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Questions and Answers
What defines the equilibrium price in a single-price monopoly?
What defines the equilibrium price in a single-price monopoly?
Which of the following statements is true regarding perfect competition compared to monopoly?
Which of the following statements is true regarding perfect competition compared to monopoly?
How is the market supply curve in perfect competition derived?
How is the market supply curve in perfect competition derived?
At equilibrium in perfect competition, what condition is satisfied?
At equilibrium in perfect competition, what condition is satisfied?
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In a single-price monopoly, how does the equilibrium output compare to perfect competition?
In a single-price monopoly, how does the equilibrium output compare to perfect competition?
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What arises due to the inefficiency of monopoly pricing?
What arises due to the inefficiency of monopoly pricing?
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What is the relationship between marginal social benefit and marginal social cost in perfect competition?
What is the relationship between marginal social benefit and marginal social cost in perfect competition?
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What is economic rent defined as?
What is economic rent defined as?
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What characteristic is indicative of a deadweight loss in a monopoly?
What characteristic is indicative of a deadweight loss in a monopoly?
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Which of the following describes rent seeking?
Which of the following describes rent seeking?
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How can rent-seeking costs impact producer surplus?
How can rent-seeking costs impact producer surplus?
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What should a firm do before launching an advertising campaign?
What should a firm do before launching an advertising campaign?
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What occurs when a monopolist's market demand curve shifts outward due to successful advertising?
What occurs when a monopolist's market demand curve shifts outward due to successful advertising?
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Which term refers to the effect where one person's demand for a good depends on others' consumption of that good?
Which term refers to the effect where one person's demand for a good depends on others' consumption of that good?
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What is the primary condition under which a firm continues to advertise?
What is the primary condition under which a firm continues to advertise?
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What impact do rent-seeking activities have on the average total cost (ATC) curve?
What impact do rent-seeking activities have on the average total cost (ATC) curve?
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What defines a monopoly in economic terms?
What defines a monopoly in economic terms?
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What is a key factor that differentiates monopolistic markets from perfectly competitive markets?
What is a key factor that differentiates monopolistic markets from perfectly competitive markets?
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In what scenario does a natural monopoly typically arise?
In what scenario does a natural monopoly typically arise?
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How does a monopolist influence the market price of a product?
How does a monopolist influence the market price of a product?
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What might prevent new firms from entering a market with a monopolist?
What might prevent new firms from entering a market with a monopolist?
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What is the potential impact of extreme scale economies on production costs?
What is the potential impact of extreme scale economies on production costs?
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What does the Lerner Index measure?
What does the Lerner Index measure?
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What can result from multiple firms producing in a market that supports a natural monopoly?
What can result from multiple firms producing in a market that supports a natural monopoly?
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What role does producer surplus play in maintaining a monopolistic market structure?
What role does producer surplus play in maintaining a monopolistic market structure?
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Which range does the Lerner Index for a monopoly typically fall within?
Which range does the Lerner Index for a monopoly typically fall within?
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What effect do better substitutes have on a firm's market power?
What effect do better substitutes have on a firm's market power?
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As demand becomes more elastic, what happens to the optimal markup?
As demand becomes more elastic, what happens to the optimal markup?
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How does the proximity of competitors affect a firm's demand elasticity?
How does the proximity of competitors affect a firm's demand elasticity?
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What does the formula for the Lerner Index include?
What does the formula for the Lerner Index include?
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If a monopoly's demand elasticity (ε) is -1.01, what is the corresponding monopoly markup?
If a monopoly's demand elasticity (ε) is -1.01, what is the corresponding monopoly markup?
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When more firms enter the market, what effect does this have on consumers?
When more firms enter the market, what effect does this have on consumers?
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What is an example of a firm that maintains control over a key resource, which contributes to its market power?
What is an example of a firm that maintains control over a key resource, which contributes to its market power?
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Why do monopolies set prices lower when increasing output?
Why do monopolies set prices lower when increasing output?
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Which of the following represents a barrier to entry due to government regulation?
Which of the following represents a barrier to entry due to government regulation?
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What does it mean when marginal revenue (MR) is less than price (P) in a monopoly?
What does it mean when marginal revenue (MR) is less than price (P) in a monopoly?
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Which factor does NOT contribute to absolute cost advantages for firms?
Which factor does NOT contribute to absolute cost advantages for firms?
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How does a monopoly differ from a firm in perfect competition regarding price setting?
How does a monopoly differ from a firm in perfect competition regarding price setting?
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What relationship exists between total revenue (TR) and the price when a monopoly increases output?
What relationship exists between total revenue (TR) and the price when a monopoly increases output?
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Which of the following illustrates the demand curve faced by a monopoly?
Which of the following illustrates the demand curve faced by a monopoly?
