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Questions and Answers
What price will the firm charge in the absence of government market intervention?
What price will the firm charge in the absence of government market intervention?
What is the profit made by the firm when it charges the monopoly price?
What is the profit made by the firm when it charges the monopoly price?
At what price does the firm break even when charging a fair return price?
At what price does the firm break even when charging a fair return price?
When the firm breaks even, what is the profit?
When the firm breaks even, what is the profit?
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What condition defines the socially optimum price for the firm?
What condition defines the socially optimum price for the firm?
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At which quantity does the socially optimum price occur?
At which quantity does the socially optimum price occur?
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What is the average total cost (ATC) at quantity Q = 4 units?
What is the average total cost (ATC) at quantity Q = 4 units?
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What will happen if the firm charges a price higher than the average total cost?
What will happen if the firm charges a price higher than the average total cost?
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What is the welfare loss caused by a monopoly represented by?
What is the welfare loss caused by a monopoly represented by?
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Which approach advocates for government intervention by breaking up monopolies?
Which approach advocates for government intervention by breaking up monopolies?
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What is the socially optimal price for regulation of a monopoly?
What is the socially optimal price for regulation of a monopoly?
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What does the fair-return price ensure for a monopolistic firm?
What does the fair-return price ensure for a monopolistic firm?
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How is consumer surplus affected in a monopolistic market compared to perfect competition?
How is consumer surplus affected in a monopolistic market compared to perfect competition?
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What does the area labeled 'A' on the monopoly diagram represent?
What does the area labeled 'A' on the monopoly diagram represent?
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In the context of a natural monopoly, what is a likely consequence of setting the price equal to marginal cost?
In the context of a natural monopoly, what is a likely consequence of setting the price equal to marginal cost?
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Which of the following statements is true regarding the long-run average total cost (LRATC) for a natural monopoly?
Which of the following statements is true regarding the long-run average total cost (LRATC) for a natural monopoly?
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What is the maximum price that business employees are willing to pay for the newspaper?
What is the maximum price that business employees are willing to pay for the newspaper?
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If Local-Daily charges a single price of $2, what will be the total profit?
If Local-Daily charges a single price of $2, what will be the total profit?
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In order for Local-Daily to successfully implement price discrimination, which condition must NOT be violated?
In order for Local-Daily to successfully implement price discrimination, which condition must NOT be violated?
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What profit would Local-Daily earn if they charged business employees $5 and students $2?
What profit would Local-Daily earn if they charged business employees $5 and students $2?
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What is the constant average total cost (ATC) per copy of the newspaper for Local-Daily?
What is the constant average total cost (ATC) per copy of the newspaper for Local-Daily?
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Which group of readers would NOT purchase the newspaper at a price of $5?
Which group of readers would NOT purchase the newspaper at a price of $5?
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What does a concentration ratio of 4 (CR4) measure?
What does a concentration ratio of 4 (CR4) measure?
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How many readers are there in each group for Local-Daily?
How many readers are there in each group for Local-Daily?
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What would be the result if Local-Daily sells the newspaper at only $2?
What would be the result if Local-Daily sells the newspaper at only $2?
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How is the Herfindahl index (HI) calculated?
How is the Herfindahl index (HI) calculated?
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In imperfect competition, which of the following is true about demand and marginal revenue?
In imperfect competition, which of the following is true about demand and marginal revenue?
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What is the outcome when price (P) is greater than average total cost (ATC)?
What is the outcome when price (P) is greater than average total cost (ATC)?
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Which outcome is only possible in the long run for a firm in an industry?
Which outcome is only possible in the long run for a firm in an industry?
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Which is NOT a scenario of short-run outcomes for firms?
Which is NOT a scenario of short-run outcomes for firms?
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What indicates productive inefficiency in a market?
What indicates productive inefficiency in a market?
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At what output level should a firm determine the point for profit maximization?
At what output level should a firm determine the point for profit maximization?
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What is the economic profit when the price is set at $22 and the average total cost is approximately $11.33 for a quantity of 6?
What is the economic profit when the price is set at $22 and the average total cost is approximately $11.33 for a quantity of 6?
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In a kinked demand curve model, what happens to demand if the price decreases?
