ECON 001 Lecture Notes - Lecture 12: Demand Curve, Perfect Competition, Market Power

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12 Jun 2018

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Chapter 15 Monopoly

I. Introduction to Monopolies

A: Characteristics of Monopolies:

1. Firm is only seller in the industry

2. Product sold is unique (no close substitutes)

3. There exists barriers to entry

●Monopolies can enjoy economic profits even in the long run

●Monopolies have ability to set their own prices

B. Barriers to Entry

1. Natural Monopoly/Economies of Scale

Industry with increasing returns to scale may result in barrier to entry

Increasing Returns to scale- ATC fall as production increases (see graph in binder)

2. Patent- awarded by the government gives holder of patent the exclusive right to

produce and sell a product for a given period of time (in US 20 years)

●Incentive to encourage innovation

3. Ownership of Key Factor of Production

●If only one firm owns a critical factor of production, then they will be only ones to

produce the good.

II. Decision Process For A Monopolist

A: Monopolist Must Choose

1. How much output to produce?

2. What price to charge for the product?

Key difference between perfect competition and monopoly is that individual firm in

monopoly is the entire industry. Industry demand curve is the monopoly’s demand curve.

Key similarity is that monopolist will maximize profits where MR=MC, but MR will no

longer equal price for monopoly.

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Document Summary

A: characteristics of monopolies: firm is only seller in the industry, product sold is unique (no close substitutes, there exists barriers to entry. Monopolies can enjoy economic profits even in the long run. Monopolies have ability to set their own prices: natural monopoly/economies of scale, barriers to entry. Industry with increasing returns to scale may result in barrier to entry. Increasing returns to scale- atc fall as production increases (see graph in binder) Patent- awarded by the government gives holder of patent the exclusive right to produce and sell a product for a given period of time (in us 20 years) If only one firm owns a critical factor of production, then they will be only ones to produce the good. Key difference between perfect competition and monopoly is that individual firm in monopoly is the entire industry. Industry demand curve is the monopoly"s demand curve.

Related Questions

1. 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: ( I put A)

to both perfectly competitive firms and monopolies

only to monopolies

only to perfectly competitive firms

only to firms that can employ discriminatory pricing strategies

2. If a monopolist or a perfectly competitive firm is producing at a break-even point, then: ( I put II, IV)
i. average revenue is equal to average variable cost
ii. average revenue is equal to the o average total cost
iii. total revenue is equal to total variable cost
iv. total revenue is equal to the total cost

iii

I and iii

ii and iv

3. What do economies of scale, the exclusive ownership of essential raw materials used in the production process, and patents have in common? (I put A)

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 firm's short-run average total cost curve is U-shaped

bluemammoth421

1. To maximize profits, a firm should produce output up to the point where

A. marginal revenue equals marginal cost

B. price equals marginal cost

C. the gap between the demand curve and the ATC is the greatest

D. all of the above

E. answers a and b, but not c

2. Which statement is false?

A. a profit maximizing firm will increase production when price exceeds marginal cost

B. the lowest point on a firm's short-run supply curve is at the shut-down point

C. A firm will operate at that ouput where MC equals MR only when it is maximizing profits

D. A profit-maximizing firm will decrease production when marginal cost exceeds price.

3. which statement is true?

A. all monopolies are good

B. All monopolies are bad

C. Most natural monopolies are government regulated or government owned

D. None of these statements is true

4. There are _____ limits to monopoly power

A. no

B. some

C. many

5. Which statement is true?

A. the monopolist's most efficient output is her most profitable output as well

B. the monopolist charges a higher price than the perfect competitor in the long run.

C. all monopolists have control over an essential resource.

D. none is true

6. As a firm grows larger

A. economies of scale set in, then diseconomies of scale.

B. diseconomies of scale set in, then economies of scale.

C. economies of scale and diseconomies of scale set in at the same time.

D. neither economies of scale nor diseconomies of scale set in.

7. A monopolist operates at the minimum point of her ATC curve

A. only in the short run

B. only in the long run

C. in both the short run and the long run

D. in neither the short run nor the long run

8. A natural monopoly

A. has an average cost curve that reaches minimum possible average cost at a low level of output.

B. has a marginal cost curve that is steeply upward slopoing.

C. is usually subject to antitrust suits

D is usually allowed to choose its price so as to maximize profits in the United States.

E. occurs when a single firm can supply the entire market demand for a product at a lower average cost than would be possible if two or more firms supplied the market.

9. For a monopolist, the price of the product

A. always equals the marginal revenue

B. is always less than the marginal revenue

C. exceeds the marginal revenue

D. always equals the marginal cost of the product

10. Monopolies are usually viewed with concern from an economic standpoint since

A. size is ingerently dangerous; the larger ther firm, the more likely it is to squeeze out the "little producer"

B. resources may be allocated in an efficient manner.

C. the government may be put at the mercy of several large producers

D. always equals the marginal cost of the product

1. A perfectly competitive firm will continue producing in the short run as long as it can cover its:

A.total cost.
B.average total cost.
C.average variable cost.
D.average fixed cost.

2. A perfectly competitive firm will earn a profit and will continue producing the profit-maximizing quantity of output in the short run if price is:

A.greater than marginal cost.
B.less than marginal cost.
C.less than average variable cost.
D.greater than average total cost.

3. Monopolistic competition is an industry characterized by:

A.a product with many close substitutes.
B.a horizontal demand curve.
C.a small number of firms.
D.barriers to entry and exit.

4. If a perfectly competitive firm increases production from 10 units to 11 units, and the market price is $20 per unit, total revenue for 10 units is:

A.$10.
B.$20
C.$200.
D.$210.

5. The demand curve facing a monopolist is:

A.horizontal, the same as that facing a perfectly competitive firm.
B.downward sloping, the same as that facing a perfectly competitive firm.
C.upward sloping, the same as that facing a perfectly competitive firm.
D.downward sloping, unlike the horizontal demand curve facing a perfectly competitive firm.

6. Suppose that a monopolist increases production from 10 units to 11 units. If the market price declines from $30 per unit to $29 per unit, marginal revenue for the eleventh unit is:

A.$1.
B.$9.
C.$19.
D.$29.

7. Most electric, gas, and water companies are examples of:

A.unregulated monopolies.
B.natural monopolies.
C.restricted-input monopolies.
D.sunk-cost monopolies.

8.If a perfectly competitive firm is producing a quantity that generates P > MC, then profit:

A.is maximized.
B.can be increased by increasing the price.
C.can be increased by decreasing the price.
D.can be increased by increasing production.

ECON 001 Lecture Notes - Lecture 12: Demand Curve, Perfect Competition, Market Power

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