A monopoly market structure is one characterized by a single seller of a unique product with no close substitutes.

Save this PDF as:

Size: px
Start display at page:

Download "A monopoly market structure is one characterized by a single seller of a unique product with no close substitutes."

Transcription

1 These notes provided by Laura Lamb are intended to complement class lectures. The notes are based on chapter 12 of Microeconomics and Behaviour 2 nd Canadian Edition by Frank and Parker (2004). Chapter 12 Monopoly A monopoly market structure is one characterized by a single seller of a unique product with no close substitutes. Unlike a competitive firm, a monopoly firm has significant control over the price it charges. A monopoly faces a demand curve. How does a firm become a monopoly? Why don t other firms enter the industry? In monopoly markets, barriers to entry exist. The sources of these barriers can be summarized as follows: 1. DeBeers once owned most of the world s diamond mines. They remain the dominant firm. Inco owned most of the world s nickel deposits. 2. The situation where the least costly way to serve a market is to have one firm produce all the product. The LAC curve slopes downward over a large quantity of output, large enough to provide for the entire market. A natural monopoly is an example i.e. BC hydro Returns to scale are important 3. A patent grants the right to exclusive benefit from all exchanges involving the invention to which it applies. 1

2 Although patents usually lead to higher prices for consumers, they make possible research and inventions that would not otherwise occur. In fact the firms usually need to sell their products at higher prices to cover the research and development of the product. In Canada, a patent has a life of 20 years. Pharmaceutical firms gain monopoly power through patents. 4. Network economies exist when a product increases in value as the number of consumers using it rises. (fax machines, cell phones) Microsoft s Windows operating system has resulted in near monopoly status for Microsoft (90% of world s pcs). Software developers have an incentive to write for he Window s format. It has become difficult to find software that is not written for Windows. 5. Governments grant limited licences for radio broadcasting Some university campuses have granted exclusive rights for vending machines sales We can safely assume, as we did for a competitive firm, that a monopolist s goal is to. The profit-maximizing behaviour of a monopolist: 2 methods: 1. Compare total revenue and total cost The total revenue curve for a monopolist is not upward sloping as it is for a competitive firm. Why? 2

3 The answer lies in the shape of the demand curves faced a firm in each market model. A competitive firm has a horizontal demand curve and a monopoly firm has a downward sloping demand curve. Remember the relationship between the changing elasticity on a downward sloping demand curve and total revenue. In order for a monopolist to sell a greater quantity of its product it must lower its price. Question: Sketch the total revenue curve for a monopolist whose demand curve is given by 100 2Q A monopolist will produce the quantity of output that corresponds with total revenue exceeding total cost by the greatest amount. 2. Compare marginal revenue and marginal cost In the short run, a profit maximizing monopolist will choose the level of output for which MC = MR, provided. Note that marginal revenue is derived from the slope of the total revenue curve. 3

4 Since the total revenue curve for a monopolist has a different shape than that for a competitive firm, we expect the marginal revenue curve for a monopolist to differ from that of a competitive firm s. For a monopolist, marginal revenue will be less than price, except in the special case of a perfectly discriminating monopolist discussed later in this chapter. Marginal revenue = (the gain in revenue from new sales) + (the loss in revenue from selling the previous output level at the new lower price) Marginal revenue and elasticity Remember from chapter 4 that there is a relationship between total revenue and price elasticity of demand. If a firm reduces price in the elastic section of the demand curve, total revenue will. In this case, the gain in revenue from the lower price is greater than the loss of revenue from selling previous output at a lower price, thus marginal revenue is. And conversely, if a firm reduces price in the inelastic section of the demand curve, total revenue will. In this case, the gain in revenue from the lower price is less than the loss of revenue from selling previous output at a lower price, thus marginal revenue is. 4

5 Graphing marginal revenue If demand is linear, marginal revenue is also linear. The marginal revenue curve has the same vertical intercept and twice the slope of the demand curve. Its horizontal intercept is half that of the demand curve. Question: Find the equation for the marginal revenue curve that corresponds to the demand curve P = 12-3Q Graphing the short-run profit maximization condition Illustrate how to calculate profit 5

6 Question: A monopolist faces a demand curve of P = 100 3Q and a short-run total cost curve of TC = Q. The associated marginal cost curve is MC = $20 per unit (note that this is the slope of TC). How much will the monopolist sell? What is the profit-maximizing price? How much economic profit will it earn at that price? Graph this question Will a monopolist ever produce on the inelastic portion of the demand curve?, because the marginal revenue will be and cannot be equated to. Note: inelastic demand implies that reducing output will increase total revenue and reduce total costs, and necessarily profits will rise. Thus any point where demand is inelastic cannot be a profit maximum.the firm can do better by reducing output. How is profit-maximizing mark-up determined? P MC MC 1 = η 1 For example, if price elasticity of demand facing a monopolist is equal to -2.5, then the profit-maximizing mark-up would be 1/(2.5-1)=.67 or 67%. This means than the profit-maximizing price is 67% higher than marginal cost. There is a negative relationship between price elasticity of demand and mark-up. 6

7 If price elasticity of demand is infinite (perfectly elastic), what is the mark-up? Will a monopolist ever shutdown? Whenever demand is lower than average variable cost for every possible level of output, the monopolist will produce nothing in the short-run. The economic loss will equal fixed costs, which is better than the economic loss that would be incurred if the firm produced any level of output. For a monopolist, the optimal level of production might occur either on the rising or on the falling portion of the MC curve, as long as it is a point where the MR curve intersects the MC curve from above. Find the optimal price and quantity for the monopolist described by the information in the following table: Q P MR SMC The monopolist maximizes profit by expanding output until MC equal MR. Where is the monopolist s supply curve? Since a monopolist is not a price taker, there is no correspondence between price and marginal revenue when market demand shifts. A given marginal revenue for one demand curve can correspond to a particular price, while the same value of marginal revenue for a different demand curve corresponds to a different price. 7