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At what point does a single-price monopoly produce the profit-maximizing quantity?
At what point does a single-price monopoly produce the profit-maximizing quantity?
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What happens to total revenue when a monopoly sets a lower price?
What happens to total revenue when a monopoly sets a lower price?
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What does the marginal revenue curve indicate for a single-price monopoly?
What does the marginal revenue curve indicate for a single-price monopoly?
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Why might a monopoly be able to sustain economic profits in the long run?
Why might a monopoly be able to sustain economic profits in the long run?
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How does the average total cost (ATC) curve affect a monopoly's pricing decision?
How does the average total cost (ATC) curve affect a monopoly's pricing decision?
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If a monopoly incurs an economic loss, what is a possible course of action in the short run?
If a monopoly incurs an economic loss, what is a possible course of action in the short run?
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What does the blue rectangle represent in the profit-maximizing choices of a monopoly?
What does the blue rectangle represent in the profit-maximizing choices of a monopoly?
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What is the significance of the point where the marginal revenue curve intersects the quantity axis?
What is the significance of the point where the marginal revenue curve intersects the quantity axis?
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Study Notes
Managerial Economics (BUSI 2050U) - Chapter 9: Monopoly
- Monopoly: A market served by only one firm. A monopolist is the sole supplier and price setter of a good within a market. Firms with market power behave differently than those in perfect competition. Examples are rare in the real world.
Table of Contents
- 9.1 Source of Monopoly and Monopoly Profit Maximization
- 9.2 Market Power
- 9.3 Market Failure & Monopoly Pricing
- 9.5 Advertising
- 9.6 Networks & Behavioral Economics
Introduction
- Firms often have market power, the ability to influence the market price of a product.
- A monopoly is the most extreme example of market power.
Sources of Market Power
- The key difference between perfect competition and a market with pricing power is the existence of barriers to entry.
- Factors preventing entry into markets with large producer surpluses.
- Normally, positive producer surplus will induce more firms to enter the market.
- Barriers to entry allow firms to maintain positive producer surplus indefinitely.
Extreme Scale Economies: Natural Monopoly
- A major entry barrier is economies of scale.
- Long-run average total cost curve is downward sloping.
- Diseconomies of scale are never present.
- This leads to a natural monopoly, where it's more efficient for a single firm to produce the entire industry output, rather than splitting it across multiple firms. Splitting output across multiple firms increases average cost of production.
Absolute Cost Advantages or Control of Key Inputs
- Many production processes depend on scarce inputs (i.e. natural resource products).
- Example: Saudi Aramco (a Saudi Arabian state-run oil company) controls a large portion of global oil supply with relatively low extraction costs.
- Firms establish absolute cost advantages through long-term contracts with intermediate suppliers.
- Apple's relationship with Foxconn (a Chinese company that assembles Apple products) is an example.
Government Regulation
- Government regulations limit entry into a market.
- Patents
- Licensing requirements (i.e., medical board certification)
- Prohibition of competition (i.e., U.S Postal Service)
9.1 A Single-Price Monopoly's Output and Price Decision
- Price and Marginal Revenue: A monopoly is a price setter, not a price taker, unlike a firm in perfect competition. A monopoly's product demand is the market demand. To achieve higher output, a monopoly must set a lower price.
- Total revenue = price × quantity
- Marginal revenue (MR) is the change in total revenue from a one-unit increase in quantity sold
- For a single-price monopoly, marginal revenue is always less than price at any output level (MR < P).
9.1 A Single-Price Monopoly's Output and Price Decision (Figure Examples)
- Illustrates the relationship between price and marginal revenue.
- Example: Given a particular price (e.g. $16) the corresponding output (quantity) and thus price are shown on the graph. As price decreases (and demand increases) the relationship and marginal revenue is calculated.
A Single-Price Monopoly's Output and Price Decision
- The monopoly produces the profit maximizing output, where MR = MC.
- Prices are set at the highest possible level, for the profit maximizing quantity.
A Single-Price Monopoly's Output and Price Decision (Figure 13.4)
- Illustrates the profit maximizing choices for a single price monopoly.
- In a specific example (a), the monopoly produces the quantity that maximizes total revenue minus total cost.
A Single-Price Monopoly's Output and Price Decision (Figure 13.4) and (b) - Demand and Marginal Revenue and Cost Curves
- In part (b) of a graph, the firm produces the quantity where MR = MC. It sets the price where customers will buy that quantity.
- The ATC curve illustrates average total cost. Economic profit is profit per unit multiplied by quantity produced.
A Single-Price Monopoly's Output and Price Decision (Long-Run Considerations)
- A monopoly may still make an economic profit in the long-run if barriers to entry prevent competitors from entering the market.
