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Questions and Answers
Which of the following best describes a key characteristic that distinguishes a monopoly from firms in a perfectly competitive market?
Which of the following best describes a key characteristic that distinguishes a monopoly from firms in a perfectly competitive market?
- Monopolies have the power to influence the market price of their product, while perfectly competitive firms are price takers. (correct)
- Monopolies always produce at the point where marginal cost equals marginal revenue, similar to perfectly competitive firms.
- Monopolies face a perfectly elastic demand curve, whereas perfectly competitive firms face a downward-sloping demand curve.
- Monopolies are characterized by having many competitors, whereas perfectly competitive firms have very few.
A company that has a significant economy of scale can be a barrier to entry. Which scenario illustrates how economies of scale function as a barrier to entry for potential competitors?
A company that has a significant economy of scale can be a barrier to entry. Which scenario illustrates how economies of scale function as a barrier to entry for potential competitors?
- A new firm has access to cheaper raw materials, giving it a cost advantage over the incumbent.
- A well-established firm spends more on advertising, creating brand loyalty that new entrants cannot match.
- A new firm offers a unique, differentiated product that attracts a niche market segment.
- A well-established firm can produce at a lower average cost than a new entrant due to its high production volume. (correct)
A single firm controls nearly all of a critical natural resource needed to produce a particular good. What type of barrier to entry does this best exemplify?
A single firm controls nearly all of a critical natural resource needed to produce a particular good. What type of barrier to entry does this best exemplify?
- Aggressive tactics to deter new entrants.
- Legal protection through patents.
- Ownership/control of key factors. (correct)
- Product differentiation and brand loyalty.
Following the acquisition of Maldivian Air Taxi by Blackstone, which business tactic most directly leverages increased market power?
Following the acquisition of Maldivian Air Taxi by Blackstone, which business tactic most directly leverages increased market power?
What is the most likely outcome of a monopolist operating on the inelastic portion of its demand curve?
What is the most likely outcome of a monopolist operating on the inelastic portion of its demand curve?
How does a monopoly typically differ from a perfectly competitive market in terms of short-run output and pricing?
How does a monopoly typically differ from a perfectly competitive market in terms of short-run output and pricing?
Why might a monopoly lack the incentive to drive costs down compared to firms in a competitive market?
Why might a monopoly lack the incentive to drive costs down compared to firms in a competitive market?
While monopolies may have less incentive to innovate, what factor could potentially drive innovation within a monopoly?
While monopolies may have less incentive to innovate, what factor could potentially drive innovation within a monopoly?
What is the primary reason for the difference in the demand curve faced by a monopoly compared to a firm in perfect competition?
What is the primary reason for the difference in the demand curve faced by a monopoly compared to a firm in perfect competition?
In the context of monopoly short-run profit maximization, at what point does a monopoly firm determine its optimal output level?
In the context of monopoly short-run profit maximization, at what point does a monopoly firm determine its optimal output level?
A firm's marginal revenue (MR) curve slopes downward. How does its slope compare to the slope of the average revenue (AR) curve?
A firm's marginal revenue (MR) curve slopes downward. How does its slope compare to the slope of the average revenue (AR) curve?
In the provided example, what is the marginal revenue when increasing production from 2 to 3 units?
In the provided example, what is the marginal revenue when increasing production from 2 to 3 units?
At what quantity does marginal revenue become negative in the example provided?
At what quantity does marginal revenue become negative in the example provided?
According to the data provided, what is the price (average revenue) when 4 units are sold?
According to the data provided, what is the price (average revenue) when 4 units are sold?
A firm is operating where its marginal revenue is negative. What does this indicate about the firm's total revenue?
A firm is operating where its marginal revenue is negative. What does this indicate about the firm's total revenue?
If a firm increases its output and observes that its marginal revenue decreases, but remains positive, what can be inferred about the price elasticity of demand?
If a firm increases its output and observes that its marginal revenue decreases, but remains positive, what can be inferred about the price elasticity of demand?
At what point is total revenue maximized in the example provided?
At what point is total revenue maximized in the example provided?
How does the relationship between the average revenue (AR) and marginal revenue (MR) curves change as quantity increases, assuming a downward sloping demand curve?
How does the relationship between the average revenue (AR) and marginal revenue (MR) curves change as quantity increases, assuming a downward sloping demand curve?
Why does a monopolist operate in the elastic portion of the demand curve?
Why does a monopolist operate in the elastic portion of the demand curve?
What happens to the marginal revenue (MR) curve as a firm's market power increases?
What happens to the marginal revenue (MR) curve as a firm's market power increases?
At what point does a monopoly maximize its profit?
At what point does a monopoly maximize its profit?
How does a monopolist determine the price to charge at the profit-maximizing output level?
