ECON101 Lecture Notes - Lecture 10: Marginal Cost, Marginal Revenue, Natural Monopoly

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3 Feb 2016

School

University of Alberta

Department

Economics

Course

ECON101

Professor

Jane Vallentyne

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ECON101 Full Course Notes

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10. 1 identify and explain the characteristics of a monopoly market structure. 10. 2 using revenue and cost information, determine the monopolist"s profit- maximizing or loss minimizing level of output, price, and profit. 10. 3 explain why a monopoly firm engages in price discrimination. 10. 4 evaluate the long-run behaviour in monopoly, from a social viewpoint. 10. 5 compare and contrast the use of marginal cost pricing versus average cost pricing in the regulation of a natural monopoly. Barriers to entry: ownership of resources without close substitutes. Own natural resources diamonds debeers: problems in raising adequate capital. A small firm trying to enter the industry might find costs prohibitive - in other words - must be big to achieve large production so that costs will be lower. A big firm trying to enter might have trouble securing capital for the venture and might not achieve a large enough market share to survive: economies of scale. Sometimes it is not profitable for more than one company.

Related Questions

1. Patent laws:
reduce incentive to innovate by restricting market entry
reduce incentive to innovate by making it difficult to use thepatented innovation
increase incentive to innovate by restricting entry into amarket
increase incentive to innovate by giving a firm permanent andexclusive production rights

2. Which of the following is true of marginal revenue for amonopolist that charges a single price?
P = MR because there are no close substitutes for the monopolist'sproduct.
P > MR because the monopolist must decrease price on all unitssold in order to sell an additional unit.
P < MR because the monopolist must decrease price on all unitssold in order to sell an additional unit.
AR = MR because there are no close substitutes for the monopolist'sproduct.

3. Negative marginal revenue means that
total revenue is decreasing as output increases
the firm is maximizing its total revenue
the firm is maximizing its economic profit
total revenue is increasing at a decreasing rate as outputincreases

4. A profit-maximizing monopolist produces an output level atwhich
marginal revenue is the greatest distance from marginal cost
price is less than marginal cost
the value to society of the last unit produced equals marginalcost
marginal revenue equals marginal cost

5. Compared to a perfectly competitive market, a monopoly tends toproduce
more output and charge a higher price
the same amount of output, but charge a higher price
less output and charge a higher price
less output and charge the same price

6. Monopolistic competition is best described as
many firms with some control over price, and some productdifferentiation
many firms with no control over price, producing identicalproducts
a few firms with some control over price, producing highlydifferentiated products
a few firms with no control over price, producing similarproducts

7. Which of the following characteristics does perfect competitionshare with monopolistic competition?
price-taking firms
zero long-run economic profit
homogeneous product
some barriers to entry

8. Monopolistically competitive firms do not achieve productiveefficiency because
entry of firms raises production costs in the long run
barriers to entry allow profit to be earned in the long run
price is greater than marginal cost at the profit maximizing outputlevel
profit is maximized at a quantity where average total cost is notminimized

9. There are multiple models of pricing behavior in oligopolisticmarkets because
it is difficult to predict how rival firms will react to anypricing decision
the demand curve slopes upward for these firms
firms could earn profit in the long run unlike other markets
price has a direct impact on profit for a firm in oligopoly

10. Which of the following is likely to occur when a two-persongame can be played repeatedly?
Collusion and cooperation among the players
The prisoner's dilemma
The industry demand curve will become perfectly elastic
The industry demand curve will become perfectly inelastic

If a monopolist or a perfectly competitive firm is producing at a break-even point, then:
i. average revenue is equal to average variable cost
ii. average revenue is equal to average total cost
iii. total revenue is equal to total variable cost
iv. total revenue is equal to total cost

iii

i and iii

ii and iv

A natural monopoly, such as a local electricity provider, is the result of:
i. a firm owning or controlling a key input used in the production process
ii. economies of scale existing over a wide range of output
iii. long-run average total costs declining continuously as output increases
iv. long-run total costs declining continuously as output increases

What do economies of scale, the exclusive ownership of essential raw materials used in the production process, and patents have in common?

they are all barriers to entry

they all help explain why a monopolists demand and marginal revenue curves are identical

they must all be present before a monopolist may practice price discrimination

they all help explain why a firms short run average total cost curve is U-shaped

#10

The principle that a firm should produce up to the point where the marginal revenue (MR) from the sale of an extra unit of output is equal to the marginal cost (MC) of producing the extra unit applies:

to both perfectly competitive firms and monopolies

only to monopolies

only to perfectly competitive firms

only to firms that can employ discriminatory pricing strategies

#11

A monopoly is producing a level of output such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $8 per unit and is incurring average variable costs of $5 per unit and average total costs of $10 per unit. Given this information, it may be concluded that the firm:

is operating at maximum total profit

is operating at a loss that could be reduced by shutting down

is operating at a profit that could be increased by producing more output

is operating at a loss that is less than the loss incurred by shutting down

#12

Suppose the demand function for a profit maximizing monopolists good is P = 120 - 0.2Q, its total cost function is TC = 40 + 4Q + Q2, and its marginal cost function is MC = 4 + 2Q. If the firm uses a uniform pricing strategy, then rounded to the nearest unit of output and to the nearest dollar the firm will:

produce 48 units of output, charge a price of $110, and earn a total profit of $5280

produce 48 units of output, charge a price of $110, and earn a total profit of $2744

produce 52 units of output, charge a price of $134, and earn a total profit of $5322

produce 52 units of output, charge a price of $134, and earn a total profit of $4016

magentabuffalo597

11)

A constant-cost, perfectly competitive industry experiences a permanent increase in demand. In adjusting to this change, what will happen to the price of the product?

	It will increase in the short-run and then decrease in the long-run, but end up above its original level in the long-run.
	It will increase in the short-run and then increase further in the long-run.
	It will increase in the short-run and then decrease back to its original level in the long-run.
	It will increase in the short-run and then decrease below its original level in the long-run.
	It will decrease in the short-run but return to its original level in the long-run.

12)

Assume that a perfectly competitive firm owns or rents a higher-quality resource that results in lower average total costs and higher economic profits in the short run. What will happen in the long-run?

	The price of the higher-quality resource will be bid upward resulting in economic rents and equalizing costs across firms.
	New firms will enter and compete with any excess profits away.
	None of the other answers is correct.
	The government will tax away any excess profits.
	The firm with the higher-quality resource will earn positive economic profits in the long run.

13)

Which of the following are characteristics of long-run equilibrium?

	No firm has an incentive to change its level of output.
	No firm has an incentive to change its plant size.
	Economic profit is zero
	All of the above
	None of the above

14)

Which of the following statements is consistent with the textbookâs analysis of perfect competition?

	Although individual perfectly competitive firms wonât pay to advertise, the industry as a whole may well advertise.
	Higher costs for one firm in the industry will result in that firm charging a higher price than the other firms in the industry.
	If all the firms in an industry charge an identical price for their products, this is clear evidence of collusive behavior.
	All of the above
	None of the above

15)

The assumptions that define the market structure known as monopoly include which of the following?

	High barriers to entry.
	There is one seller.
	There are no close substitutes available.
	All of the above
	None of the above

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ECON101 Lecture Notes - Lecture 10: Marginal Cost, Marginal Revenue, Natural Monopoly

ECON101 Full Course Notes

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