Chapter 3 - Pricing Power & Monopolies

Question 1

Pricing Power

Answer 1

The ability of a firm to influence the price at which it sells a product or service to increase economic profit.

• A firm with pricing power can raise its price without losing all sales and can lower its price to increase sales.

Question 2

Marginal Revenue

Answer 2

The change in total revenue associated with selling one more unit.

Question 3

Marginal Revenue _____ Price in Perfect Competition.

Marginal Revenue is __________ Price otherwise.

Answer 3

equals;

less than

• MR = P in pefect competition*
• MR < P otherwise*

Question 4

For firms seeking profit maximization, increases in _____ are only profitable SO LONG AS __________ is __________ __________.

Answer 4

Quantity; Marginal Revenue; greater than; Marginal Cost

• Eventually, increasing production quantity lowers MR and/or raises MC to a point where MR = MC and increases in quantity are no longer profitable.

Question 5

The 3 Market Structures in which Firms Have Pricing Power:

Answer 5

1. Oligopoly
2. Monopolistic Competition
3. Monopoly

Question 6

In Monopolies** and **Monopolistic Competition, Marginal Revenue is _____ Price.

In Perfect Competition, Marginal Revenue is _____ Price.

Answer 6

less than;

equal to

Question 7

Monopolistic Competition

Answer 7

• No barriers to entry (not cheap or free, just means other firms can enter).
• Sellers have some pricing power (demand curve has a somewhat downward slope).
• Positive economic rents attract market entry until economic profit reaches a long-term equilibrium of zero.

Question 8

Monopoly

Answer 8

• One seller.
• Seller has some pricing power. They can lower the price to sell more, and will sell less if the price is raised.
• Barriers to entry deter or prevent new firms from entering the market.

Question 9

Oligopoly

Answer 9

• A FEW sellers (maybe 2 to 5).
• Sellers have some pricing power. They need to think about how the other firms will react to their price change.
• Barriers to entry deter or prevent new firms from entering the market.

Question 10

The 4 Main Barriers to Entry:

Answer 10

1. Government Restrictions
2. Resource Ownership
3. Patents & Copyrights
4. Large Economies of Scale (“Natural Monopolies”)

Question 11

A Natural Monopoly is created when an industry has a _____ fixed/startup cost but a _____ marginal cost.

Answer 11

high;

low

• This deters new entrants and allows established firms to outcompete new firms in terms of cost.

Question 12

In a Monopoly, Monopolistic Competition, or Oligopoly, once Marginal Cost _____ Price, the market begins to generate negative economic profit.

Answer 12

equals

Question 13

The 4 Implications of a Monopoly:

Answer 13

1. Higher Price and Lower Quantity Traded (relative to perfect competition).
2. Inefficient (no market pressure to control costs or quality or to innovate).
3. Losses to Consumers Exceed Gains to the Producer (inefficient Pareto chart).

Question 14

Rent Seeking

Answer 14

The pursuit – by a firm or group of firms – of government restrictions that create barriers to entry and allow existing firms to earn monopoly rents.