micro ch 12

Which of the following does the monopolist not have?

A supply curve

What is the term for factors that prohibit firms from entering an industry?

Barriers to entry

Which of the following are reasons for a monopoly's loss of economic profit?

Change in tastes reducing demand Upward-shifting cost curves caused by escalating resource prices

What term is used to describe declining average total costs with added firm size?

Economies of scale

What leads to most patentable inventions and products?

Research and development

Why does an inventor need to have her or his invention protected from rivals?

Rivals will use the invention without having shared in the effort and expense of developing it.

Which of the following explains why a pure monopolist is able to maintain an economic profit in the long run?

There are no new entrants to increase supply, drive down price, and eliminate profit.

Suppose a pure monopolist faces the following cost data, as shown by the table on the left, and the demand schedule, as shown on the right.

a. Calculate the missing TR and MR amounts. b. What is the profit-maximizing price for this monopolist? - $63 What is the profit-maximizing output? - 4 units c. What is the monopolist's profit? - $42

Two legal ________ to entry are patents and licenses.

barriers

Monopoly yields neither _______ efficiency nor allocative efficiency.

productive

The firm and ______ are synonymous in pure monopoly

the industry

Which of the following exists when a single firm is the sole producer of a product for which there are no close substitutes?

Pure monopoly

Which of the following add nothing to the firm's output, but increase the firm's costs?

Rent-seeking expenditures

Which of the following are assumptions made in the model of pure monopoly?

The firm is a single-price monopolist and charges the same price for all units of output. No unit of government regulates the firm. Patents, economies of scale, and resource ownership secure the firm's monopoly.

How much will a profit-seeking monopolist produce if producing is preferable to shutting down?

Up to the output at which marginal revenue equals marginal cost

A monopolist will never choose a price-quantity combination where price reductions cause:

a decrease in total revenue

The government broke up Standard Oil in 1911 due to its breach of ______ (one word) laws.

antitrust

Economies of scale refer to ______ average total costs with added firm size.

declining

_______ utilities are government owned or regulated.

public

A monopolist does not have a supply curve because:

there is no single, unique price associated with each level of output it does not equate price with marginal cost

Marginal revenue is the change in ______ revenue associated with a single-unit change in output.

total

The monopolist seeks maximum ______ profit, not maximum unit profit.

total

Which of the following describes what "no close substitutes" means as it relates to consumers and a pure monopoly?

A consumer must either buy the monopolized product or do without it entirely.

Why might a monopolist accept a less-than-maximum per-unit profit?

Additional sales more than compensate for the lower profit per unit.

Which of the following describes why marginal revenue is less than price for monopolists?

Because the lower price of the extra unit of output also applies to all prior units of output

How does a monopolist change the price of its product?

By changing the quantity of the product it produces.

With a fixed downward-sloping demand curve, how can a monopolist increase sales?

By charging a lower price

Which of the following is a reason for a monopoly's loss of economic profit?

Changes in tastes that reduce demand for a product

It is difficult to start up a major league sports team because existing professional teams have contracts with the best players and long-term leases on stadiums. Which barrier to entry does this illustrate?

Control of a key resource

Which statement is true about costs for purely competitive and monopolistic producers?

Costs for purely competitive and monopolistic producers may not be the same.

What is the shape of the product demand curve for a pure monopolist?

Downward sloping

Which of the following steps are necessary to determine the profit-maximizing level of output, profit-maximizing price, and economic profit in pure monopoly?

Employ the profit-maximizing rule of MR=MC. Identify the profit-maximizing price and output by finding the price/output combination at MR=MC.

Which of the following two terms are synonymous in a pure monopoly?

Firm and industry

How does a monopoly generally transfer income?

From consumers to the owners of the monopoly

What are the two legal barriers to entry created by the government?

Licenses Patents

How do economies of scale affect long-run average total costs for a firm?

Long-run average total costs decline over a wide range of output.

If producing is preferable to shutting down, a profit-seeking monopolist will produce up to the output at which _______.

MR = MC

Which of the following can cause X-inefficiency?