8 Thus, a monopolist may produce Q* 1 and sell at P* in one period, and then sell Q* 2 at P* in another period (price remains constant). A monopolist does not have a, it has a which is to equate MR and MC. Long-run adjustments for monopolists A monopolist maximizes profits where MC = MR. Illustrate long-run profit situation: Sometimes economic profits will disappear for a monopolist in the long-run. 8

9 What might cause this to occur? In many cases, positive economic profits may persist in the long-run. Natural monopolies tend to enjoy positive profits over time. Price discrimination So far, we have considered the case of a single price monopolist where it is assumed that the firm sells its output at the same price to all their customers. In reality, monopolists often charge different prices to different buyers a practice called price discrimination. Examples: movie theatre tickets, airline tickets A monopolist can increase its profits by practicing price discrimination. And further, not all the increase in profit is at the expense of the buyer. Efficiency actually increases under price discrimination. Consider the situation where a monopolist sells to two distinct markets. For instance, a publisher sells a unique economics textbook in Canada and in China. In other words, the firm is the only supplier in the domestic market and in the foreign market. The demand curve and marginal revenue curves for the two markets are given: (Fig 12-13, p 372) 9

10 In order to maximize profit, the marginal revenue should be the same in each market, and will be equal to marginal cost at the profit-maximizing quantity of output. Graphically, the marginal revenue curves are added horizontally across the two markets. Question: Suppose a monopolist sells in two separate markets, with demand curves given by P 1 = 15 Q 1 and P 2 = 25 Q 2, respectively. If the total cost curve is given by TC = 7 + 3Q (MC = 2), what quantities should the firm sell and what prices should it charge in the two markets? How is price elasticity of demand related to the prices charged in each market? The monopolist charges the less elastic market. This scenario described above is an example of third degree price discrimination, the case there buyers in separate markets are charged different prices. Other examples of third degree price discrimination: movie theatre tickets to seniors and students. Seniors and students have more elastic demand for movie theatre tickets. 10

11 Price discrimination typically occurs where arbitrage is difficult or impossible. Arbitrage:. Arbitrage is not possible for movie theatre tickets. It is possible, but difficult, for the university textbook market. The case of perfect price discrimination (a.k.a. first degree price discrimination) Perfect price discrimination involves the greatest degree of market segregation. In this case, the monopolist charges each buyer a different price based on their price elasticity of demand. If the intervals into which the monopolist can partition the product are arbitrarily small, the firm s total revenue will increase by the total area of the triangle..the area that used to be consumer surplus. In this case the consumer pays the maximum he/she is willing to pay for each unit of output and subsequently receives no consumer surplus. 11

12 How much output will a profit-maximizing, perfectly discriminating monopolist produce? What is the MR curve for a perfectly discriminating monopolist? Rationale for MR curve = demand curve: The firm can lower price to sell additional output without having to reduce the price on the output originally sold. This results in a higher level of output. Comparison of a single price monopolist and a perfectly discriminating monopolist: 1. Perfectly discriminating monopolist produces a higher level of output. 2. A positive level of consumer surplus typically exists with a single price monopolist, but not with a perfectly discriminating one. ** Perfect price discrimination is a never-attained theoretical limit. (p 375). Why? Second-degree price discrimination The practice, on the part of the seller, of posting a schedule of prices reflecting price declines with quantity purchases. 12

13 Many electric utility companies use a declining tail-block rate structure, which is an example of second-degree price discrimination. Example: First 500 kilowatt-hours Next 700 kilowatt-hours Additional $0.10 per $0.07 per $0.04 per kilowatt-hour It is similar to first-degree price discrimination in that the strategy is an attempt to take consumer surplus from the buyer. There are two major differences that set it apart from first-degree price discrimination: 1. Same rate schedule applies to all buyers, thus the strategy does not attempt to set prices according to elasticity differences among buyers. 2. Limited rate categories tend to limit the amount of consumer surplus captured by the firm. Hurdle model of price discrimination This model consists of a technique whereby the firm induces the most elastic buyers to identify themselves. The seller sets up a hurdle and sets a discount price available to those buyers who elect to jump over it. The logic is that those buyers who are most sensitive to price will be much more likely than others to jump the hurdle (p 377). Examples 13

14 1. a rebate form included in the product package The hurdle is the time and effort it takes to fill out the form, find a stamp and an envelope, and get it to the post office. The firm hopes that people who do not care much about the price will not bother to go through the process. People with less elastic demand will end up paying the regular price and those with more elastic demand will pay the lower discount price 2. airlines: hurdles- book 2 weeks in advance and stay over a Saturday night. The hurdle works somewhat like a tax. The imposition of a hurdle places a perunit transaction cost T on those who choose to jump it. A buyer will not jump the hurdle if T> (P H P L ) A buyer will jump the hurdle if T< (P H P L ) With a perfect hurdle, none of the people who pay the discount price has a reservation price greater than or equal to the regular price. In other words, the buyers who jump the hurdle would not have purchased the product without the discount. The model is similar to first-degree price discrimination in that it tries to modify prices to the elasticities of the individual buyers. The model differs from first-degree price discrimination in that it cannot hope to capture the entire consumer surplus. 14

