# These notes essentially correspond to chapter 11 of the text.

Size: px
Start display at page:

## Transcription

1 These notes essentially correspond to chapter 11 of the text. 1 Monopoly A monopolist is de ned as a single seller of a well-de ned product for which there are no close substitutes. In reality, there are very few true monopolists; however, people sometimes consider rms with a large market share (such as Microsoft) a monopolist. We will focus on the implications of the true monopolist. In the perfectly competitive market, the market demand curve is downward sloping, and the rm s demand curve is horizontal (perfectly elastic). In a monopoly, the market demand curve is also downward-sloping however, since there is only a single seller in the market, the market demand curve is also the monopolist s demand curve. The monopolist s downward-sloping demand curve has some implications for the monopolist s M R. 1.1 Deriving MR for monopolist We will derive the monopolist s MR by example rst, and then through a formal mathematical derivation Deriving MR by example Suppose that the monopolist faces the following inverse demand function, (Q) = 100 Q. The monopolist s T R function is found by multiplying price and quantity, so that T R = (Q) Q = (100 Q) Q in this example. We can now ll out the table below for the given quantities. The price is found by plugging the di erent quantity levels into the inverse demand function. Total revenue is found by multiplying price and quantity. Recall that M R is just the increase in T R from one unit to the next (which is how we found MC in chapter 7, except we looked at the increase in T C from one unit to the next). Quantity rice TR MR If we were to plot the price and quantity pairs, we would get the rm s demand curve. If we were to plot the MR and quantity pairs, we would get the rm s M R. lotting the two relationships gives us: 1

2 rice Quantity The MR is the steeper of the two lines, and lies inside the demand curve. Notice that the MR of the 2 nd unit is \$97 even though the price is \$98. The reason that MR < is because if the monopolist wishes to sell an additional unit, it needs to lower the price on EVERY unit sold. Thus, the rst unit that was initially sold for \$99 brought in additional revenue of \$99. To sell 2 units, the monopolist must lower the price to \$98. The second unit brings in additional revenue of \$98, but the 1 st unit must now also be sold for \$98, which is a loss of \$1 in revenue. Thus, the total additional revenue generated by the second unit is \$98 \$1 = \$97. So, the MR for a monopolist will fall faster than the demand curve. Recall that in a perfectly competitive market the M R and demand curves were the same curves Deriving a M R function We can also derive a monopolist s MR as a function of quantity. I will work through the steps for deriving a monopolist s M R function for a linear inverse demand function (we will only work with linear inverse demand functions). At the end of the derivation, I will give you a rule that you can use to nd the monopolist s M R function for any linear inverse demand function. Recall that T R = (Q) Q which equals (a bq) Q for a general linear inverse demand function with intercept a and slope ( b). We want to see how total revenue changes for a very small, essentially zero, change in quantity. Start with the total revenue of some quantity Q. T R (Q) = (a bq) Q = aq bq 2 Now, nd the total revenue for Q + h, which h is some positive, albeit very small, amount. T R (Q + h) = (a b (Q + h)) (Q + h) = (a bq bh) (Q + h) = aq bq 2 bqh + ah bqh bh 2 2

