Deck 13: Monopoly and Antitrust Policy

Question 1

What are the assumptions of a pure monopoly?

Answer 1

One producer, no close substitutes, barriers to entry.

Question 2

The railroad companies of Pacific Union and Central Pacific were both built with massive government subsidies often on a per-mile basic in the late 19^th century, which created railroad monopolies. Both failed soon after completion of their lines. The Great Northern railroad took much longer to build since it was completed without government subsidies. It turned out to be much more successful than either Pacific Union or Central Pacific. What could account for this apparent disparity?

Answer 2

Subsidies often bread inefficiency. In this particular case subsidizing a railroad based on a per-mile basis probably led Pacific Union and Central Union to build more circuitous routes. The Great Northern railroad had every incentive to keep costs down as much as possible and probably laid fewer miles of track since it was not receiving subsidies. Shorter routes probably made their shipments arrive at their destinations much faster and improved efficiency.

Question 3

List five types of barriers to entry.

Answer 3

(1.) Government rules. (2.) Patents. (3.) Economies of scale and other cost advantages. (4.) Ownership of a scarce factor of production. (5.) Network effects.

Question 4

What is a pure monopoly?

Question 5

The Polaroid corporation earned a patent for its instamatic camera in the 1960s. If the constitutional length of patent protection is 20 years, why do you believe Polaroid's effective use of its patent ended much earlier?

Question 6

Why is it that pure monopoly would not likely exist without government?

Question 7

What would be the economic dangers of eliminating patent protection in the pharmaceutical industry as a means of "eliminating monopoly power"?

Question 8

Why is a government franchise likely to serve as a stronger barrier to entry than possessing technology than competitors don't currently posses?

Question 9

What are barriers to entry?

Question 10

Segway Corporation has a monopoly on its personal transporter, which is a scooter that carries one person. The company achieved its monopoly through the procurement of a patent. In spite of this advantage it has yet to turn a profit. One major impediment for the product is the existence of local ordinance around the country that prohibits the use of motorized scooters on sidewalks where the Segway might otherwise provide great utility to users. Where do you believe the demand curve is in relation to the average total cost? What do you believe the company's executives are banking on since they continue to stay in business even in the face of losses?

Question 11

A doctor sets up a private practice in small town where he faces no other competitors. In spite of his monopoly position why is he not guaranteed to make a profit?

Question 12

What is a patent?

Question 13

From an economic standpoint, patents reduce efficiency because they serve as a barrier to entry and thus limit market competition. Are there any positive economic benefits of patents? Explain.

Question 14

What is an imperfectly competitive industry?

Question 15

What determines how much market power a firm has?

Question 16

Describe the marginal revenue curve in relationship to the demand curve for a monopoly. Why is it like that?

Question 17

What is the one thing that all firms in an imperfectly competitive market have in common?

Question 18

A successful local entrepreneur opens up the only Chevrolet dealership in a medium sized Texas town. Why does this not necessarily constitute a monopoly position?

Question 19

What is market power?

Question 20

What four decisions must firms with market power make?

Question 21

Use Figure 13.1 above to help with the following question. Why is it true that at every level of output except the first unit, the monopolist's marginal revenue (MR) is below price.

Question 22

Critically evaluate the following statement. "Monopolists are able to pass on the full amount of any increase in their fixed cost to the consumer in the form of higher prices."

Question 23

Comment on the following statement: "A firm with market power is able to charge any price it likes."

Question 24

A bureaucrat at a public utility commission hearing testifies that the local area telephone monopoly is able to maximize its revenue. For that reason the rate-hike request should be denied.

Question 25

Use Figure 13.2 which depicts a monopolist firm to help with the following question. Why would this firm not find it profitable to produce more than Qm or less than Qm?

Question 26

ABC, Incorporated has a local monopoly in the sale of automatic paper towel dispensers. The table below shows the demand for these towel dispensers at various prices. The total cost of production of the various levels of output is also shown. Calculate total revenue and profit for the firm. What level of output maximizes profit? What price should the firm charge?

Question 27

The table below represents the demand for Morey's Marbles which has a monopoly in the sale of marbles. Calculate total revenue and marginal revenue for the levels of output given.

Question 28

Why is marginal revenue less than price for a monopolist?

Question 29

The chief executive officer of a monopoly firm gives a directive to his production managers to maximize the per unit profit for the upcoming fiscal year. Evaluate the economic wisdom of this advice.

Question 30

Comment on the following statement: "For a monopolist, marginal revenue is always equal to price."

Question 31

What decision must be made by firms with market power that is not made by firms which operate in perfectly competitive markets? Explain.

Question 32

A newspaper article in commenting on the local electric monopoly tells its readers that the company's dominant economic position as a monopolist allows it to produce whatever output level it desires and to set whatever price it wishes. Critically evaluate this position.

Question 33

Why would a monopolist never price in the inelastic portion of the demand curve?

Question 34

Describe the supply curve in a monopoly market.

Question 35

Using Table 13.1 calculate the total revenue of this firm at each price and quantity demanded. Explain why total revenue eventually declines.

Question 36

What is the profit-maximizing rule for a monopolist?

Question 37

The table below represents the demand for Widgets, Inc., which has a monopoly in the sale of widgets. Calculate total revenue and marginal revenue for the levels of output given.

Question 38

Draw a linear demand curve and marginal revenue curve and the corresponding total revenue curve below it.

Question 39

Critically evaluate the following statement. "Since monopolies are by definition a one-firm industry they are able to charge the consumer the highest price possible."

Question 40

How does the demand curve facing a monopoly firm compare with the demand curve facing a perfectly competitive firm?

Question 41

Polly's Piñatas has a local monopoly in the sale of piñatas. The table below shows the demand for piñatas at various prices. The total cost of production of the various levels of output is also shown. Calculate marginal revenue and marginal cost for the firm. What level of output maximizes profit? What price should the firm charge?

Question 42

The graph below shows a firm's demand, marginal revenue, and marginal cost curves. Find the profit-maximizing level of output and mark it q*. Find the price the firm should charge and mark it P*.

Question 43

Below are the demand, marginal cost, and marginal revenue curves for Lita's, Inc. Lita has decided that her firm should produce 20 units per day. Is this the profit-maximizing level of output? Explain.

Question 44

A monopolist has the power to set price, but is not entirely free to set the price of its product. Explain.

Question 45

XYZ Company has a local monopoly in the sale of water fountains. The table below shows the demand for water fountains at various prices. The total cost of production of the various levels of output is also shown. Calculate total revenue and profit for the firm. What level of output maximizes profit? What price should the firm charge?