15 How efficient is a monopoly? The long-run equilibrium in a perfectly competitive industry maximum efficiency is achieved in that there are no possibilities for additional gains from exchange. The value to the buyers of the last unit of output = market value of the resources required to produce the last unit of output This does not hold true for a. A single price monopolist s equilibrium outcome results in a loss of consumer surplus. The cost to society is called the deadweight loss from monopoly. In the case of a perfectly discriminating monopolist, the results are the same as for a perfectly competitive industry, except that the benefit is producer surplus in place of consumer surplus. Public Policy toward natural monopoly To compare a monopoly to a perfectly competitive ideal is not so practical, but to compare it to real world market models is both practical and relevant. Consider a natural monopoly, a firm with an ATC curve that declines over a large quantity of output, which corresponds to the entire market demand. 15

16 Two objections to a single-price monopolist s output and price decision: 1. fairness: 2. efficiency: The efficient level of production: P = MC. Is there a problem with the efficient level of production? Alternative solutions: 1. State ownership and management Government would charge the efficient price, P = MC and absorb economic losses out of general tax revenues. Government enterprises are currently operated by all three levels of government: federal, provincial and local. Some are run as departments of the government, some as government-owned Crown corporations, and some as public-private collaborative enterprises. For instance, Canada Post is a crown corporation and a legislated monopoly with first-class mail delivery that may in part be justified by natural monopoly considerations. As well, it competes directly with private courier companies in providing express delivery services. 2. State regulation and private monopolies This option involves leaves firm ownership in private hands while providing regulations and guidelines that limit the power to price and restrict output. Rate-of-return regulation in Canada is a common form of government price regulation. Under this regulation, prices are set allowing the firm to earn a predetermined rate of return on invested capital. The rate of return is typically set according to the opportunity cost of its capital, i.e. a competitive rate of return on investment. Deciding on this rate can be difficult. Two disadvantages of rate-of-return regulation: 16

17 1. The : (purchasing more capital equipment than is necessary; there is an incentive to purchase the gold-plated rather than the regular water cooler. 2 : in the case where the monopoly serves more than one market, it charges below-cost prices in the more elastic market and cross-subsidizes the loss with above-cost prices in the less elastic market. The rationale behind cross-subsidization is that the below-cost price in the elastic market increases sales by more than the above-cost price in the less elastic market. The resulting increase in output increases the firm s capital requirements and increases the profits allowed by regulation. Despite some of the difficulties, governments all over the world regulate the price and output decisions of natural monopolies. 3. The government would specify in detail the service it wanted to provide and then call for private firms to submit bids to supply the service. The low bidder would then get the contract. The contract must specify the details of the service (i.e. postal delivery, garbage collection, etc.) to be provided in extraordinary detail. 4. Vigorous enforcement of This method involves controlling monopoly power through competition policy. The Competition Act deals with a broad range of issues which include anticompetitive activities. Provisions cover misleading advertising and predatory pricing (selling products below cost in an attempt to drive out a rival firm). The Act prohibits collusion between firms in price-setting, bidding for tenders, or partitioning the market. The Act requires government approval of any mergers which would significantly increase the degree of concentration in an industry. 5. Let the monopolist choose its own price and level of output. 17

18 What about fairness and efficiency? In some cases, the seriousness of these problems is reduced. Efficiency: For instance, the more finely the monopolist partitions the market under the hurdle model, the smaller the efficiency loss will be. When natural monopolies use hurdle pricing to expand their markets, the efficiency problem is reduced. Fairness: Hurdle pricing also can result in a reduced fairness problem. However, not all monopolies use hurdle pricing. Sum: None of the five options offers a perfect solution. All of the solutions are used in some form. 18

Econ 2113: Principles of Microeconomics. Spring 2009 ECU

Econ 2113: Principles of Microeconomics. Spring 2009 ECU Econ 2113: Principles of Microeconomics Spring 2009 ECU Chapter 12 Monopoly Market Power Market power is the ability to influence the market, and in particular the market price, by influencing the total

More information

Monopoly CHAPTER. Goals. Outcomes

Monopoly CHAPTER. Goals. Outcomes CHAPTER 15 Monopoly Goals in this chapter you will Learn why some markets have only one seller Analyze how a monopoly determines the quantity to produce and the price to charge See how the monopoly s decisions

More information

Monopoly. Cost. Average total cost. Quantity of Output

Monopoly. Cost. Average total cost. Quantity of Output While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The

More information

Lecture 12. Monopoly

Lecture 12. Monopoly Lecture 12 Monopoly By the end of this lecture, you should understand: why some markets have only one seller how a monopoly determines the quantity to produce and the price to charge how the monopoly s

More information

Monopoly, Oligopoly, and Monopolistic Competition Chapter 8 McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Monopoly, Oligopoly, and Monopolistic Competition Chapter 8 McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Monopoly, Oligopoly, and Monopolistic Competition Chapter 8 McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives 1. Distinguish among three types

More information

Monopoly. 3 Microeconomics LESSON 5. Introduction and Description. Time Required. Materials

Monopoly. 3 Microeconomics LESSON 5. Introduction and Description. Time Required. Materials LESSON 5 Monopoly Introduction and Description Lesson 5 extends the theory of the firm to the model of a Students will see that the profit-maximization rules for the monopoly are the same as they were

More information

Chapter 10: Monopoly

Chapter 10: Monopoly Chapter 10: Monopoly Answers to Study Exercise Question 1 a) horizontal; downward sloping b) marginal revenue; marginal cost; equals; is greater than c) greater than d) less than Question 2 a) Total revenue

More information

Monopoly. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University

Monopoly. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 15 Monopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Market power Why Monopolies Arise Alters the relationship between a firm s costs and the selling price Monopoly

More information

Firms in competitive markets: Perfect Competition and Monopoly

Firms in competitive markets: Perfect Competition and Monopoly Lesson 6 Firms in competitive markets: Perfect Competition and Monopoly Henan University of Technology Sino-British College Transfer Abroad Undergraduate Programme 0 In this lesson, look for the answers

More information

CH 14. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

CH 14. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question. Class: Date: CH 14 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. We define a monopoly as a market with a. one supplier and no barriers to entry. b. one

More information

Monopoly. Basic Economics Chapter 15. Why Monopolies Arise. Monopoly

Monopoly. Basic Economics Chapter 15. Why Monopolies Arise. Monopoly 1 Why Monopolies Arise Basic Economics Chapter 15 Monopoly Monopoly - The monopolist is a firm that is the sole seller of a product (or service) without close substitutes - The monopolist is a price maker

More information

Principles of. Economics. Week 6. Firm in Competitive & Monopoly market. 7 th April 2014

Principles of. Economics. Week 6. Firm in Competitive & Monopoly market. 7 th April 2014 Principles of Economics Week 6 Firm in Competitive & Monopoly market 7 th April 2014 In this week, look for the answers to these questions:!what is a perfectly competitive market?!what is marginal revenue?

