Chapter 15: Monopoly

Question 1

Define ‘Monopoly’.

Answer 1

A firm that is the sole seller of a product without close substitutes.

Question 2

Define ‘Natural monopoly’.

Answer 2

A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

Question 3

Define ‘Price discrimination’.

Answer 3

The business practice of selling the same good at different prices to different customers.
Often increases monopolist profits (increases economic welfare by getting good to consumers who otherwise would not buy).

Question 4

How can a monopoly arise?

Answer 4

1. A single firm owns a key resource
2. The government gives a firm the exclusive right to produce a good
3. When a single firm can supply the entire market at a lower cost than many firms could.

Question 5

Because a monopoly is the sole producer in its market, it faces a ___-___ demand curve for its product.

Answer 5

Downward-sloping. (As opposed to horizontal for competitive firm, price taker)
When a monopoly increases production by 1 unit, it causes the price of its good to fall, which reduces the amount of revenue earned on all units produced. As a result, a monopoly’s MR is always below the price of its good (demand curve above MR curve).

Question 6

Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which …? The monopoly then chooses the price at which that quantity is demanded.

Answer 6

MR=MC.

Question 7

Unlike a competitive firm, a monopoly firm’s price ___ its MR, so its price ___ MC.

Answer 7

Exceeds and exceeds.

Question 8

Why does a monopoly cause deadweight taxes similar to those caused by taxes?

Answer 8

A monopolist’s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus. Charging a price above MC, some consumers who value the good more than its cost of production do not buy it.

Question 9

When can the deadweight losses of monopoly be completely eliminated?

Answer 9

In the extreme case of perfect price discrimination.
More generally, when price discrimination is imperfect, it can either raise or lower welfare compared to the outcome with a single monopoly price.

Question 10

What are the 4 ways that policymakers can respond to the inefficiency of monopoly behavior?

Answer 10

1. Antitrust laws to make the industry more competitive
2. Regulate the prices that the monopoly charges
3. Turn monopoly into a government run enterprise
4. If the market failure is deemed small compared to the inevitable imperfections of policies, they can do nothing at all.

Question 11

What is arbitrage?

Answer 11

The process of buying a good in one market at a lower price and selling the good in another market at a higher price.

Question 12

What is synergies?

Answer 12

The benefits of greater efficiency as a result of mergers (i.e. merging not to reduce competition, but to lower costs through more efficient joint production).

Question 13

What are the similarities and differences between monopolies and competitive firms?

Answer 13

Similarities:

• Goal to maximize profits
• maximizing profits at MR=MC
• Ability to earn economic profits in the short run

Differences:

• Number of firms
• MR = P, vs. MR < P
• Only competitive firm produces welfare-maximizing level of output
• Only competitive firm has entry in long run
• Only monopoly can earn economic profits in the long run
• Price discrimination is only possible in monopoly