Microeconomics Final - Monopolies
A monopolistically competitive firm that earns economic profits in the short run will be able to expand its market share even if the market size remains constant.
False
A monopoly is defined as a firm that has the largest market share in an industry.
False
A snack shop inside a hotel in a busy city has a monopoly on food sales if it is the only food vendor in the hotel that is open 24 hours a day.
False
How do the price and quantity of a monopoly compare to that of a perfectly competitive industry?
A monopolist sells a smaller quantity and charges a price greater than the perfectly competitive price.
closed monopoly
A monopoly that enjoys the protection of legal restrictions on competition
Open monopoly
A monopoly where one firm temporarily becomes the sole supplier of a product but has no special protection from competition
What is the difference between a monopoly's marginal revenue curve and a perfect competitor's marginal revenue curve?
A monopoly's marginal revenue curve lies entirely below its market demand curve and is downward sloping, but a perfect competitor's marginal revenue curve is the same as its demand curve which is horizontal at the prevailing market price.
Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market, but by separate curves for a firm in a monopolistically competitive market?
A perfectly competitive firm faces a horizontal demand curve and does not have to cut the price to sell a larger quantity, so marginal revenue will always be equal to the selling price, which is represented by the demand curve. A monopolistically competitive firm must cut the price to sell a larger quantity, so its marginal revenue curve will be below its demand curve.
What is a public franchise? Are all public franchises natural monopolies?
A public franchise is a firm which the government designates as the only legal provider of a good or service. It is doubtful that most public franchises are natural monopolies. If they were, they wouldn't need the government to restrict their competitors.
Explain why the monopolist has no supply curve?
A supply curve shows the relationship between the price of a product and the quantity that suppliers are willing and able to supply. The monopolist selects its profit-maximizing output by equating marginal revenue to marginal cost and takes the price dictated by the demand curve. Thus, there is no array of prices and quantities supplied.
What is the relationship between marginal revenue and average revenue for a monopolist and is it the same for a perfect competitor?
Average revenue is equal to price for any firm but for a monopolist, marginal revenue is always less than price and therefore marginal revenue is less than average revenue. For a perfect competitor, marginal revenue is equal to price.
What is the difference between zero accounting profit and zero economic profit?
Economic profits take into account opportunity costs. Accounting profits do not. So, economic profits will typically be smaller than accounting profits. If a firm has zero accounting profits, it will be making an economic loss, while a firm with zero economic profits will have positive accounting profits.
What is meant by "excess capacity"? How does it relate to consumer utility?
Excess capacity refers to a situation where a firm does not produce at the lowest possible average cost. In other words, economies of scale have not been exhausted. Excess capacity is an inevitable consequence of product differentiation. Firms differentiate their products in order to appeal to consumers' varied tastes. Consumers are, therefore, better off—they have greater utility—than they would be if companies did not differentiate their products. Consumers are willing to pay for the higher costs that result from product differentiation.
A monopolistically competitive firm can increase its profits beyond the long-run equilibrium break-even level by deliberately lowering its price to force some of its competitors out of the market.
False
If the marginal revenue is negative then the revenue lost from receiving a lower price on all the units that could have been sold at the original price is smaller than the additional revenue from selling one more unit of the good.
False
In monopolistic competition, if a firm produces a highly desirable product relative to its competitors, the firm will be able to raise its price without losing any customers.
False
Monopolistically competitive firms face a perfectly elastic demand curve
False
The market demand curve facing a monopolist is more elastic than the market demand curve facing a monopolistic competitor.
False
When a monopolistically competitive firm breaks even in the long run, this is equivalent to earning a zero accounting profit.
False
When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the income effect and a gain in revenue due to the substitution effect.
False
Discuss the role of product differentiation and advertising in monopolistic competition.
Firms acquire market power through product differentiation, distinguishing their products from similar products offered by competitors. Product differentiation promotes market power by convincing consumers that a particular firm's product is superior to the products offered by its rivals. One way to create differentiation is through advertising. Successful advertising increases demand for a firm's product and makes its demand more inelastic. Although advertising increases costs, if the increase in revenue from sales generated by advertising exceeds the cost, the firm's profit will increase.
Why are many companies concerned about brand management?
Firms are concerned about brand management because maintaining their product's unique identity and good reputation is necessary for stopping competitors from attracting their customers away.
Suppose that a perfectly competitive industry becomes a monopoly. What effect will this have on consumer surplus, producer surplus, and deadweight loss?
If a perfectly competitive industry is monopolized, consumer surplus will decrease, producer surplus will increase, and there will be a deadweight loss.
What is the most important difference between perfectly competitive markets and monopolistically competitive markets?