More information

ECON 2100 Principles of Microeconomics (Summer 2016) Monopoly

ECON 2100 Principles of Microeconomics (Summer 2016) Monopoly ECON 21 Principles of Microeconomics (Summer 216) Monopoly Relevant readings from the textbook: Mankiw, Ch. 15 Monopoly Suggested problems from the textbook: Chapter 15 Questions for Review (Page 323):

More information

Unit 6 Perfect Competition and Monopoly - Practice Problems

Unit 6 Perfect Competition and Monopoly - Practice Problems Unit 6 Perfect Competition and Monopoly - Practice Problems Multiple Choice Identify the choice that best completes the statement or answers the question. 1. One characteristic of a perfectly competitive

More information

Monopoly. While a competitive firm is a price taker, a monopoly firm is a price maker.

Monopoly. While a competitive firm is a price taker, a monopoly firm is a price maker. Monopoly Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. Monopoly A firm is considered a monopoly if... it is the sole seller of its product. its product does not

More information

Monopoly. Chapter 15

Monopoly. Chapter 15 Monopoly Chapter 15 Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker. Monopoly u A firm is considered a monopoly if... it is the sole seller of its product. its product

More information

Chapter 10 Lecture Notes

Chapter 10 Lecture Notes Chapter 10 Lecture Notes I. Pure Monopoly: An Introduction A. Definition: Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. B. There are

More information

Other examples of monopoly include Australia Post.

Other examples of monopoly include Australia Post. In this session we will look at monopolies, where there is only one firm in the market with no close substitutes. For example, Microsoft first designed the operating system Windows. As a result of this

More information

Market structures. Why Monopolies Arise. Why Monopolies Arise. Market power. Monopoly. Monopoly resources

Market structures. Why Monopolies Arise. Why Monopolies Arise. Market power. Monopoly. Monopoly resources Market structures Why Monopolies Arise Market power Alters the relationship between a firm s costs and the selling price Charges a price that exceeds marginal cost A high price reduces the quantity purchased

More information

CHAPTER NINE MONOPOLY

CHAPTER NINE MONOPOLY CHAPTER NINE MONOPOLY This chapter examines how a market controlled by a single producer behaves. What price will a monopolist charge for his output? How much will he produce? The basic characteristics

More information

Introduction. Learning Objectives. Learning Objectives. Economics Today Twelfth Edition. Chapter 24 Monopoly

Introduction. Learning Objectives. Learning Objectives. Economics Today Twelfth Edition. Chapter 24 Monopoly Roger LeRoy Miller Economics Today Twelfth Edition Chapter 24 Monopoly Introduction The cement market in Mexico is dominated by a single company that accounts for more than 70 percent of all sales. Why

More information

Chapter 10 Pure Monopoly

Chapter 10 Pure Monopoly Chapter 10 Pure Monopoly Multiple Choice Questions 1. Pure monopoly means: A. any market in which the demand curve to the firm is downsloping. B. a standardized product being produced by many firms. C.

More information

MONOPOLY SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes

MONOPOLY SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1 MONOPOLY SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1. A market might have a monopoly because: (1) a key resource is owned by a single firm; (2) the government gives a single firm the exclusive right

More information

Pure Monopoly. The antithesis of Pure Competition!

Pure Monopoly. The antithesis of Pure Competition! Pure Monopoly The antithesis of Pure Competition! Characteristics of the Pure Monopoly Single seller a sole producer No close substitutes unique product Price maker control over price Blocked entry strong

More information

Quiz #5 Week 04/12/2009 to 04/18/2009

Quiz #5 Week 04/12/2009 to 04/18/2009 Quiz #5 Week 04/12/2009 to 04/18/2009 You have 30 minutes to answer the following 17 multiple choice questions. Record your answers in the bubble sheet. Your grade in this quiz will count for 1% of your

More information

All but which of the following are true in the long-run for a competitive firm that maximizes profits?

All but which of the following are true in the long-run for a competitive firm that maximizes profits? Microeconomics, Module 11: Monopoly (Chapter 10) Illustrative Test Questions (The attached PDF file has better formatting.) Question 11.1: Profit Maximization: Monopoly Which of the following is true in

More information

Economics. Monopoly. N. Gregory Mankiw. Premium PowerPoint Slides by Vance Ginn & Ron Cronovich C H A P T E R P R I N C I P L E S O F

Economics. Monopoly. N. Gregory Mankiw. Premium PowerPoint Slides by Vance Ginn & Ron Cronovich C H A P T E R P R I N C I P L E S O F C H A P T E R Monopoly Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Vance Ginn & Ron Cronovich 2009 South-Western, a part of Cengage Learning, all rights reserved In

More information

Chapter 12. Monopoly. Chapter Outline. Key Ideas. Key Ideas. Introducing a New Market Structure. Evidence-Based Economics Example 11/25/2016