9.2 Markup Formula for Companies with Market Power: The Lerner Index
- Starting with the definition of marginal revenue & setting it equal to marginal cost.
- Calculating the left-hand side using P/P (doesn't change anything), with AP/AQ (and P)
- Final formula for markup: (P – MC)/P = 1/│ε│
9.2 Market Power
- The Lerner Index or Price Markup The Lerner Index measures market power. The larger the difference between price and marginal cost, the higher the Lerner Index. This index can be calculated for any firm.
- Lerner Index and Elasticity The formula for The Lerner Index or price markup for a monopoly range from 0 up to 1. -If ɛ = -1.01, only slightly elastic, the monopoly markup is ~0.99 (99%) -If ɛ = -3, more elastic, the monopoly markup is ~0.33 (33%) -If ɛ = - ∞, perfectly elastic, the monopoly markup is zero.
9.2 Market Power (Sources of Market Power and examples)
- Market power derives from the availability of substitutes, the number of firms, and the proximity of competitors.
- Less power with better substitutes: When better substitutes enter the market.
- Less power with more firms: When more firms enter the market, choices increase.
- Less power with closer competitors: When companies offering similar services move closer together.
9.3 Single-Price Monopoly and Competition Compared (Graph Examples)
- Comparing Price and Output: Illustrates the price and quantity for perfect competition versus monopolies.
- Market Demand Curve (D): The demand curve that the firm in a monopoly faces.
- Market Supply Curve (S = MC): The horizontal sum of individual firms' marginal cost curves.
9.3 Single-Price Monopoly and Competition Compared
- Perfect Competition Equilibrium: The quantity demanded equals the quantity supplied at Qc, and the price is Pc.
9.3 Single-Price Monopoly and Competition Compared (Analysis of Differences)
- Monopoly Equilibrium: The output is at Qm, where marginal revenue equals marginal cost(MR = MC) .
- The price(PM) is set at the point on the demand curve that corresponds to the profit maximizing quantity.
- Compared to perfect competition, a monopoly produces a smaller quantity at a higher price.
9.3 Single-Price Monopoly and Competition Compared (Efficiency Comparison)
- Figure 13.6(a): Perfect competition is efficient because the market demand curve (MSB) equals the supply curve (MSC).
9.3 Single-Price Monopoly and Competition Compared (Total Surplus)
- Total surplus is maximized when quantity produced in perfect competition.
9.3 Single-Price Monopoly and Competition Compared (Inefficiencies)
- Figure 13.6(b): Monopoly results in inefficiency as price exceeds marginal social cost, marginal social benefit exceeds marginal social cost and deadweight loss arises.
9.3 Single-Price Monopoly and Competition Compared (Redistribution of Surpluses)
- Some of the lost consumer surplus in a monopoly environment becomes part of the producer surplus.
9.3 Single-Price Monopoly and Competition Compared (Rent-Seeking)
- Rent seeking refers to the pursuit of wealth by capturing economic rent.
- Rent-seekers try two ways buy a monopoly.
- create a monopoly by using resources in political activity.
9.3 Single-Price Monopoly and Competition Compared (Rent-Seeking Equilibrium)
- The area shows potential producer surplus if there is no rent seeking. Rent seeking can eliminate producer surplus.
9.3 Single-Price Monopoly and Competition Compared (Rent-Seeking Costs)
- Rent-seeking costs increase ATC curve, reduce producer surplus and increases deadweight loss.
9.5 Advertising
- Advertising and Net Profit: Successful advertising shifts the market demand curve outward.
- Deciding Whether to Advertise: Advertise only if expected net profit (gross profit minus advertising cost) increases.
- How Much to Advertise: Advertise until marginal benefit (gross profit or marginal revenue) equals marginal cost.
9.6 Networks & Behavioral Economics
- Network Externalities: A good has a network externality if one person's demand depends on others' consumption.
- Positive network externality: A good's value to a consumer increases as more people use it (i.e. telephones, fax machines)
- Networks need to reach a critical mass of users to succeed.
-
Bandwagon and Snob Effects:
- Bandwagon effect: Value of a good increases with more people using it.
- Snob effect: Value of a good increases with fewer people using it.
9.6 Networks & Behavioral Economics (Monopoly Implications)
- Positive network externalities can lead to monopolies as consumers favor firms with large user bases (e.g., Windows).
9.6 Networks & Behavioral Economics (Managerial Implications: Introductory Pricing)
- Managers should consider using introductory pricing to accelerate critical mass (e.g., products being sold at low prices to encourage consumers to adopt them)
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Description
Explore the critical concepts of monopoly within Managerial Economics in this quiz. Understand the sources of monopoly, market power, and the implications of monopoly pricing. Dive into key topics like market failure, advertising, and behavioral economics as they relate to monopolistic structures.
