Monopoly

Question 1

Show on the graph:

• Break even points
• Close down point
• Productive efficiency
• Revenue maximisation
• Allocative efficiency
• Profit maximisation

Answer 1

• Break even points: ATC = AR
• Close down point: AVC = MC
• Productive efficiency: ATC = MC
• Revenue maximisation: MR = 0
• Allocative efficiency: MC = AR
• Profit maximisation: MC = MR

Question 2

monopoly

Answer 2

market where one firm dominates the market for a good that has no substitutes and where significant barriers to entry exist

Question 3

Assumption monopoly:

1. number of firms
2. price control
3. barriers to exit/entry
4. product type
5. dependence
6. economic profit short run
7. economic profit long run

Answer 3

1. one
2. significant (price maker)
3. near total
4. unique
5. independent
6. possible
7. possible

Question 4

market (monopoly) power

Answer 4

ability to set the price of the good

Question 5

What are barriers to entry for monopolies?

Answer 5

1. economies of scale (in order to compete with existing firms must produce at unachievable level of output at a reasonable cost)
2. legal barriers (copyrights, patents)
3. ownership of essential resources (e.g. large mining companies own richest mines)
4. aggressive tactics (monopolies can buy out firms, can cut prices to below-cost levels to drive smaller firms with smaller profit reserves out)

Question 6

demand curve for a monopoly

Answer 6

the firm is the industry so has downsloping market demand curve

monopolist limited by this demand curve

Question 7

How to show profit and loss from cost curves?

Answer 7

• MC = MR is profit maximising point
• go straight up to demand curve
• go straight up to cost curve
• difference is economic profit/loss

Question 8

Disadvantages of monopoly

Answer 8

Higher prices and lower quantity produced

• benefits producers and hurts consumers
• can harm relatively poor consumers the most especially if the good is a necessity

Producer welfare gains at the expense of consumers

• see graph

Incentive problems

• lack of innovation (from lack of competition)
• incentive to avoid competition (use aggressive tactics rather than innovating or lowering costs)

Question 9

Advantages of monopoly

Answer 9

Economies of scale

• reduction of costs only achieved through massive output
• see graph

Higher profits enable greater research and development

• perfectly competitive firms only achieve profit in short run
• fewer resources available to improve development

Question 10

Policies to regulate monopoly power

Answer 10

Natural monopoly

• governments grant exclusive production rights to firm and subsidies
• yield lower costs and more output for consumers
• public monopolies usually subject to regulation and government oversight

Anti-trust legislation

• laws that act against anti-competitive power