Chapter 12. Monopoly. Chapter Outline. Key Ideas. Key Ideas. Introducing a New Market Structure. Evidence-Based Economics Example 11/25/2016 Chapter 12 Modified by Chapter Outline 1. Introducing a New Market Structure 2. 3. 4. Choosing the Optimal Quantity and Price 5. The "Broken" Invisible Hand: The Cost of 6. 7. Government Policy toward

More information

Monopoly CHAPTER 15. Henry Demarest Lloyd. Monopoly is business at the end of its journey. Monopoly 15. McGraw-Hill/Irwin

Monopoly CHAPTER 15. Henry Demarest Lloyd. Monopoly is business at the end of its journey. Monopoly 15. McGraw-Hill/Irwin CHAPTER 15 Monopoly Monopoly is business at the end of its journey. Henry Demarest Lloyd McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. A Monopolistic Market A

More information

Monopoly and How It Arises

Monopoly and How It Arises Monopoly and How It Arises A monopoly is a market: That produces a good or service for which no close substitute exists In which there is one supplier that is protected from competition by a barrier preventing

More information

ECON 102 Wooten Final Exam Practice Exam Solutions

ECON 102 Wooten Final Exam Practice Exam Solutions www.liontutors.com ECON 102 Wooten Final Exam Practice Exam Solutions 1. A monopolist will increase price and decrease quantity to maximize profits when compared to perfect competition because a monopolist

More information

MICROECONOMICS - CLUTCH CH MONOPOLY.

MICROECONOMICS - CLUTCH CH MONOPOLY. !! www.clutchprep.com CONCEPT: CHARACTERISTICS OF MONOPOLY A market is a monopoly when: Nature of Good: The goods for sale are - No close substitutes Setting Price: The sellers are - Only in the market

More information

Monopoly. Econ 102: Introduction to Microeconomics

Monopoly. Econ 102: Introduction to Microeconomics Monopoly Econ 102: Introduction to Microeconomics 1 1.1 Goals of today s class Goals of today s class Learn how monopolies maintain market power. Learn how monopolies make production decisions. Learn how

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Micro - HW 4 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In central Florida during the spring, strawberry growers are price takers. The reason

More information

Eco201 Review questions for chapters Prof. Bill Even ====QUESTIONS FOR CHAPTER 13=============================

Eco201 Review questions for chapters Prof. Bill Even ====QUESTIONS FOR CHAPTER 13============================= Eco201 Review questions for chapters 13-15 Prof. Bill Even ====QUESTIONS FOR CHAPTER 13============================= 1) A monopoly has two key features, which are. A) barriers to entry and close substitutes

More information

ECON December 4, 2008 Exam 3

ECON December 4, 2008 Exam 3 Name Portion of ID# Multiple Choice: Identify the letter of the choice that best completes the statement or answers the question. 1. A fundamental source of monopoly market power arises from a. perfectly

More information

iv. The monopolist will receive economic profits as long as price is greater than the average total cost

iv. The monopolist will receive economic profits as long as price is greater than the average total cost Chapter 15: Monopoly (Lecture Outline) -------------------------------------------------------------------------------------------------------------------------- Monopolies have no close competitors and,

More information

At P = $120, Q = 1,000, and marginal revenue is ,000 = $100

At P = $120, Q = 1,000, and marginal revenue is ,000 = $100 Microeconomics, monopoly, final exam practice problems (The attached PDF file has better formatting.) *Question 1.1: Marginal Revenue Assume the demand curve is linear.! At P = $100, total revenue is $200,000.!

More information

Eco 300 Intermediate Micro

Eco 300 Intermediate Micro Eco 300 Intermediate Micro Instructor: Amalia Jerison Office Hours: T 12:00-1:00, Th 12:00-1:00, and by appointment BA 127A, aj4575@albany.edu A. Jerison (BA 127A) Eco 300 Spring 2010 1 / 61 Monopoly Market

More information

Principles of Economics. January 2018

Principles of Economics. January 2018 Principles of Economics January 2018 Monopoly Contents Market structures 14 Monopoly 15 Monopolistic competition 16 Oligopoly Principles of Economics January 2018 2 / 39 Monopoly Market power In a competitive

More information

ECON 115. Industrial Organization

ECON 115. Industrial Organization ECON 115 Industrial Organization 1. Linear (3rd Degree) Price Discrimination First Hour QUIZ Second Hour Introduction to Price Discrimination Third-degree price discrimination Two Rules Examples of price

More information

Micro Monopoly Essentials 1 WCC

Micro Monopoly Essentials 1 WCC Micro Monopoly Essentials 1 WCC As we've said before, perfect competition is the benchmark against which we will judge all other market structures. It is ideal in the sense that it achieves productive

More information

Perfect Competition CHAPTER14

Perfect Competition CHAPTER14 Perfect Competition CHAPTER14 MARKET TYPES The four market types are Perfect competition Monopoly Monopolistic competition Oligopoly MARKET TYPES Perfect Competition Perfect competition exists when Many

More information

Market structures Perfect competition

Market structures Perfect competition Market structures Perfect competition Market Structures Market structure refers to the number and size of buyers and sellers in the market for a good or service. A market can be defined as a group of firms

More information

FIRMS IN COMPETITIVE MARKETS

FIRMS IN COMPETITIVE MARKETS 14 FIRMS IN COMPETITIVE MARKETS WHAT S NEW IN THE FOURTH EDITION: The rules for profit maximization are written more clearly. LEARNING OBJECTIVES: By the end of this chapter, students should understand:

More information

FINALTERM EXAMINATION FALL 2006

FINALTERM EXAMINATION FALL 2006 FINALTERM EXAMINATION FALL 2006 QUESTION NO: 1 (MARKS: 1) - PLEASE CHOOSE ONE Compared to the equilibrium price and quantity sold in a competitive market, a monopolist Will charge a price and sell a quantity.

