Podcast
Questions and Answers
Which of the following is a characteristic of a monopoly?
Which of the following is a characteristic of a monopoly?
- Firms producing differentiated products.
- A single firm dominating the market. (correct)
- Many firms selling identical products.
- Free entry and exit for firms.
A single-price monopoly sells different units of output for different prices.
A single-price monopoly sells different units of output for different prices.
False (B)
What condition must be met to maximize economic profit for a single-price monopoly?
What condition must be met to maximize economic profit for a single-price monopoly?
MR = MC
A barrier to entry that arises because one firm can supply a good or service to an entire market at a lower cost than two or more firms could is called a ______ monopoly.
A barrier to entry that arises because one firm can supply a good or service to an entire market at a lower cost than two or more firms could is called a ______ monopoly.
Match the following types of barriers to entry with their examples:
Match the following types of barriers to entry with their examples:
If the elasticity of demand for a good is greater than 1, the demand is considered what?
If the elasticity of demand for a good is greater than 1, the demand is considered what?
In perfect competition, equilibrium occurs where marginal revenue is equal to marginal cost
In perfect competition, equilibrium occurs where marginal revenue is equal to marginal cost
What happens to consumer surplus when a single-price monopoly engages in price discrimination?
What happens to consumer surplus when a single-price monopoly engages in price discrimination?
The pursuit of wealth by capturing economic rent is known as ______.
The pursuit of wealth by capturing economic rent is known as ______.
Which of the following accurately describes the outcome when a single-price monopoly is compared to perfect competition?
Which of the following accurately describes the outcome when a single-price monopoly is compared to perfect competition?
Price discrimination always leads to a decrease in profitability for a monopoly.
Price discrimination always leads to a decrease in profitability for a monopoly.
What is the main goal of monopoly regulation?
What is the main goal of monopoly regulation?
When monopolies redistribute consumer surplus to producer surplus, this is primarily pursued through ______.
When monopolies redistribute consumer surplus to producer surplus, this is primarily pursued through ______.
What is the effect on deadweight loss when a rent seeker makes zero economic profit?
What is the effect on deadweight loss when a rent seeker makes zero economic profit?
Perfect price discrimination results in deadweight loss.
Perfect price discrimination results in deadweight loss.
Under what condition does a monopoly achieve efficiency in terms of output and pricing?
Under what condition does a monopoly achieve efficiency in terms of output and pricing?
Setting a price ceiling for a monopoly is also known as ______.
Setting a price ceiling for a monopoly is also known as ______.
What is the result of average cost pricing regulation for a monopoly?
What is the result of average cost pricing regulation for a monopoly?
Government subsidies cannot result in deadweight loss
Government subsidies cannot result in deadweight loss
What is the main purpose demonstrating a low rate of return on capital, in the context of monopoly regulation?
What is the main purpose demonstrating a low rate of return on capital, in the context of monopoly regulation?
Flashcards
Monopoly
Monopoly
A market with only one firm.
Barriers to entry
Barriers to entry
Barriers that prevent other firms from entering the market.
Ownership barrier to entry
Ownership barrier to entry
Monopoly due to control of a resource.
Single-price monopoly
Single-price monopoly
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Price-discriminating monopoly
Price-discriminating monopoly
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Marginal revenue
Marginal revenue
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Profit Maximization
Profit Maximization
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Efficient Quantity
Efficient Quantity
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Perfect competition equilibrium
Perfect competition equilibrium
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Rent-seeking
Rent-seeking
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Maximize Profit
Maximize Profit
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Price Discrimination
Price Discrimination
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Perfect Price Discrimination
Perfect Price Discrimination
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Marginal Cost Pricing Rule
Marginal Cost Pricing Rule
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Rate of Return Regulation
Rate of Return Regulation
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Price Cap Regulation
Price Cap Regulation
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Economic Efficiency
Economic Efficiency
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Consumer Surplus
Consumer Surplus
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Producer Surplus
Producer Surplus
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Deadweight Loss
Deadweight Loss
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Study Notes
Monopoly
- Exists within a market with a single firm
- Produces a good/service with no close substitutes
- Protected by barriers preventing firms from entering the market
How Monopolies Arise
- Due to a lack of substitutes
- Due to barriers
- Natural barriers lead to natural monopoly
- Ownership barriers exist, such as De Beers
- Legal barriers, such as public franchise, government license, patent, and copyright
Monopoly Price-Setting Strategies
- Monopolies set their own prices
Single Price Monopoly
- Must sell each unit of output for the same price to all customers
Price Discriminating Monopoly
- Sells different units of a good/service for different prices
Price and Marginal Revenue
- The demand curve the firm faces equals the market demand curve
- Total Revenue (TR) = Price (P) x Quantity (Q)
- Marginal Revenue (MR) = Change in TR / Change in Quantity
- MR is less than P
Marginal Revenue and Elasticity
- Marginal revenue relates to elasticity of demand for the good
- Elastic demand has an elasticity greater than 1
- Inelastic demand has an elasticity less than 1
- Unit elastic demand has an elasticity of 1
- Monopolistic demand is elastic
Price and Output Decision
- Economic profit is maximized when (P – ATC) x Q is highest
- Marginal revenue equals marginal cost, and price equals demand
Perfect Competition
- Equilibrium is reached where Supply = Marginal Cost = Demand
Monopoly Output and Pricing vs Perfect Competition
- Competitive market's supply becomes the monopoly's marginal cost curve
- Single-price monopoly produces less and charges more than perfect competition
Perfect Competition Equilibrium
- Occurs where Supply = Demand
- Efficient because Marginal Social Benefit (MSB) = Marginal Social Cost (MSC)
- Maximizes surplus
- LRAC is minimized
Monopoly Equilibrium
- Occurs where Marginal Revenue = Marginal Cost and Price = Demand
- Results in less quantity and higher prices than perfect competition
- Inefficient because Marginal Social Benefit (MSB) exceeds Marginal Social Cost (MSC)
- Surplus is redistributed and reduced by deadweight loss
- LRAC is not minimized
Rent Seeking
- Surplus equals economic rent
- Wealth is pursued by capturing economic rent, defined as rent seeking
- Monopoly redistributes consumer surplus as producer surplus, which results in the pursuit of monopoly profit through rent seeking
- Monopolists rent seek by buying or creating a monopoly
Rent-Seeking Equilibrium
- There are no barriers to entering rent seeking
- Rent seeking resembles perfect competition
- Competition among rent seekers increases Average Total Cost (ATC)
- Rent seekers have zero economic profit
- Deadweight loss becomes larger than lost producer surplus
Price Discrimination
- Increases economic profit
Two Ways of Price Discrimination
- By discriminating among groups of buyers
- By discriminating between units of a good
Results of Price Discrimination
- Price discrimination captures consumer surplus and converts it to producer surplus
- Buyers will pay a price as close as possible to their maximum willingness to pay
Perfect Price Discrimination
- Occurs when a firm can sell each output unit at the highest price someone will pay
- Eliminates consumer surplus, which becomes producer surplus
- Market demand curve becomes the MR curve
- Achieves efficiency due to zero deadweight loss
Efficient Regulation of a Natural Monopoly
- Involves marginal cost pricing where Price = Marginal Cost
- Results in efficient quantity but economic loss, which is covered through price discrimination
- Average cost pricing sets Price = Average Cost
- Results in break-even but deadweight loss
- A government subsidy results in deadweight loss via taxation
- Rate of return regulation is used to justify price with low rate of return on capital, which can lead to over-inflated wasteful expenditure
- Price cap regulation sets a ceiling
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