Maintaining a poorly motivated work force Avoiding business risk Hiring incompetent relatives

Which of the following can be a cause of extensive economies of scale?

Modern technology

Which of the following are characteristics of public utilities?

Monopolies or near monopolies Government owned or regulated

Which are reasons that costs differ between a purely competitive firm and a pure monopoly?

Monopoly-preserving expenditures The "very long run" perspective

What may occur when only a single firm can achieve the economies of scale necessary to compete in an industry?

Natural monopoly

What is the term used to describe a situation where a single firm has the bulk of sales in a specific market?

Near-monopoly

Which characteristic of pure monopoly requires a consumer to buy the monopolized product or do without it entirely?

No close substitutes

Which of the following are conditions necessary for price discrimination?

No resale Monopoly power Market segregation

If the objective of government is to achieve allocative efficiency, what kind of price should government establish for the monopolist?

One that is equal to its marginal cost.

Which of the following is considered a barrier to entry into an industry?

Ownership of essential property

Which of the following is considered a barrier to entry protecting an inventor from its rivals?

Patents

Which of the following are the main characteristics of a pure monopoly?

Presence of a single seller Control over the price Blocked entry for other firms Unavailability of close substitutes for its products

What is the term used to refer to charging different prices to different buyers of a specific product?

Price discrimination

Which of the following are potential solutions to the economic losses incurred by a regulated monopoly caused by socially optimal pricing?

Price discrimination Public subsidies

Which of the following are entry barriers created by monopolists?

Price reductions Increased advertising

A firm's manager is given the following information: To sell 4 units of output, a price of $132 must be charged; this level of output reflects marginal revenue of $102 and marginal costs of $60. If the firm wants to sell 5 units of output, a price of $122 must be charged; this reflects marginal revenue of $82 and marginal costs of $70. To sell 6 units of output, a price of $112 must be charged; at this level of output, marginal revenue will be $62 and marginal costs $80. What should the manager do?

Produce 5 units of output and charge $122.

The table below shows the total cost and marginal cost for Choco Lovers, a monopolistic firm producing different quantities of chocolate gift boxes. Fill in the blanks in the table.

Profit-maximizing quantity = 45 units Profit-maximizing price = $21 Profit = $787

What is the term used to refer to a product's ability to satisfy a large number of consumers at the same time?

Simultaneous consumption

Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a book. Will the author and the publisher want to charge the same price for the book?

The author would prefer a lower price than the publisher.

a. How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? b. Why does it differ? Of what significance is the difference? c. Complete the following statement.

The demand curve faced by a purely monopolistic seller is - downward sloping, whereas that facing the purely competitive firm is perfectly elastic. The demand curve facing a - purely competitive firm is perfectly elastic, because it may sell all that it wishes at the equilibrium price. The pure monopolist's demand curve is not - perfectly inelastic, because MR is negative when demand is inelastic, so MR = MC < 0.

If a firm is found guilty of achieving a monopoly through anticompetitive actions, then which of the following may occur?

The firm may be expressly prohibited from engaging in certain business activities. The firm may be broken into two or more competing firms.

In a pure monopoly, marginal revenue is less than price for every unit of output except which one?

The first

Which of the following are reasons that a monopolist is considered a price maker?

The monopolist controls the total quantity supplied. The monopolist exerts control over the price.

Hiring incompetent relatives and poor supervision of workers can result in ______.

X-inefficiency

When a firm produces a specific output level at a higher cost than the necessary cost for that level of output, it is called ______.