More information

Monopoly. Firm s equilibrium. Muhammad Rafi Khan

Monopoly. Firm s equilibrium. Muhammad Rafi Khan 1 Monopoly It is a type of market structure where there is only one producer and many buyers. The monopolist produces an industry s entire output. In contrast to perfectly competitive firms, which are

More information

- pure monopoly: only one seller of a good/service with no close substitutes

- pure monopoly: only one seller of a good/service with no close substitutes Micro 101, Chapter 10 1 Chapter 10: Monopoly Main objectives: 1. Define what constitutes a monopoly - pure monopoly: only one seller of a good/service with no close substitutes 2. Describe types of barriers

More information

S11Microeconomics, Exam 3 Answer Key. Instruction:

S11Microeconomics, Exam 3 Answer Key. Instruction: S11Microeconomics, Exam 3 Answer Key Instruction: Exam 3 Student Name: Microeconomics, several versions Early May, 2011 Instructions: I) On your Scantron card you must print three things: 1) Full name

More information

MICROECONOMIC FOUNDATIONS OF COST-BENEFIT ANALYSIS. Townley, Chapter 4

MICROECONOMIC FOUNDATIONS OF COST-BENEFIT ANALYSIS. Townley, Chapter 4 MICROECONOMIC FOUNDATIONS OF COST-BENEFIT ANALYSIS Townley, Chapter 4 Review of Basic Microeconomics Slides cover the following topics from textbook: Input markets. Decision making on the margin. Pricing

More information

Coffee is produced at a constant marginal cost of $1.00 a pound. Due to a shortage of cocoa beans, the marginal cost rises to $2.00 a pound.

Coffee is produced at a constant marginal cost of $1.00 a pound. Due to a shortage of cocoa beans, the marginal cost rises to $2.00 a pound. Microeconomics, Module 11: Monopoly (Chapter 10) Illustrative Test Questions (The attached PDF file has better formatting.) Updated: June 27, 2005 Question 11.1: Monopoly All but which of the following

More information

AP Microeconomics Chapter 11 Outline

AP Microeconomics Chapter 11 Outline I. Learning Objectives In this chapter students should learn: A. The characteristics of pure monopoly. B. How a pure monopoly sets its profit-maximizing output and price. C. The economic effects of monopoly.

More information

ECON 202 2/13/2009. Pure Monopoly Characteristics. Chapter 22 Pure Monopoly

ECON 202 2/13/2009. Pure Monopoly Characteristics. Chapter 22 Pure Monopoly ECON 202 Chapter 22 Pure Monopoly Pure Monopoly Exists when a single firm is the sole producer of a product for which there are no close substitutes. There are a number of products where the producers

More information

ECON 2100 (Summer 2016 Sections 10 & 11) Exam #3C

ECON 2100 (Summer 2016 Sections 10 & 11) Exam #3C ECON 21 (Summer 216 Sections 1 & 11) Exam #3C Multiple Choice Questions: (3 points each) 1. I am taking of the exam. C. Version C 2. is a market structure in which there is one single seller of a unique

More information

ECON 2100 (Summer 2016 Sections 10 & 11) Exam #3D

ECON 2100 (Summer 2016 Sections 10 & 11) Exam #3D ECON 21 (Summer 216 Sections 1 & 11) Exam #3D Multiple Choice Questions: (3 points each) 1. I am taking of the exam. D. Version D 2. is a market structure in which there is one single seller of a unique

More information

Unit 4: Imperfect Competition

Unit 4: Imperfect Competition Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique

More information

Principles of Microeconomics Module 5.1. Understanding Profit

Principles of Microeconomics Module 5.1. Understanding Profit Principles of Microeconomics Module 5.1 Understanding Profit 180 Production Choices of Firms All firms have one goal in mind: MAX PROFITS PROFITS = TOTAL REVENUE TOTAL COST Two ways to reach this goal:

More information

NAME: INTERMEDIATE MICROECONOMIC THEORY FALL 2006 ECONOMICS 300/012 Final Exam December 8, 2006

NAME: INTERMEDIATE MICROECONOMIC THEORY FALL 2006 ECONOMICS 300/012 Final Exam December 8, 2006 NAME: INTERMEDIATE MICROECONOMIC THEORY FALL 2006 ECONOMICS 300/012 Section I: Multiple Choice (4 points each) Identify the choice that best completes the statement or answers the question. 1. The slope

More information

CH 13. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

CH 13. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question. Class: Date: CH 13 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. One requirement for an industry to be perfectly competitive is that a. sellers and buyers

More information

Market Power at Work: Computer Market Revisited

Market Power at Work: Computer Market Revisited Monopolies Part II Competition is always a good thing. It forces us to do our best. A monopoly renders people complacent and satisfied with mediocrity. Nancy Pearcey Market Power at Work: Computer Market

More information

VIII 1 TOPIC VIII: MONOPOLY AND OTHER INDUSTRY STRUCTURES. I. Monopoly - Single Firm With No Threat of Close Competition. Other Industry Structures

VIII 1 TOPIC VIII: MONOPOLY AND OTHER INDUSTRY STRUCTURES. I. Monopoly - Single Firm With No Threat of Close Competition. Other Industry Structures TOPIC VIII: MONOPOLY AND OTHER INDUSTRY STRUCTURES I. Monopoly - Single Firm With No Threat of Close Competition II. Other Industry Structures CONCEPTS AND PRINCIPLES MONOPOLY We now consider the opposite

More information

Price discrimination by a monopolist

Price discrimination by a monopolist Review Imperfect Competition: Monopoly Reasons for monopolies Monopolies problem: Choses quantity such that marginal costs equal to marginal revenue The social deadweight loss of a monopoly Price discrimination

More information

CH 15: Monopoly. Lecture

CH 15: Monopoly. Lecture CH 15: Monopoly Lecture Characteristics of Monopolies A monopoly is a market structure in which one firm makes up the entire market Firm=Industry Characteristics of Monopolies The monopolist is a price

More information

Jacob: W hat if Framer Jacob has 10% percent of the U.S. wheat production? Is he still a competitive producer?

