Econ 2010: Ch 24

In a monopoly market​ structure, the firm and the industry are one and the same

True

Economies of scale contribute to the creation of natural monopolies All of the following barriers to entry can be categorized as government or legal restrictions except

True; ownership of essential resources

In order to price​ discriminate, a firm must

face a downward-sloping demand curve

The better the substitutes for a monopoly​ firm's product, the

greater the price elasticity of demand

Consider the figure to the right. Suppose that Qm is 8.2 units per​ week, that Pmis $5.00 per​ unit, and that the average total cost of producing the 8.2 units is ​$2.70 per unit. What is the dollar amount of maximized monopoly​ profits?

$18.86 ((Pm - ATCm)*Qm = (5.00 - 2.70)*8.2))

Suppose that in the figure to the​ right, a monopolist knows that if it produces 1111 units of​ output, its total revenues equal ​$63.80. If it were to reduce the price of its product to ​$5.60 per​ unit, the quantity​ demanded, and hence its​ output, would rise to 12 units per week. What would be the marginal revenue that the monopolist would derive from producing and selling a 12th ​unit? Since total revenues for 1111 units equal ​$63.80​, marginal revenue from the production and sale of the 12th unit would be ​

$3.40 (TR of 12th (12*5.60) - TR of 11th (63.80))

A​ monopolist's maximized rate of economic profits is ​$500 per week. Its weekly output is 500 ​units, and at this output​ rate, the​ firm's marginal cost is ​$23 per unit. The price at which it sells each unit is ​$33 per unit - At these profit and output​ rates, the​ firm's average total cost is - At these profit and output​ rates, the​ firm's marginal revenue is

- $32 (P-ATC = profit/quantity) - $23 (MR=MC)

The marginal revenue curve of a monopoly crosses its marginal cost curve at $44 per unit, and an output of 5 million units - What is the profit maximizing (loss-minimizing) output? The price that consumers are willing to pay for this output is ​$50 per unit. If it produces this​ output, the​ firm's average total cost is ​$55 per​ unit, and its average fixed cost is ​$66 per unit. - What are the​ firm's economic profits​ (or economic​ losses)?

- 5 million units - $-25 million (economic profits = (average revenue(price)-average total cost)*output = 50-55*5)

Use the graph - What is the monopolist's profit-maximizing output? - At the profit-maximizing output rate, what is the average total cost? - At the profit-maximizing output rate, what is the average revenue? - At the profit-maximizing output rate, what is the monopolist's total cost? - At the profit-maximizing output rate, what is the monopolist's total revenue? - What is the maximum profit?

- 5,000 - $5.25 - $6.00 - $26,250 (5.25*5,000) - $30,000 (6.00*5,000) - $3,750 (30,000-26,250)

- Consider a price discriminating monopolist. Which of the following is​ true? For each of the following​ examples, which group will pay the higher price​ (as a result of having less elastic​ demand)? - Air transport for business people and tourists - Serving food on weekdays to businesspeople and retired people - A theater that shows the same movie to large families and to individuals and couples

- All of the above are true (A monopoly will engage in price discrimination whenever feasible to increase profits, the monopolist will sell some of its output at higher prices to consumers with less elastic demand, charging different prices to different customers does not mean the monopoly is necessarily using price discrimination) - business people - business people - individuals and couples

Consider the diagram with the​ demand, MR,​ ATC, and MC curves. - For a​ monopoly, the​ profit-maximizing levels of output and price will be shown by the point - Suppose that the marginal cost and average total cost curves also illustrate the horizontal summation of the firms in a perfectly competitive industry in the long run. In a perfectly competitive​ industry, the equilibrium output and price levels will be shown by the point - A society faces economic cost by allowing monopolies to exist because monopolies

- G - E - charge a price higher than marginal cost and produce less than what society wants

- The marginal revenue curve for a perfectly competitive firms is - While the marginal revenue of the monopolist is

- horizontal - downward sloping

Consider the figure to the right. Suppose that Qm 7.7 units per​ week, that Pm is $5.50 per​ unit, and that the average total cost of producing the 7.7 units is initially $3.00 per unit. Then an increase in fixed costs occurs causing the ATC curve to shift upward and the average total cost of producing 7.7 units of output to rise to $3.90 per unit. - Does the​ monopolist's profit-maximizing weekly output​ rise, fall, or remain the​ same? - What is the new amount of maximized weekly economic​ profits?

- unaffected - old amount: $32.19 (6.40-2.70*8.7) new amount: $13.05 (6.40-4.90*8.7)

A monopolist can sell 25 toys per day for $10 each. To sell 26 toys per day, the price must be cut to $9. The marginal revenue of the 26th toy is:

-$16.00 (26*9 - 25*10)

Price for Monopoly

> Marginal Cost

Which case below best represents a case of price​ discrimination?

A major airline sells tickets to senior citizens at lower prices than to other passengers

Given the cost curves in the diagram, what market situation would you expect to occur?

A natural monopoly

Which of the following is not necessary for price discrimination to​ exist?

