ECON 010 Chapter Notes - Chapter 14: Profit Maximization, Perfect Competition, Fixed Cost

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ECON010 Chapter 14: Monopolies

Monopoly: firm that is the only seller of a good/service that does not have a close

substitute

Patent: exclusive right t a product for a pd of 20yrs from the date the product is invented

Public franchise: gov designation that a firm is the only legal provider of a good/service

Network externalities: situation in which the usefulness of a produce increases with the

number of consumers who use it

Natural monopoly: situation in which economies of scale are so large that one firm can

supply the entire market at a lower ATC than can two or more firms

Market power: ability of firm to charge a price greater than MC

Collusion: agreement among firms to charge the same price or otherwise not compete

Antitrust laws: laws aimed at eliminating collusion and promoting competition among

firms

Horizontal merger: merger between firms in same industry

Vertical merger: merger between firms at diff stages of production of a good

-1 defn: firm has a monopoly if it can ignore the actions of all other firms (other firms must

not be producing close substitutes if the monopolist can ignore the other firms’ prices

-2 defn: no other firms selling substitute close enough that the firm’s economic profits are

competed away in the long run

To have a monopoly, barriers to entry may be high enough to keep out other competing

firms for 4 main reasons:

1) a gov blocks entry of more than one firm into a market

2) one firm has control of a key resource necessary to produce a good

a. Aluminum Company of America (Alcoa)

b. International nickel company of canada

3) there are important network externalities in supplying the good/service

a. Microsoft windows

4) economies of scale are so large that one firm has a national monopoly

In US, gov blocks entry in 2 main ways:

1) by granting a patent/copyright to individual/firm giving it the exclusive right to

produce a product

2) granting firm a public franchise making it the exclusive legal provider of a

good/service (ie utility

Patents: encourage firms to spend money on research/development necessary to create

new products

Network externalities: sets off virtuous cycle: if a firm can attract enough customers

initially, it can attract additional customers because its product’s value has been increased

by more people using it

-alternate view: network externalities do not create barrier to entry if new firm’s product is

better

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natural monopoly: only room for one firm in the market

-ATC curve still declining when crossing demand curve

-splitting quantity produced to two firms (producing 100 each) raises ATC

-usually in markets where fixed costs are very large relative to variable costs

-ie, electricity firm

-Monopoly maximizes profit by producing where MR=MC

-monopoly’s demand curve is same as market demand curve for the product vs perfectly

competitive where market demand curve is diff from individual firm’s demand curve

-price makers: if raise price, will lose some but not all of customers

-downward sloping demand curve and downward sloping marginal revenue curve

Market demand=average revenue

-When firm cuts price of product: good-sells more units; bad-receives less revenue from

each unit

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Document Summary

Monopoly: firm that is the only seller of a good/service that does not have a close substitute. Patent: exclusive right t a product for a pd of 20yrs from the date the product is invented. Copyright: a gov granted exclusive right to produce and sell a creation. Public franchise: gov designation that a firm is the only legal provider of a good/service. Network externalities: situation in which the usefulness of a produce increases with the number of consumers who use it. Natural monopoly: situation in which economies of scale are so large that one firm can supply the entire market at a lower atc than can two or more firms. Market power: ability of firm to charge a price greater than mc. Collusion: agreement among firms to charge the same price or otherwise not compete. Antitrust laws: laws aimed at eliminating collusion and promoting competition among firms. Horizontal merger: merger between firms in same industry.

Related Questions

Governments often have the potential to influence whether firms are monopolies. How might the government affect whether a firm is a monopoly?

The government could

Grant a firm a public franchise, making it the exclusive legal provider of a good or service.
grant a patent to a firm, giving it the exclusive right to produce a product.
Grant a copyright to a firm, making it a neutral monopoly
Grant a firm a public enterprise allowing it to benefit from network externalities
Reduce taxes so that a firm benefits from diseconomies of scale

coffeeox888

1) Assume that two firms (Firm A and Firm B) operate in the U.S. steel industry. The owner of Firm A writes the following letter to the owner of Firm B:

Dear Owner of Firm B,

I have concluded that if we both restrict output such that we each produce only 3 million tons of steel per year, we can both charge a price that will allow us to effectively monopolize the steel market and to maximize our joint profits. If you would like to enter into this agreement with me, please draft a contract that specifies this agreement and I will be more than willing to meet with you and sign it.