X-inefficiency

The exclusive right of an inventor to use, or to allow another to use, her or his invention is called:

a patent

Suppose that a price-discriminating monopolist has segregated its market into two groups of buyers, as shown by the following tables.

a. Calculate the missing TR and MR amounts for Group 1 b. Assume that MC is $13 in both markets and MC = ATC at all output levels. What price will the firm charge in each market? - Group 1: 6 units will be produced at a price of $48 - Group 2: 6 units will be produced at a price of $33 c. Based solely on these two prices, which market has the higher price elasticity of demand? - The second market has the higher price elasticity of demand. d. What will be this monopolist's total economic profit? - $330

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.

a. If this firm keeps increasing its output level, will ATC per bag ever increase? - No Are there economies of scale at all levels of output? - Yes b. If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge? - $1 per bag At that price, what will be the size of the firm's profit or loss? - Loss of $10 million Will the firm want to exit the industry? - Yes c. 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? - $0 million d. If consumers instead demanded 20 million bags at a price of $2 per bag, how big would the firm's profit or less be? - Profit of $10 million e. 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. - $1.50

Suppose a monopolist's profit-maximizing output is 200 units per week and that the firm sells its output at a price of $60 per unit. The firm has total costs of $9,000 per week. Assume the monopolist is maximizing its profit and earns $30 per unit from the sale of the last unit produced each week.

a. What are the firm's weekly economic profits? - $3000 b. What is the firm's marginal cost? - $30 c. What is the firm's average total cost? - $45

Answer the following questions about the barriers to entry that shield monopolies from competition.

a. Which of the following is not a major barrier to entry into an industry? - Diminishing marginal returns b. Which of the following is a true statement? - Unfair competition is a barrier with no social justification.

If the objective of government is to achieve _______ efficiency, it should establish a legal price for the monopolist that is equal to its marginal cost.

allocative

Monopoly yields neither productive nor ________ efficiency.

allocative

Because a monopoly is a price maker and prices its products in the elastic portion of the demand curve, its output is less than that required to achieve minimum average total cost. In addition, the monopoly's price will exceed its marginal cost at this level of output. Monopoly therefore creates

an efficiency loss.

A monopolist does not achieve productive efficiency because it produces a level of output that does not correspond to the minimum point of the ________ _________ cost curve.

average total

The monopolist's level of output is not at the minimum point of ______, meaning it will not be productively efficient.

average total cost

As an example of ______, the Federal Communications Commission licenses only so many radio and television stations in each geographic area.

barriers to entry

Simultaneous _______ is a product's ability to satisfy a large number of consumers at the same time.

consumption

Marginal revenue is less than price at every unit of output because the monopolist

could have sold these prior units at a higher price if it had not produced and sold the extra output.

A natural monopoly occurs when the market demand curve crosses the long-run average total cost (ATC) curve where average total costs are still ______.

declining

With a natural monopoly the demand curve intersects the long-run average total cost curve where the long-run average total cost curve is still ______

declining

A pure monopolist must face a downward-sloping product ______ curve

demand

Price _______, or charging different prices to different consumers, is widely practiced in the US economy.

discrimination

The practice of charging different prices to different buyers for a specific product is known as price

discrimination

The MR curve of a perfectly competitive firm is horizontal. The MR curve of a monopoly firm is:

downward sloping.

Price makers are firms with:

downward-sloping demand curves

A firm's long-run average total costs may decline over a wide range of output due to ________ of scale.

economies

Modern technology can be a cause of extensive ______.

economies of scale

The demand curve intersects the natural monopolist's long-run average total cost curve at a point where long-run average total costs are still falling, due to ______.

economies of scale

When productive efficiency and allocative efficiency are not achieved in a market, it is called a(n) ______.

efficiency loss

The monopolist wants a price-quantity combination to fall in the _____ section of its demand curve, where a lower price means _____ total revenue.

elastic; greater

True or false: A firm is producing 24 units of output. At the 24th unit of output, marginal revenue is $5, and marginal cost is $4; at the 25th unit of output, marginal revenue is $4.50, and marginal cost is $4.50; at the 26th unit of output, marginal revenue is $4, and marginal cost is $5. This firm made the correct choice by producing only 24 units of output and then stopping.

false

True or false: Price discrimination is not practiced very often in the US economy.

false

______ create(s) legal barriers to entry.

government

X-inefficiency occurs when a firm operates at a cost that is _________ (higher/lower) than the lowest cost for a particular level of output.

higher

As an example of price discrimination, airlines charge higher fares to business travelers whose demand for travel is ______ and offer lower, more restricted fares to vacationers and others with more _______ demand.

inelastic; elastic

In many large cities, the number of taxicabs allowed to operate is limited by the local government through the ______.

issuing of licenses

The socially optimal price (P = MC) is socially optimal because:

it achieves allocative efficiency.

