# Chapter 9 Microeconomics (Exam 3)

 Monopoly   the sole seller of a good that has no close substitutes Barriers to Entry Factors that prevent new firms from profitably entering  The golden rule of profit maximization is  the same for the monopolist as it is for the perfectly competitive firm: find the rate of output for which marginal revenue equals marginal cost Deadweight Loss of Monopoly Some of the consumer surplus is transferred to the monopolist in the form of profits, and some is lost to society.  Under perfect competition, price equals marginal cost Under monopoly, price exceeds marginal cost If there is no price that is greater than average variable cost, the firm should shut down and minimize its losses by limiting them to the amount of the fixed costs. The firm should produce if  there is some rate of output at which all variable costs and some fixed costs are covered. Price Discrimination charging different prices to different customers or charging the same consumer different prices for different units of the same good.  To price discriminate,  a firm must face a downward-sloping demand curve, must have at least two different groups of customers with different elasticities of demand, must be able to identify members of the different groups easily, and must be able to prevent resale of its products between members of the groups. To maximize profits by price discriminating,  the monopolist equates marginal revenue for each group of customers with the marginal cost of supplying the good. The group with the more price inelastic demand will pay the higher price. Perfect Price Discrimination Charge consumers what they are willing to pay In states where the government runs liquor stores, the monopoly results from legal restrictions If a small town has only one grocery store, the grocer has a monopoly as a result of  economies of scale relative to the market demand.  For a monopolist that does not perfectly price discriminate, marginal revenue is less than price because the firm must lower price on all units to sell additional units and the firm faces a downward-sloping demand curve. Total revenue for a monopolist is at a maximum when  marginal revenue equals zero If a monopoly lowers price to sell additional units, its revenues increase if the percentage increase in units sold is greater than the percentage decrease in price.  A monopolist always produces on the elastic portion of the demand curve. A monopolist will maximize profits at which rate of output in Exhibit 2? Q 2 In Exhibit 2, what will the profit-maximizing rate of output be if fixed costs increase? Q 2 In Exhibit 3, the monopolist's economic profits are zero. In Exhibit 3, a monopoly that perfectly price discriminates will produce Q 2 units. In Exhibit 3, what could cause the ATC curve to shift down to the AVC curve without affecting theMC curve? elimination of fixed costs The fundamental difference between a monopoly and a firm in perfect competition is that a monopoly faces a downward-sloping demand curve.  In the long run, a monopolist will adjust the scale of the firm to maximize profits.  Other things equal, a monopoly does not want to raise price since it operates on the elastic portion of its demand curve. Consider Exhibit 4. What is the price-output combination if the industry is perfectly competitive? if it is a monopoly that does not price discriminate? Perfect competition: quantity = i , price = g ; Monopoly: quantity = h , price = f The monopoly in Exhibit 4 does not price discriminate. What is its deadweight loss? bdc In Exhibit 4, what are the profits of a monopolist that is able to perfectly price discriminate? Acg In Exhibit 4, what are the deadweight losses if the firm perfectly price discriminates? zero Which of the following statements about monopoly is true?  Local monopolies are more common than national monopolies. Suppose a monopoly is afraid that the U.S. Justice Department is going to intervene in the market of the monopoly because of the firm's monopoly power. Which of the following actions may it take? both lower price and lobby congress to block the Justice Department's action. Other things equal, the deadweight loss of monopoly is greater the less elastic the demand curve.  Which of the following could make actual deadweight losses different from what is indicated by a typical graphical analysis? all of these answers  Which of the following is not a requirement for price discrimination? economies of scale  A price-discriminating monopolist charges the highest price to the group with the least elastic demand Which type of firm is providing allocative efficiency? both a perfectly competitive firm and a monopoly that perfectly discriminates. Authorstraightupdeme ID183946 Card SetChapter 9 Microeconomics (Exam 3) DescriptionChapter 9 Microeconomics (Exam 3) Updated2012-12-01T06:36:40Z Show Answers