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27 Cards in this Set
- Front
- Back
table on page 337
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very important
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A monopolistic firm is a price _____
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maker
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Because monopoly firms are unchecked by competition they don't always provide the best outcome to society
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true
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The fundamental cause of a monopoly is______
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barriers to entry
a monopoly remains the only firm to sell bec. no competitors can enter the market to compete with it |
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Barriers to entry have 3 main sources
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Monopoly resources: a key resource required for production is owned by a single firm
Government Regulation: The government gives a single firm the exclusive right to produce some good or service The production process: A single firm can produce output at a lower cost than can a larger number of producers |
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Natural Monopoly
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A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
When a firm's average total cost curve continually declines |
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Average Revenue always equals the price of the good?
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true!
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A monopolist's marginal revenue is always less than the price of its good
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true
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review page 316
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do it now
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Marginal Revenue is very different for monopolies. When a monopoly increases he amount it sells, this action has 2 effects on total revenue:
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The output effect: More output is sold, so Q is higher, which tends to increase total revenue
The price effect: The price falls, so P is lower, which tends to decrease total revenue |
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Competitve firms have no price effect because they can sell all they want at the market price
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true
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Why is a monopoly's marginal revenue less than its price?
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when a monopoly increases production by 1 unit, it must reduce the price it charges for every unit it sells, and this cut in price reduces revenue on the units it was already selling
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For a monopoly the Marginal revenue curve lies below the Demand curve (average Rev curve)
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true
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The monopolist profit maximizing quantity of output is determined by the intersection of what 2 curves?
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Marginal revenue curve & the marginal cost curve
rvw page 319 |
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Explain the difference between a competitive firms MR and a monopoly's MR curve
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The MR of a competitve firm equals its price, whereas the marginal revenue of a monopoly is less than its price.
Competitive firms P=MR=MC Monopoly P > MR = MC |
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IN competitive markets, price EQUALS marginal cost.
In monopolized markets, price EXCEEDS marginal cost |
true
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Compare pg 321 & 294
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True!
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The equality of marginal revenue and marginal cost a the profit maximizing quantity is the same for both types of firms. What differs is the relationship of the price to marginal revenue and marginal cost
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after the monopoly firm chooses teh quantity of output that equates marginal revenue and marginal cost, it uses the demand curve to find the highest price it can charge and sell that quantity
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How do you graphically calculate a monopoly's profit?
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(Monopoly price - monopoly ATC) X Quantity where marginal cost = marginal revenue
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The socially efficient quantity is found where the demand curve and the marginal cost curve intersect
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true
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The monopolist chooses to produce and sell the quantity where ____ = _____
The benevolent social planner would choose the quantity where ___ = ____ |
Marginal Revenue = Marginal cost
Demand = Marginal Cost As a result of this the monopoly produces LESS than the socially desirable quantity of output (DWL arises see pg 324) |
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The deadweight loss caused by a monopoly is similar to the deadweight loss caused by a tax the difference is
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The government collects the Tax revenue while the private firm gets the monopoly profit
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Monopoly profit is not a social problem
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bc it doesn't decrease the size of the economic pie it just transfers more of the existing pie (TS) to the producers
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THe problem in a monpolized marekt arises because the firm produces and sells a quantity of outptu below the level that maximizes total surplus
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true
The DWL measures how much teh economic pie shrinks as a result The inefficiency is connect to the monopoly's high price. Consumers buy fewer units when the firm raises its price above its marginal cost. But keep in mind that the profit earned on teh units that contiue to be sold is NOT the problem. The problem setms from the inefficiently low quantity of output. Put differently the high monopoly price did not discourage some consumers from buying the good, it would raise producer surplus by exactly the amount it reduced consumer surpulus, leaving total surplus the same as could be achieved by a benevolent social planner. |
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Price Discrimination
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The business practice of selling the same good at different prices to different customers
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3 lessons to be learned about price discrimination
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1. it is a rational strategy for a profit maximizing monopolist.
2. it requires the ability to separate customers according to their willingess to pay (certain market forces can prevent firms from price discriminating however, like arbitrage (the process of buying a good in one market at a low price and selling it in another marekt at a higher price)) 3. It can raise economic welfare. (those who value it more pay more those who value it less pay less and the firm gets increased profit. everyone wins) Price Discrimination in some cases can eliminate the inefficiency inherent in monopoly pricing |
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If a firm has a downward sloping demand curve that implies that it has some form of market power
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true
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