ECON 1000 Chapter Notes - Chapter 13: Monopoly Profit, Natural Monopoly, Demand Curve

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Monopoly is a model of market structure where the force of competition is absent and there is only one supplier with market power. Price-setting strategies depend on type of monopoly: single-price monopoly must sell each unit of output at same price to all customers, price discrimination selling different units of output for different prices (ex. Singe-price monopoly charges same price for every unit output: mo(cid:374)opol(cid:455)"s de(cid:373)a(cid:374)d cur(cid:448)e is i(cid:374)dustr(cid:455) de(cid:373)a(cid:374)d cur(cid:448)e, marginal revenue (mr) < price (p). To sell additional output, must lower p on all output: because the lower price results in a revenue loss and the increased quantity sold results in a revenue gain. Monopoly has no supply curve: monopoly can make economic profit even in long run because barriers prevent entry of new firms. Output and price: single-price monopoly q < competitive q, single-price monopoly p > competitive p, smaller output, higher price when compared to perfectly competitive industry.

Related Questions

1.As long as price is sufficient to cover __________, the firm isbetter off by operating rather than by shutting down in the shortrun.
Answer
marginal cost
average fixed cost
average variable cost
marginal revenue

2.The owner of Tie-Dyed T-shirts, a perfectly competitive firm, hashired you to give him some economic advise. He has told you thatthe market price for his shirts is $20 and that he is currentlyproducing 200 shirts at an AVC of $15 in the short run and an AC of$25. What would you recommend to him?
Answer
To continue producing in the short run, as his loss from productionis less than his fixed costs, but to exit the industry in the longrun if there are no changes in economic conditions.
To shut down in the short run, as he is incurring a loss and toleave the industry in the long run, if there are no changes ineconomic conditions.
To continue to produce in the short run, even though he is earninga loss, and to expand in the future with the hope of increasingmarket share and total revenue.
You tell him you cannot make any recommendations until you knowwhat his fixed costs are.

3.Which type of barrier to entry allows the electric company tomaintain a monopoly over the production of electricity?
Answer
a patent
economies of scale
diseconomies of scale
ownership of a scarce factor of production.

4. Why can a monopolist continue to make positive profits even inthe long-run while a perfectly competitive firm can make only zeroeconomic profits in the long-run?
Answer
Because a monopoly only has one firm while perfect competition hasmany.
Because monopoly has barriers to entry and perfect competition hasfree entry.
Because perfect competition has barriers to entry and monopoly hasfree entry.
Because in perfect competition everyone produces the same productand because in monopoly there are no close substitutes.

5.What is the difference between diminishing returns anddiseconomies of scale?
Answer
Diminishing returns is in the short run while diseconomies of scaleis in the long run.
Diminishing returns is in the long run while diseconomies of scaleis in the short run.
They are both the same thing.
There is no such thing as diseconomies of scale.

6. What does the LAC look like for a firm with constant returns toscale?
Answer
It slopes downwards.
It slopes upwards.
It is a horizontal straight line.
It is a vertical straight line.

7.Natural monopoly occurs when there are:
Answer
large economies of scale.
firms joining together to limit output and raise prices.
different prices for different consumers or groups ofconsumers.
patents.

8.Suppose we know that a monopolist is maximizing its profits.Which of the following must be true? The monopolist has
Answer
maximized its total revenue.
set price equal to its average cost.
maximized the difference between marginal revenue and marginalcost.
set marginal revenue equal to marginal cost.

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ECON 1000 Chapter Notes - Chapter 13: Monopoly Profit, Natural Monopoly, Demand Curve

ECON 1000 Full Course Notes

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