Jacob: W hat if Framer Jacob has 10% percent of the U.S. wheat production? Is he still a competitive producer? Microeconomics, Module 7: Competition in the Short Run (Chapter 7) Additional Illustrative Test Questions (The attached PDF file has better formatting.) Updated: June 9, 2005 Question 7.1: Pricing in a

More information

CH 14: Perfect Competition

CH 14: Perfect Competition CH 14: Perfect Competition Characteristics of Perfect Competition 1. Both buyers and sellers are price takers A price taker is a firm (or individual) who takes the price determined by market supply and

More information

short run long run short run consumer surplus producer surplus marginal revenue

short run long run short run consumer surplus producer surplus marginal revenue Test 3 Econ 3144 Name Fall 2005 Dr. Rupp 20 Multiple Choice Questions (50 points) & 4 Discussion (50 points) Signature I have neither given nor received aid on this exam Use this table to answer questions

More information

c) Will the monopolist described in (b) earn positive, negative, or zero economic profits? Explain your answer.

c) Will the monopolist described in (b) earn positive, negative, or zero economic profits? Explain your answer. Economics 101 Summer 2015 Answers to Homework #4b Due Tuesday June 16, 2015 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on

More information

MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition

MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter 17 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates

More information

REDEEMER S UNIVERSITY

REDEEMER S UNIVERSITY REDEEMER S UNIVERSITY Km 46/48 Lagos Ibadan Expressway, Redemption City, Ogun State COLLEGE OF MANAGEMENT SCIENCE DEPARTMENT OF ECONOMICS AND BUSINESS STUDIES COURSE CODE /TITLE ECO 202/Microeconomics

More information

23 Perfect Competition

23 Perfect Competition 23 Perfect Competition Learning Objectives After you have studied this chapter, you should be able to 1. define price taker, total revenues, marginal revenue, short-run shutdown price, short-run breakeven

More information

Practice Exam 3: S201 Walker Fall 2009

Practice Exam 3: S201 Walker Fall 2009 Practice Exam 3: S201 Walker Fall 2009 I. Multiple Choice (3 points each) 1. Which of the following statements about the short-run is false? A. The marginal product of labor may increase or decrease. B.

More information

CHAPTER 16 MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition

CHAPTER 16 MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition CHAPTER 16 MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter Summary This chapter presents the traditional, idealized model of perfect competition. In it, you will

More information

Monopoly. Business Economics

Monopoly. Business Economics Business Economics Monopoly Managerial Decisions for Firms with Market ower Monopoly Thomas & Maurice, Chapter 12 Herbert Stocker herbert.stocker@uibk.ac.at Institute of International Studies University

More information

2007 Thomson South-Western

2007 Thomson South-Western Monopolistic Competition Characteristics: Many sellers Product differentiation Free entry and exit In the long run, profits are driven to zero Firms have some control over price What does the costs graph

More information

Ch. 9 LECTURE NOTES 9-1

Ch. 9 LECTURE NOTES 9-1 Ch. 9 LECTURE NOTES I. Four market models will be addressed in Chapters 9-11; characteristics of the models are summarized in Table 9.1. A. Pure competition entails a large number of firms, standardized

More information

Perfect competition: occurs when none of the individual market participants (ie buyers or sellers) can influence the price of the product.

Perfect competition: occurs when none of the individual market participants (ie buyers or sellers) can influence the price of the product. Perfect Competition In this section of work and the next one we derive the equilibrium positions of firms in order to determine whether or not it is profitable for a firm to produce and, if so, what quantities

More information

Lecture 11. Firms in competitive markets

Lecture 11. Firms in competitive markets Lecture 11 Firms in competitive markets By the end of this lecture, you should understand: what characteristics make a market competitive how competitive firms decide how much output to produce how competitive

More information

Principles of Microeconomics ECONOMICS 103. Topic 8: Imperfect Competition. Single price monopoly. Monopolistic competition.

Principles of Microeconomics ECONOMICS 103. Topic 8: Imperfect Competition. Single price monopoly. Monopolistic competition. ECONOMICS 103 Topic 8: Imperfect Competition Single price monopoly. Monopolistic competition. 1 COMPETITIVE MARKETS V MONOPOLY Thus far, all firms have been price takers. - Markets are characterized by

More information

AP Microeconomics Chapter 10 Outline

AP Microeconomics Chapter 10 Outline I. Learning Objectives In this chapter students should learn: A. How the long run differs from the short run in pure competition. B. Why profits encourage entry into a purely competitive industry and losses

More information

CHAPTER 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

CHAPTER 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets CHAPTER 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets CHAPTER OUTLINE Perfect competition Demand at the market and firm levels Short-run output decisions Long-run decisions

More information

THE UNIVERSITY OF WESTERN ONTARIO. E. Rivers ECONOMICS 1021B-001 March 18, 2012 MIDTERM #2. 2. Check that your examination contains 50 questions.

