Deck 14: Monopoly

Question 1

Briefly discuss three possible barriers to entry for an industry and assess whether these barriers are good or bad for consumers or society as a whole.

Answer 1

(1) Natural ability represents a barrier when someone is simply better than anyone else at providing a product either of better quality or at lower costs. Consumers, it would seem, derive some benefit from this ability, and it would also seem undesirable to penalize such ability, even when it results in otherwise undesirable monopoly power.
(2) Increasing returns to scale are potentially good for society, but only to the extent that they are utilized. Greater efficiency is achieved with one firm, but regulation may be needed to get output to desired levels.
(3) Government restrictions, such as trade restraints, can also create monopolies. While theoretically this could be done with the same motives and results as patents, in practice such government favors are actively pursued without much consideration for social welfare.

Question 2

What does it mean to say that a monopolist is practicing price discrimination?

Answer 2

A monopolist is practicing price discrimination when it charges different prices for an identical product to different individuals or groups of individuals.

Question 3

How would we show graphically the welfare loss resulting from converting a perfectly competitive industry into a monopoly?

Answer 3

Construct a demand curve, a marginal revenue curve and a marginal cost curve. In a competitive industry, the total consumer and producer surplus is the area between the demand curve and the marginal cost curve up to the point where the two curves intersect. That would be the market equilibrium output in a perfectly competitive market. The monopolist reduces output to the level where the marginal cost curve intersects the marginal revenue curve. The monopolist raises price to the point where that output line intersects the demand curve.
The area under the demand curve between the two output levels measures the benefit lost to society. Some of that loss is regained because society recoups the value of the resources that are freed up by reducing production. That is the area under the marginal cost curve between the two output levels. The net loss to society of decreasing output from the competitive level to the monopoly level is the triangle formed by the monopoly output line and the segments of the marginal revenue and marginal cost curves that lie between the two output levels. Note that the rectangle measuring the transfer of surplus from the consumer to the monopolist as a result of the price increase is not a loss for society since both the producer and the consumer are members of society.

Question 4

Why are barriers to entry crucial to maintaining a monopoly?

Question 5

In what ways is monopolistic competition different from perfect competition? In what ways are they alike?

Question 6

Give three real world examples of price discrimination practices that some companies follow.

Question 7

Why are barriers to entry important to maintaining a monopoly? Discuss the three most important types of barriers to entry.

Question 8

Why will a monopolistic firm maximize total profit if it produces at the output level where marginal revenue equals marginal cost?

Question 9

What is the key difference between a perfectly competitive firm and a monopolist with respect to the relationship between price and marginal revenue?

Question 10

The law of demand states that the greater the quantity of a good purchased, the lower its price will have to be, other things held constant. Explain why monopoly firms see this law in action but perfectly competitive firms do not.

Question 11

Define monopoly. What is the primary reason for the existence of a monopoly? Describe three types of barriers to entry.

Question 12

Why is marginal revenue always less than price for a monopolist? Construct an example to illustrate your answer.

Question 13

As the owner/operator of One-of-a-Kind Gifts (the only gift shop in town), you want to make as much profit as you can. Suppose that at your current level of production, you determine that your MR > MC. What should you do? Explain. What would you do if you had discovered that MR < MC at your current production level? (Assume marginal cost rises as output rises.) Explain.

Question 14

What are the four distinguishing characteristics of monopolistic competition? How does monopolistic competition differ from oligopoly?

Question 15

What are the two keys that enable a monopolist to successfully price discriminate?

Question 16

How and why are the decisions facing a monopolist different from the collective decisions of firms in a perfectly competitive market?

Question 17

How are a monopolist's price, output, and profit determined graphically?

Question 18

Compare how P, ATC, MC, and MR are related to each other in the long-run equilibrium of a perfectly competitive firm and a monopolistically competitive firm. What is the key difference between them?

Question 19

Why does a price-discriminating monopolist earn more profit than a monopolist who does not price-discriminate?

Question 20

Why does a price-discriminating monopolist earn more profit than a monopolist who does not price-discriminate? What must a monopolist do in order to successfully price discriminate? Give three real world examples of price discrimination practices

Question 21

Demonstrate graphically and explain verbally an example of a monopolist earning a positive economic profit.

Question 22

What are the four distinguishing characteristics of monopolistic competition?

Question 23

(a) Complete the following table: Note: Marginal values are values between levels of output.
(b) Suppose the firm's variable costs are as given in the accompanying table. What is the firm's profit-maximizing level of output? (c) What would the profit-maximizing output be if the government offered to pay the firm's variable costs of production?
(d) What would profit-maximizing output be if instead the government decided to levy a tax of $100 on the firm, independent of its output decision?
(e) Do we know whether the firm will exit the industry in the short run? How about in the long run? Why or why not?

