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ECON 208 Lecture Notes - Lecture 10: Average Cost, Allocative Efficiency, Monopoly Profit

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pearllama233
10 Jan 2016
School
McGill University
Department
Economics
Course
ECON 208
Professor
Irakli Japaridze

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ECON 208 Full Course Notes
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Document Summary

A monopoly exists in a market were there is only one firm producing a product. Below are the assumptions made about this model. Nb of firms in a monopolistic industry there is only one firm producing a product, hence the firm is the industry. There are barriers of entry into a monopolistic industry, hence new firms cannot enter the industry and it remains a monopoly. As an effect of the barriers of entry a monopolistic firm is able to make abnormal profits. The below diagram illustrates the short run output of a monopolistic firm. A monopolistic firm can control price or output but not both. A monopolistic firm will maximize profits when marginal costs are equal to marginal revenue. As seen by the above diagram it is possible for a monopolistic firm to make abnormal profits, (the ar curve is sloped for a monopoly as the demand for the industry is equal to that of the firm).

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Related Questions

1) A natural monopoly exists when:

a. A few firms collude to make one large firm

b. Firms enter the industry as a result of profit incentives

c. Economies of scale provide large cost advantages to having one firm produce the industry's output

d. Firms naturally maximize regardless of market structure

 

2) A(n) ____ is a single firm with ___, whereas a(n) ___ implies an industry with ____ firm(s) and ____ .

a. Monopoly; barriers to entry; oligopoly; few; no barriers to entry

b. Oligopoly; no barriers to entry; monopoly; many; easy entry and exit

c. Monopoly; barriers to entry; monopolistic competition; many; easy entry and exit

d. Monopolistic competitor; barriers to entry; monopoly; one; barriers to entry

 

3) In monopolistic competition:

a. Each firm produces a product identical to that of every other firm in the industry

b. Firms are aware of their strategic interdependence

c. Firms earn large economic profits in the long run

d. Firms earn zero economic profits in the long run

 

4) A monopolistically competitive industry, such as corn snack chips, and a perfectly competitive industry, like wheat farming, are alike in that:

a. There are many firms in each industry

b. Firms in both types of industries produce similar but not identical products

c. Barriers to entry in both industries are large

d. Firms in both types of industries produce identical products

13. If a monopolistic competitor is producing an output for which marginal revenue is $40 and the marginal cost is $32, to maximize profits the firm should
A. decrease the level of output.
B. keep the level of output constant.
C. continue to make $8 per unit.
D. increase the level of output.

14. A monopolistic competitor will not make an economic profit unless
A. it engages in price discrimination.
B. its marginal revenue is greater than its marginal cost.
C. it faces an inelastic demand curve.
D. its price is greater than its average total cost.

15. The definition of monopolistic competition includes
A. few firms and ease of entry and exit.
B. few firms and barriers to entry and exit.
C. many firms and barriers to entry and exit.
D. many firms and ease of entry and exit.

16. Characteristics of monopolistic competition include all of the following except
A. significant barriers to entry.
B. a relatively large number of sellers and buyers.
C. small market share for each seller.
D. differentiated products.

1 How does monopolistic competition differ from the pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Please explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor and how that, in turn, affects its economic profit.

2 "Competition in quality and service may be just as effective as price competition in giving buyers more for their money." Do you agree? Why? Explain why monopolistically competitive firms frequently prefer nonprice to price competition.

3 Critically evaluate and explain:
a. In monopolistically competitive industries, economic profits compete away in the long run; hence, there is no valid reason to criticize such industries' performance and efficiency.
b. In the long run, monopolistic competition leads to a monopolistic price but not to monopolistic profits.