3 So, T R (Q) = aq bq 2 and T R (Q + h) = aq bq 2 2bQh + ah bh 2 (notice that I combined the 2 ( bqh) terms into ( 2bQh)). The de nition for MR says that it is the change in T R divided by the change in quantity. The change in T R is: This simpli es to: T R = aq bq 2 2bQh + ah bh 2 aq bq 2 T R = 2bQh + ah bh 2 Since we began by producing Q and we have now increased production to Q + h, the change in quantity is Q + h Q = h. So our MR is: MR (Q) = T R Q = 2bQh + ah bh 2 h Simplifying, we are left with: MR (Q) = ( 2bQ + a bh) There is one nal step. Recall that we wanted h to be a very small number, essentially zero. If h is essentially zero, then the term ( bh) = ( b 0) = 0 and it drops out. This leaves us with (I will rearrange so that the a term is rst): MR (Q) = a For those of you that have had calculus, the MR function is simply the derivative of the T R function with respect to quantity. So: dt R (Q) d (Q) = d aq bq2 dq 2bQ = a 2bQ Either way gets you the same answer, that the MR function is a 2bQ for a linear inverse demand function of the form a bq. This is our rule: RULE If the inverse demand function is a linear inverse demand function of the form (Q) = a bq, then the marginal revenue function is: MR (Q) = a 2bQ. 1.2 ro t maximization for a monopolist We will use two methods to nd the monopolist s maximum pro t. is a graphical method and the second is a mathematical method. The rst 3

4 1.2.1 ro t maximization graphically The steps to nding the monopolist s pro t-maximizing price and quantity are similar to those for the perfectly competitive rm. A picture is shown below and the steps are described following the picture. 1. The rst step is to nd the quantity that corresponds to the point where MR = MC. This is Q in the picture. 2. The second step is to nd the price that corresponds to the quantity that corresponds to the point where MR = MC. The rm nds this price by nding the price on the DEMAND curve that corresponds to its pro tmaximizing quantity. This is shown in the picture as. 3. Find the rm s total revenue at the pro t-maximizing price and quantity. Since this is just the price times the quantity it is ( ) (Q ). 4. Now, nd the AT C that corresponds to the pro t-maximizing quantity. This is shown as AT C in the picture. 5. Find the rm s total cost at the pro t-maximizing price and quantity. This is T C = (AT C ) (Q ). 6. The rm s pro t is then T R T C. Alternatively, the rm s pro t can be written as = ( ) (Q ) (AT C ) (Q ) = ( AT C ) (Q ). When written this way, it is easy to see that the pro t the rm earns is simply the rectangle outlined by the dotted lines in the picture from 4

5 to AT C and over to Q. rectangle. So pro t is simply the area outlined by that ro t maximization mathematically We will follow the same basic steps to determine the pro t-maximizing price and quantity mathematically. We will need a few pieces of information: the monopolist s inverse demand function, marginal revenue function, marginal cost function, and either the average total cost function or the total cost function. Assume that the inverse demand function is: (Q) = 24 Q. This means that the marginal revenue function is: M R (Q) = 24 2Q. Suppose that the monopolist s marginal cost function is: M C (Q) = 2Q, and that the monopolist s average total cost function is: AT C (Q) = Q + 12 Q. 1. The rst step is to nd the quantity that corresponds to the point where MR = MC. Since MR (Q) = 24 2Q and MC (Q) = 2Q, we set MR (Q) = MC (Q). This gives us: 24 2Q = 2Q 24 = 4Q Q = 6 2. The second step is to nd the price that corresponds to the quantity that corresponds to the point where MR = MC. We know that when MR = MC, the rm s quantity is 6. The price that the rm will sell 6 units at is found by plugging the quantity into the inverse demand function, which is (Q) = 24 Q. (6) = 24 6 = 18 Thus, the rm will sell 6 units at a price of Now, total revenue is simply price times quantity, or \$18 6 = \$ Now, nd the AT C that corresponds to the pro t-maximizing quantity. We can use the AT C function, which is AT C (Q) = Q + 12 Q. So: AT C (6) = = = 8 Thus, the average total cost of producing 6 units is \$8. 5. The monopolist s total cost is just AT C times Q, or \$8 6 = \$48. 5

