Chapter 10- Understanding Monopoly

Question 1

When does a monopoly exist

Answer 1

when a single seller supplies the entire market for a good/service

Question 2

Conditions for a monopolist

Answer 2

1. Must have something unique to sell, no subs 2
2. . Have a way to prevent competitors from entering the market

Question 3

Monopoly power

Answer 3

A measure of a monopolists ability to set the price of a good or service

Question 4

BArriers to entry

Answer 4

Restrictions that make it difficult for new firms to enter the market

Question 5

What type of economic profit for monopolosts

Answer 5

long run economic profit

Question 6

Natural barriers

Answer 6

Barriers that exist naturally within the market

Question 7

What are the three types of natural barriers

Answer 7

Control of resources, Problems in raising capital, economies of scale

Question 8

Control of resources

Answer 8

Best way to limit competition is by controlling the resource essential in production

Question 9

Problems in raising capital

Answer 9

Hard to start up without huge funds, so it is difficult to enter the market

Question 10

Economies of scale

Answer 10

Occurs when long run average growth galls as production expands.

Question 11

Effect of economies of scales

Answer 11

Low cost and low prices give larger firms ability to drive rivals out of business

Question 12

Natural monopoly

Answer 12

occurs when a single large firm has lower costs than any other competitior

Question 13

Government created barriers

Answer 13

Government enforced statutes and regulations to limit the scope of competition

Question 14

Two government created barriers

Answer 14

Licensing and Patents/Copy right law

Question 15

Licensing

Answer 15

To minimize negative externalities, governments occasionally establish monopolies through licensing requirements

Question 16

Patents and copyright law

Answer 16

The assurance that no one else can play or sell another artists works

Question 17

Effects of patents and copyright law

Answer 17

Economic growth, incentive to innovate

Question 18

4 Characteristics of monopolies

Answer 18

One seller, Product with no subs, High barriers to entry, Price making

Question 19

Main descriptor of a monopoly

Answer 19

Price maker

Question 20

Price maker

Answer 20

Has some control over the price and what it charges

Question 21

Where does marginal revenue lie on the demand curve

Answer 21

MR lies to the left of the demand curve

Question 22

Profit maximizing rule acronym

Answer 22

MC=MR

Question 23

Relationship of P and MR in a monopoly

Answer 23

P>MR

Question 24

Demand curve for a monopoly

Answer 24

Downward sloping demand curve

Question 25

What happens to price when the demand is inelastic and elasticq

Answer 25

Inelastic=higher price, Elastic= Lower price

Question 26

Why do Monolpolies use the profit maximizing rule

Answer 26

Bc of the downsloping demand, they must search for the most profitable price

Question 27

In a competitive market what is the relationship of MR and P

Answer 27

Marginal revenue is less than price

Question 28

3 Problems of a monopoly

Answer 28

Results in a inefficient level of output, provides fewer choice for consumers, and encourages firms to lobby for government protection

Question 29

Inefficent output and price

Answer 29

Monopolies charge too much and produce too little

Question 30

Rent seeking

Answer 30

Occurs when resources are used to secure monopoly rights through political process

Question 31

3 Solutions to problems of a monopoly

Answer 31

Breaking up the monopoly, Reducing trade barriers, Regulating markets

Question 32

Antitrust laws

Answer 32

designed to prevent monopoly practices and promote competition

Question 33

Reducing trade barriers

Answer 33

lessens the influence of a monopoly and promotes the efficient use of resources.

Question 34

Regulating markets

Answer 34

Government can allow the monopoly to persist but regulate the ability to charge excessive prices

Question 35

What happens to production when MR=MC

Answer 35

Stop production

Question 36

What happens to production when MR>MC

Answer 36

Produce more

Question 37

What happens to production when MR

Answer 37

less production

Question 38

WHere does the MR curve lie

Answer 38

Below the demand curve

Question 39

The output effect refers to

Answer 39

change in prices affect the quantity sold

Question 40

when does market failure occur

Answer 40

when the output level of the firm is inefficent

Question 41

why are monopolies inefficent

Answer 41

They can earn excessive long-run profits

Question 42

why does deadweight loss exist in a monopoly

Answer 42

Bc the monopolist charges a price that is above MC