In both perfectly competitive and monopolistically competitive industries there are many firms and low barriers to entry. However, while products are identical in perfectly competitive markets, products are similar—but not identical—in monopolistically competitive markets.
Explain why market power leads to a deadweight loss. Is the total deadweight loss from market power in the United States large or small?
Market power allows a firm to set its price above marginal cost, which creates deadweight loss. Research suggests that in the United States total deadweight loss from market power is fairly small, perhaps less than one percent of GDP.
What is the difference between the terms "marketing" and "advertising"?
Marketing consists of all the activities that are necessary for a firm to sell a product to a consumer. Marketing is not limited only to advertising. Product placement and defending a brand name can also be included under marketing.
Shutdown point
Minimum AVC Fixed costs must be paid regardless of a shutdown meaning that sometimes it makes sense for a struggling business to stay open
Supply
NO supply curve in a monopoly
What effect does the entry of new firms in a monopolistically competitive market have on the economic profits of existing firms in the market? How might existing firms attempt to counteract this effect?
New firms entering an industry cause the demand curves for the products of existing firms to shift to the left. Existing firms will be able to sell less at every price, so their profits will decline. If existing firms can find new ways to differentiate their products or find new ways to lower their cost of production, they have a better chance of maintaining profits as other firms enter the market.
Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare?
No. Although monopolistically competitive firms reduce total economic surplus by producing less than the efficient amount (creating a deadweight loss) they also increase consumer welfare because people are willing to pay more for variety and for products that are more closely suited to their tastes. Consumer welfare can be measured by consumer surplus.
Profit Minimizing output of a monopolist
PPU = P-ATC TR = PxQ TC = ATCxQ Total Profit = TR-TC P = Fixed costs + AVC Whether or not you shutdown or stay in business is related to AVC (average variable cost)
Why is it so hard for other firms to join a monopoly?
Patents and copyrights usually keep monopolies going. Also, economies of sale
U.S. antitrust laws are designed to prohibit monopolization and encourage competition. Why, then, does the government erect barriers to entry and create monopoly power by granting firms patents?
Patents are designed to encourage creative activity and promote the development of new technologies. Firms can spend years on research and development in the search for new and better production processes and consumer products. Research and development is costly - many potential new ideas are ultimately not technically feasible or never become commercially successful. If research and development results in a successful product, competing firms can easily copy the product and sell it without incurring the research costs of the firm that developed the product, if patent protection is not granted. Most people would object to this form of "free riding" on equity grounds; but patents also encourage firms to conduct research that leads to social benefits: new technologies result in a higher standard of living for all and a more efficient allocation of society's scarce resources.
Total Revenue
Pride x Quantity
One of the assumptions of monopolistic competition is that firms produce differentiated products. What does this assumption imply about the demand curve facing a representative firm?
Product differentiation is a source of market power. This implies that the monopolistically competitive firm faces a downward-sloping demand curve.
Explain whether a monopoly that maximizes profit will also be maximizing revenue and production.
Profit maximization is not the same thing as revenue maximization. To maximize revenue the firm would produce up to the point where marginal revenue is zero. Unless marginal cost is zero, this is a larger quantity than the quantity where marginal revenue equals marginal cost. Maximizing production could mean producing the physical maximum possible. This is likely to be far beyond the profit-maximizing level of output.
Equilibrium in a perfectly competitive market results in the greatest amount of economic surplus, or total benefit to society, from the production of a good. Why, then, did Joseph Schumpeter argue that an economy may benefit more from firms that have market power than from firms that are perfectly competitive?
Schumpeter did not deny that perfectly competitive firms produced the greatest amount of consumer surplus, but this result does not address which type of market structure is best for developing new products. Schumpeter pointed to the large costs of product development; how can small, perfectly competitive firms afford the monetary cost and the risk of failure that product development requires? Only large firms in monopoly or oligopoly industries can afford investments in research and development, and the inevitable failures that accompany research. According to Schumpeter, the higher prices firms with market power charge are less important than the benefits from new products these firms introduce to the market.
Suppose that if a local McDonald's restaurant reduces the price of a Big Mac from $4.00 to $3.25, the number of Big Macs it sells per day will increase from 4 to 5. Explain the output effect and the price effect resulting from this change. Using a graph, illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac. What is the total change in revenue received which results from this price decrease?
The 1 extra Big Mac sold is the output effect. The $0.75 cents less it receives for each Big Mac sold at the lower price is the price effect. The total change in revenue resulting from the price decrease is $3.25 - $3.00 = $0.25
Why would an organization as large as the National Football League (NFL) incur large legal expenses to try to prevent bars and restaurants from using their trademarked term "Super Bowl" in their advertising?
