ECO101H1 Lecture 16: Lecture 16-Monopoly

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copperclam445

1 Aug 2010

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Monopoly

Definition:

Single Seller (of product with no close substitutes)

Barriers to entry

(1) legal barriers (legal monopoly)

- post office (first class mail)

- patents

(2) natural barriers (natural monopoly)

Occurs when one firm can supply entire market at lower average cost than

two or more firms Ù economies of scale over the relevant range

Natural Monopoly Example: Pipeline

One firm can produce for entire market at lower cost than 2 or more firms

High fixed costs (pipeline) plus low marginal cost (maintaining pipeline)

=> ATC falls over relevant range

Natural Monopoly

1. Economies of scale (declining ATC) = barrier to entry

2. If monopolist (say, gas pipeline) is making economic profits, will new firm enter?

NO.

2nd firm would have higher ATC (as would 1st firm) if market is shared

**Past Tests 2 posted on site

www.notesolution.com

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Single seller (of product with no close substitutes) Barriers to entry (1) legal barriers (legal monopoly) Occurs when one firm can supply entire market at lower average cost than two or more firms economies of scale over the relevant range. One firm can produce for entire market at lower cost than 2 or more firms. High fixed costs (pipeline) plus low marginal cost (maintaining pipeline) 2nd firm would have higher atc (as would 1st firm) if market is shared. **past tests 2 posted on site www. notesolution. com (mr) < price (p) very important. Because the market demand curve slopes downward, a monopolist must lower price to sell more output (p x q) At q = 2, mr = 7 < p = 8. At q = 3, mr = 3 < p = 6 if price is 6, demand is 4. If person wants to increase output, must lower price.

Related Questions

74) This market would be considered a “natural monopoly" because over the relevant range of output) A) average cost is declining. B) marginal cost is below average cost. C) the firm is experiencing economies of scale. D) one firm is able to produce any given level of output cheaper than two firms could. E) all of the above are true.

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

Select the correct answer:

A (legal; natural) monopoly exists when one firm can meet the entire market demand at a lower average total cost than two or more firms could.

A monopoly that is able to sell different units of a good or service for different prices is a (natural-price; price-discriminating) monopoly.

The act of obtaining special treatment by the government to create an economic profit is called (government surplus; rent seeking).

Regulated firms have an incentive to inflate their costs under (rate of return; price cap) regulation.

The U.S. Postal Service has a (natural; legal) monopoly on first class mail delivery.

A (single-price; price discriminating) monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost and then charging the maximum price that consumers are willing to pay for that quantity.

The key idea behind price discrimination is to convert (consumer surplus; producer surplus) into economic profit.

ECO101H1 Lecture 16: Lecture 16-Monopoly

ECO101H1 Full Course Notes

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