# ECON 2100 Principles of Microeconomics (Summer 2016) Monopoly

Size: px
Start display at page:

Download "ECON 2100 Principles of Microeconomics (Summer 2016) Monopoly"

Transcription

1 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): 1, 3, 4, 5, and 6 Chapter 15 Quick Check Multiple Choice (Page 324): 2, 3, 4, and 5 Chapter 15 Problems and Applications (Pages ): 1, 5, 6, 8, 9, and 1 Definitions and Concepts: Monopoly a market structure in which there is one single seller of a unique good (with no close substitutes ) and in which there are barriers to entry which prevent rival firms from entering the market curve that a monopolist faces is the market demand curve for the good. Downward sloping nature of demand curve implies i. a monopolist can increase price without demanded dropping to zero ii. a monopolist must decrease price in order to increase demanded Market Power a firm has market power if: (i) it can increase the price of its product without losing all customers, or equivalently (ii) it must decrease the price of its product in order to sell additional units. Market Power control over price Firms in perfectly competitive markets have no market power [ horizontal demand curve ] Firms in imperfectly competitive markets (i.e., all other market structures) have at least some market power [ downward sloping demand curve ] P( Q) ( P) Q P From MR P Q, we see why Q Q 1. For a firm with market power, MR P (since P in order to bring about Q ) [Marginal Revenue is less than Price] 2. For a firm in a perfectly competitive market, MR P (since Q possible even with P ) Inverse Elasticity Pricing Rule to maximize profit, a firm must be operating where the markup of price above marginal costs as a percentage of price is equal to minus the inverse of price elasticity of demand.

2 Barriers to Entry factors which make it either impossible or very costly for new firms to enter a market and compete with existing firms Common Barriers to Entry: 1. Exclusive Ownership of an essential input. If a firm has exclusive ownership or access to an input which is needed to produce a good, then as a result they will be the only producer of the good. In practice, monopolies rarely arise because of exclusive ownership of an essential input 2. Cost Structure as a barrier to entry. If there are economies of scale, then average costs decrease as of output is increased. Thus, total production costs are lowest when all production takes place within one firm. It may be that one single firm is able to produce a good and earn substantial positive profits, but a second firm could not profitably enter the market (since, with two firms in the market, average total costs for each firm would be substantially higher) Natural Monopoly a monopoly which arises because one single firm can produce a good at lower total cost than could two or more firms 3. Government Created Monopolies. Governments may (for various reasons) erect legal barriers to entry, thereby establishing a particular seller as a monopolist in a market Government may have exclusive ownership of an essential input and must decide who has access to the input. To encourage research and development and creative activity, government awards/grants patents and copyrights. o Patent legal protection which grants the patent holder the exclusive right to create a particular product or use a particular production technique o A patent establishes a successful innovator as a monopolist for a specified period of time. Allows innovator to earn a monopoly profit for a fixed period of time, in order to encourage innovation (i.e., as a reward for successful innovation ) Realize cost savings for society resulting from economies of scale o If an industry is characterized by significant economies of scale, then the Government might establish one particular supplier as a monopolist (in order to avoid wasteful duplication of costs ) and then closely regulate the behavior of the monopolist (in order to minimize the resulting Deadweight Loss) Price Discrimination the practice of charging a different price for different units sold of an essentially identical good (with the difference in price not being a result of differences in cost of production)

3 First Degree Price Discrimination or Perfect Price Discrimination a practice in which a firm charges every consumer an amount exactly equal to buyer s reservation price for every unit sold Requires firm to know the exact value of reservation price of every consumer for every unit => assumptions are so extreme that it can never be used in practice Second Degree Price Discrimination or Menu Pricing a practice in which a firm presents all consumers with different pricing menus and allows each consumer to choose the menu which they prefer Firm simply needs to know that there are fundamental differences across consumers, but need not be able to identify the particular type of any specific consumer Examples: cell phone pricing packages, first class versus coach air travel, premium cable versus basic cable. Third Degree Price Discrimination or Segmented Pricing a practice under which a firm separates consumers into different market segments, and then charges each different segment of consumers a different constant per unit price for each unit purchased Must be able to easily separate the consumers into different markets (and effectively prevent resale across segments), and have reason to suspect that the optimal constant per unit price differs across the two market segments Examples: student discounts, senior discounts, different prices for DVDs and pharmaceuticals across different countries

