question
Know the following graphs and figures:
answer
-Page 201 Graph
-Page 203 Graph
-Page 210 Graph
-Figure 10.6
-Figure 10.9
-Page 203 Graph
-Page 210 Graph
-Figure 10.6
-Figure 10.9
question
What are the major characteristics of a pure monopoly?
answer
-Single Seller: a sole producer of a specific good or service. The firm and the industry are one
-No Close Substitutes: unique product that nobody else produces.
-Price Maker: control over price and quantity supplied.
-Blocked Entry: strong barriers to entry block potential competition. The barriers can be economic, technological or legal for example.
-Non-Price Competition: the product produced can be standardized (utilities) or differentiated (Windows). Standardized products use mostly PR for product awareness and differentiated products will use advertising to promote their product.
-No Close Substitutes: unique product that nobody else produces.
-Price Maker: control over price and quantity supplied.
-Blocked Entry: strong barriers to entry block potential competition. The barriers can be economic, technological or legal for example.
-Non-Price Competition: the product produced can be standardized (utilities) or differentiated (Windows). Standardized products use mostly PR for product awareness and differentiated products will use advertising to promote their product.
question
Why do we study pure monopolies?
answer
-Pure monopolies are very rare
question
What are the barriers that make it difficult to enter the monopoly market?
answer
-Barrier to Entry(factors that keeps firms from entering an industry):
-Economies of Scale: Declining ATC with added firm size makes it difficult for a new firm to start up. They cannot realize the economies of scale.
-Legal Barriers: Patents and Licenses. Patents enable monopolies to have the exclusive right to an invention. Licensing makes it difficult for new firms to enter because there is a limited number of licenses. For example, the taxi cab business in a large city.
-Ownership of Essential Resources: a monopoly can own or control the resources necessary to produce their product.
-Pricing: A monopoly can prevent new firms from entering by slashing their prices.
-Economies of Scale: Declining ATC with added firm size makes it difficult for a new firm to start up. They cannot realize the economies of scale.
-Legal Barriers: Patents and Licenses. Patents enable monopolies to have the exclusive right to an invention. Licensing makes it difficult for new firms to enter because there is a limited number of licenses. For example, the taxi cab business in a large city.
-Ownership of Essential Resources: a monopoly can own or control the resources necessary to produce their product.
-Pricing: A monopoly can prevent new firms from entering by slashing their prices.
question
What is the difference between monopoly demand and pure competition demand?
answer
-The difference between a pure competitor and a pure monopolist is on the demand side.
-Instead of a purely elastic demand curve like pure competition, it is a down-sloping demand curve.
-Instead of a purely elastic demand curve like pure competition, it is a down-sloping demand curve.
question
Why is marginal revenue less than price in a monopoly?
answer
-The only way for a monopolist to increase sales is by charging a lower price. But by doing so, they forgoe the revenue from the higher price.
question
Why are monopolist's price makers?
answer
-In a pure monopoly, the monopolist is the only producer, so the industry output is what that monopoly decides to produce.
-With a down-sloping demand curve, each amount of output has a unique price.
-When the monopolist decides on the quantity to produce, they are also determining the price.
-With a down-sloping demand curve, each amount of output has a unique price.
-When the monopolist decides on the quantity to produce, they are also determining the price.
question
What area of demand do monopolist's set their prices in and why?
answer
-Monopolist sets prices in elastic region of demand curve
-Monopolists will never choose a price-quantity combination where price reductions cause total revenues to decrease.
-This would be the inelastic portion of the demand curve.
-Monopolists will never choose a price-quantity combination where price reductions cause total revenues to decrease.
-This would be the inelastic portion of the demand curve.
question
How do monopolist's determine output and price?
answer
-Step 1
-Determine the profit-maximizing output by finding where MR=MC.
-Step 2
-Determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist's demand curve.
-Step 3
-Determine the pure monopolist's economic profit by using one of two methods:
-Method 1: Find profit per unit by subtracting the average total cost of the profit-maximizing output from the profit-maximizing price. Then multiply the difference by the profit-maximizing output to determine economic profit (if any).
-Method 2:Find total cost by multiplying the average total cost of the profit-maximizing output by that output. Find total revenue by multiplying the profit-maximizing output by the profit-maximizing price. Then subtract total cost from total revenue to determine the economic profit (if any).
-Determine the profit-maximizing output by finding where MR=MC.
-Step 2
-Determine the profit-maximizing price by extending a vertical line upward from the output determined in step 1 to the pure monopolist's demand curve.
-Step 3
-Determine the pure monopolist's economic profit by using one of two methods:
-Method 1: Find profit per unit by subtracting the average total cost of the profit-maximizing output from the profit-maximizing price. Then multiply the difference by the profit-maximizing output to determine economic profit (if any).
-Method 2:Find total cost by multiplying the average total cost of the profit-maximizing output by that output. Find total revenue by multiplying the profit-maximizing output by the profit-maximizing price. Then subtract total cost from total revenue to determine the economic profit (if any).
question
What are the misconceptions concerning monopoly pricing?
answer
-Not the Highest Prices: Many people believe that a monopoly will charge the highest price they can. This is not true because if the price is too high, sales and revenues will decline.
-Total Profit: The monopolist seeks total profit, not unit profit. This is because additional sales offset the lower unit profit.
-Possibility of Losses: Economic profit is more likely for a monopolist than a pure competitor. However, they can have losses. Demand can decrease or costs could escalate which would result in losses.
-Total Profit: The monopolist seeks total profit, not unit profit. This is because additional sales offset the lower unit profit.
-Possibility of Losses: Economic profit is more likely for a monopolist than a pure competitor. However, they can have losses. Demand can decrease or costs could escalate which would result in losses.
question
Can a monopoly suffer losses? If so, how?
answer
-Yes, demand can decrease or costs could escalate which would result in losses.
question
Be able to draw the appropriate cost curves for a monopoly, including showing profit, loss and dead weight loss.
answer
Be able to draw the appropriate cost curves for a monopoly, including showing profit, loss and dead weight loss.
question
What is income transfer?
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-Basically, a monopoly transfers income from consumers to the owners of the monopoly.
question
What are the cost complications of a monopoly?
answer
-Economies of Scale
-X-Inefficiency: when a firm produces output at a higher cost than is necessary to produce it.
-Technological Advance: Monopolists are not as technologically progressive.
-X-Inefficiency: when a firm produces output at a higher cost than is necessary to produce it.
-Technological Advance: Monopolists are not as technologically progressive.
question
How can a monopoly price discriminate? What are some examples of price discrimination?
answer
-Price discrimination:
-Charging different buyers different prices
-Price differences are not based on cost differences
-Examples:
-Business travel
-Electric utilities
-Movie theaters
-Golf courses
-Railroad companies
-Coupons
-International trade
-Charging different buyers different prices
-Price differences are not based on cost differences
-Examples:
-Business travel
-Electric utilities
-Movie theaters
-Golf courses
-Railroad companies
-Coupons
-International trade
question
What is a regulated monopoly?
answer
-Natural Monopolies
-Socially Optimal Price(Set Price=Marginal Cost)
-Fair Return Price(Set Price=ATC)
-Socially Optimal Price(Set Price=Marginal Cost)
-Fair Return Price(Set Price=ATC)
question
What is the difference between an unregulated monopoly's price, the fair-return price and the socially optimum price? Be able to illustrate and explain this in a graph.
answer
-----------------------------------------------idk lol
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