ECN 104 Chapter Notes - Chapter 10: Price Discrimination, Economic Surplus, Deadweight Loss

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viridiancrow801

11 May 2016

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A monopolist is the sole producer of a commodity for which there are no close substitutes. The monopolist does not charge the highest price it can get. The price that yields maximum total profit to the monopolist rarely coincides with the price that yields maximum unit profit. High costs and a weak demand may prevent the monopolist from realizing any profit at all. The monopolist avoids the inelastic region of its demand curve. A monopolist can increase its profit by practicing price discrimination provided: it can segregate buyers on the basis of elasticities of demand, its product or service cannot be readily transferred between the segregated markets. The inefficiency of monopoly can be measured using the concepts of consumer surplus and producer surplus: the efficiency loss associated with monopoly is called deadweight loss. Monopoly-an industry in which one firm is the sole producer or seller of a product or service for which no close substitutes exist.

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. 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

1.
A monopolist faces the following demand curve:

Price Quantity Demanded

$51 1

$47 2

$42 3

$36 4

$29 5

$21 6

$12 7

The monopolist has total fixed costs of $60 and has a constantmarginal cost of $15. What is the profit-maximizing level ofproduction?

A) 5 units
B) 3 units
C) 2 units
D) 4 units
2.
A monopolist faces the following demand curve:

Price Quantity Demanded

$10 5

$9 10

$8 16

$7 23

$6 31

$5 49

$4 52

$3 60

The monopolist has total fixed costs of $40 and a constant marginalcost of $5. At the profit-maximizing level of output, themonopolistâs average total cost is

A) $6.74
B) $9.00
C) $7.50
D) $5.82
3.
A monopoly market

A) generally fails to maximize total economic well-being.
B) generally fails to maximize producer surplus.
C) always maximizes total economic well-being.
D) always minimizes consumer surplus.
4.
For a monopoly, the supply curve is a portion of its
A) none of the above; a monopoly does not have a supplycurve.
B) average total cost curve.
C) marginal revenue curve.
D) marginal cost curve.
5.
A monopoly firm can sell 200 units of output for $36.00 per unit.Alternatively, it can sell 201 units of output for $35.80 per unit.The marginal revenue of the 201st unit of output is
A) $â35.80.
B) $4.20.
C) $â4.20.
D) $35.80.
6.
If a monopolist sells 100 units at $8 per unit and realizes anaverage total cost of $6 per unit, what is the monopolist'sprofit?
A) $800
B) $400
C) $600
D) $200
7.
A monopolist is a price
A) setter, and therefore has no demand curve.
B) setter, and therefore has no supply curve.
C) taker, and therefore has no supply curve.
D) setter, and therefore has no variable cost curve.
8.
To define a monopoly, we cite the following characteristics: (i)The firm is the sole seller of its product. (ii) The firmâs productdoes not have close substitutes. (iii) The firm generates a largeeconomic profit. (iv) The firm is located in a small geographicmarket.
A) (ii) and (iv)
B) All of the above are correct.
C) (i) and (ii)
D) (i) and (iii)
9.
Consider a transportation corporation named C.R. Evans that hasjust completed the development of a new subway system in amedium-sized town in the Northwest. Currently, there are plenty ofseats on the subway, and it is never crowded. Its capacity farexceeds the needs of the city. After just a few years of operation,the shareholders of C.R. Evans experienced incredible rates ofreturn on their investment, due to the profitability of thecorporation.

Which of the following statements are most likely to be true? (i)New entrants to the market know they will earn a smaller piece ofthe market than C.R. Evans currently has. (ii) C.R. Evans is mostlikely experiencing increasing average total cost. (iii) C.R. Evansis a natural monopoly.

A) (ii) and (iii)
B) All of the above are correct.
C) (i) and (iii)
D) (i) and (ii)
10.

Quantity
Price
Total Revenue
Average Revenue
Marginal Revenue
1
$35
$35

2

64
32
29
3
$29

4

17
5
$23

11
6

120

7
$17

-1
8

-7
9

99
11
-13
10

80
8

If the monopolist sells 8 units of its product, how much totalrevenue will it receive from the sale?

You wil have to complete the entries in this table to get ananswer. It is a wothwhile exercise and I encourage you to completethe table.

HINT: (a.) Total Revenue = Price x Quantity. (So for quantity of 3x price of $29 = 87 total revenue)

(b) Average Revenue is the same as Price. (So column 2 and column 4would be the same. Calculate to see if that is correct)

(c) Marginal Revenue = Change in TR divided by change in quantity.(You calculated TR = 87 for Q=3. Thus to find MR for Q = 3, findthe change in TR= 87 - 64 and divided by one).

A) 112
B) It cannot be determined from the information provided.
C) 164
D) 40
11.
What conditions need to be present for a firm to be able to use'price discrimination?'
A) Firm should not be perfectly competitive; the market can beseparated according to different elasticities; items can beresold
B) Firm should be perfectly competitive; the market can beseparated according to different elasticities; resale of the itemsis not possible.
C) Firm should not be perfectly competitive; buyers should havesame elasticities;; resale of the items is not possible.
D) Firm should not be perfectly competitive; the market can beseparated according to different elasticities; resale of the itemsis not possible.
12.
If the government regulates the natural monopoly by asking it tocharge a price that is equal to its marginal cost (P=MC) theregulated monopoly will -------- so instead the government ends upletting it charge a price equal to its ------
A) have a profit; fixed cost
B) have a profit; average cost
C) have a loss; variable cost
D) have a loss; average cost

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ECN 104 Chapter Notes - Chapter 10: Price Discrimination, Economic Surplus, Deadweight Loss

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