A perfectly elastic demand curve

Monopoly has social costs because

All of the above (a monopoly produces less and charges a higher price than a perfectly competitive firm would producing the same product or service, too few resources are being used in the monopoly industry and too many are used elsewhere, P is greater than MC and this implies economic inefficiency)

A natural monopoly

All of the above (has decreasing​ long-run average total costs over a very large range of output, has economies of scale over a very large range of output, has decreasing​ long-run marginal costs over a very large range of output)

Which of the following would definitely not be an example of price​ discrimination?

An electric power company charges less for electricity used during off-peak hours when production costs are lower

Which of the following is not a barrier to entry into a market?

Diseconomies of scale

A monopolist can charge any price it wants without experiencing a change in quantity demanded

False

Consumer surplus is the sum of the total amount that consumers would have been willing to pay and the total amount that they actually​ pay, given the market clearing price that prevails in the perfectly competitive market

False

Both perfect competitors and monopolists must lower prices to sell more output The demand curve for the monopolist is​ ________ and the demand curve for the perfect competitor is​ ________

False; downward sloping and horizontal

The demand curve faced by the monopolist

Has greater price elasticity of demand as close substitutes for the monopoly product are developed

The demand curve of the monopolist

Is the same as the industry demand curve

In the graph, the profit-maximizing price for a monopoly is

P1

Which of the following statements about price discrimination is​ true?

Successful price discrimination will provide the firm with more profit than if it did not discriminate

If a public utility company is considered a​ monopolist, which of the following is not​ true?

The company's demand curve and supply curve are upward sloping

What's necessary for a firm to practice price discrimination?

The firm must be able to prevent resale of the product

Evaluate the following statement. A profit maximizing monopolist will never operate in a price range in which price elasticity of demand is inelastic

True

Why is there a social cost of monopoly?

Too few resources are being used in a monopoly

Because a monopolist produces a smaller quantity and charges a higher price than it would as a perfect​ competitor, a portion of the consumer surplus experienced under perfect competition becomes deadweight loss

True

Because a monopolist produces a smaller quantity and charges a higher price than it would as a perfect​ competitor, total consumer surplus under a monopoly is less than it is under perfect competition

True

Because a monopolist produces output at a point where price is greater than marginal​ cost, underproduction occurs

True

A monopolist is defined as

a single supplier of a good or service for which there is no close substitute

A monopoly is socially inefficient because it

charges a price greater than marginal cost

Marginal revenue for a monopolist is

downward sloping and always less than price

The demand curve faced by a purely monopolistic seller is

downward​ sloping, whereas that facing the purely competitive firm is perfectly elastic

As opposed to other types of monopoly, a natural monopoly typically owes its monopoly position to

economies of scale

A manager of a monopoly firm notices that the firm is producing output at a rate at which average total cost is falling but is not at its minimum feasible point. The manager argues that surely the firm must not be maximizing its economic profits. The​ manager's argument is

incorrect, since profit maximization requires that marginal revenue equals marginal cost but does not require the average total cost to be at any particular level

If a​ monopolist's marginal cost curve shifts​ upward, the​ monopolist's price will _____ , the output rate will _____

increase; decrease

As the number of imperfect substitutes for a monopoly firms product increases, the price elasticity of demand

increases

As the number of imperfect substitutes for a monopoly​ firm's product​ increases, the price elasticity of demand

increases

Consider the figure to the right. Suppose that Q1 is equal to 30 units of output per week. If the vertical distance to point A is $12 per unit and the vertical distance to point B is $22 per​ unit, then by how much does producing the 30th unit of output affect the​ firm's economic​ profits?

increases; $10 (12-2)

You observe that the revenue of a monopolist varies directly with changes in price This firm ______ maximizing its economic profits because a​ profit-maximizing monopolist will never operate in a price range in which demand is

is not; inelastic since this is range in which revenues are falling and the firm could raise revenues by raising the price into the elastic range of demand

In a monopoly market structure, the firm ( the monopolist)

is the whole industry

If we were to compare the amount produced by firms in a competitive industry to the output produced by a​ monopoly, the monopolist will produce

on the elastic portion of the demand curve and charge a higher price

For a monopolist, marginal revenue is

less than price (MR supply curve starts at the same point as MR demand curve but is twice as steep)

When the demand for a monopolist falls, the marginal revenue also shifts left and will intersect the marginal cost at a _____ output level The output rate will _____ , and economic profits will likely

lower; decrease; decrease

The costs of a purely competitive firm and a monopoly could be different because the

monopoly might experience economies of scale not available to the competitive firm

A new competitor enters the industry and competes with a second​ firm, which had been a monopolist. The second firm finds that although demand is not perfectly​ elastic, it is now relatively more elastic. The second​ firm's marginal revenue will be​ _____________ and its​ profit-maximizing price will be​ ___________

more elastic; lower

Monopoly producers are faced with

no competitive producers of the same product

For a monopoly,

price = average revenue only

Charging different prices for similar products that have different marginal costs is called

price differentiation

As compared to a perfectly competitive industry, a monopoly industry with identical cost curves will

produce less and set a higher price

The monopolist sets prices by

producing the quantity where marginal cost = marginal revenue and charging the price that corresponds to that quantity

All of the following are necessary conditions for price discrimination except

the firm must be a price taker

A firm can be the sole supplier of a good and still not be considered a monopoly if

there are very close substitutes for the good