ECON 100 - Chapter 13 - Monopolies

  1. 1. Name 4 examples of a monopoly

    2. What are 4 barriers to entry that allow monopolies to exist and give examples
    • 1
    • a. Athletes
    • b. Diamonds (De Beers in the 1880s)
    • c. Patented or copywrited goods
    • d. China's Salt Commission (state monopoly), or Hudson Bay Co back in the day

    2: Possible Barriers to Entry

    • a. Control of a scarce resource or input
    • ex. de Beers controlled over 90% of the diamond market until 1980s
    • ex Pharmaceutical companies and drug formulas

    • b. Economies of scale 
    • For firms with very large fixed costs, ATC will be decreasing over the relevant range of output because of a strong spreading effect, these firms are natural monopolies
    • * As Q increases, ATC decreases, so new entrants producing smaller quantities would have higher ATC and would not be able to compete

    * It would cost less for one firm to supply the entire market, rather than many firms each producing smaller quantities

    ex. Railways, electricity, skytrains

    c. Technological superiority or network externalities

    • ex. Software: word, excel, Power Point etc.
    • Because consumers need to use what everyone else is using

    d. Government created barriers

    • ex. Patents (20 years) and copyrights (50 years)
    • Both provide incentive for inventions and creativity
  2. 1. What is the difference between a perfectly competitive market and a monopoly in terms of MR?

    2. What is the equation for price elasticity of demand?

    3. Where will monopolists produce as far as elasticity of demand goes?

    If E < 1, then demand is__ with a stronger____
    If E > 1, then demand is___ with a stornger ___
    If E = 1, then demand is:
    1. In a PC market, P = MR because the price stays constant, but in a monopoly P does not equal MR! It will change according to the quantity selected, and that will depend on elasticity and the price effect. 

    2. E = %ΔQ / %ΔP

    3. Monopolists will only produce in the elastic portion of demand, because MR ≥ 0

    • 4. 
    • E < 1: Inelastic = stronger price effect 
    • E > 1: Elastic = stronger quantity effect
    • E = 1: Unit elastic = equal effects
  3. 1. Where does a monopolist maximize profits?

    2. True or False
    *For a monopoly, the profit maximizing quantity is NOT the same as the revenue maximizing quantity
    1. Where MR = MC

    • 2. True!!
    • You might be able to get a higher revenue with a higher quantity, but the TC could be higher making it less profitable.
  4. 1. How do you find Pm for a monopoly that is deregulated?

    2. How do you calculate the profits?

    3. Visualize
    • 1. Find the quantity Qm where MR = MC
    • Then draw a vertical line up to the demand curve, and that will be the price where profits are maximized. 

    2. Same as for a PC market. (Pm - ATC) Qm

    • 3. 
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  5. 1. Demand function: P = 100 - 0.25Q
    In a monopoly, what would be the MR function?

    2. How would you go about answering this question?
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    1. P = 100 - 0.5Q

    • 2.
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    • To find MR function, just multiply the slope of the demand function by 2

    Then to find Qm, set the MR function equal to the MC function and solve for Q

    Then to find Pm, insert the answer to Qm into the demand function.

    You can also find the x intercept for d by inserting 0 as the price, and the same for the x intercept of the MR function. 

    If you want to find P*, then you would insert Qm into either the MR function or the MC function since they are both the same
  6. 1. Why are monopolies inefficient compared to PC markets?

    2. How does the Canadian gov. regulate single priced monopolists?

    3. What are 3 examples of a natural monopoly?

    4. What is the difference between the ATC of a single priced monopoly, and a natural monopoly?

    5. What is the significance of this difference?
    1. Because the demand price (Pm) is greater than the supply price, and therefore there is DWL.

    2. It makes it illegal to collude with other firms to restrict output, and mergers have to be approved by the Competition Bureau

    3. Railways, electricity and skytrains

    4. For a natural monopoly, the ATC curve is downward sloping instead of u-shaped with no minimum point.

    • 5. The MC curve never crosses the ATC within the relevant range of output
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  7. 1. In a natural monopoly, how many times does the ATC curve cross the demand curve?

    2. What is the relationship between MC and ATC in a natural monopoly?

    3. What is the difference in cost between ATC and MC in a natural monopoly

    4. Why is it more efficient to have a natural monopoly, rather than two or three firms?
    1. Twice

    2. MC is relatively flat, and does not cross ATC

    • 3. MC is very low (it costs very little more to put one more person on the skytrain), and ATC very high because of the high fixed cost of building and maintaining it
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    4. Because one large firm can produce the quantity demanded in the market at a lower cost than several small firms.
  8. 1. What happens to market efficiency when a natural monopoly is unregulated?

    2. What are the two solutions to this problem?
    • 1. There is a HUGE amount of DWL.
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    2. Public ownership or price regulation
  9. 1. What is the benefit of government (public) ownership of natural monopolies?

    2. For a publicly owned monopolist, what is the output, price and profit?

    3. What is the downsides to publicly owned monopolies, and what is done about it?

    4. What is the formula for the subsidy?
    • 1. Prices can be set to maximize efficiency rather than profits. 
    • *They can produce what people need at the quantity demanded and therefore there is no DWL. 

    • 2.
    • Output = Q*
    • Price = P*
    • Profit = (P* - ATC)(Q*) ***LOSS***
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    3. While setting MC = D is socially optimal, the firm will lose money and have to be subsidized with tax revenue. 

    Governments are also not very good at running businesses

    4. (ATC - P)(Q)
  10. 1. How do price-regulated monopolies operate?

    2. In a price regulated natural monopoly, where are the following set

    3. In a price regulated monopoly, what is profit?

    4. How does the DWL of a regulated monopoly compare to that of an unregulated monopoly?

    5. Give 2 examples of price regulated monopolies?
    • 1. A price ceiling is set by the government.
    • *Fun Fact* This is an example of a price ceiling that actually improves market efficiency.

    • 2. 
    • Price = Pr (the price ceiling set by gov. to where the demand curve meets the ATC curve, and there are no profits)

    Output = Qr The quantity where D = ATC

    3. Profit = (Pr - ATC)(Qr) = 0

    4. It's smaller

    • 5. Translink and BC Hydro
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  11. 1. What is the common problem shared by monopolies controled by both public ownership and price regulation?
    1. A lack of incentives to minimize costs
  12. 1. How do you find Q in the following 3 types of monopolies

    a. Unregulated monopoly
    b. Publicly owned monopoly
    c. Price regulated monopoly

    2. How do you calculate a loss by a publicly owned monopoly?

    3. How would you calculate this?
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    1. Q is found by the following equations

    a. Unregulated: MR = MC (QM is profit maximizing quantity)

    b. Public ownership: D = MC (Q*)

    c. Price regulated: ATC = D (the second time it crosses). This is Qr where the firm breaks even. 

    • 2. (P - ATC) x Q
    • Subsidy = (ATC - P) x Q

    • 3. 
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  13. 1. What is price discrimination?

    2. Name some examples of price discrimination

    3. Why is price discrimination more profitable?

    4. Answer this if you can
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    1. When a monopolist charges different prices to different groups of consumers. This results in higher profits. 

    • 2.
    • a. Student and senior discounts
    • b. Coupons
    • c. Evening and weekend cell minutes
    • d. Different prices for airline tickets at different times

    3. Consumers have different williness to pay and therefore have different price elasticities of demand because of their differnt income, preferences and necessities. 

    * This allows monopolists to charge higher prices to consimers with higher incomes who have a more inelastic demand

    • 4. 
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Card Set
ECON 100 - Chapter 13 - Monopolies
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