In a kinked demand curve model, what happens to demand if the price decreases?
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What is the primary characteristic of firms in the collusive pricing model?
What is the primary characteristic of firms in the collusive pricing model?
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What is the typical outcome when a dominant firm initiates price changes in the price leadership model?
What is the typical outcome when a dominant firm initiates price changes in the price leadership model?
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Why is oligopoly considered inefficient in terms of pricing?
Why is oligopoly considered inefficient in terms of pricing?
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What condition leads to a gap in the marginal revenue curve in the kinked demand curve model?
What condition leads to a gap in the marginal revenue curve in the kinked demand curve model?
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What is a common strategy used by firms in an oligopoly to prevent new entrants from entering the market?
What is a common strategy used by firms in an oligopoly to prevent new entrants from entering the market?
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What is the result when price is set above the minimum average total cost in an oligopoly?
What is the result when price is set above the minimum average total cost in an oligopoly?
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Study Notes
Monopoly
- A monopoly firm charges a price where marginal revenue equals marginal cost (MR=MC)
- Monopoly profit equals total revenue minus total cost
- The fair-return price for a monopoly is the break-even price, where price equals average total cost
- The socially optimum price for a monopoly is where price equals marginal cost, leading to allocative efficiency
Welfare Cost of Monopoly
- Monopolist charges a higher price and sells less than a perfectly competitive industry
- The welfare loss is the sum of consumer surplus lost (B + D) and producer surplus gained (C)
- The welfare loss created by a monopoly is the "deadweight loss"
- Opportunity cost of resources not used is not a loss to society (A)
Public Policy Toward Monopolies
- Antitrust laws break up monopolies
- Regulation sets prices and quantities
- Public ownership creates state-run enterprises
- Doing nothing allows markets to address monopolies naturally
Regulation Pricing Choices
- Setting a price for a natural monopoly at marginal cost leads to allocative efficiency, but may incur losses for the firm
- A fair-return price breaks even for the firm, which is socially acceptable
- A natural monopolist cannot always achieve productive efficiency
Measuring Industry Concentration
- Concentration ratio reveals the percentage of sales held by the four largest firms in an industry
- Herfindahl index sums the squared values of individual market shares of firms within an industry
Demand and Marginal Revenue
- Monopolistic firms face a downward sloping demand curve
- This means that price is greater than marginal revenue (P > MR = MC)
Marginal Approach
- Find profit maximizing output by locating where MR=MC
- The price is determined by where the demand curve intersects the profit maximizing output
Possible Outcomes
- In the short run, firms can make profits, break even, sustain losses, or shut down
- In the long run, firms tend to break even (zero economic profit) due to entry and exit of firms
Efficiency
- Monopolies are not productively efficient because price is greater than the minimum average total cost
- Monopolies are not allocatively efficient because price is greater than marginal cost
Kinked Demand Curve Model
- A gap in the marginal revenue curve exists due to the assumption that firms will match price decreases, but not increases
- This means firms will not immediately change their price or output for small changes in marginal cost
- The demand curve is elastic if prices increase and inelastic if prices decrease
Collusive Pricing Model
- Oligopolies act like a monopoly and set a price to maximize joint profits
- Output quotas are assigned to individual firms to maximize total output
Price Leadership Model
- An implicit form of collusion occurs where a dominant firm initiates price changes
- Other firms follow the leader and may use limit pricing to prevent entry of new firms
- This is an informal form of collusion
Oligopoly Inefficiency
- Oligopolies lack productive and allocative efficiency
- Oligopolies lack allocative efficiency because price is greater than marginal cost
Price Discrimination Conditions
- Price discrimination requires monopoly power, market segregation, and prevention of resale
Price Discrimination Example (Local-Daily Newspaper)
- Local-Daily can charge different prices to business employees and students
- By charging higher prices to business employees and lower prices to students, Local-Daily can maximize its profits
- The obstacle for Local-Daily is preventing resale of newspapers between the two groups
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Description
Explore the concepts of monopolies, including their pricing strategies, welfare costs, and the implications of public policy. This quiz covers essential economic principles related to monopolistic practices and regulatory frameworks. Test your understanding of how monopolies differ from competitive markets and analyze the welfare losses involved.
