Chapter 10

Question 1

What kind of slope does the demand curve of a monopoly have?

Answer 1

It has a negatively sloped demand curve

Question 2

What kind of tradeoff does a monopolist face as a consequence of its negatively sloped demand curve?

Answer 2

A tradeoff between the price it charges and the quantity it sells

Question 3

What is the total revenue equal to if a monopolist charges the same price for all units sold?

Answer 3

TR = p x Q

Question 4

What is average revenue?

Answer 4

It is total revenue divided by quantity

Question 5

What is the equation for average revenue?

Answer 5

AR = TR/Q = (p x Q)/Q = p

Question 6

What is the monopolist’s average revenue curve?

Answer 6

The monopolist’s demand curve

Question 7

What is marginal revenu?

Answer 7

It is the revenue resulting from the sale of one more unit of the product

Question 8

What is the equation for marginal revenue?

Answer 8

MR = ΔTR/ΔQ

Question 9

What must a monopolist do in order to sell one extra unit?

Answer 9

It must reduce the price that it charges on all units

Question 10

What is not the price received for one extra unit sold for a monopolist?

Answer 10

It is not the firm’s marginal revenue because by reducing the price of all previous units, the firm loses some revenue

Question 11

What is marginal revenue equal to?

Answer 11

It is equal to the price minus this lost revenue

Question 12

What is the marginal revenue for the monopolist?

Answer 12

It is less than the price that the monopolist receives for that unit so the monopolist’s MR curve lies below the demand curve

Question 13

Where is the profit-maximizing output for the monopoly?

Answer 13

When MC = MR

Question 14

When does the monopolist make an economic profit?

Answer 14

When p > ATC

Question 15

What determines the price in the monopoly?

Answer 15

The demand curve

Question 16

Why doesn’t the monopolist have a supply curve?

Answer 16

Because it is not a price taker

Question 17

How does the monopolist choose its profit-maximizing price-quantity combination?

Answer 17

From among the possible combinations on the market demand curve

Question 18

The level of output in a monopolized industry is [less/more] than the level of output that would be produced if the industry were perfectly competitive

Answer 18

less

Question 19

For a monopoly, p is what?

Answer 19

p > MC

Question 20

In a monopoly, the marginal value to society of extra units, as reflected by price, [is less than/is greater than] the marginal cost of producing the extra units

Answer 20

is greater than

Question 21

When would more economic surplus be generated for society?

Answer 21

If the monopolist increased its level of output

Question 22

What does the monopolist’s profit-maximizing decision to restrict output below the competitive level create?

Answer 22

It creates a loss of economic surplus for society - a deadweight loss

Question 23

What does a monopoly lead to?

Answer 23

It leads to market inefficiency

Question 24

For monopoly profits to persist what needs to be prevented?

Answer 24

The entry of new firms

Question 25

How can the entry of new firms be prevented?

Answer 25

An entry barrier - natural vs created A natural monopoly Network effects

Question 26

How are many entry barriers created

Answer 26

By conscious government actions

Question 27

In the very long run, what kind of changes can circumvent effective entry barriers?

Answer 27

Technological changes and innovations

Question 28

What is creative destruction?

Answer 28

It is the elimination of one product by a superior one

Question 29

What does technological progress act as?

Answer 29

It acts as an agent of a change and economic growth that comes with periodic loss of privileged positions on the part of the displaced firms and their workers

Question 30

What are cartels?

Answer 30

Cartels are a type of illegal monopoly that tend t be unstable because members have incentive to cheat

Question 31

What happens when all firms cheat?

Answer 31

The price falls back toward the competitive level, and joint profits will not be maximized

Question 32

What must a successful cartel do?

Answer 32

It must prevent the entry of new producers They are also often able to license the firms in the industry and to control entry by restricting the number of licenses

Question 33

What is price discrimination?

Answer 33

It is the sale by one firm of different units of a product at two or more different prices for reasons not associated with differences in cost

Question 34

If price differences reflect cost differences, then they are not ____

Answer 34

discriminatory

Question 35

When price differences are based on different buyer's valuations of the same product, they are ____

Answer 35

discriminatory

Question 36

When is price discrimination possible?

Answer 36

Market Power Different Valuations of the Product Prevent Arbitrage

Question 37

What is price discrimination among units of output

Answer 37

A firm captures consumer surplus by charging different prices for different units sold

Question 38

What is price discrimination among market segments?

Answer 38

It is a more common form of price discrimination thant price discrimination among units because it is easier for firms to distinguish between different market segments than it is to detect an individual consumer's willingness to pay for different units of that product

Question 39

What is close to perfect price discrimination?

Answer 39

When each unit sold is at each client's personal value

Question 40

Can price discrimination be based on quantity and quality?

Answer 40

Yes it can

Question 41

When does hurdle pricing exist?

Answer 41

When firms create an obstacle that consumers must overcome to get a lower price

Question 42

What can consumers do when hurdle pricing exists?

Answer 42

They can assign themselves to various market segments - those who don't want to jump the hurdle are willing to pay the high price, and those who choose to jump the hurdle to benefit from the low price

Question 43

What does the most profitable system of discriminatory prices for any given level of output provide to the firm?

Answer 43

Higher profits than the profit-maximizing single price

Question 44

What will a monopolist that price discriminates among units produce?

Answer 44

They will produce more output thant will a single-price monopolist