Microeconomics Chapter 9 Flashcards
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Questions and Answers

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?

A firm that sets the price of its product to maximize profit.

A monopolist's product is unique (without a reasonable substitute).

True

What are the 3 sources of monopoly power?

<p>Legal barriers, economies of scale (natural monopoly), and control of important inputs.</p> Signup and view all the answers

What are legal barriers in the context of monopolies?

<p>The law allows only one producer (Franchising, licensing, patents).</p> Signup and view all the answers

What are economies of scale?

<p>A firm can produce at a lower cost than a number of small firms could.</p> Signup and view all the answers

What is meant by control of important inputs?

<p>A monopolist controls crucial resources necessary for production.</p> Signup and view all the answers

What does a monopolist's demand curve look like?

<p>It is the same as the market demand curve.</p> Signup and view all the answers

Why is the monopolist's demand curve downward sloping?

<p>The monopolist cannot set both price and quantity, and if the output increases, the price will fall.</p> Signup and view all the answers

If the monopolist wants to expand output, it must accept a lower price.

<p>True</p> Signup and view all the answers

Where does a monopolist's marginal revenue curve lie?

<p>It lies below the demand curve.</p> Signup and view all the answers

The marginal revenue of a monopolist is always less than the price.

<p>True</p> Signup and view all the answers

A competitive firm can sell more output without lowering price.

<p>True</p> Signup and view all the answers

A monopolist must drop their price to sell more.

<p>True</p> Signup and view all the answers

What does the elasticity of demand for a monopolist vary with?

<p>Elasticity varies along a linear demand curve.</p> Signup and view all the answers

A monopolist will never knowingly operate in the inelastic portion of its demand curve.

<p>True</p> Signup and view all the answers

What happens to total revenue with increased output for a monopolist?

<p>Lower total revenue, and higher total cost.</p> Signup and view all the answers

What is the equilibrium output for a monopolist?

<p>Marginal Revenue = Marginal Cost.</p> Signup and view all the answers

What does a monopolist charge customers?

<p>The price according to the demand for the product, at the profit-maximizing output.</p> Signup and view all the answers

What does MR > MC indicate for a monopolist?

<p>Lost total profits from producing too little.</p> Signup and view all the answers

What does MC > MR signify for a monopolist?

<p>Lost total profits from producing too much output.</p> Signup and view all the answers

What do patents and copyrights provide to a firm?

<p>Monopoly power (exclusive right to make the product for 20 years).</p> Signup and view all the answers

The fall in price when a patent expires shows the effect on competition.

<p>True</p> Signup and view all the answers

How can monopoly profits or losses be found?

<p>By comparing price per unit and average total cost at Q*.</p> Signup and view all the answers

What is economic profit?

<p>If Price &gt; Average Total Cost.</p> Signup and view all the answers

What is economic loss?

<p>If Price &lt; Average Total Cost.</p> Signup and view all the answers

What are the 3 major objections to monopoly?

<ol> <li>It's not fair for monopoly owners to have persistent economic profits. 2. It leads to market inefficiencies. 3. Lack of competition hinders technological advances.</li> </ol> Signup and view all the answers

How does monopoly promote inefficiency?

<p>It promotes smaller output and higher prices (Price &gt; Marginal Cost).</p> Signup and view all the answers

How does monopoly hinder innovation?

<p>It may lead to greater concentration of economic power, which could hinder innovation.</p> Signup and view all the answers

What are the two approaches to dealing with monopolies?

<ol> <li>Anti-combining laws 2. Government regulation.</li> </ol> Signup and view all the answers

What are anti-combine laws designed to do?

<p>Reduce the abuses of monopoly power and push production closer to social optimum.</p> Signup and view all the answers

What is Canada's anti-combine law?

<p>It is currently covered by the Competition Act of 1986; business practices that unduly prevent or lessen competition that cover both criminal and civil offences.</p> Signup and view all the answers

What are the criminal offences in the anti-combine law?

<p>Handled by the courts including fixing prices, bid-rigging, and predatory pricing.</p> Signup and view all the answers

What are the civil offences in the anti-combine law?

<p>Handled by the Competition Tribunal including mergers that lessen competition and abuse of a dominant market position.</p> Signup and view all the answers

What is government regulation on monopolies?

<p>Privately owned monopolies may be allowed to operate but are under the regulation of a government agency.</p> Signup and view all the answers

Is government regulation on monopolies sustainable in the long run?

<p>False</p> Signup and view all the answers

What is average cost pricing?

<p>Sets price equal to average total cost, where the demand curve intersects average total costs.</p> Signup and view all the answers

What is price discrimination?

<p>When producers charge different prices for the same good or service when no cost differences exist.</p> Signup and view all the answers

What are the conditions for price discrimination?

<p>Monopoly power, market segregation, and no resale.</p> Signup and view all the answers

What is monopoly power?

<p>One firm or a small group that follows identical pricing policies.</p> Signup and view all the answers

What is market segregation?

<p>The demand curves for markets, groups, or individuals are different.</p> Signup and view all the answers

What does no resale mean in price discrimination?

<p>The person buying at a discount cannot resell the product.</p> Signup and view all the answers

Why does price discrimination exist?

<p>A seller can make more money by charging different buyers different prices.</p> Signup and view all the answers

What is marginal cost pricing?

<p>Sets price equal to marginal cost, where demand intersects marginal cost and achieves allocative efficiency.</p> Signup and view all the answers

How does the demand curve for a monopolist differ from that of a perfectly competitive firm?

<p>The monopolist's demand curve is downward sloping because it is the market demand curve.</p> Signup and view all the answers

Why is marginal revenue less than price in a monopoly?

<p>Because there is a downward-sloping demand curve.</p> Signup and view all the answers

What is the relationship between the elasticity of demand and total and marginal revenue?

<p>Along the elastic portion of the demand curve, a fall in price leads to an increase in total revenue, making marginal revenue positive.</p> Signup and view all the answers

How does the monopolist determine the profit-maximizing output?

<p>The monopolist maximizes profits at that output where marginal revenue equals marginal cost.</p> Signup and view all the answers

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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Explore key concepts from Microeconomics Chapter 9 with these flashcards. This quiz covers essential terms such as pure monopoly and price maker, aiding in your understanding of market structures. Test your knowledge and reinforce your learning with true or false questions.

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