How does a monopolist determine the price to charge at the profit-maximizing output level?
In a monopoly, what condition typically allows supernormal profits to persist in the long run?
In a monopoly, what condition typically allows supernormal profits to persist in the long run?
If a monopolist's average revenue (AR) is greater than its average cost (AC), what does this indicate?
If a monopolist's average revenue (AR) is greater than its average cost (AC), what does this indicate?
What is a key characteristic of the monopolist's demand curve?
What is a key characteristic of the monopolist's demand curve?
How does the price set by a monopolist compare to that of a firm in a perfectly competitive market, assuming similar cost structures?
How does the price set by a monopolist compare to that of a firm in a perfectly competitive market, assuming similar cost structures?
Flashcards
Monopoly
Monopoly
A market structure characterized by a single seller, high barriers to entry, and the power to set prices.
Market Power
Market Power
The ability of a firm to influence the price of its product in the market.
Barriers to Entry
Barriers to Entry
Factors that prevent new firms from entering a market, protecting existing firms (incumbents).
Economies of Scale
Economies of Scale
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Monopoly Demand Curve
Monopoly Demand Curve
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AR Curve
AR Curve
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MR Curve
MR Curve
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D (Demand)
D (Demand)
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MR below AR
MR below AR
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Positive Marginal Revenue
Positive Marginal Revenue
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Negative Marginal Revenue
Negative Marginal Revenue
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Revenue Curve
Revenue Curve
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MR and AR Curve Slope Relationship
MR and AR Curve Slope Relationship
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Monopoly Cost Inefficiency
Monopoly Cost Inefficiency
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What is a Monopoly?
What is a Monopoly?
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Economies of Scale (Monopoly)
Economies of Scale (Monopoly)
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Monopoly Innovation
Monopoly Innovation
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Monopoly vs. Perfect Competition (Price & Output)
Monopoly vs. Perfect Competition (Price & Output)
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AR and MR Curves
AR and MR Curves
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Monopolist Demand Curve
Monopolist Demand Curve
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Profit Maximization (Monopoly)
Profit Maximization (Monopoly)
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Monopoly Price Determination
Monopoly Price Determination
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Long-Run Monopoly Profits
Long-Run Monopoly Profits
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Defining Supernormal Profit
Defining Supernormal Profit
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Total Profit Area
Total Profit Area
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Monopolies and Elasticity
Monopolies and Elasticity
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Study Notes
Monopoly
- In a monopoly the lack of competition enable the entity to define the price of it's product. Necessities are an example of this
- Market power determines price and production without risk of being undercut
Sources of barriers to entry
- Includes economies of scale and scope
- Product differentiation and brand loyalty contribute to barriers to entry
- Lower costs for an already established firm
- Control of key factors or retail outlets
- Legal protection, mergers, and takeovers
- Using retained profits and aggressive tactics
TMA and Maldivian Air Taxi
- Back in 2013, TMA had 48 aircraft
- There was a prices increase from previous seaplane contracts
- Reduction in services and benefits being offered to hospitality groups
- An exclusivity clause forbidding other deals between the company and other seaplane operators
- A “contractual link” to use landplane operations will allegedly be launched by TMA
- A minimum contract term of three years for seaplane operations
- In 2019 Manta Air entered the market with 3 seaplanes
Monopoly Demand
- The monopolist's demand curve is downward sloping
- The greater the market power, the less elastic, steeper, and inelastic the demand curve, water is an example
- MR is below AR = D
AR and MR curves
- The slope of the MR curve is twice that of the AR curve
- When AR changes by £1, MR changes by £2
- A monopolist operates in elastic part of AR because an increase in price leads to higher revenue
Profit maximization
- Profit is maximized where Marginal Cost (MC) equals Marginal Revenue (MR)
- Output is where MC = MR
- Price is found from the Demand curve (where D = AR)
- Supernormal profit can persist in long run
Competition Comparison
- Compared to perfect competition, a monopoly has lower short-run output at a higher price as the market is not flooded
- Supernormal profit is not competed away
- Costs may remain high due to lack of competition thus there is no incentive drive costs down
- There can be substantial economies of scale because of the size of the monopoly, for example, Rockerfeller
- Has less incentive to innovate
- There is a greater possibility of R&D and innovation through investing ploughed-back profit
- Possible monopoly profit may encourage risk taking and the development of new industries
Additional Notes
- The difference in the demand curve under monopoly and perfect competition is key
- Definition and characteristics of monopoly are need to be remembered
- Price and output decisions in short run and long run must be considered
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Description
Monopolies occur when a single entity controls the price of a product due to lack of competition. Barriers to entry include economies of scale, product differentiation, cost advantages, control of resources, and legal protection. TMA and Maldivian Air Taxi are examples of how monopolies can affect service and pricing.
