Chapter 10 : Monopoly Flashcards
Slope of the monopoly demand curve
Negative demand curve.
TR equation for a monopolist
TR = p x Q, if it charges the same price for all units sold.
AR equation for a monopolist
AR = TR/Q = (p x Q)/Q = p
True or False? The monopolist demand curve is also the average revenue curve.
True, since demand also shows the price of the product, and AR = p
Difference in the MR of competitive markets vs monopoly
Competitive market : MR = p
Monopoly : MR < p
True or False? MR curve lies below the demand curve or the AR curve
True.
Why is the MR <p for a monopoly?
Because the demand curve is negatively sloped. The monopolist must reduce the price of all of his units in order to sell one more unit.
What do zones 1 and 2 show?
Zone 1 : the 50$ gain in TR because of selling 5 extra units at 5$ each.
Zone 2 : the 40$ loss in revenue because of selling the first 40 units at 1$ less.
MR = deltaTR/deltaQ
MR equation
MR = deltaTR/deltaQ
Is a monopolist a price taker?
No, therefore, it does not have a supply curve.
When, and only when, should the firm only produce?
If the price is above the AVC
In a monopoly, where is profit maximized (at which Q*)?
When MC(Q) = MR(Q)
How to determine the economic profit of a monopoly from a graph?
The area of : quantity x (price - costs)
Green area in the graph
Is the level of output in a monopolized industry more or less than the level of output in a perfectly competitive industry?
In monopoly : less than in industry
Compare the relationship between the price and the MC in a perfectly competitive market vs in a monopoly
Monopoly : p>MC
P. Competitive : p = MC
Explain why there is a deadweight loss to society with monopolies.
The Quantity supplied will be less despite the market demand.
Two types of entry barriers
- Natural
- Created
Why are entry barriers important?
To prevent the entry of new firms in the market, and allow monopolies to remain monopolies.
Example of created entry barriers
Conscious government actions.
Modern examples of monopolies
Facebook, eBay, Microsoft
What is a cartel?
A group of firms agreeing to act as a single seller in order to maximize joint profits by eliminating the competition.
When cartels form, profits can be ________ by ______ the output.
Increased, decreasing
Explain the graph of the effects of cartelizing a competitive industry.
Initially, the Equilibrium in the perfectly competitive industry is set by the intersection of the supply and demand curves. This is Qc.
Then, when cartels form, the graph switches to the behavior of monopolies, who are maximize their profits by MR = MC, which is at a lower output (Qm), for a higher price.
Qm < Qc
Why are cartels unstable?
Because their members have an incentive to cheat, by producing more output than agreed.
They want to produce until price = MC.
