ECON101 Chapter Notes - Chapter 13: Perfect Competition, Social Cost, Economic Rent

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lemonbeetle804

15 Jun 2018

School

University of Waterloo

Department

Economics

Course

ECON101

Professor

Wokia Kumase

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Chapter 13

Monopoly: Is a market with a single firm that produces a good or service with no

close substitutes and that is protected by a barrier that prevents other firms from

entering the market. In a monopoly MR < P. Arises from:

- No close substitutes

- Barrier to entry

Barrier to Entry: A constraint that protects a firm from potential competitors.

- Natural

- Ownership

- Legal

Natural Monopoly: A market in which economies of scale enable one firm to

supply the entire market at the lowest possible cost.

Legal Monopoly: A market in which competition and entry are restricted by the

granting of a public franchise, government license, patent, or copyright.

Single-Price Monopoly: A firm that must sell each unit of its output for the same

price to all its customers.

Price Discrimination: Selling different units of a good or service for different

prices. The good or service must non-re-sellable, and it must be possible to

identify and separate different buyer types. Discrimination in two main ways:

- Among groups of buyers

- Among units of a good

Maximum Profit: Occurs when MC = MR. The difference between the change in

MC and MR is the change in profit.

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Monopoly: is a market with a single firm that produces a good or service with no close substitutes and that is protected by a barrier that prevents other firms from entering the market. In a monopoly mr < p. arises from: Barrier to entry: a constraint that protects a firm from potential competitors. Natural monopoly: a market in which economies of scale enable one firm to supply the entire market at the lowest possible cost. Legal monopoly: a market in which competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright. Single-price monopoly: a firm that must sell each unit of its output for the same price to all its customers. Price discrimination: selling different units of a good or service for different prices. The good or service must non-re-sellable, and it must be possible to identify and separate different buyer types. Mc and mr is the change in profit.

Related Questions

When the demand for a good or service limits the quantity that can be sold to an output at which the firm experiences economies of scale, the ____.

A) firm is a single-price monopoly

B) good that the industry produces has close substitutes

C) firm is a natural monopoly

D) firms are protected from competition by a legal barrier

carminegoldfish488

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.

1.As long as price is sufficient to cover __________, the firm isbetter off by operating rather than by shutting down in the shortrun.
Answer
marginal cost
average fixed cost
average variable cost
marginal revenue

2.The owner of Tie-Dyed T-shirts, a perfectly competitive firm, hashired you to give him some economic advise. He has told you thatthe market price for his shirts is $20 and that he is currentlyproducing 200 shirts at an AVC of $15 in the short run and an AC of$25. What would you recommend to him?
Answer
To continue producing in the short run, as his loss from productionis less than his fixed costs, but to exit the industry in the longrun if there are no changes in economic conditions.
To shut down in the short run, as he is incurring a loss and toleave the industry in the long run, if there are no changes ineconomic conditions.
To continue to produce in the short run, even though he is earninga loss, and to expand in the future with the hope of increasingmarket share and total revenue.
You tell him you cannot make any recommendations until you knowwhat his fixed costs are.

3.Which type of barrier to entry allows the electric company tomaintain a monopoly over the production of electricity?
Answer
a patent
economies of scale
diseconomies of scale
ownership of a scarce factor of production.

4. Why can a monopolist continue to make positive profits even inthe long-run while a perfectly competitive firm can make only zeroeconomic profits in the long-run?
Answer
Because a monopoly only has one firm while perfect competition hasmany.
Because monopoly has barriers to entry and perfect competition hasfree entry.
Because perfect competition has barriers to entry and monopoly hasfree entry.
Because in perfect competition everyone produces the same productand because in monopoly there are no close substitutes.

5.What is the difference between diminishing returns anddiseconomies of scale?
Answer
Diminishing returns is in the short run while diseconomies of scaleis in the long run.
Diminishing returns is in the long run while diseconomies of scaleis in the short run.
They are both the same thing.
There is no such thing as diseconomies of scale.

6. What does the LAC look like for a firm with constant returns toscale?
Answer
It slopes downwards.
It slopes upwards.
It is a horizontal straight line.
It is a vertical straight line.

7.Natural monopoly occurs when there are:
Answer
large economies of scale.
firms joining together to limit output and raise prices.
different prices for different consumers or groups ofconsumers.
patents.

8.Suppose we know that a monopolist is maximizing its profits.Which of the following must be true? The monopolist has
Answer
maximized its total revenue.
set price equal to its average cost.
maximized the difference between marginal revenue and marginalcost.
set marginal revenue equal to marginal cost.

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ECON101 Chapter Notes - Chapter 13: Perfect Competition, Social Cost, Economic Rent

ECON101 Full Course Notes

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