Questions and Answers
What is a pure monopolist?
A one-firm industry.
Why may pure monopolists obtain economic profits in the long run?
Because of barriers to entry.
Which of the following is a characteristic of pure monopoly?
What may a large minimum efficient scale of plant combined with limited market demand lead to?
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How does the nondiscriminating monopolist's demand curve compare to a purely competitive firm's demand curve?
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What happens to marginal revenue for a nondiscriminating imperfectly competitive firm?
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How does the pure monopolist's demand curve relate to the industry demand curve?
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Why does price exceed marginal revenue for the pure monopolist?
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How elastic is the demand curve faced by a pure monopolist compared to a single purely competitive firm?
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The pure monopolist's demand curve is relatively elastic in the price range where marginal revenue is positive.
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In which segment of its demand curve should a pure monopolist never produce?
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If a pure monopolist is operating in a range of output where demand is elastic, what can be said about marginal revenue?
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The MR = MC rule applies both to pure monopoly and pure competition.
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In the long run, how will a pure monopolist maximize profits?
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What marginal cost condition must a pure monopolist satisfy to sell the sixth unit if it can sell 5 units at $4 each and 6 units at $3.90 each?
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What is the marginal revenue when a pure monopolist sells 20 units at $10 each and 21 units at $9.75 each?
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If a pure monopolist's average total cost is $4, price is $5, marginal cost is $2, and marginal revenue is $3, what economic profit is the firm realizing?
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What does it indicate if a pure monopolist is producing at an output where price equals average total cost?
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A pure monopolist will realize an economic profit if price exceeds average total cost at the equilibrium output.
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In the short run, what can a pure monopolist's profit be?
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Study Notes
Pure Monopolist Characteristics
- A pure monopolist operates as a one-firm industry, dominating the market.
- Barriers to entry allow pure monopolists to maintain economic profits in the long run, limiting competition.
- Natural monopolies may form when there is a large minimum efficient scale of production combined with limited market demand.
Demand Curve and Elasticity
- The demand curve for a pure monopolist is identical to the industry demand curve and is less elastic than that of purely competitive firms.
- Price exceeds marginal revenue due to the downsloping nature of the demand curve.
- A pure monopolist's demand curve is relatively elastic in the price range where marginal revenue remains positive.
Marginal Revenue and Output Decisions
- The MR = MC rule applies to both pure monopolists and purely competitive firms to maximize profits.
- A nondiscriminating monopolist experiences total revenue maximization when marginal revenue is zero.
- If operating in the elastic segment of the demand curve, marginal revenue for a monopolist will be positive but declining.
Production Strategies
- A pure monopolist should avoid production in the inelastic segment of the demand curve, as increasing price can lead to an increase in total revenue and a reduction in total costs.
- Economic profit can materialize if the price exceeds average total cost (ATC), and zero economic profit occurs when price equals ATC.
Profit Scenarios and Marginal Considerations
- In the short run, a pure monopolist’s profit can fluctuate to be positive, zero, or negative based on market conditions.
- Specific scenarios illustrate decision-making; for example, a monopolist may produce an additional unit if marginal cost is lower than marginal revenue regarding production boundaries.
Example Calculations
- When a monopolist can sell units at declining prices (e.g., 5 units at $4 each, 6 at $3.90), it will produce the sixth unit if marginal cost is $3.40 or less.
- In another instance, selling 20 units at $10 and 21 units at $9.75 indicates that the marginal revenue of the twenty-first unit would be computed at $4.75.
Economic Profit Dynamics
- A scenario where a monopolist has ATC at $4, price at $5, MC at $2, and MR at $3 indicates the potential for increased economic profits through higher output.
- Conversely, when a monopolist produces at P = ATC, economic profit remains zero, emphasizing the balance required in production decisions.
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Description
Explore the characteristics and implications of pure monopolies in this quiz. Understand how demand elasticity, pricing strategies, and marginal revenue influence monopolist behavior. Test your knowledge on key concepts that define monopolistic market structures.
