Microeconomics- Chapter 12

What is a monopoly?

 A market structure with a single firm producin

What are the two key reasons a monopoly arises?

A: (1) No close substitutes and (2) Barriers to entry.

What are the three types of barriers to entry?

A: Natural, ownership, and legal barriers.

What is a natural monopoly?

What is a natural monopoly?
A: A market where economies of scale enable one firm to supply the entire market at the lowest cost.

Give an example of a natural monopoly.

A: Electric power, water, and gas utilities.

What are ownership barriers to entry?

A: Market control due to concentrated ownership (e.g., EssilorLuxottica in sunglasses).

What are legal barriers to entry?

A: Public franchises, government licenses, patents, and copyrights.

What are examples of information-age natural monopolies?

A: Microsoft (76% PC OS market) and Google (93% search engine market).

What is a single-price monopoly?

A: A monopoly that sells all units at the same price to all customers.

How is total revenue (TR) calculated?

A: TR = Price × Quantity.

How is marginal revenue (MR) calculated?

A: MR = ΔTR / ΔQ.

Why does the MR curve lie below the demand curve?

A: Because lowering price to sell an extra unit reduces revenue on all previous units.

What is the relationship between MR and elasticity of demand?

A:

• Elastic demand → MR positive

• Inelastic demand → MR negative

• Unit elastic → MR = 0

Where does a monopoly maximize profit?

A: Where MR = MC.

How does monopoly price compare to MC?

A: Monopoly price > marginal cost.

How do increases in fixed costs affect monopoly output?

A: They reduce profit but do not change the profit-maximizing output level.

In perfect competition, what determines price?

A: Market supply and demand intersection (P = MC).

In monopoly, how are price and output determined?

A: Price is set above MC; output is where MR = MC.

Compare monopoly and perfect competition in terms of output and price.

A: Monopoly produces less (QM < QC) and charges a higher price (PM > PC).

Why is monopoly inefficient?

A: Because marginal social benefit > marginal social cost, creating deadweight loss.

What happens to consumer and producer surplus in a monopoly?

A: Consumer surplus decreases; some is transferred to the monopolist as producer surplus, and some becomes deadweight loss.

What is price discrimination?

A: Selling the same good at different prices to different buyers.

What are the conditions necessary for price discrimination?

A: The firm must have market power, prevent resale, and identify different buyers.

What are two main types of price discrimination?

A: (1) Among groups of buyers (e.g., business vs leisure travelers)
(2) Among units of a good (e.g., second pizza discount)

What is perfect price discrimination?

A: When each unit is sold at the highest price each consumer is willing to pay, eliminating consumer surplus.

What is the effect of perfect price discrimination on efficiency?

A: Output increases to the efficient level (P = MC), and deadweight loss is eliminated.

How does price discrimination affect producer surplus?

A: It increases producer surplus and converts consumer surplus into economic profit.

What is rent seeking?

A: The pursuit of wealth by capturing economic rent through monopolies or lobbying.

What is rent-seeking equilibrium?

A: When competition among rent seekers drives economic profit to zero, increasing deadweight loss.

What is the natural monopoly dilemma?

A: Economies of scale make one firm efficient, but its market power leads to high prices and low output.

What are two main theories of regulation?

A:

• Social interest theory (regulation for efficiency)

• Capture theory (regulation benefits producers)

What is the marginal cost pricing rule?

A: Setting price equal to marginal cost to achieve efficient output, though it may cause losses for the firm.

What is average cost pricing?

A: Setting price equal to average total cost, allowing zero profit but causing deadweight loss.

What are rate-of-return and price-cap regulations?

A:

• Rate-of-return: Ensures profits don’t exceed a set level (can cause inefficiency).

• Price-cap: Sets a price ceiling to encourage cost control and efficiency.

How can firms cover losses under marginal cost pricing?

A: Through subsidies, price discrimination, or two-part tariffs.