Monopoly and Market Dynamics

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Questions and Answers

What characterizes a monopolist in a market?

  • Operates without any barriers to entry.
  • Has multiple sellers competing for customers.
  • Sets prices based on market forces.
  • Is the only seller with no close substitutes. (correct)

Which of the following is a barrier to entry in a monopolistic market?

  • An oversaturated market.
  • High consumer demand.
  • Diversity in product offerings.
  • Government regulations granting exclusivity. (correct)

What does it mean for a monopolist to be a 'price maker'?

  • It follows the market price set by competitors.
  • It has the ability to set prices independently of market demand. (correct)
  • It cannot influence prices due to market saturation.
  • It must price its product below competitors to attract buyers.

Which of the following is NOT considered a type of monopoly resource?

<p>Shared resources between multiple companies. (C)</p> Signup and view all the answers

What is an example of economies of scale in a monopolistic market?

<p>Lower per-unit costs as production increases. (D)</p> Signup and view all the answers

Which of the following statements about monopolies is false?

<p>Monopolies have no impact on market competition. (A)</p> Signup and view all the answers

Which characteristic is essential for a market to be classified as a monopoly?

<p>Single ownership of a product by one seller. (C)</p> Signup and view all the answers

What can lead to a firm achieving monopoly status in the market?

<p>Government-imposed restrictions on competition. (A)</p> Signup and view all the answers

What is the elasticity of demand for the monopolist's product, given that a 10 percent price decrease leads to a 5 percent increase in total revenue?

<p>1.5 (C)</p> Signup and view all the answers

At what price should the monopolist charge to maximize profits if the marginal cost is 10 baht and elasticity is 1.5?

<p>30 baht (D)</p> Signup and view all the answers

How does the pricing of generic drugs compare to that of monopolist drugs in the pharmaceutical market?

<p>Generic drugs are priced below monopolist drugs. (C)</p> Signup and view all the answers

What percentage change in total revenue occurs from a 10 percent decrease in price for the monopolist?

<p>5 percent increase (D)</p> Signup and view all the answers

In a monopoly, the monopolist sets the price in relation to which of the following?

<p>Marginal Revenue (C)</p> Signup and view all the answers

What is the relationship between marginal revenue and price for a monopoly?

<p>Marginal revenue is always less than price. (D)</p> Signup and view all the answers

Which effect contributes to an increase in total revenue when quantity sold increases?

<p>Output effect from selling a higher quantity. (D)</p> Signup and view all the answers

If a monopoly increases production, what happens to the price of the good?

<p>Price decreases as quantity sold increases. (A)</p> Signup and view all the answers

What does the demand curve represent in the context of a monopoly?

<p>The relationship between quantity sold and market price. (C)</p> Signup and view all the answers

Why is the marginal revenue curve below the demand curve for a monopoly?

<p>The price on all units must fall if more is produced. (D)</p> Signup and view all the answers

What occurs when the price effect of increasing production dominates the output effect?

<p>Total revenue decreases. (C)</p> Signup and view all the answers

In a monopolistic market, what can be inferred about the relationship between total revenue and output when marginal revenue is less than price?

<p>Total revenue decreases with higher output. (C)</p> Signup and view all the answers

What is a primary condition necessary for price discrimination to occur?

<p>Monopoly power (A)</p> Signup and view all the answers

What happens to the marginal revenue of a monopoly as the quantity of the good sold increases?

<p>Marginal revenue decreases. (B)</p> Signup and view all the answers

Which of the following strategies is an example of price discrimination?

<p>Discount coupons for seniors (A)</p> Signup and view all the answers

In a scenario where different groups of buyers have varying price elasticity of demand, which group is likely to pay a higher price?

<p>Group with low elasticity (Ed &lt; 1) (D)</p> Signup and view all the answers

What is a critical factor that prevents resale of tickets among different buyer groups under price discrimination?

<p>Unique identifiers on tickets (B)</p> Signup and view all the answers

Which of the following is NOT a method to increase competition against monopolies?

