
Which of the following is a true statement?
The lower the number, the thicker the wire and narrower the ribbon
it has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly. This proposal
does not consider that the output of natural monopolists would still be at the suboptimal level where P > MC.
The MR curve of a perfectly competitive firm is horizontal. The MR curve of a monopoly firm is:
downsloping
U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. U.S. pharmaceutical companies, for profit reasons, oppose laws allowing reimportation of drugs to the United States because reimportation would
make it much more difficult to maintain the differing prices.
How often do perfectly competitive firms engage in price discrimination?
never
No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then pure monopoly does not exist." A monopoly is more likely to persist if the cross price elasticity of demand is
positive and less than 1