6 6. The monopolist s pro t is then T R T C, which is just \$108 \$48 = \$60. Notice that the steps to nd maximum pro ts are the same in either method. In one method a picture is used and in another method functions are used. 2 Monopolist and rice Elasticity of Demand We can determine how much market power a monopolist has if we calculate the monopolist s ED at its pro t-maximizing quantity. However, we will need to rewrite the MR in terms of ED. We know that, for a linear inverse demand function, MR (Q) = a 2bQ. Use the following steps to rewrite the MR. We know that (Q) = a MR (Q) = a 2bQ = a bq bq bq, so: We also know that ( So: MR (Q) = bq b) = Q (where it is understood that Q is negative). MR (Q) = + Q Q Multiply both sides by one (this is one of the tricks). On the left-hand side, we will choose our one to be 1, and on the right-hand side we will choose our one to be. MR (Q) = + Q Q Distribute: Now rewrite as: MR (Q) = + Q Q Factor out the : MR (Q) = + Q Q MR (Q) = 1 + Q Q Recall that price elasticity of demand is equal to the last term is simply the reciprocal of the ED. So: MR (Q) = ED 6 Q Q. Notice that

7 where ED is negative (and NOT the absolute value). This formula has some interesting implications for the monopolist s pricing decision. First, notice that if ED = 1 then MR = 0. If 0 > ED > 1, then MR < 0. If 1 > ED > 1, then MR > 0. This suggests that the monopolist will never price on the inelastic portion of its demand curve, as the monopolist will actually be losing revenue by choosing a price on the inelastic portion of the demand curve. Recall that the elasticity for a linear demand curve depends on the particular point chosen along the demand curve. As we move up the demand curve (higher prices), demand becomes more elastic. As we move down the demand curve (towards a 0 price), demand becomes more elastic. For linear demand curves, the quantity level halfway between 0 and the point where the demand curve crosses the quantity axis is the point that corresponds to ED = 1. Thus, the MR at this point is zero. 2.1 rice-cost Markup and Market ower In a perfectly competitive market, when a rm chooses its quantity it sets MR = MC. However, since the rm s MR is the same as the price in the market, the rm is in essence charging a price equal to its marginal cost, or = MC. With a monopolist, the price charged by the rm is above the MC of production for that unit. We can use the price-cost markup as an indicator of a monopolist s market power. The price-cost markup formula is: MC The formula will range from 0 to 1: If = MC, as in the perfectly competitive rm, then the price-cost markup will equal 0; as the monopolist increases its price above marginal cost (e ectively making marginal cost very small relative to price), then the price-cost markup will tend to 1. So, the closer the number is to 0 the less market power the rm has. 2.2 Lerner Index and Market ower An alternative method of determining market power is to look at the Lerner Index. Recall that MR = ED. At the pro t-maximizing quantity, MR = MC, so ED = MC. We can use a few algebra maneuvers to show that MC = 1 ED at the pro t-maximizing quantity. Start with: = MC ED Then: = MC ED 7

8 Multiply both sides by negative one: 1 1 ED = MC Now, add one to both sides. I will add the number 1 to the left-hand side, and the term to the right-hand side. But I am really just adding one to both sides. Simplify to get: ED = MC 1 ED = MC Thus, at the pro t-maximizing quantity, the price-cost markup is simply the reciprocal of the monopolist s price elasticity of demand at that quantity. This is known as the Lerner Index, and it measures market power in the same manner as the price-cost markup. Note that the more elastic demand is at the monopolist s pro t-maximizing quantity, the less market power the rm has. Also note that this relationship only holds at the rm s pro t-maximizing quantity, since we assumed that MR = MC when we derived the fact that 1 ED = MC. 3 Monopolies and Social Welfare It was suggested that one reason to use the perfectly competitive market was that it provided a benchmark model for markets to reach. We can now compare the welfare properties of the monopoly with those of the perfectly competitive market. There are quite possibly more de nitions for the term e cient in economics than there are for any other term. We can de ne e ciency as a market situation where all the gains from trade are captured. Recall the partial equilibrium analysis of a tax from chapter 3. When a tax was imposed on the market there were some trades that were previously made that were no longer possible. This loss to society from trades that were not made is called deadweight loss. What we will show is that the perfectly competitive market contains no deadweight loss, while the monopoly market does. However, we will need to de ne a few terms rst. Consumer Surplus Consumer surplus is the di erence between a consumer s maximum willingness to pay for a unit of the good (the height of the demand curve) and the price actually paid for the good. Thus, if the most a consumer is willing to pay is \$10 for a good and the consumer only pays \$3, then the consumer has \$7 in consumer surplus. If we were to look at the consumer surplus on a graph, it would be the entire area under the demand curve but above the price paid. 8