The National Football League has spent a great deal of time and money to establish a successful brand name and to get consumers to automatically think of the NFL when they see anyone using the term "Super Bowl." By not legally challenging even the smallest of restaurants or bars, the NFL not only faces the possibility that consumers will think these restaurants and bars are associated with the NFL and that these restaurants and bars will take advantage of that perception, but also that other restaurants, bars, or other companies would choose to use the term without fear of legal action or retribution. If the NFL did not attempt to legally defend its trademark, even in the smallest of cases, it could eventually face the possibility of "Super Bowl" no longer being associated with the NFL.
What happens to a monopoly's revenue when it sells more units of its product?
The monopolist must lower its price to sell more. Two things happen when a monopolist lowers its price. First, revenue will tend to rise as the monopolist sells more units and second, revenue tend to fall because less revenue is received from each unit than the amount received at the higher price. The total effect on total revenue could be an increase, a decrease, or no change in total revenue.
"Being the only seller in the market, the monopolist can choose any price and quantity it desires." Evaluate this statement: Is it true or false? Explain your answer.
The statement is false. The monopolist cannot choose both the price and quantity. The monopolist has some market power and therefore has some ability to affect market price but it does not control the demand curve. If the monopolist sets a price, the quantity sold will be indicated by the demand curve.
Economies of Scale
This occurs when a firm faces declining average total cost over the entire range of output that consumers are willing to buy. When this happens, the larger the firm's output, the smaller its per-unit costs, making it difficult for small firms to enter the market since the small firms face much higher average costs. Thus, only a single firm will survive.
What are the formulas for total revenue, average revenue, and marginal revenue.
Total revenue equals price × quantity; average revenue = (total revenue)/quantity (and also equals price); marginal revenue = (change in total revenue)/(change in quantity)
Average Revenue
Total revenue/Quantity produced (AR also equals price and demand)
A monopolistically competitive firm that earns economic profits in the short run will face a more elastic demand curve in the long run.
True
Firms in monopolistic competition compete by selling similar, but not identical products.
True
For a downward-sloping demand curve, the marginal revenue decreases as the quantity sold increases.
True
If a monopolistically competitive firm breaks even, the firm is earning as much in this industry as it could in any other comparable industry.
True
If some monopolistically competitive firms exit their market after suffering short-run losses, the demand curves of remaining firms will shift to the right.
True
Joe Santos owns the only pizza parlor in a small town that is also home to a McDonald's, a Taco Bell, and a Kentucky Fried Chicken. Using a broad definition of a monopoly, Joe has a monopoly if the menu items sold at the other restaurants are not considered close substitutes for the food sold at the pizza parlor.
True
New firms are able to enter monopolistically competitive markets because there are low barriers to entry.
True
Unlike a perfect competitor, a monopolist faces the market demand curve.
True
Both the perfectly competitive firm and the monopolistically competitive firm produce at the output where marginal revenue equals marginal cost (MR = MC) but only the perfectly competitive firm achieves allocative efficiency. Explain why this is the case.
Unlike the perfectly competitive firm, the monopolistically competitive firm faces a downward sloping demand curve which means that the firm must lower its price to sell additional units of output. As a result, price will always be greater than marginal revenue (P > MR). By contrast, the perfectly competitive firm faces a horizontal demand curve and P = MR. The profit-maximizing rule, MR = MC, applies to all firms but because in perfect competition P = MR the rule can be written as P = MC. A firm achieves allocative efficiency if it charges a price equals to the MC of producing the last unit. This condition is satisfied at the profit-maximizing output for the perfectly competitive firm (since P = MC = MR) but will not hold for the profit-maximizing output of monopolistically competitive firm for which P > MR = MC.
There are many wheat farmers in the world, and there are also many McDonald's restaurants in the world. Why, then, does a McDonald's restaurant face a downward-sloping demand curve while a wheat farmer faces a horizontal demand curve?
Wheat farmers are selling identical goods, but fast food restaurants do not sell identical goods. If a wheat farmer raises his price above the market price, he will lose all of his buyers. A McDonald's restaurant can raise its price without losing all of its buyers because it is selling a product that is not identical to the products sold by other restaurants.
elasticity
When Ed>1, TR increases and MR>0 When Ed=1, TR is maximized and MR=0 When Ed<1, TR decreases and MR<0 Hence the monopolist will not push sales into the range where the products demand curve becomes inelastic
natural monopoly
a single firm can supply a good or service to an entire market at a lower cost
Price
determined by demand, set by market. Lower demand means a lower price but you do not lose revenue as this depends on elasticity of demand. =D=AR
Marginal Revenue
the additional income from selling one more unit of a good, change in TR/change Q = slope of the TR curve