Sincerely,

Owner of Firm A

If this letter were sent in the year 1944, the:

a) Owners of both Firm A and Firm B would not be guilty of violating antitrust laws because antitrust laws in 1944 contained exceptions for certain nationally important industries like the steel industry.

b) Owners of both Firm A and Firm B would not be guilty of anything because there were no antitrust laws in existence in 1944.

c) Owner of Firm A would be guilty of violating antitrust laws only if she met with the owner of Firm B and signed the contract, but she would not be guilty if the attempt to monopolize the market failed because the owner of Firm B never responded to the letter.

d) Owner of Firm A would be guilty of violating antitrust laws because she merely attempted to monopolize the steel industry.

e) Owners of both Firm A and Firm B would not be guilty of violating antitrust laws because antitrust laws in 1944 applied only to industries made up of three or more firms.

2) Entry of new firms will continue in a monopolistically competitive industry until:

a) Marginal cost = 0 (zero).

b) Economic profit is negative.

c) Marginal revenue = marginal cost.

d) Economic profit equals zero.

e) Marginal Revenue = 0 (zero).

3) A monopolistically competitive firm usually charges less than a monopoly firm because:

a) It is part of a group of firms that have formally agreed to control the price and the output of a product.

b) Its primary goal is to reap monopoly profits by replacing competition with cooperation.

c) It has a monopoly, but potential entrants exist in the form of contestable markets.

d) It faces some degree of competition due to low barriers to entry.

e) Producing homogenous output is more expensive than producing differentiated output.

4) An example of price discrimination is when:

a) A single box of Froot Loops costs $3.50, but when purchased in a case of six, it costs only $3.00 per box.

b) You can purchase a new PC for half the price of a new Mac, even though they are both computers.

c) Procter & Gamble charges $9 for a bottle of Tide laundry detergent, while the store brand costs the consumer significantly less, despite being somewhat similar products.

d) Out-of-state students pay more for the same education as in-state students.

e)Movie theaters do not allow children into R-rated movies without a parent or guardian.

5) The Varsity, located in downtown Atlanta, is the world's largest drive-in restaurant. Located near the Georgia Tech campus, the drive-in attracts two distinct types of customers: college students and visitors to Atlanta. The owners are considering offering a student discount of $1 off their combo meal, which is regularly priced at $9. There are 5,000 students interested in purchasing a combo meal, with a maximum willingness to pay of $8. There are 5,000 visiting customers interested in purchasing the combo meal, with a maximum willingness to pay of $9. Assume that each customer, at most, will purchase a single meal and the marginal cost is $5. What will be the amount of total revenue for the Varsity if the owners offer a single price of $8 per combo meal?

a) $65,000

b) $85,000

c) $40,000

d) $80,000

e) $90,000

6) A competitive firm would have:

a) More elastic demand than a monopolistically competitive firm.

b) More inelastic demand than a monopolistically competitive firm.

c) A horizontal demand curve.

d) Bowed-in or bowed-out demand.

e) An upward-sloping demand curve.

7) It is unrealistic to regulate a natural monopoly at marginal cost pricing because:

a) The government is not allowed to regulate markets.

b) With this type of regulation, the firm will want to shut down, and that outcome is not desirable for society.

c) Firms do not need to follow regulations from the government.

d) Regulating a market causes more deadweight loss.

e) Marginal cost pricing ends up having the natural monopoly firm earn zero economic profits.

8) Price discrimination allows businesses to make additional profits and allows markets to work more:

a) Efficiently

b) Unfairly

c) Realistically

d) Equitably

e) Independently

9) Antitrust laws are designed to:

a) Increase prices.

b) Promote monopoly practices.

c) Promote awareness of government programs.

d) Promote competition.

e) Decrease output.

10) Barriers to entry:

a) Do not exist for monopolies.

b) Exist for perfectly competitive firms.

c) Restrict the entry of new firms into the market.

d) Always lead to profits.

e) Measure the ability of firms to set the price for a good.

ultramarinemule185

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

ECON 010 Chapter Notes - Chapter 14: Profit Maximization, Perfect Competition, Fixed Cost

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