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ECON 1050 Chapter Notes - Chapter 13: Monopoly Price, Deadweight Loss, Marginal Revenue

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burgundywolf182
4 Dec 2016
School
University of Guelph
Department
Economics
Course
ECON 1050
Professor
Eveline Adomait

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CHAPTER 13 - MONOPOLY
Monopoly and How It Arises
A Monopoly is a market with a single firm that produces a good or service
How it Arises
No Close Substitutes
Barrier to Entry
No Close Substitutes
A monopoly sells a good or service that has no good substitutes
Barrier to Entry
Constraint that protects a firm from potential competitors
3 types of barrier to entry:
o Natural Barrier to Entry
o Ownership Barrier to Entry
o Legal Barrier to Entry
Natural Barrier to Entry
Creates a natural monopoly: a market in which economies of scale enable one firm
to supply the entire market at the lowest possible cost (ex. Hydro company)
Ownership Barrier to Entry
When one firm owns a significant portion of a key resource in production
Legal Barrier to Entry
Creates a legal monopoly: a market in which competition and entry are restricted
by granting of a public franchise, government licence, patent, or copyright.
Monopoly Price Setting Strategies
Single Price
Price Discrimination
Single Price
A Single Price Monopoly is a firm that must sell each unit of its output for the
same price to all its customers
Price Discrimination
When a firm sells different units of a good or service for different prices
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CHAPTER 13 - MONOPOLY
A Single-Price Monopoly’s Output and Price Decision
Price and Marginal Revenue
A monopoly’s demand curve is the market demand
curve and a single-price monopoly’s marginal
revenue is less than price
Marginal Revenue and Elasticity
In a monopoly demand is always elastic
Price and Output Decision
A monopoly maximizes profit by producing the output at which marginal revenue
equals marginal cost and by charging the maximum price that consumers are willing
to pay for that output
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Document Summary

A monopoly is a market with a single firm that produces a good or service. A monopoly sells a good or service that has no good substitutes. Constraint that protects a firm from potential competitors. 3 types of barrier to entry: natural barrier to entry, ownership barrier to entry, legal barrier to entry. Creates a natural monopoly: a market in which economies of scale enable one firm to supply the entire market at the lowest possible cost (ex. When one firm owns a significant portion of a key resource in production. Creates a legal monopoly: a market in which competition and entry are restricted by granting of a public franchise, government licence, patent, or copyright. A single price monopoly is a firm that must sell each unit of its output for the same price to all its customers. When a firm sells different units of a good or service for different prices.

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Related Questions

When the demand for a good or service limits the quantity that can be sold to an output at which the firm experiences economies of scale, the ____.
 
A) firm is a single-price monopoly
B) good that the industry produces has close substitutes
C) firm is a natural monopoly
D) firms are protected from competition by a legal barrier

 

1. Which characteristic led to Microsoft exercising monopoly power?

 

A.copyright protection for the Windows operating system
 

B .no close substitutes
 

C.economies of scale
 

D.government franchise

 

2. The goal of antitrust law is to:

 

A. prevent monopolies and monopoly power from arising.
 

B.protect monopolies from the competition.
 

C. make sure consumers pay high prices.
 

D. preserve allocative inefficiencies of monopolies.

 

3. Which of the following is not a characteristic of a monopoly?

 

A. The market has just one seller.
 

B.There exist significant barriers to entry.
 

C. Substitutes for the monopolist's products are available to buyers.
 

D. No close substitutes exist for the monopolist's products.

 

4. A constantly declining long-run average cost curve is a characteristic of what type of industrial structure:

 

A. Monopoly
 

B. Natural monopoly
 

C. Oligopoly
 

D. Perfect competition

 

5. An industry that has large economies of scale operates most efficiently as a(n):

 

A.competitive industry.
 

B.monopoly
 

C.regulated natural monopoly.
 

D.anarchic industry.
1.As long as price is sufficient to cover __________, the firm isbetter off by operating rather than by shutting down in the shortrun.
Answer
marginal cost
average fixed cost
average variable cost
marginal revenue

2.The owner of Tie-Dyed T-shirts, a perfectly competitive firm, hashired you to give him some economic advise. He has told you thatthe market price for his shirts is $20 and that he is currentlyproducing 200 shirts at an AVC of $15 in the short run and an AC of$25. What would you recommend to him?
Answer
To continue producing in the short run, as his loss from productionis less than his fixed costs, but to exit the industry in the longrun if there are no changes in economic conditions.
To shut down in the short run, as he is incurring a loss and toleave the industry in the long run, if there are no changes ineconomic conditions.
To continue to produce in the short run, even though he is earninga loss, and to expand in the future with the hope of increasingmarket share and total revenue.
You tell him you cannot make any recommendations until you knowwhat his fixed costs are.

3.Which type of barrier to entry allows the electric company tomaintain a monopoly over the production of electricity?
Answer
a patent
economies of scale
diseconomies of scale
ownership of a scarce factor of production.

4. Why can a monopolist continue to make positive profits even inthe long-run while a perfectly competitive firm can make only zeroeconomic profits in the long-run?
Answer
Because a monopoly only has one firm while perfect competition hasmany.
Because monopoly has barriers to entry and perfect competition hasfree entry.
Because perfect competition has barriers to entry and monopoly hasfree entry.
Because in perfect competition everyone produces the same productand because in monopoly there are no close substitutes.

5.What is the difference between diminishing returns anddiseconomies of scale?
Answer
Diminishing returns is in the short run while diseconomies of scaleis in the long run.
Diminishing returns is in the long run while diseconomies of scaleis in the short run.
They are both the same thing.
There is no such thing as diseconomies of scale.

6. What does the LAC look like for a firm with constant returns toscale?
Answer
It slopes downwards.
It slopes upwards.
It is a horizontal straight line.
It is a vertical straight line.

7.Natural monopoly occurs when there are:
Answer
large economies of scale.
firms joining together to limit output and raise prices.
different prices for different consumers or groups ofconsumers.
patents.

8.Suppose we know that a monopolist is maximizing its profits.Which of the following must be true? The monopolist has
Answer
maximized its total revenue.
set price equal to its average cost.
maximized the difference between marginal revenue and marginalcost.
set marginal revenue equal to marginal cost.