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Modules 61-63: Market Structures: Monopoly

Module 61: Introduction to Monopoly (pages 608-615)

1. What is the optimum output rule for all market structures?
The optimum output rule says that firms should produce the quantity at which MC = MR.

2. Compare/ contrast the demand curve for perfect competition and monopoly.
The demand curve for perfect competition is horizontal, and it's equal to the market price. The demand curve
for a monopoly is very similar to the demand curves from the S/D unit.

3. Explain the quantity and price effect.
Quantity effect: one more unit is sold, increasing TR by the price of that item.
Price effect: Selling the last unit forces the monopolist to cut the MP on all items sold; this decreased TR.

4. Why is marginal revenue (MR) less than price (P) in a monopoly?
MR < P due to the price effect. MR received is always lower than the price at which the monopolist sells the
item. This creates a wedge between the MR and demand curves.

5. Describe the differences between the MR curves in a perfectly competitive firm and a monopoly.
How does this relate to market power?
In a perfectly competitive firm, the MR curve is horizontal, since all the firms are price-takers with no market
power and therefore cannot influence the MP. In a monopoly, the firm can change the price to whatever they
like, forcing the curve to have a downward-sloping demand curve, which is always above the MR curve.

6. The quantity effect dominates the price effect when total quantity is low.

7. The price effect dominates the quantity effect when total quantity is high.

8. Why does the MR curve fall below zero?
The MR curve falls below zero because each additional item that is sold makes the monopolist lose money.

9. Look at figure 61.3. Compare the optimal output points of a monopoly and perfect competition.
What does this indicate about efficiency in a monopoly?
The optimal outpoint of a monopoly is less than that of perfect competition. The efficiency in a monopoly is less
than in perfect competition, since it cannot produce as many goods as a perfectly competitive industry,
meaning that the monopolist has fewer opportunities to sell and consumers have less opportunities to buy.

10. Compared with a competitive industry, a monopolist...
a. produces a smaller quantity
b. charges a higher price
c. earns a profit

11. What is the formula for profit? Write it three different ways.
Profit = TR - TC
P = (P
M
x Q
M
) (ATC
M
x Q
M
)
P = (P
M
ATC
M
) x Q
M

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12. Why do monopolists make profit in the long run?
They can make profits in the long run (unlike in perfect competition) since there are barriers to entry.

13. Draw a correctly labeled graph of a monopoly (See Figure 61.4)

Module 62: Monopoly and Public Policy (pages 617-621)

1. Terms:
1. public ownership: the government or a government-owned firm supplies the good in a monopoly
2. price regulation: limits the price a monopolist can charge

2. Why is monopoly inefficient?
A monopoly is inefficient because the consumers lose more than the monopolist gains, hurting the economy.

3. Why is the MC curve horizontal in Figure 62.1? (Think in terms of the authors purpose.)
The MC curve is horizontal because MC = P = ATC; MC = ATC because there is no fixed cost, making MC
constant.

4. What makes it difficult to break up a natural monopoly?
A natural monopoly is hard to break up because it may be a lose-lose situation for both the producers and
consumers.

5. What are the common solutions to dealing with natural monopolies and what are the positives and
negatives of each public policy strategy?
1. Public ownership
1. Advantages: Prices set based on efficiency, not profit
2. Cons: Less willing to keep prices down / sell good quality products, serve political interests
2. Regulation
1. Must be high enough to cover ATC
2. Advantages: Higher production at lower price, producer profits decreased increased
consumer surplus
3. Cons:

1. If price ceilings are used to manage monopolies, the price cannot fall under what level? Why?



2. What is meant by welfare effects?


Module 63: Price Discrimination (pages 624-629)

1. Terms:
a. single-price monopolist


b. price discrimination
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c. perfect price discrimination

2. Why is the example of the airline industry a good example of price discrimination?



3. What happens to consumer surplus when a monopoly practices price discrimination? Explain.



4. Why is the concept sensitivity to price important to understanding why monopolies price
discrimination?


5. Why is the concept willingness to pay important to understanding price discrimination?



6. What is apparent about the greater the number of prices?



7. Why is perfect price discrimination almost never possible in practice?



8. Describe these techniques for price discrimination. (3 points)
a. Advance purchase restrictions


b. Volume discounts


c. Two part tariffs


9. What is true about efficiency and price discrimination?



10. Why is price discrimination an ethical issue?