question
Characteristics of a Monopoly
answer
1. 1 Large firm (the firm is the market)
2. Unique product (no close substitutes)
3. High barriers (new firms have extreme difficulty entering the industry)
4. Price Makers
5. Some advertising
2. Unique product (no close substitutes)
3. High barriers (new firms have extreme difficulty entering the industry)
4. Price Makers
5. Some advertising
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Do all monopolies make a profit? Explain
answer
No. The water and electric companies are monopolies, but the government regulates them so they don't make profit.
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Why are monopolies good sometimes?
answer
If there were competing electric companies, they would charge more. Having only one electric company keeps prices down.
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Natural Monopoly
answer
Occurs because it is better to only have one firm producing that specific product because having only one firm would mean lowest cost.
Without competition, that firm can produce at a lower cost.
Without competition, that firm can produce at a lower cost.
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How does a demand curve look on a monopoly graph? What does this mean?
answer
Downward sloping
Means a firm will have to lower its prices to sell more of the product.
Means a firm will have to lower its prices to sell more of the product.
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When is total revenue maximized? (for the total revenue test, only on elastic/inelastic graph)
answer
When MR crosses the x-axis
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Where does a monopoly always produce? (elastic/inelastic)
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The elastic range
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Where are the elastic and inelastic ranges?
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To the left of where MR=0 is the elastic range
To the right of where MR=0 is the inelastic range
To the right of where MR=0 is the inelastic range
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Where is the profit maximization point?
answer
Go to where MC=MR, like always but then draw up until you hit the demand curve. That is where profit is maximized
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Formula for Profit/loss per unit
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Profit or loss/quantity produced
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Are monopolies efficient?
answer
No.
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Why aren't monopolies efficient?
answer
1. They charge a higher price
-They could provide more for less
2. They don't produce enough
-Not allocative-ly efficient
3. They produce at higher costs
-Not productively efficient
-They could provide more for less
2. They don't produce enough
-Not allocative-ly efficient
3. They produce at higher costs
-Not productively efficient
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When MR=MC, monopolies produce ______ and charge ______
answer
Less...more
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When monopolies produce less and charge more, they _____ Consumer surplus and ______ producer surplus
answer
decrease cs... increase ps
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Because monopolies decrease consumer surplus and increase producer surplus, there is a...
answer
Deadweight loss
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What is productively efficient? Are monopolies productively efficient?
answer
-Producing at the lowest cost
-they aren't because they aren't producing at the lowest cost
-they aren't because they aren't producing at the lowest cost
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What is allocative efficiency? Are monopolies allocative-ly efficient?
answer
-Producing at where society wants
-No
-No
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Where is allocative efficiency?
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Where P=MC
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Where do natural monopolies produce?
answer
At the socially optimal point
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Where is productively efficiency?
answer
P=ATC
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Where is the socially optimal point?
answer
P=MC (MC crosses demand)
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How does the government regulate monopolies?
answer
Use price controls such as price ceilings
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What would happen if the government sets a price ceiling to get the socially optimal quantity?
answer
The firm would take a loss and would need a subsidy
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Price discrimination
answer
Selling the same products to different buyers at different prices
charges each consumer what they are willing to pay to increase profits
charges each consumer what they are willing to pay to increase profits
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What does a firm need to use price discrimination?
answer
1. Monopoly power
2. Must be able to segregate the market (2 groups, like students and adults at MetLife)
3. Consumers can't resell the product
Think MetLife tickets
2. Must be able to segregate the market (2 groups, like students and adults at MetLife)
3. Consumers can't resell the product
Think MetLife tickets
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When price discrimination is used, MR=?
answer
Demand AND PRICE
(MR DP. line)
(MR DP. line)
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Where is no economic profit?
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Where P=ATC (aka productively efficient aka normal profit)
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Synonyms for productively efficient.
answer
No economic profit/normal profit
Fair Returns
P=ATC
Fair Returns
P=ATC
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Socially optimal point is the same as...
answer
Allocative efficiency point
MC=D
MC=D
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Where is the consumer surplus in a price discriminating market?
answer
NOWHERE
question
Deadweight Loss
answer
Loss as a result of Inefficiency
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