Question 24

What is a natural monopoly?

Question 25

Compare how P, ATC, MC, and MR are related to each other in the long-run equilibrium setting for a perfectly competitive firm and a monopolistically competitive firm.

Question 26

Consider the following table, which represents demand and cost conditions for a monopoly firm.
(a) Fill in the missing values.
(b) What output level should the firm produce? Explain. (NOTE: Marginal values should be interpreted as values between levels of output.)

Question 27

Economists may prefer a competitive outcome to a monopoly outcome due to the "welfare loss" associated with the latter. Draw a picture to illustrate the welfare loss associated with the monopoly outcome.

Question 28

Demonstrate graphically and explain verbally the case of a monopolist earning zero economic profit.

Question 29

In long-run equilibrium in both perfect competition and monopolistic competition there is zero economic profit and yet the two cases are not identical. What is the key difference between them?

Question 30

Using the diagram below compare the monopoly price and quantity (label them P_M and Q_M, respectively) to the perfectly competitive price and quantity (label them P_C and Q_C, respectively).

Question 31

You own four firms that produce different products. The following table summarizes the conditions in each firm. After calculating the missing numbers for each firm, choose a decision for each firm from among the following four decisions, and explain how you reached each particular decision.
(a) continue producing the same output level
(b) shut down
(c) increase output
(d) decrease output

Question 32

Using the diagram below, add the curve(s) that are needed to illustrate the profit-maximizing output level and price for this monopolist. Mark the profit-maximizing quantity and price.

Question 33

What are two possible benefits from advertising from a consumer's perspective? What are two possible drawbacks?

Question 34

Consider the following diagram: Explain why producing output level Q₀ is not the monopolist's profit-maximizing output level. How much output should the firm produce? Illustrate as Q₁ in the diagram below.

Question 35

Consider the following diagram: Demonstrate graphically and explain verbally why moving away from producing output level Q₀ will result in a decrease in profit for this monopolist.

Question 36

What is a platform monopoly, and why does it often provide services for free?

Question 37

Demonstrate graphically the price and quantity a natural monopolist would choose in the absence of regulation. Shade the area representing profit. In a diagram show what happens to that profit if the monopolist is required to charge a price equal to marginal cost, PC.

Question 38

As manager of a mutual fund, your job is to buy stocks in companies whose stock price will rise. You decide to only buy stocks of monopoly companies rather than perfectly competitive companies. Your rationale: the monopoly company stocks are a "sure-thing" since customers have no alternative suppliers, which means monopolies earn much more profit than perfectly competitive firms (which you expect to result in higher stock prices for the monopoly companies). What is wrong with assuming that monopolies must be profitable? Explain, using a diagram to illustrate your explanation.

Question 39

Demonstrate graphically and explain verbally an example where a monopolist is better-off shutting down.

Question 40

What aspect of a platform business tends to make it a monopoly?

Question 41

Demonstrate graphically and explain verbally how forcing a natural monopoly to produce at the competitive market solution (P = MC) results in a loss for the monopolist.

Question 42

Demonstrate graphically and explain verbally the long-run equilibrium for a monopolistically competitive firm. How does this differ from the long run equilibrium of a monopoly firm?

Question 43

Does the following diagram illustrate a monopolistically competitive firm in a long-run equilibrium? If yes, explain why. If no, explain why not and redraw the diagram so that it is a long-run equilibrium. (Extra Credit: What forces move a monopolistically competitive industry to equilibrium?)

Question 44

Demonstrate graphically and explain verbally the difference between long-run equilibrium for a perfectly competitive firm and a monopolistically competitive firm.

Question 45

Demonstrate graphically and explain verbally the case of a monopolistically competitive firm earning a positive economic profit. Is this firm in a short run or a long-run equilibrium? In the short run, how does this case differ from the monopoly market outcome?

Question 46

Graphically show the transition from short-run to long-run equilibrium for a monopolistic competitor. Begin by drawing a graph of short-run equilibrium. In the graph, have the firm make an economic profit at its profit-maximizing level of output. Identify its short-run profit, and then show and describe how profits will disappear in long-run equilibrium.

Question 47

At one time, the FCC auctioned off the rights to use public airwaves for wireless communications devices, receiving $23 billion dollars in bids for 4,249 licenses. More than $10 billion was turned over to the U.S. Treasury. These auctions may be thought of as a government sale of a monopoly since one company's use of a particular frequency prevents another from using it. Who gains and who loses when the government sells a monopoly, compared to the case where monopolies don't require licenses to operate? Explain.