•There are no close substitutes for the monopolist’s product
What are some examples ofimpossible entry?
•Owner of a vital resource•Legal barriers•Economies of scale
What are major barriers that prevent new firms from entering and competing with a monopolist?
•Ownership of a Vital Resource•Legal Barriers•Economies of Scale
What is the advantage ofeconomies of scale?
•Because of economies of scale, a single firm in an industry will produce output at a lower per-unit cost than two or more firms
What is anatural monopoly?
•An industry in which the long-run average cost of production declines throughout the entire market
What is unique about a naturalmonopoly?
•A single firm will produce output at a lower per-unit cost than two or more firms in the industry
What is a network good?
A good that increases in value to each user as the total number of users increase. As a result, a firm can achieve economies of scale. Examples include Facebook and Match.com.
What is a price maker?
•A firm that faces a downward-sloping demand curve•As a result, a monopolist can choose its price along the demand curve.
What is the difference betweenmonopoly and perfect competition?
•The D and MR curves of the monopolist are downward sloping; in perfect competition they are equal and horizontal
What is unique about the demandcurve for a monopolist?
•The monopolist demand curve and the industry demand curve are one in the same
Why is MR < P for all but thefirst unit of output?
•Observe the relationship between P and MR in Exhibit 2.•To sell 1 unit, P=$138 and TR=$138.•To sell 2 units, P=$125 and TR=$250.•Compute that TR increases $112 ($250-$125), which means MR=$112.•Notice that at 2 units P=$125>$112 and this gap widens as the units increase.
What two methods does a monopolist use to maximize profit orminimize losses?
• Total revenue method• MR = MC method
Can a monopolist make a profit inthe long-run?
•If the positions of a monopolist’s demand and cost curves give it a profit and nothing changes these curves, it can make a profit in the long-run
What isprice discrimination?
•The practice of a seller charging different prices for the same product not justified by cost differences
What is arbitrage?
•The practice of earning a profit by buying a good at a low price and reselling the good at a higher price
Is price discrimination unfair?
•At the lower price, many buyers benefit from the discrimination by not being excluded from purchasing the product if a higher price were charged.
Is pricediscrimination unfair?
•At the lower price, many buyers benefit from the discrimination by not being excluded from purchasing the product if a higher price were charged.
Is perfectcompetition efficient?
•A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources. Thus, the marginal benefit equals the marginal cost of resources to produce it.
Is perfect competition efficient?
•A perfectly competitive firm that produces where P = MC achieves an efficient allocation of resources. Thus, the marginal benefit equals the marginal cost of resources to produce it.
Is monopoly efficient?
•A monopolist is inefficient because it sets P>MR=MC and resources are underallocated to the production of its product
How does monopoly harm consumers?
•It charges a higher price and produces a lower quantity than would be the case in a perfectly competitive situation
What is the case againstmonopoly?
•Higher price•Charges a Price > MC•Long-run economic profit•Alters the distribution of income to favor monopolist
If a firm is currently equating MR and MC and product price = $24, AVC = $22, and ATC = $26, then in the long run this firm:
will go out of business
If a firm reacts to other firms' market decisions by anticipating how the other will then react, this is:
mutual interdependence
A monopolist will earn economic profits as long as his price exceeds:
average total cost
Suppose an oil cartel has an agreement to restrict members' production in order to maintain a price of $30 per barrel. A single cartel member may want to cheat and exceed its quota so that it can:
earn a bigger profit
In the long run, marginal cost must equal marginal revenue for a monopolistic competitive firm, but not at the minimum point of the long-run average cost curve.
T/F
true
Cartels are legal in the United States? T/F
False
A competitive firm maximizes its profits (or minimizes is losses) by producing the quantity where the market price equals the firm's:
marginal cost
In the short run, the profit maximizing (or minimizing) quantity of output for any firm to produce exists at that output level at which marginal revenue equals marginal cost. T/F
True
A monopolist that maximizes total revenue earns maximum economic profit. T/F
False
Which of the following best explains why a firm in a perfectly competitive market must take the price determined in the market?
) The short-run average total costs of firms that are price takers will be constant. B) If a price taker increased its price, consumers would buy from other suppliers. C) Firms in a price-taker market will have to advertise in order to increase sales. D) There are no good substitutes for the product supplied by a firm that is a price taker.
B
If the market price is $5 and you are currently producing at a level where average total cost is $3 and falling, you should:
E)
To maximize long-run profits, the monopolistically competitive firm shown in Exhibit 10-2 will charge a price per unit of: A) zero. B) $5. C) $10. D) $15. E) $20.
D because at 10 it will opportate at a shortrun mr=mc but at d=lrac is 15
Monopolistic competitive firms in the long run earn:
zero pure economic profit
A market situation where a small number of sellers dominate the entire industry is called:
oligopoly
Which of the following is a necessary condition for price discrimination?
A) The seller must be able to divide the markets according to the different price elasticities of demand. B) It must be difficult for one buyer to resell to another buyer. C) Both a and b. D) Neither a nor b.
C both a and b
In the perfectly competitive market, all firms in the market are assumed to be producing:
identical product
A major characteristic of the theory of oligopoly is that:
D)
A competitive firm maximizes its profits (or minimizes is losses) by producing the quantity where the market price equals the firm's:
marginal cost
If pizza used to be produced in a perfectly competitive market, and now the pizza market has become a monopoly, we can expect:
D)
A monopoly:
C)
Regardless of the demand for its product, a monopolist will be able to earn positive economic profits T/f.
False
An industry is said to be a natural monopoly when:
C)
As new firms enter a monopolistic competitive industry, it can be expected that:
B)
A monopolist faces a downward-sloping demand curve because:
A)
Under monopoly, a firm:
C)
For a monopolist to practice price discrimination, one necessary condition is that the product offered for sale must be:
A) high quality. B) expensive. C) cheap. D) impossible or difficult to resell.
impossible or difficult to resell
Compared to the perfectly competitive outcome, monopolistically competitive markets will result in:
B)
If a monopolistically competitive firm can earn a profit, it will increase production until:
D)
Which of the following is a market structure of monopoly?
B)
Because a competitive firm is a price taker, it faces a demand curve that is:
C)
If a potato farmer expands output, he finds that the increase in total revenue is less than the increase in total costs. This means that:
C)
If marginal revenue equals marginal cost in the short run, the perfectly competitive firm earns zero profits. T/F