4 Marginal Revenue for a linear demand function: Consider a market in which demand is characterized by the linear inverse demand function P D ( Q) a bq. Our general expression for Marginal Revenue is P MR Q P (" slope" ) Q P Q For P D ( Q) a bq, " slope" b Thus, MR ( b) Q PD ( Q) bq a bq a 2bQ Comparing P D ( Q) a bq and MR a 2bQ, the latter function has the same vertical intercept but is twice as steep a Marginal Revenue (1/2)a (1/2)(a/b) (a/b)

5 Profit Maximization for firm with Market Power: To maximize profit, the firm should: 1. Produce every unit of output for which MR>MC 2. Don t produce any units for which MR<MC Q* Set price equal to the amount which will make consumers exactly willing and able to purchase Q* => rely upon the vertical interpretation of demand in order to determine the profit maximizing price P* Q*

6 Profit of firm with market power: P* ATC(q) ATC(Q*) Q* (Profit) = (Total Revenues) (Total Costs) = [P*][Q*] [Q*][ATC(Q*)] = [Q*][P* ATC(Q*)] = ( light green area above ) So, this monopolist is able to earn a positive profit, and will therefore not want to shut down. But, is this always be the case? Shutting down only ever makes sense if it is never possible for the firm to cover their variable costs of production. That is, produce a positive so long as for some the firm has: (Total Revenue) > (Variable Costs) (P)(Q) > [Q][AVC(Q)] P > AVC (Q) But, (P) is simply the height of the demand curve So, the firm will produce a positive in the short run so long as AVC(Q) dips below the demand curve at some level of Q Similarly, the firm is able to earn a positive profit so long as they are able to generate revenues which cover total costs at some level of output. This is true so long as: (Total Revenue) > (Total Costs) (P)(Q) > [Q][ATC(Q)] P > ATC (Q) But, (P) is simply the height of the demand curve So, the firm will be able to earn a positive profit so long as ATC(Q) dips below the demand curve at some level of Q

7 Alternative Interpretation of Profit Max Condition At this point we have noted that the firm will maximize profit by choosing the for which: MR=MC However, we previously specified MR in terms of price elasticity as: 1 MR P1 p Thus, the condition for profit maximization becomes: 1 1 P1 MC P P MC p p 1 P MC P MC P 1 p P p In this final form, this rule for profit maximization is called the Inverse Elasticity Pricing Rule (IEPR) Inverse Elasticity Pricing Rule to maximize profit, a firm must be operating where the markup of price above marginal costs as a percentage of price is equal to minus the inverse of price elasticity of demand. Surplus and Efficiency (when firm with market power maximizes profit): Efficiency: One any one particular unit (buyer s reservation price) = (height of demand) (seller s reservation price) = (height of MC) For efficiency, we should trade all units for which () > (MC) => (DWL) > at Q* => Firm with market power produces less than the efficient P* CS PS DWL Q* Q E

8 First Degree or Perfect Price Discrimination: Again, the knowledge required by the seller to actually engage in such behavior can almost never be known => no good real world examples of 1 st Degree P.D. However, it is still insightful to figure out what a firm would do if they were able to engage in such pricing If (at each along the demand curve) the firm charges each consumer an amount exactly equal to reservation price, then Marginal Revenue is simply equal to height of demand = MR Q FDPD Firm would sell (Q FDPD ) units => extract the entire area below the demand curve, up to the sold as Revenue => (Revenue)=( blue + yellow ) ( yellow ) = (Variable Costs) => (PS) = ( blue ) Note that (CS) = () => Consumers are worse off (compared to traditional monopoly ) (DWL) = () => Social Surplus is larger (compared to traditional monopoly ) So, P.D. can clearly increase both PS and Social Welfare

9 Example of Segmented Pricing leading to increase in CS : Segment A has demand given by the linear inverse function P A D ( q) 1 q Segment B has demand given by the linear inverse function P B D ( q) 2 q Firm has constant marginal costs of MC 4 If these two segments were treated as one single market (i.e., if a common price was set across the two markets), then Profit maximized by setting price of 52, selling 48 units in Segment A and completely ignoring Segment B Segment A : (CS) and (PS) both positive Segment B : (CS) and (PS) both zero If the firm is allowed to engage in Segmented Pricing : set price of 52 in Segment A => sell 48 units in Segment A set price of 12 in Segment B => sell 8 units in Segment B Outcome in Segment A is identical to what is was before But now, in Segment B : (CS) and (PS) are both positive instead of zero Thus, when the firm is able to practice Segment Pricing (as opposed to restricting the firm to charging a common price across both segments) in this example: Producer s Surplus is larger Total Consumers Surplus is larger Therefore, Total Social Surplus is larger (DWL is smaller) Nobody is worse off and some people are strictly better off