10 In the competitive market, there is no deadweight loss. The market is perfectly e cient, as all the gains from trade in both the market and the rm pictures have been captured. 3.2 Welfare and monopoly The picture below shows the welfare e ects of a monopoly. 10

11 Notice that in the monopoly market the e cient quantity (Qeff) is not the same as the monopolist s pro t-maximizing quantity (Q m ). This is because the e cient quantity is found at the point where society s marginal bene t (the demand curve) equals society s marginal cost (the monopolist s MC), while the monopolist looks at its own marginal bene t (which is the MR curve) and nds the quantity that sets its own marginal bene t equal to MC. Since the monopolist s marginal bene t curve is not the same as society s marginal bene t curve, the market is ine cient, and deadweight loss (DWL) results. The fact that deadweight loss results in a monopoly is the reason that monopolies are considered bad (well, at least that s why economists consider monopolies bad). Of course, since monopolies are so bad, why then do they exist? 3.3 Reasons monopolies exist There are two major reasons why monopolies exist, which can be broken into a few subcategories. Those reasons are cost advantages and government actions Cost Advantages 1. Control a key input One reason that a monopoly may exist is that a rm may control a key input needed in the production of a product. In the diamond market, DeBeers owned 80% of the world s diamond supply at one point in time. Thus, if someone wanted diamonds, they had to go through DeBeers. 11

12 2. Superior technology/production technique It can also be the case that one rm has a better production technology or technique than other rms. If this is the case, that rm will be able to charge a lower price than the other rms and, if it can charge a low enough price while still maintaing pro ts, it should be able to drive the other rms from the market, creating a monopoly or at least a near-monopoly. 3. Natural monopoly A natural monopoly exists when the LRATC for a representative rm in an industry is decreasing throughout the entire range of relevant demand. In this case, the larger a rm becomes the the lower the per-unit costs it experiences (there are no diseconomies of scale). Thus, a single rm will have lower production costs than 2 or more rms Government Actions 1. Government monopolies There are some industries, such as the post o ce, that are run by the government and protected from competition. These industries are monopolies because the government has deemed them as monopolies. 2. Licensing In most cases the government does not license monopolies, but it does require licenses (liquor licenses, medallions for New York City taxicabs) that protect rms from competition. 3. atents atents are used to protect inventors from having their creative work stolen/copied by others. The government grants the inventor a patent that gives him monopoly power over his product for a speci ed time period. 3.4 Government actions that reduce market power The government attempts to reduce market power because rms with more market power tend to cause larger deadweight loss in the market. The government can reduce market power through a few methods. 1. Remove arti cial restrictions in the market Any government action that creates market power could be removed in order to reduce market power. 2. Increase competition through antitrust laws The antitrust laws were created to reduce market power. The government prosecutes rms for various forms of anti-competitive behavior in an e ort to reduce market power. 12

13 3. rice or pro t regulation If we look at the monopolist s picture, we can see what the price should be that will allow the e cient quantity to be traded in the market. Thus, the government could force the monopolist to price at this level, increasing e ciency. Of course, nding this price in a theoretical model is much easier than it is in the real-world. 4 The monopolist s LR equilibrium Recall that positive economic pro ts attract other rms to enter the market when the market is perfectly competitive. However, when the market is a monopoly, the monopolist is protected by some entry barrier. Since the monopolist is protected by an entry barrier other rms cannot enter into the industry thus they cannot take away the monopolist s economic pro t. This means that the monopolist s LR equilibrium, if its entry barriers stay intact, will look exactly like its short-run equilibrium, even if positive economic pro ts are being made. The primary di erence between the monopolist and the perfectly competitive market in the LR is that the monopolist can sustain economic pro ts in the LR while the perfectly competitive rm cannot. 13