<p>Allowing monopolistic practices (D)</p> Signup and view all the answers

What is one common regulatory response to natural monopolies?

<p>Price controls (B)</p> Signup and view all the answers

In public policy towards monopolies, what is the term for splitting a large company into smaller entities?

<p>Divestiture (A)</p> Signup and view all the answers

Which of the following is an example of quantity discount as a form of price discrimination?

<p>Providing a 10% discount for large orders (D)</p> Signup and view all the answers

What negative consequence can arise from a lack of efficient management in public ownership?

<p>Financial losses for consumers and taxpayers (B)</p> Signup and view all the answers

Which of the following options best describes a product with inelastic demand?

<p>Demand remains relatively stable despite price changes (D)</p> Signup and view all the answers

What relationship does the formula $MR = P (1 - \frac{1}{\epsilon}) = MC$ illustrate?

<p>The balance between price setting and demand elasticity. (A)</p> Signup and view all the answers

When a firm sets its price, under what condition does it ensure a positive marginal revenue?

<p>When elasticity is greater than 1. (B)</p> Signup and view all the answers

What does the price markup formula $P = \frac{\epsilon}{\epsilon - 1} \cdot MC$ imply regarding pricing strategy?

<p>Higher elasticity results in lower markup. (D)</p> Signup and view all the answers

How is the profit margin, or Lerner Index, defined in the formula $L = \frac{P - MC}{P}$?

<p>It represents the proportion of revenue retained after covering marginal costs. (D)</p> Signup and view all the answers

In the context of elasticity, why is the negative sign in price elasticity often ignored in the equations?

<p>The focus is on the absolute values for simplified analysis. (B)</p> Signup and view all the answers

Why might a firm choose to operate where demand elasticity is greater than 1?

<p>To ensure they receive a higher marginal revenue. (D)</p> Signup and view all the answers

What type of product would most likely be oriented towards a pricing strategy where elasticity is less than 1?

<p>Essential commodities. (B)</p> Signup and view all the answers

What does it mean for a firm to be a price maker in terms of demand elasticity?

<p>It executes prices above the marginal cost without losing customers. (D)</p> Signup and view all the answers

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Study Notes

Monopoly

  • A single seller of a product without close substitutes
  • A monopolist is a price maker
  • The monopolist has barriers to entry.

Barriers To Entry

  • Government regulations.
  • Monopoly resources (a company has unique access to resources).
  • Technology (technology can make the cost of production lower than all other companies).
  • Economies of scale (efficiency and lower costs due to large production).

Marginal Revenue (MR)

  • MR < P
  • Marginal revenue curve is below the demand curve
  • If the monopoly increases production, the price on all units sold must fall, therefore marginal revenue is always less than the price.

Relationship Between MR and Elasticity

  • MR = P (1 − 1/ ε) = MC
  • The firm sets its own price and will set the price where demand is elastic (elasticity >1) to ensure a positive marginal revenue.

Pricing Formula

  • Price Mark Up formula:
    • P=(ε/(ε−1)).MC
  • Profit Margin (Lerner Index):
    • (P-MC)/P = L = 1/ε, where ε > 1

Monopoly Drugs versus Generic Drugs

  • The production of generic drugs creates a competitive market.
  • Generic drugs are produced where MR = MC and P = MC
  • Generic drug prices are below the monopolist's price.

Price Discrimination

  • Examples of price discrimination:
    • Movie tickets.
    • Airline prices.
    • Discount coupons.
    • Financial aid.
    • Quantity discounts.
  • Conditions for price discrimination:
    • Monopoly power.
    • Different price elasticity of demand for different buyers.
    • No re-sales among different groups of buyers.

Public Policy Toward Monopolies

  • Increasing competition with antitrust laws:
    • Prevent mergers.
    • Break up companies.
    • Prevent companies from coordinating their activities to make markets less competitive.
  • Regulation: price control
  • Common in case of natural monopolies.
  • Public ownership.
    • If it does a bad job, losers are the customers and taxpayers.

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