10 Problem: 1. Consider a firm operating in a market in which, Marginal Costs, and Average Variable Costs are as illustrated below. Note that demand is a linear function. Also illustrated is the resulting Marginal Cost curve, if the firm was to charge all consumers the same per unit price for every unit of output purchased A. If this firm charged a common price for every unit of output sold, how many units would they choose to sell and what price would they charge? 1B. If this firm was able to practice Perfect Price Discrimination, how many units would they sell? How much Total Revenue would they generate? For what values of Fixed Costs would they be able to earn a positive profit? Multiple Choice Questions: 1,6 2, 2,5 2,2 AVC(q) 4, 1. Edna sells bathing suits. She offers customers a 15% discount if they show her a valid student I.D. at the time of purchase. This behavior by Edna is an example of A. a monopolist erecting a substantial entry barrier. B. First Degree Price Discrimination (or Perfect Price Discrimination). C. Third Degree Price Discrimination (or Segmented Pricing). D. a firm choosing to produce a positive of output in the short run, even though they are unable to earn a positive profit. 2. is a market structure in which there is one single seller of a unique good (with no close substitutes ) and in which there are barriers to entry which prevent rival firms from entering the market A. Perfect Competition B. Monopoly C. Oligopoly D. Monopolistic Competition

11 3. Carl sells turnips in a small, rural town in South Dakota. Since he is the only turnip seller in town, he has some market power. He is currently charging 1.25 for each five pound bag of turnips, a price at which he sells 4 bags per month. If he were to increase his sold to 5 bags per month A. he would be able to increase the price he charges. B. he would not have to change is price whatsoever. C. he would have to decrease the price he charges. D. he would have to be able to avoid all Fixed Costs of production. 4. According to the Inverse Elasticity Pricing Rule, when maximizing profit a firm must be operating in a way such that 1 is equal to p A. P. B. P MC. C. P. MC D. P MC. P 5. is a legal protection which grants the holder the exclusive right to create a particular product or use a particular production technique. A. A Natural Monopoly B. A Menu Price C. A Patent D. An Inverse Elasticity Pricing Rule 6. In general, a monopolist will A. set the price of their product equal to the value of the highest reservation price that any buyer has for their product. B. produce/sell every unit of output for which Marginal Costs are positive. C. produce/sell the level of output which makes Average Fixed Costs as small as possible. D. produce/sell the level of output which equates Marginal Revenue to Marginal Costs. 7. For a firm with market power, while for a firm in a perfectly competitive market. A. Marginal Revenue is less than Price; Marginal Revenue is greater than Price. B. Marginal Revenue is less than Price; Marginal Revenue is equal to Price. C. Marginal Revenue is equal to Price; Marginal Revenue is less than Price. D. Marginal Revenue is less than Price; Marginal Revenue is also less than Price.

12 For questions 8 through 11, consider a monopolist operating in the market illustrated below. Suppose throughout that the monopolist is restricted to charging a common price for every unit of output sold AVC(q) , 1,2 8. In order to maximize profit this monopolist should A. sell 1, units of output. B. charge a price of 1 per unit. C. charge a price of 6 per unit. D. None of the above answers are correct. 9. The efficient level of trade in this market is A. units. B. 4 units. C. 6 units. D. 1,2 units. 1. Assuming that the per unit price received by the monopolist is equal to the height of demand at the of output traded, Producer s Surplus would be negative if this monopolist were to produce A. 4 units of output. B. any level of output between 4 units and 6 units. C. exactly 1,2 units of output. D. more than 1,2 units of output. 11. The maximum profit of this monopolist would be exactly equal to if Fixed Costs were A. exactly equal to zero B. less than 1,6 C. exactly equal to 2, D. greater than 2,8

13 Answer to Problem: 1A. The firm would maximize profit by producing the at which is equal to. From inspection of the graph, this occurs at 1,6 units of output. The corresponding price which they would want to charge is obtained by determining the height of the demand curve at this desired. In section of the graph shows that this optimal price is 6. per unit. 1B. If the firm is able to practice Perfect Price Discrimination, then Marginal Revenue is in essence the Curve. The firm would therefore want to produce the at which intersects. From inspection of the graph, this is 2,2 units. The given curves reveal that AVC of producing 2,2 are 3.6. Thus, Variable Costs at this are 7,92. Since demand is a linear function, Total Revenue (which is the entire area below the demand curve in this situation) is: (4.5)(2,2)+(1/2)(5.5)(2,2) = (9,9)+(6,5) = 15,95. Thus, Producer s Surplus is 8,3. It follows that the firm could earn a positive profit if and only if Fixed Costs are less than 8,3. Answers to Multiple Choice Questions: 1. C 2. B 3. C 4. D 5. C 6. D 7. B 8. D 9. C 1. D 11. C