### 1 Applying the Competitive Model. 2 Consumer welfare. These notes essentially correspond to chapter 9 of the text.

These notes essentially correspond to chapter 9 of the text. 1 Applying the Competitive Model The focus of this chapter is welfare economics. Note that "welfare" has a much di erent meaning in economics

### EconS Monopoly - Part 2

EconS 305 - Monopoly - Part 2 Eric Dunaway Washington State University eric.dunaway@wsu.edu October 26, 2015 Eric Dunaway (WSU) EconS 305 - Lecture 24 October 26, 2015 1 / 47 Introduction Last time, we

### EconS Monopoly - Part 1

EconS 305 - Monopoly - Part 1 Eric Dunaway Washington State University eric.dunaway@wsu.edu October 23, 2015 Eric Dunaway (WSU) EconS 305 - Lecture 23 October 23, 2015 1 / 50 Introduction For the rest

### EconS Perfect Competition and Monopoly

EconS 425 - Perfect Competition and Monopoly Eric Dunaway Washington State University eric.dunaway@wsu.edu Industrial Organization Eric Dunaway (WSU) EconS 425 Industrial Organization 1 / 47 Introduction

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

### 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

### 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

### P rofit t (1 + i) t. V alue = t=0

These notes correspond to Chapter 2 of the text. 1 Optimization A key concept in economics is that of optimization. It s a tool that can be used for many applications, but for now we will use it for pro

### Chapter Eleven. Topics. Marginal Revenue and Price. A firm s revenue is:

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

### 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

### 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

### 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

### 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

### 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

### 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

### 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):

### 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

### 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

### 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

### 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

### UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) Monopoly and Market Power. Session V Sep 18, 2010

UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) Monopoly and Market Power Session V Sep 18, 2010 Monopoly In contrast to perfect competition, a monopoly is a market

### Lesson 3-2 Profit Maximization

Lesson 3-2 rofit Maximization E: What is a Market Graph? 13-3 (4) Standard 3b: Students will explain the 5 dimensions of market structure and identify how perfect competition, monopoly, monopolistic competition,

### Chapter 11. Monopoly

Chapter 11 Monopoly Topics Monopoly Profit Maximization. Market Power. Welfare Effects of Monopoly. Cost Advantages That Create Monopolies. Government Actions That Create Monopolies. Government Actions

### THEORY OF THE FIRM. Number of Workers Bread Loaves (thousands) :

Universidad Carlos III Microeconomics THEORY OF THE FIRM A. Production. 1. Answer the questions of parts (a)-(e) for rms whose production functions are: (1.1) F (L; K) = p LK; (1.2) F (L; K) = L + 4K,

### 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

### Lesson 3-2 Profit Maximization

Lesson 3-2 Profit Maximization Standard 3b: Students will explain the 5 dimensions of market structure and identify how perfect competition, monopoly, monopolistic competition, and oligopoly are characterized

### EconS Endogenous Market Size

EconS 425 - Endogenous Market Size Eric Dunaway Washington State University eric.dunaway@wsu.edu Industrial Organization Eric Dunaway (WSU) EconS 425 Industrial Organization 1 / 35 Introduction Let s contrinue

### 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

### EconS Third-Degree Price Discrimination

EconS 425 - Third-Degree Price Discrimination Eric Dunaway Washington State University eric.dunaway@wsu.edu Industrial Organization Eric Dunaway (WSU) EconS 425 Industrial Organization 1 / 41 Introduction

