Chapter 9: Monopoly

Chapter 9 Monopoly Key Concepts Summary Practice Quiz Internet Exercises©2000 South-Western College Publishing1In this chapter, you will learn to solve these economic puzzles:Why doesn’t the monopolist gouge consumers by charging the highest possible price?How can price discrimination be fair?Are medallion cabs in New York City monopolists?2What is a Monopoly?Single sellerUnique productImpossible entry into the market3What are the most common Monopolies? Local monopolies are more common real-world approximations of the model than national or world market monopolies4What does it mean to have a Unique Product?There are no close substitutes for the monopolists product5What are some examples of Impossible Entry?Owner of a vital resourceLegal barriersEconomies of scale6What is aNatural Monopoly?An industry in which the long-run average cost of production declines throughout the entire market7What is unique about a Natural Monopoly?A single firm will produce output at a lower per-unit cost than two or more firms in the industry8What is a Price Maker?A firm that faces a downward-sloping demand curve9What is the difference between Monopoly and Perfect Competition?The D and MR curves of the monopolist are downward sloping; in perfect competition they are horizontal10What is unique about the Demand Curve for a Monopolist?The monopolist demand curve and the industry demand curve are one in the same11402015105203035406080100Minimizing Costs in a Natural MonopolyCost per Unit (dollars)255 firms2 firms1 firmQuantity of Output12What determines Price for a Monopolist?Demand13Why is MR MCLong-run economic profitAlters the distribution of income to favor monopolist32Key Concepts33Key ConceptsWhat is a Monopoly?What is a Natural Monopoly?What is unique about a Natural Monopoly?What is a Price Maker?What is the difference between Monopoly and Perfect Competition?Why is MR 1. When MR is equal to zero, price elasticity of demand is unit elastic, = 1. When MR is negative, price elasticity of demand is inelastic, Ed < 1. 43 The short-run-profit-maximizing monopolist, like the perfectly competitive firm, locates the profit-maximizing price by producing the output where the MR and the MAC curves intersect. If this is less than the AVC curve, the monopolist shuts down to minimize losses. 44$100$75$50$251234$125$150$175$20056789ATCMCMR=MCDMRProfitAVCQP45$100$75$50$251234$125$150$175$20056789ATCMCMR=MCDMRLossAVCPQ46 The long-run-profit-maximizing monopolist earns a profit because of barriers to entry. If demand and cost conditions prevent the monopolist from earning a profit, it will leave the industry. 47 Price discrimination allows the monopolist to increase profits by charging buyers different prices, rather than a single price. 48 Three conditions are necessary for price discrimination: (1) the demand curve must be downward-sloping, (2) buyers in different markets must have different price elasticities of demand, and (3) buyers must be prevented from reselling the product at a higher price than the purchase price. 49Q1MCMR=MCDMRT1Price DiscriminationMarket for average studentsPQ50Q2MCMR=MCDMRT2MonopolistPQPrice DiscriminationMarket for superior students51 Monopoly disadvantages are these: (1) A monopolist charges a higher price and produces less output than a perfectly competitive firm, (2) resource allocation is inefficient because the monopolist produces less than if competition existed, (3) monopoly produces higher long-run profits than if competition existed, and (4) monopoly transfers income from consumers to producers to a greater degree than under perfect competition. 52QcMCMR=MCPcPerfect CompetitionMR, DPQ53QmMCMR=MCDMRPmMonopolistPQ54 Chapter 9 Quiz©2000 South-Western College Publishing551. A monopolist always faces a demand curve that is a. perfectly inelastic.b. perfectly elastic.c. unit elastic.d. the same as the market demand curve.D. A monopoly is the only seller, so there is no distinction between the market demand curve and the individual demand curve.562. A monopoly sets thea. price at which marginal revenue equals zero.b. price that maximizes total revenue.c. highest possible price on its demand curve.d. price at which marginal revenue equals marginal cost.D. Profits are always maximized if the firm produces at the point where MR = MC.57$40$30$20$101234$50$60$70$8056789ATCMCMR=MCDMRProfitAVCQP583. A monopolist sets a. the highest possible price.b. a price corresponding to the minimum average total cost.c. a price equal to marginal revenue.d. a price determined by the point on the demand curve corresponding to the level of output at which marginal revenue equals marginal cost. e. none of the above. D. Demand determines price in all market forms.594. Which of the following is true for the monopolist? a. Economic profit is possible in the long-run.b. Marginal Revenue is less than the price charged.c. Profit maximizing or loss minimizing occurs when marginal revenue equals marginal cost.d. All of the above are true.D. All of the above are characteristics of a monopoly.60$20$10100200$30$40300400ATCAVCMCDMRExhibit 8QP615. As shown in Exhibit 8, the profit-maximizing or loss-minimizing output for this monopolist is a. 100 units a day.b. 200 units a day.c. 300 units a day.d. 400 units a day.B. 200 units is the point at which MR = MC.626. As shown in Exhibit 8, this monopolist a. should shut down in the short-run.b. should shut down in the long-run.c. earns zero economic profit.d. earns positive economic profit.D. At the point where MR = MC (on the vertical line), P is greater than ATC; therefore, total revenue is greater than total cost and an economic profit is being made. 637. To maximize profit or minimize loss, the monopolist in Exhibit 8 should set its price at a. $30 per unit.b. $25 per unit.c. $20 per unit..d. $10 per unit.e. $40 per unit. B. Maximum profit or minimized losses are found by drawing a vertical line where MR = MC. This line intersects the demand curve at $25.648. If the monopolist in Exhibit 8 operates at the profit-maximizing output, it will earn total revenue to pay about what portion of its total fixed cost? a. None.b. One-half.c. Two-thirds.d. All total fixed costs.D. Since the monopolist is making a profit, it can pay all of its fixed costs. 659. For a monopolist to practice effective price discrimination, one necessary condition isa. identical demand curves among groups of buyers.b. differences in the price elasticity of demand among groups of buyers.c. a homogeneous product.d. none of the above.B. Price discrimination takes place when a monopolist is faced with buyers that are widely different; therefore, the buyers elasticity of demand for the product will be different.6610. What is the act of buying a commodity at a lower price and selling it at a higher price?a. Buying short.b. Discounting.c. Tariffing.d. Arbitrage.D. The practice of earning a profit by buying a good at a low price and reselling the good at a higher price6711. Under both perfect competition and monopoly, a firm a. is a price taker.b. is a price maker.c. will shut down in the short run if price falls short of average total cost.d. always earns a pure economic profit.e. sets marginal cost equal to marginal revenue.E. The profit maximizing output for any firm is where MR = MC. 68Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises69END70