THE UNIVERSITY OF WESTERN ONTARIO. E. Rivers ECONOMICS 1021B-001 March 18, 2012 MIDTERM #2. 2. Check that your examination contains 50 questions. NAME THE UNIVERSITY OF WESTERN ONTARIO LONDON CANADA E. Rivers ECONOMICS 1021B-001 March 18, 2012 MIDTERM #2 INSTRUCTIONS: 1. You will have 2 hours to complete the exam. 2. Check that your examination

More information

Chapter 7: Market Structures Section 2

Chapter 7: Market Structures Section 2 Chapter 7: Market Structures Section 2 Objectives 1. Describe characteristics and give examples of a monopoly. 2. Describe how monopolies, including government monopolies, are formed. 3. Explain how a

More information

Chapter 7: Market Structures Section 2

Chapter 7: Market Structures Section 2 Chapter 7: Market Structures Section 2 Objectives 1. Describe characteristics and give examples of a monopoly. 2. Describe how monopolies, including government monopolies, are formed. 3. Explain how a

More information

Joven Liew Jia Wen Industrial Economics I Notes. What is competition?

Joven Liew Jia Wen Industrial Economics I Notes. What is competition? Industrial Economics I Notes What is competition? Competition in markets is generally considered a good thing (welfare economics) Competition authorities look at whether change in market structure or firm

More information

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1 1) A monopoly is an industry with A) a single firm in which the entry of new firms is blocked. B) a small number of firms each large enough to impact the market price of its output. C) many firms each

More information

Practice Exam 3: S201 Walker Fall 2004

Practice Exam 3: S201 Walker Fall 2004 Practice Exam 3: S201 Walker Fall 2004 I. Multiple Choice (3 points each) 1. Which of the following statements about the short-run is false? A. The marginal product of labor may increase or decrease. B.

More information

Chapter 13. Microeconomics. Monopolistic Competition: The Competitive Model in a More Realistic Setting

Chapter 13. Microeconomics. Monopolistic Competition: The Competitive Model in a More Realistic Setting Microeconomics Modified by: Yun Wang Florida International University Spring, 2018 1 Chapter 13 Monopolistic Competition: The Competitive Model in a More Realistic Setting Chapter Outline 13.1 Demand and

More information

AP Microeconomics Review Session #3 Key Terms & Concepts

AP Microeconomics Review Session #3 Key Terms & Concepts The Firm, Profit, and the Costs of Production 1. Explicit vs. implicit costs 2. Short-run vs. long-run decisions 3. Fixed inputs vs. variable inputs 4. Short-run production measures: be able to calculate/graph

More information

INTRODUCTION ECONOMIC PROFITS

INTRODUCTION ECONOMIC PROFITS INTRODUCTION This chapter addresses the following key questions: What are profits? What are the unique characteristics of competitive firms? How much output will a competitive firm produce? Chapter 7 THE

More information

Perfect Competition Chapter 7 Section 1

Perfect Competition Chapter 7 Section 1 Perfect Competition Chapter 7 Section 1 Four Conditions of Perfect Perfect competition is a market structure in which a large number of firms all produce the same product. Many buyers and sellers Identical

More information

Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Unit 7. Firm behaviour and market structure: monopoly Quiz 1. What of the following can be considered as the measure of a market power? A. ; B. ; C.. Answers A and B are both correct; E. All of the above

More information

Lecture Two SHORT-RUN AND LONG-RUN PRICING-OUTPUT DECISION IN A MONOPOLY MARKET

Lecture Two SHORT-RUN AND LONG-RUN PRICING-OUTPUT DECISION IN A MONOPOLY MARKET EDO UNIVERSITY IYAMHO COURSE CODE: ECO 311 COURSE TITLE: Intermediate Microeconomics NUMBER OF UNITS: Three COURSE LECTURER: Dr. (Mrs.) Evelyn Ogbeide-Osaretin Lecture Two SHORT-RUN AND LONG-RUN RICING-OUTUT

More information

Unit 4: Imperfect Competition

Unit 4: Imperfect Competition Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique

More information

ECON 2100 (Summer 2012 Sections 07 and 08) Exam #3A

ECON 2100 (Summer 2012 Sections 07 and 08) Exam #3A ECON 21 (Summer 212 Sections 7 and 8) Exam #3A Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. Excess Capacity refers to the A. quantity of output at which Average

More information

a. Sells a product differentiated from that of its competitors d. produces at the minimum of average total cost in the long run

a. Sells a product differentiated from that of its competitors d. produces at the minimum of average total cost in the long run I. From Seminar Slides: 3, 4, 5, 6. 3. For each of the following characteristics, say whether it describes a perfectly competitive firm (PC), a monopolistically competitive firm (MC), both, or neither.

More information

Market Structure & Imperfect Competition

Market Structure & Imperfect Competition In the Name of God Sharif University of Technology Graduate School of Management and Economics Microeconomics (for MBA students) 44111 (1393-94 1 st term) - Group 2 Dr. S. Farshad Fatemi Market Structure

More information

Microeconomics. Use the Following Graph to Answer Question 3

Microeconomics. Use the Following Graph to Answer Question 3 More Tutorial at www.dumblittledoctor.com Microeconomics 1. To an economist, a good is scarce when: *a. the amount of the good available is less than the amount that people want when the good's price equals

More information

Ecn Intermediate Microeconomic Theory University of California - Davis June 11, 2009 Instructor: John Parman. Final Exam

Ecn Intermediate Microeconomic Theory University of California - Davis June 11, 2009 Instructor: John Parman. Final Exam Ecn 100 - Intermediate Microeconomic Theory University of California - Davis June 11, 2009 Instructor: John Parman Final Exam You have until 8pm to complete the exam, be certain to use your time wisely.

More information

Unit 13 AP Economics - Practice

Unit 13 AP Economics - Practice DO NOT WRITE ON THIS TEST! Unit 13 AP Economics - Practice Multiple Choice Identify the choice that best completes the statement or answers the question. 1. A natural monopoly exists whenever a single

More information

Monopolistic Competition

Monopolistic Competition Monopolistic Competition CHAPTER16 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Describe and identify monopolistic competition. 2 Explain how

More information