Market Economy MCQ 3 (monopoly)

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Questions and Answers

What is a key characteristic of a monopoly?

There are many sellers in the market

The firm is the industry and there are no close substitutes available (correct)

The firm aims to maximise expenditure

The firm produces low quality products

What is the goal of a monopolist?

To maximise quantity produced

To produce at the lowest point on the average cost curve

To produce where marginal revenue equals marginal cost (correct)

To reduce profits to zero

What is a barrier to entry in a monopoly?

A patent that prevents new firms from entering an industry (correct)

A decrease in the price of raw materials

An increase in the wage rate

A factor that increases the demand for a product

Why can a monopolist operate inefficiently?

Because it does not have to produce at the lowest point on the average cost curve Signup and view all the answers

What determines the price and quantity of a good in a monopoly?

The firm can set either price or quantity, but not both Signup and view all the answers

Which type of price discrimination involves charging different customers different prices based on their characteristics?

Third degree price discrimination Signup and view all the answers

What is a necessary condition for price discrimination to occur?

Monopoly power Signup and view all the answers

What is the main objective of first degree price discrimination?

To eliminate consumer surplus Signup and view all the answers

Why is it necessary for the seller to keep markets separate in price discrimination?

To prevent reselling Signup and view all the answers

What is a characteristic of a highly concentrated market?

A small number of large firms account for a large percentage of market share Signup and view all the answers

What is one of the roles of a regulator in controlling monopolies?

To approve/reject requests by firms to increase prices Signup and view all the answers

What is an advantage of being a large firm in a monopoly?

It can benefit from economies of scale Signup and view all the answers

What is a disadvantage of a monopoly?

It can be inefficient and wasteful of resources Signup and view all the answers

What happens to taxpayers when a state monopoly is loss-making?

They have to subsidise the loss-making monopoly Signup and view all the answers

What is a result of a lack of competition in a monopoly?

Firms have no incentive to be creative or innovative Signup and view all the answers

Study Notes

Monopoly Characteristics

Single Seller: A monopoly is characterized by a single firm that dominates the entire industry, with no close substitutes available in the market.
Profit Maximization: The monopoly firm aims to maximize its profits by producing a quantity where Marginal Revenue (MR) equals Marginal Cost (MC), with MC cutting MR from below.
Law of Demand: The monopoly firm is subject to the Law of Demand, which means it can either set its price or quantity, but not both simultaneously.
Barriers to Entry: The existence of barriers to entry, such as patents, copyrights, high start-up costs, economies of scale, or sole access to raw materials, prevents new firms from entering the industry or market.
Inefficient Operations: Monopoly firms can operate inefficiently, failing to produce at the lowest point on the Average Cost (AC) curve, leading to a mismatch between production and cost minimization.

Price Discrimination

Price discrimination involves charging different customers different prices for the same good/service, without difference in cost of production.

Types of Price Discrimination

First Degree Price Discrimination: Elimination of consumer surplus, where the seller knows the maximum price each consumer is willing to pay, e.g. a solicitor providing legal advice to a client.
Second Degree Price Discrimination: Giving discounts to those who buy in bulk, where the seller is aware of the Law of Diminishing Marginal Utility.
Third Degree Price Discrimination: Charging different prices based on the characteristics of the consumer, e.g. a hairdresser charging a lower price for students (who are relatively price elastic).

Conditions Necessary for Price Discrimination

Monopoly Power: The seller must have monopoly power in the market.
Identify Groups with Different PEDs: The seller must be able to identify groups of consumers with different Price Elasticity of Demand (PED).
Keep Markets Separate: The seller must be able to keep the markets separate to prevent reselling.
Consumer Indifference: Consumers must not care to pay a higher price, they must be indifferent to the price difference.

Market Concentration

A highly concentrated market is characterized by a small number of large firms holding a large percentage of market share.
The smaller the number of firms, the more concentrated the market, leading to increased competitiveness.

Regulation of Monopolies

Addressing customer complaints
Approving or rejecting price increase requests from firms
Conducting inspections
Prosecuting firms for breaching regulations

Monopoly Advantages

Benefit from economies of scale due to large size
Access to substantial capital for R&D and other purposes
Job security for employees due to lack of competition
No duplication of services

Monopoly Disadvantages

Can be inefficient and wasteful of resources
Lack of incentive for innovation and creativity due to no competition
May exploit consumers to achieve supernormal profits
Taxpayer subsidies required for loss-making state monopolies

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Description

Test your knowledge of the characteristics of a monopoly, including the single seller, profit maximization, and barriers to entry.