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Characteristics of a Monopoly
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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
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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?
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If there were competing electric companies, they would charge more. Having only one electric company keeps prices down.
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Natural Monopoly
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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?
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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)
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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?
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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?
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No.
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Why aren't monopolies efficient?
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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 ______
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Less...more
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When monopolies produce less and charge more, they _____ Consumer surplus and ______ producer surplus
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decrease cs... increase ps
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Because monopolies decrease consumer surplus and increase producer surplus, there is a...
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Deadweight loss
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What is productively efficient? Are monopolies productively efficient?
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-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?
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-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?
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At the socially optimal point
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Where is productively efficiency?
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P=ATC
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Where is the socially optimal point?
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P=MC (MC crosses demand)
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How does the government regulate monopolies?
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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?
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The firm would take a loss and would need a subsidy
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Price discrimination
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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?
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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=?
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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.
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No economic profit/normal profit
Fair Returns
P=ATC
Fair Returns
P=ATC
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Socially optimal point is the same as...
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Allocative efficiency point
MC=D
MC=D
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Where is the consumer surplus in a price discriminating market?
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NOWHERE
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Deadweight Loss
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Loss as a result of Inefficiency