### 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

### 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

### 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

### 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

### Unit 6: Non-Competitive Markets

Unit 6: Non-Competitive Markets Name: Date: / / Simple Monopoly in the Commodity Market A market structure in which there is a single seller is called monopoly. The conditions hidden in this single line

### EconS First-Degree Price Discrimination

EconS 425 - First-Degree Price Discrimination Eric Dunaway Washington State University eric.dunaway@wsu.edu Industrial Organization Eric Dunaway (WSU) EconS 425 Industrial Organization 1 / 41 Introduction

### ECON 115. Industrial Organization

ECON 115 Industrial Organization 1. Tonight is a calculus review. 2. And a review of basic microeconomics. 3. We will do a couple of problems in class. First hour: Calculus Thinking on the margin. Introducing

### not to be republished NCERT Chapter 6 Non-competitive Markets 6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET

Chapter 6 We recall that perfect competition was theorised as a market structure where both consumers and firms were price takers. The behaviour of the firm in such circumstances was described in the Chapter

### Eastern Mediterranean University Faculty of Business and Economics Department of Economics Fall Semester

Eastern Mediterranean University Faculty of Business and Economics Department of Economics 2016-17 Fall Semester Duration: 110 minutes ECON101 - Introduction to Economics I Final Exam Type A 11 January

### 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

### 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

### 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

### Ecn Intermediate Microeconomic Theory University of California - Davis March 19, 2009 Instructor: John Parman. Final Exam

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis March 19, 2009 Instructor: John Parman Final Exam You have until 5:30pm to complete the exam, be certain to use your time wisely.

### 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

### 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

### 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

### 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

### 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

### 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

### EconS Vertical Pricing Restraints 2

EconS 425 - Vertical Pricing Restraints 2 Eric Dunaway Washington State University eric.dunaway@wsu.edu Industrial Organization Eric Dunaway (WSU) EconS 425 Industrial Organization 1 / 38 Introduction

### 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.!

### 1.4 Applications of Functions to Economics

CHAPTER 1. FUNCTIONS AND CHANGE 18 1.4 Applications of Functions to Economics Definition. The cost function gives the total cost of producing a quantity of some good. The standard notation is: q = quantity,

### 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

### - 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

### 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.

### 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

### 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

### 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

### Consumer and Producer Surplus and Deadweight Loss

Consumer and Producer Surplus and Deadweight Loss The deadweight loss, value of lost time or quantity waste problem requires several steps. A ceiling or floor price must be given. We call that price the

### 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

### Introduction to Economics II: Producer Theory

Introduction to Economics II: Producer Theory Leslie Reinhorn Durham University Business School October 2014 Plan of the Lecture Introduction The Case of Perfect Competition pro t maximization problem

### 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

### 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

### Microeconomics. Claudia Vogel EUV. Winter Term 2009/2010. Market Power: Monopoly and Monopsony

Microeconomics Claudia Vogel EUV Winter Term 2009/2010 Claudia Vogel (EUV) Microeconomics Winter Term 2009/2010 1 / 34 Lecture Outline Part III Market Structure and Competitive Strategy 10 The Social Costs

### 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

### MICROECONOMICS - CLUTCH CH MONOPOLISTIC COMPETITION.

!! www.clutchprep.com CONCEPT: CHARACTERISTICS OF MONOPOLISTIC COMPETITION A market is in monopolistic competition when: Nature of Good: The goods for sale are, but not identical - Products are said to

### 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?

### EconS Competitive Markets Part 1

EconS 305 - Competitive Markets Part 1 Eric Dunaway Washington State University eric.dunaway@wsu.edu October 11, 2015 Eric Dunaway (WSU) EconS 305 - Lecture 19 October 11, 2015 1 / 48 Introduction Today,

### 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

### 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

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

### 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

### Chapter 11 Perfect Competition

Chapter 11 Perfect Competition Introduction: To an economist, a competitive firm is a firm that does not determine its market price. This type of firm is free to sell as many units of its good as it wishes

