Chapter 15 - Monopoly

Question 1

What is a Monopoly

Answer 1

• a firm that is the sole of a product in a market without close substitutes
• Has market power: the ability to influence the market price of the product it sells

Question 2

Barriers to Entry in a Monopoly Market

Answer 2

1) Monopoly Resources - One firm controls access to necessary resource
2) Government-Created Monopoly
3) Natural Monopoly - a single firm can produce the entire Q needed at the lowest possible cost; economy of scale

Question 3

Monopoly Demand Curve

Answer 3

• The only seller; therefore has a downward-sloping demand curve (firms in competitive markets have horizontal demand curves at P)

Question 4

Monopoly Revenue

Answer 4

P will always equal AR

P will always be greater than MR

• because to sell a higher Q, monopoly firm must reduce P
• in Competitive Markets P=MR

Question 5

Output Effect

Answer 5

higher output raises revenue

Question 6

Price Effect

Answer 6

lower price reduces revenue

Question 7

Monopoly Profit Maximization

Answer 7

• MR=MC is the profit maximizing Q
• P is taken from the demand curve at the profit maximizing Q
• this is profitable if above the ATC; and vice versa

Question 8

Monopoly Supply Curve

Answer 8

• Monopolies do not have supply curves
• Monopoly is a price maker; Q does not depend on P
• Q and P are determined by MC and MR

Question 9

Monopoly Equlibrium

Answer 9

• P is greater than MR=MC

- Q is too low in monopoly

Question 10

Price Discrimination

Answer 10

• Selling the same good at different prices to different buyers; based on consumer WTP
• In Perfect Price Discrimination firm makes pure profit; this is not possible in reality