### 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

### ECON 2100 (Summer 2012 Sections 07 and 08) Exam #3C Answer Key

ECON 21 (Summer 212 Sections 7 and 8) Exam #3C Answer Key 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

More information

### ECON 2100 (Summer 2014 Sections 08 & 09) Exam #3D

ECON 21 (Summer 214 Sections 8 & 9) Exam #3D Multiple Choice Questions: (3 points each) 1. I am taking of the exam. D. Version D 2. If a firm is currently operating at a point where costs of production

More information

### 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 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

### ECON 2100 (Summer 2015 Sections 07 & 08) Exam #3A

ECON 2100 (Summer 2015 Sections 07 & 08) Exam #3A Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. For a firm with market power Marginal Revenue, while for a firm

More information

### ECON 2100 (Summer 2014 Sections 08 & 09) Exam #3A

ECON 21 (Summer 214 Sections 8 & 9) Exam #3A Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. Average Fixed Costs of Production A. must remain constant as the level

More information

### ECON 2100 (Summer 2015 Sections 07 & 08) Exam #3C

ECON 21 (Summer 215 Sections 7 & 8) 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 102 Brown Final Exam Practice Exam Solutions

www.liontutors.com ECON 102 Brown Final Exam Practice Exam Solutions 1. B 2. C 3. C All products are identical (homogenous) in perfect competition so there is no such thing as brand preference. 4. C Breakeven

More information

### ECON 2100 (Summer 2010 Sections 05 and 06) Exam #3 (Version C)

ECON 21 (Summer 21 Sections 5 and 6) Exam #3 (Version C) Multiple Choice Questions: (3 points each) 1. Average Fixed costs of Production A. are defined as Fixed Costs of Production divided by quantity

More information

### 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

### 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

### ECON 2100 Principles of Microeconomics (Summer 2016) Behavior of Firms in Perfectly Competitive Markets

ECON 21 Principles of Microeconomics (Summer 216) Behavior of Firms in Perfectly Competitive Markets Relevant readings from the textbook: Mankiw, Ch. 14 Firms in Competitive Markets Suggested problems

More information

### 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

### 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

### 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

### 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. 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

### 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

### ECON 4550 (Fall 2011) Exam 1

ECON 455 (Fall 211) Exam 1 Name Multiple Choice Questions: (4 points each) 1. Jimmy is risk neutral. He is faced with a random payoff with expected value of \$2,. Further, for this payoff the highest possible

More information

### 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

### 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

### ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions

www.liontutors.com ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions 1. A A large number of firms will be able to operate in the industry because you only need to produce a small amount

More information

### 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

### 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

### 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

### 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

### 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 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

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

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

More information

### 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

### ECON 2100 (Summer 2013 Section 06) Exam #3 (Version A)

ECON 21 (Summer 213 Section 6) Exam #3 (Version A) Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. At the most basic level, profit is defined as A. Total Revenues

More information

### 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

### 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

### Boston College Problem Set 6, Fall 2012 EC Principles of Microeconomics Instructor: Inacio G L Bo

Problem Set 6, Fall 01 EC 131 - Principles of Microeconomics Instructor: Inacio G L Bo Answer the questions in the spaces provided on the question sheets. If you run out of room for an answer, continue

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

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

### 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

### ECN 3103 INDUSTRIAL ORGANISATION

ECN 3103 INDUSTRIAL ORGANISATION 3. Monopoly Mr. Sydney Armstrong Lecturer 1 The University of Guyana 1 Semester 1, 2016 OUR PLAN Monopoly Reference for reviewing these concepts: Carlton, Perloff, Modern

More information

### 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

### ECON 102 Brown Final Exam (New Material) Practice Exam Solutions

www.liontutors.com ECON 102 Brown Final Exam (New Material) Practice Exam Solutions 1. B A very large percent of their earnings comes from economic rent 2. B Any funds left, after everyone who has a claim

More information

### 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

### Marginal willingness to pay (WTP). The maximum amount a consumer will spend for an extra unit of the good.

McPeak Lecture 10 PAI 723 The competitive model. Marginal willingness to pay (WTP). The maximum amount a consumer will spend for an extra unit of the good. As we derived a demand curve for an individual

