Market Structures: Monopoly and Competition Analysis
Monopoly Market Structure: Key Concepts
What is *not* a barrier to entry in a monopolized market?
Answer: A single firm is very large.
Definition of a Natural Monopoly
A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a natural monopoly.
Marginal Revenue for a Monopolist
When a monopolist produces an additional unit, the marginal revenue generated by that unit must be below the price because the price effect outweighs the output effect.
Monopolist Profit Maximization Rule
A monopolist maximizes profit by producing the quantity at which marginal revenue equals marginal cost.
Price and Marginal Cost Comparison
Which statement about price and marginal cost in competitive and monopolized markets is true?
Answer: In competitive markets, price equals marginal cost; in monopolized markets, price exceeds marginal cost.
Monopolist’s Profit-Maximizing Choice
The profit-maximizing monopolist will choose the price and quantity represented by the point where MR = MC intersects the demand curve.
Source of Monopoly Inefficiency
The inefficiency associated with monopoly is due to underproduction of the good.
Monopoly vs. Perfect Competition Outcomes
Compared to a perfectly competitive market, a monopoly market will usually generate higher prices and lower output.
The Monopolist’s Supply Curve
The monopolist’s supply curve does not exist.
Impact of Marginal Cost Pricing Regulation
Using government regulations to force a natural monopoly to charge a price equal to its marginal cost will cause the monopolist to exit the market.
Purpose of Antitrust Laws
The purpose of antitrust laws is to increase competition in an industry by preventing mergers and breaking up large firms.
Public Ownership Efficiency
Public ownership of natural monopolies tends to be inefficient.
Price Discrimination and Deadweight Loss
Which statement about price discrimination is not true?
Answer: Perfect price discrimination generates a deadweight loss. (Perfect price discrimination eliminates deadweight loss.)
Breaking Up a Natural Monopoly and Costs
If regulators break up a natural monopoly into many smaller firms, the cost of production will rise.
Long-Run Monopoly Profits
A monopoly is able to continue to generate economic profits in the long run because there is some barrier to entry to that market.
Monopolist Output Adjustment
If marginal revenue exceeds marginal cost, a monopolist should increase output.
Monopolistic Competition: Characteristics and Pricing
Non-Characteristic of Monopolistic Competition
Which of the following is not a characteristic of a monopolistically competitive market? Long-run economic profits.
Product Least Likely in Monopolistic Competition
Which product is least likely to be sold in a monopolistically competitive market? Cotton.
Long-Run Profit Comparison
The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run.
Short-Run Entry Dynamics
In the short run, if the price is above average total cost in a monopolistically competitive market, the firm makes profits and firms enter the market.
Profit-Maximizing Output (Exhibit Dependent)
If the monopolistic competitor described by Exhibit is producing at the profit-maximizing (loss-minimizing) level of output, it is generating losses.
Long-Run Market Adjustment (Exhibit Dependent)
The monopolistically competitive market shown in Exhibit will, in the long run, cause producers to exit the market, which will shift the demand faced by incumbent firms to the right.
Pricing Decisions in Monopolistic Competition
Monopolistically competitive firms choose the quantity at which marginal cost equals marginal revenue and then use the demand curve to determine the price consistent with this quantity.
Long-Run Profit Status (Exhibit Dependent)
Exhibit depicts a monopolistically competitive firm generating zero profits in the long run.
Scale of Production and Pricing Decisions
Which of the following is true? Monopolistically competitive firms produce with excess capacity and charge a price above marginal cost.