ECO101H1 Lecture 17: Lecture 17-Economic Profit of Monopolist

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copperclam445

1 Aug 2010

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Tuesday, November 17th, 2009.

Economic Profit of Monopolist

P > ATC Æ Profit

P = ATC Æ Zero Profit

P < ATC Æ Loss

At Qm, P > ATC => Economic Profits

Digression

0DUNHW66 VXPRIILUPV¶VVVFKHGXOHV

VXPRIILUPV¶PFVFKHGXOHV

= MC for industry as a whole

= MC of monopolist

ATC

Economic

profit earned

by monopolist

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CONTRIVED SCARCITY: A competitive Industry is Monopolized

Results: RXWSXWLVUHGXFHGµFRQWULYHGVFDUFLW\´

(2) price increases

A Perfectly Competitive Industry is Monopolized

Government Policy Towards New Drugs

Objective: 1) Encourage research and development

2) Protect consumers from monopoly prices

Policy: Grant patent protection (monopoly), but for limited period of time.

Period of Patent Protection: Consumers Pay Monopoly Price (PM)

SS = MC

MC [=SS in Perfect Competition]

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ECO101H1 Full Course Notes

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At qm, p > atc => economic profits. Objective: encourage research and development, protect consumers from monopoly prices. Grant patent protection (monopoly), but for limited period of time. Period of patent protection: consumers pay monopoly price (pm) After patent expires: legal barrier to entry is eliminated and consumers pay. Firm sells same product to different customers at different prices. Let mc = atc = to produce a widget. Alternative strategies for firm: (1) p = 20 profits: 1,000 * (20 1) = 19,000 (2) p = 5 profits: 1,000 * (5 1) = 4,000. 24,000 (3) p = 20 for a customers. Profits: 1,000 * (20 1) = 19,000. Price discrimination (2) hard cover / paperback books. If monopolist can, will charge high price to customers with low price elasticity of demand, and conversely www. notesolution. com. Low price elasticity: charge high price (airline: business travelers) High price elasticity: charge low price (airline: weekend travelers)

Related Questions

1) A natural monopoly exists when:

a. A few firms collude to make one large firm

b. Firms enter the industry as a result of profit incentives

c. Economies of scale provide large cost advantages to having one firm produce the industry's output

d. Firms naturally maximize regardless of market structure

2) A(n) ____ is a single firm with ___, whereas a(n) ___ implies an industry with ____ firm(s) and ____ .

a. Monopoly; barriers to entry; oligopoly; few; no barriers to entry

b. Oligopoly; no barriers to entry; monopoly; many; easy entry and exit

c. Monopoly; barriers to entry; monopolistic competition; many; easy entry and exit

d. Monopolistic competitor; barriers to entry; monopoly; one; barriers to entry

3) In monopolistic competition:

a. Each firm produces a product identical to that of every other firm in the industry

b. Firms are aware of their strategic interdependence

c. Firms earn large economic profits in the long run

d. Firms earn zero economic profits in the long run

4) A monopolistically competitive industry, such as corn snack chips, and a perfectly competitive industry, like wheat farming, are alike in that:

a. There are many firms in each industry

b. Firms in both types of industries produce similar but not identical products

c. Barriers to entry in both industries are large

d. Firms in both types of industries produce identical products

byzantiumfish483

1. Which characteristic led to Microsoft exercising monopoly power?

A.copyright protection for the Windows operating system

B .no close substitutes

C.economies of scale

D.government franchise

2. The goal of antitrust law is to:

A. prevent monopolies and monopoly power from arising.

B.protect monopolies from the competition.

C. make sure consumers pay high prices.

D. preserve allocative inefficiencies of monopolies.

3. Which of the following is not a characteristic of a monopoly?

A. The market has just one seller.

B.There exist significant barriers to entry.

C. Substitutes for the monopolist's products are available to buyers.

D. No close substitutes exist for the monopolist's products.

4. A constantly declining long-run average cost curve is a characteristic of what type of industrial structure:

A. Monopoly

B. Natural monopoly

C. Oligopoly

D. Perfect competition

5. An industry that has large economies of scale operates most efficiently as a(n):

	A.competitive industry.
	B.monopoly
	C.regulated natural monopoly.
	D.anarchic industry.

goldcattle908

1 How does monopolistic competition differ from the pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Please explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor and how that, in turn, affects its economic profit.

2 "Competition in quality and service may be just as effective as price competition in giving buyers more for their money." Do you agree? Why? Explain why monopolistically competitive firms frequently prefer nonprice to price competition.

3 Critically evaluate and explain:
a. In monopolistically competitive industries, economic profits compete away in the long run; hence, there is no valid reason to criticize such industries' performance and efficiency.
b. In the long run, monopolistic competition leads to a monopolistic price but not to monopolistic profits.

amethystjellyfish726

ECO101H1 Lecture 17: Lecture 17-Economic Profit of Monopolist

ECO101H1 Full Course Notes

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