More information

### 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

### 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

### ECON 101: Principles of Microeconomics Discussion Section Week 12 TA: Kanit Kuevibulvanich

Important Concepts: Monopoly ECON 101: Principles of Microeconomics Discussion Section Week 12 Comparison of Perfectly Competitive Market and Monopoly Market Perfect Competition Monopoly Number of Participants

More information

### 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

### 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

### 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

### 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

### 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

### 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

### Monopoly and How It Arises

13 MONOPOLY Monopoly and How It Arises A monopoly is a market: That produces a good or service for which no close substitute exists If a good has a close substitute, even if it is produced by only one

More information

### Lecture 10: Market Power and Monopoly

Lecture 10: Market Power and Monopoly November 8, 2016 Overview Course Administration Sources of Market Power Market Power and Marginal Revenue Profit Maximization and Market Power How a Firm With Market

More information

### Chapter Summary and Learning Objectives

CHAPTER 11 Firms in Perfectly Competitive Markets Chapter Summary and Learning Objectives 11.1 Perfectly Competitive Markets (pages 369 371) Explain what a perfectly competitive market is and why a perfect

More information

### 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

### - 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

### 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

### Lecture 11: Market Power and Monopoly

Lecture 11: Market Power and Monopoly November 13, 2018 Overview Course Administration Sources of Market Power Market Power and Marginal Revenue Profit Maximization and Market Power How a Firm With 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

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

### ECON 8010 (Spring 2014) Exam 1

ECON 81 (Spring 214) Exam 1 Name A. Key Multiple Choice Questions: (4 points each) 1. The states that a rational decision maker should undertake an action if and only if the Marginal Benefit from taking

More information

### 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

### ECON 101 KONG Midterm 2 CMP Review Session. Presented by Benji Huang

ECON 101 KONG Midterm 2 CMP Review Session Presented by Benji Huang Chapter 5 Efficiency and Equity Benefit, Cost, Surplus Consumers (1) A consumer benefits from the consumption of a product this benefit

More information

### 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

### Econ 111 2nd MT 16 17

Econ 111 2nd MT 16 17 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Starting from a situation in which a firm in a competitive market produces and sells

More information

### Lecture 11: Market Power and Monopoly

Lecture 11: Market Power and Monopoly November 14, 2017 Overview Course Administration Sources of Market Power Market Power and Marginal Revenue Profit Maximization and Market Power How a Firm With Market

More information

### 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

### 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

### ECON 200. Introduction to Microeconomics

ECON 200. Introduction to Microeconomics Homework 5 Part II Name: [Multiple Choice] 1. A firm is a natural monopoly if it exhibits the following as its output increases: (d) a. decreasing marginal revenue

More information

### Chapter 13 MODELS OF MONOPOLY. Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved.

Chapter 13 MODELS OF MONOPOLY Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. 1 Monopoly A monopoly is a single supplier to a market This firm may choose to produce

More information

### ECON 311 MICROECONOMICS THEORY I

ECON 311 MICROECONOMICS THEORY I Profit Maximisation & Perfect Competition (Short-Run) Dr. F. Kwame Agyire-Tettey Department of Economics Contact Information: fagyire-tettey@ug.edu.gh Session Overview

More information

### 11.1 Monopoly Profit Maximization

11.1 Monopoly Profit Maximization CHAPTER 11 MONOPOLY A monopoly is the only supplier of a good for which there is no close substitute. Monopolies are not price takers like competitive firms Monopoly output

More information

### 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

### Monopolistic Markets. Causes of Monopolies

Monopolistic Markets Causes of Monopolies The causes of monopolization Monoplositic resources Only one firm owns a resource which is crucial for production (e.g. diamond monopol of DeBeers). Monopols created

More information

### 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

### Econ 001: Midterm 2 (Dr. Stein) Answer Key March 23, 2011

Instructions: Econ 001: Midterm 2 (Dr. Stein) Answer Key March 23, 2011 This is a 60-minute examination. Write all answers in the blue books provided. Show all work. Use diagrams where appropriate and

More information

### Chapter 11. Monopoly. I think it s wrong that only one company makes the game Monopoly. Steven Wright

Chapter 11 Monopoly I think it s wrong that only one company makes the game Monopoly. Steven Wright Chapter 11 Outline 11.1 Monopoly Profit Maximization 11.2 Market Power 11.3 Welfare Effects of Monopoly

More information

### Practice Exam 3: S201 Walker Fall with answers to MC

Practice Exam 3: S201 Walker Fall 2007 - with answers to MC Print Your Name: I. Multiple Choice (3 points each) 1. If marginal utility is falling then A. total utility must be falling. B. marginal utility

More information

### 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

### Introduction. Managerial Problem. Solution Approach

Monopoly Introduction Managerial Problem Drug firms have patents that expire after 20 years and one expects drug prices to fall once generic drugs enter the market. However, as evidence shows, often prices

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.

