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Questions and Answers
Questions and Answers
What is a pure monopoly?
What is a pure monopoly?
Where there is only one seller of a product for which no close substitute is available.
What is a price maker?
What is a price maker?
A firm that sets the price of its product to maximize profit.
A monopolist's product is unique (without a reasonable substitute).
A monopolist's product is unique (without a reasonable substitute).
True (A)
What are the 3 sources of monopoly power?
What are the 3 sources of monopoly power?
What are legal barriers in the context of monopolies?
What are legal barriers in the context of monopolies?
What are economies of scale?
What are economies of scale?
What is meant by control of important inputs?
What is meant by control of important inputs?
What does a monopolist's demand curve look like?
What does a monopolist's demand curve look like?
Why is the monopolist's demand curve downward sloping?
Why is the monopolist's demand curve downward sloping?
If the monopolist wants to expand output, it must accept a lower price.
If the monopolist wants to expand output, it must accept a lower price.
Where does a monopolist's marginal revenue curve lie?
Where does a monopolist's marginal revenue curve lie?
The marginal revenue of a monopolist is always less than the price.
The marginal revenue of a monopolist is always less than the price.
A competitive firm can sell more output without lowering price.
A competitive firm can sell more output without lowering price.
A monopolist must drop their price to sell more.
A monopolist must drop their price to sell more.
What does the elasticity of demand for a monopolist vary with?
What does the elasticity of demand for a monopolist vary with?
A monopolist will never knowingly operate in the inelastic portion of its demand curve.
A monopolist will never knowingly operate in the inelastic portion of its demand curve.
What happens to total revenue with increased output for a monopolist?
What happens to total revenue with increased output for a monopolist?
What is the equilibrium output for a monopolist?
What is the equilibrium output for a monopolist?
What does a monopolist charge customers?
What does a monopolist charge customers?
What does MR > MC indicate for a monopolist?
What does MR > MC indicate for a monopolist?
What does MC > MR signify for a monopolist?
What does MC > MR signify for a monopolist?
What do patents and copyrights provide to a firm?
What do patents and copyrights provide to a firm?
The fall in price when a patent expires shows the effect on competition.
The fall in price when a patent expires shows the effect on competition.
How can monopoly profits or losses be found?
How can monopoly profits or losses be found?
What is economic profit?
What is economic profit?
What is economic loss?
What is economic loss?
What are the 3 major objections to monopoly?
What are the 3 major objections to monopoly?
How does monopoly promote inefficiency?
How does monopoly promote inefficiency?
How does monopoly hinder innovation?
How does monopoly hinder innovation?
What are the two approaches to dealing with monopolies?
What are the two approaches to dealing with monopolies?
What are anti-combine laws designed to do?
What are anti-combine laws designed to do?
What is Canada's anti-combine law?
What is Canada's anti-combine law?
What are the criminal offences in the anti-combine law?
What are the criminal offences in the anti-combine law?
What are the civil offences in the anti-combine law?
What are the civil offences in the anti-combine law?
What is government regulation on monopolies?
What is government regulation on monopolies?
Is government regulation on monopolies sustainable in the long run?
Is government regulation on monopolies sustainable in the long run?
What is average cost pricing?
What is average cost pricing?
What is price discrimination?
What is price discrimination?
What are the conditions for price discrimination?
What are the conditions for price discrimination?
What is monopoly power?
What is monopoly power?
What is market segregation?
What is market segregation?
What does no resale mean in price discrimination?
What does no resale mean in price discrimination?
Why does price discrimination exist?
Why does price discrimination exist?
What is marginal cost pricing?
What is marginal cost pricing?
How does the demand curve for a monopolist differ from that of a perfectly competitive firm?
How does the demand curve for a monopolist differ from that of a perfectly competitive firm?
Why is marginal revenue less than price in a monopoly?
Why is marginal revenue less than price in a monopoly?
What is the relationship between the elasticity of demand and total and marginal revenue?
What is the relationship between the elasticity of demand and total and marginal revenue?
How does the monopolist determine the profit-maximizing output?
How does the monopolist determine the profit-maximizing output?
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Study Notes
Study Notes
Monopoly Concepts
- Pure monopoly involves a single seller of a product without close substitutes.
- A monopolist acts as a price maker, setting prices to maximize profit.
- A monopolist's product uniqueness stems from legal barriers, economies of scale, and control of critical inputs.
Sources of Monopoly Power
- Legal barriers include franchising, licensing, and patents that restrict production to one entity.
- Economies of scale suggest that a single firm can produce at a lower cost than several smaller firms (natural monopoly).
- Control of key resources exemplified by Alcoa's dominance in Bauxite production during the 1990s.
Demand Curves
- Monopolists share the same demand curve as the market demand, which is downward sloping.
- A monopolist must lower prices to increase output, leading to a decline in marginal revenue.
Revenue Concepts
- Monopolists' marginal revenue lies below the demand curve; increasing quantity sold requires a lower price for all units sold.
- Economic profit occurs when price exceeds average total cost, while losses occur when price is lower than average total cost.
Profit Maximization
- Monopolist equilibrium is achieved where marginal revenue equals marginal cost (MR=MC).
- To maximize profit, monopolists calculate total revenue by multiplying price by quantity at the equilibrium point.
Price Discrimination
- Price discrimination arises when different prices are charged for the same good without cost differences; conditions include monopoly power, market segregation, and prohibition of resale.
- This pricing strategy allows firms to maximize profits by charging varying prices to different consumers.
Market Inefficiencies
- Monopolies often lead to market inefficiencies, resulting in smaller outputs and higher prices, as the price is greater than marginal cost.
- The absence of competition can hinder technological advancements.
Government Regulation and Anti-Combine Laws
- Two main approaches to manage monopolies are through anti-combine laws and government regulation.
- Canada's anti-combine law aims to reduce anti-competitive practices, covering both criminal and civil offences.
Sustainability of Regulation
- Government regulation on monopolies is not sustainable in the long run, as it leads to losses for the producer.
- Average cost pricing sets price equal to average total costs, impacting overall market efficiency.
Elasticity and Total Revenue
- The relationship between elasticity and revenue indicates that in Elastic demand, a price drop increases total revenue, while in Inelastic demand, a price drop decreases total revenue.
- Monopolists prefer to operate in the elastic portion of their demand curve to maximize total revenue.
General Implications of Monopoly
- Persistent economic profits in monopolies are deemed unfair and are a primary objection against their existence.
- Monopolies have implications for pricing strategies, innovation, and overall economic welfare, creating a potential need for regulatory oversight.
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