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. These companies, for profit reasons, oppose laws allowing re-importation of drugs to the United States because

it would make it much more difficult to maintain the different prescription drug prices.

Government creates _______ barriers to entry.

legal

When a monopolist charges a higher price than a purely competitive firm would, the monopolist essentially ______.

levies a "private tax" on consumers

With a fixed downward sloping demand curve, the pure monopolist can only increase sales by charging a ______ price.

lower

Monopolists use economies of scale to block the entry of new firms into an industry by ______.

lowering prices so that another firm cannot compete

Firms with downward-sloping product demand curves are called price ______

makers

The change in total revenue associated with a one-unit change in output is called ______ revenue.

marginal

In a pure monopoly, ______ is less than the price for every unit of output except the first.

marginal revenue

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

A(n) ______ is able to maintain an economic profit in the long run because there are no new entrants to increase supply, drive down price, and eliminate economic profit.

monopoly

Network effects may drive a market toward _________, because consumers tend to choose standard products that everyone else is using.

monopoly

Patents, economies of scale, and resource ownership are all assumptions of the pure ______ model.

monopoly

Slashing prices is an example of an entry barrier created by a(n) ______

monopoly

The main characteristics of a pure _______ are a single seller, no close substitutes, a price maker, blocked entry, and non-price competition.

monopoly

When the market demand curve crosses the long-run average total cost curve where average total costs are declining, the firm is called a(n)

natural monopoly

A _________-monopoly occurs when a single firm has the bulk of sales in a specific market.

near

_______ effects exist if the value of a product to each user increases as the total number of users increase.

network

How often do perfectly competitive firms engage in price discrimination?

never

In general, as shown in the figure, a fair return price will lead to ______ and a socially optimal price will lead to ______.

normal profit; economic loss

A monopolist uses the profit-maximizing rule of marginal revenue equals marginal cost to determine the profit-maximizing ______ and ______

output; price

A _______ (one word) is the exclusive right of an inventor to use, or allow another to use, her or his invention.

patent

The strongest barriers to entry effectively block all ______.

potential competition

At a pure monopolist's profit-maximizing output (Qm), its _______ exceeds marginal cost, resulting in allocative inefficiency.

price

Drawing a vertical line from the profit-maximizing output on the horizontal axis to the demand curve represents the ______.

price

At the profit-maximizing output (Qm), a monopolist's ______ is higher than marginal cost; therefore, a monopolist has allocative inefficiency.

price (Pm)

Market segregation must exist in order for a monopolist to ______.

price discriminate

Baseball ticket sellers charge a different price for adults and children. Ballpark concession stands charge the same prices for products sold to any customer. The baseball ticket sellers are providing a successful example of

price discrimination.

A regulated monopoly is likely to suffer losses when ______.price is set to marginal cost (P = MC)

price is set to marginal cost (P = MC) price is set to achieve the most efficient allocation of resources

Monopolists use economies of scale to block the entry of new firms into an industry by reducing ______ so that other firms cannot compete.

prices

An unregulated monopolist uses the marginal revenue equals marginal cost (MR = MC) rule to determine the ______.

profit-maximizing output and price

What is it called when a firm spends significant money to maintain a monopoly through government legislation?

rent-seeking expenditures

_______ and development leads to most patentable inventions and products.

research

Two solutions to the economic losses caused by socially optimal pricing are providing public ______ and condoning price discrimination.

subsidies

A pure monopoly exists when a single firm is the sole producer of a product for which there are no close ___.

substitutes

Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two different prices. To maximize profit, the monopolist should charge a higher price to the group that has:

the lower elasticity of demand.

A natural monopoly's economies of scale refers to one firm's ability to achieve the lowest long-run average total cost, also known as

the minimum efficient scale at a high level of output.