### Chapter 1- Introduction

Chapter 1- Introduction A SIMPLE ECONOMY Central PROBLEMS OF AN ECONOMY: scarcity of resources problem of choice Every society has to decide on how to use its scarce resources. Production, exchange and

### 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.

### Supply in a Competitive Market

Supply in a Competitive Market 8 Introduction 8 Chapter Outline 8.1 Market Structures and Perfect Competition in the Short Run 8.2 Profit Maximization in a Perfectly Competitive Market 8.3 Perfect Competition

### 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

### 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

### 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

### 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

### 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

### Thursday, October 13: Short and Long Run Equilibria

Amherst College epartment of Economics Economics 54 Fall 2005 Thursday, October 13: Short and Long Run Equilibria Equilibrium in the Short Run The equilibrium price and quantity are determined by the market

### 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

### 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

### 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

### UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) Fall 2013

UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) Fall 2013 Monopolistic markets and pricing with market power (PR 10.1-10.4 and 11.1-11.4) Module 4 Sep. 20, 2014

### Economics. Monopolistic Perfect Competition. Monopolistic Competition. Monopolistic Competition 11/29/2013. The Big Picture. Perfect Competition

16 Modified by Joseph Tao-yi Wang Ron Cronovich The Big Picture Chapter 13: The cost of production Now, we will look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter

### EconS Pricing and Advertising - Part 2

EconS 305 - Pricing and Advertising - Part 2 Eric Dunaway Washington State University eric.dunaway@wsu.edu November 2, 2015 Eric Dunaway (WSU) EconS 305 - Lecture 27 November 2, 2015 1 / 47 Introduction

### 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.

### 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

### Econ 300: Intermediate Microeconomics, Spring 2014 Final Exam Study Guide 1

Econ 300: Intermediate Microeconomics, Spring 2014 Final Exam Study Guide 1 Chronological order of topics covered in class (to the best of my memory). Introduction to Microeconomics (Chapter 1) What is

### THEORY OF THE FIRM. 2. Let us consider the production function Q = F (L; K) = LK: a) Compute the isoquants K = g(l) for Q = 729 and Q = 100:

Universidad Carlos III Microeconomics THEORY OF THE FIRM A. Production. 1. Let us consider the production function Q = F (L; K) = (LK) 1 2 : a) Compute the isoquants K = g(l) for Q = 27 and Q = 10: b)

### Economics. Monopolistic Competition. Firms in Competitive Markets. Monopolistic Competition 11/22/2012. The Big Picture. Perfect Competition

16 Modified by Joseph Tao-yi Wang Ron Cronovich The Big Picture Chapter 13: The cost of production Now, we will look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter

### Monopoly. The single seller or firm referred to as a monopolist or monopolistic firm. Characteristics of a monopolistic industry

Monopoly Monopoly: a market structure in which there is only one seller of a good or service that has no close substitutes and entry to the market is completely blocked. The single seller or firm referred

### 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

### Economics 101 Spring 2001 Section 4 - Hallam Quiz 10. For questions 1-9, consider firms using a technology with cost and marginal cost functions:

Economics 101 Spring 2001 Section 4 - Hallam Quiz 10 For questions 1-9, consider firms using a technology with cost and marginal cost functions: Cost (q) = 256 + 16 q + q 2 MC(q) = 16 + 2q 1. What is the

### Homework 4 Economics

Homework 4 Economics 501.01 Manisha Goel Due: Tuesday, March 1, 011 (beginning of class). Draw and label all graphs clearly. Show all work. Explain. Question 1. Governments often regulate the price of

### The above Figure 1 shows the demand and cost curves facing a monopolist.

Practice 13&14 1) The key characteristics of a monopolistically competitive market structure include A) few sellers. B) sellers selling similar but differentiated products. C) high barriers to entry. D)

### 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.