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

### 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

### 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

### 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

### Many sellers: There are many firms competing for the same group of customers.

Microeconomics 2 Chapter 16 Monopolistic Competition 16-1 Between monopoly and perfect Competition One type of imperfectly competitive market is an oligopoly, a market with only a few sellers, each offering

More information

### Chapter 15: Monopoly. Notes. Watanabe Econ Monopoly 1 / 83. Notes. Watanabe Econ Monopoly 2 / 83. Notes

Econ 3 Introduction to Economics: Micro Chapter : Monopoly Instructor: Hiroki Watanabe Spring 3 Watanabe Econ 93 Monopoly / 83 Monopolistic Market Monopolistic Pricing 3 Inefficiency of Monopoly Price

More information

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

PRACTICE FOR PERFECT COMPETITION Fatma Nur Karaman MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) What is the difference between perfect competition

More information

### Lecture 4.June 2008 Microeconomics Esther Kalkbrenner:

Lecture 4.June 2008 Microeconomics Esther Kalkbrenner: Supply and Demand Familiar Concepts Supply and Demand (Chapter 2) Applying the Supply and Demand Model (Chapter 3) Consumers Choice Consumer Choice

More information

### Final Exam - Solutions

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis December 10, 009 Instructor: John Parman Final Exam - Solutions You have until 1:30pm to complete this exam. Be certain to put

More information

### Agenda. Profit Maximization by a Monopolist. 1. Profit Maximization by a Monopolist. 2. Marginal Revenue. 3. Profit Maximization Exercise

Agenda 1. Profit Maximization by a Monopolist 2. Marginal Revenue 3. Profit Maximization Exercise 4. Effect of Elasticities on Monopoly Price 5. Comparative Statics of Monopoly 6. Monopolist with Multiple

More information

### Chapter 6. Competition

Chapter 6 Competition Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-1 Chapter 6 The goal of this

More information

### 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

### 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

### Chapter Eleven. Monopoly

Chapter Eleven Monopoly Topics Monopoly Profit Maximization. Effects of a Shift of the Demand Curve. Market Power. Welfare Effects of Monopoly. Cost Advantages That Create Monopolies. Government Actions

More information

### University of Toronto July 27, ECO 100Y L0201 INTRODUCTION TO ECONOMICS Midterm Test # 2

Department of Economics Prof. Gustavo Indart University of Toronto July 27, 2006 SOLUTION ECO 100Y L0201 INTRODUCTION TO ECONOMICS Midterm Test # 2 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1.

More information

### 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

### Seminar 3 Monopoly. Simona Montagnana. Week 25 March 20, 2017

Seminar 3 Monopoly Simona Montagnana Week 25 March 20, 2017 2/41 Question 2 2. Explain carefully why a natural monopoly might occur. a Discuss the problem of using marginal cost pricing to regulate a natural

More information

### Ecn Intermediate Microeconomic Theory University of California - Davis December 10, 2009 Instructor: John Parman. Final Exam

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis December 10, 2009 Instructor: John Parman Final Exam You have until 12:30pm to complete this exam. Be certain to put your name,

More information

### MARKETS. Part Review. Reading Between the Lines SONY CORP. HAS CUT THE U.S. PRICE OF ITS PLAYSTATION 2

Part Review 4 FIRMS AND MARKETS Reading Between the Lines SONY CORP. HAS CUT THE U.S. PRICE OF ITS PLAYSTATION 2 On May 14, 2002 Sony announced it was cutting the cost of its PlayStation 2 by 33 percent,

More information

### Professor: Houman Mortazavi Econ 101 Fall Sample Questions

Sample Questions 1) Guy has an income (Y) of \$70 with which he can purchase DVDs (D) at \$15 each and haircuts (H) at \$10 each. Which one of the following represents Guy's budget line? A) Y = 10QD - 20QH

More information

### Module 61 Introduction to Monopoly

What you will learn in this Module: How a monopolist determines the profit-maximizing price and quantity How to determine whether a monopoly is earning a profit or a loss Module 61 Introduction to Monopoly

More information