Monopoly (25)

What is a natural monopoly?

Organically formed, comes from large economies of scale

How is price determined by a monopoly?

Based on the amount supplied by a monopoly

At what MC do monopolies produce?

MC = MR

What is the formula for revenue

p(y) times y

What is price elasticity for a monopoly

e < 0

How does a monopolist act if elasticity is perfectly inelastic

As a competitive market

What is the formula for MR that accounts for price elasticity

MR = P(Y) (1  + 1/E)

What is that formula also equal to?

K , the monopolist's marginal cost of production at a constant $k

What is the relationship between MR and p for monopolies

MR < p

SInce p decreases as y increases, MR

Decreases as y increases

Why do monopolists sell less than a competitive market

Selling too much means revenue declines

What is markup pricing

Outprice price is the marginal cost of production plus the markup

How to find the markup; formula?

Pm/Pc which turns to 1 / (1 + 1/e)

What elasticity causes a smaller markup

Elastic, because any large markup and people will sub away

What elasticity do monopolies not operate between

-1 and 0

How are monopolies regulated?

With taxes

What is the cost function accounting for quantity tax

c(y) = (c + t)Y

What determines the extent of the tax burdened by consumers?

Elasticity

What effect does a tax have on output and price

Less output, higher prices

What function does the tax get added onto to find Pt and Yt

The cost function

What is the change in price after a tax for a linear demand function?

Delta p = t/2

What happens to the MC with a lump sum tax

It stays the same

Will firms produce with a large lump sum tax

As long as profits are still 0 or positive after it is subtracted

Do governments prefer quantity tax or lump sum tax

Whichever makes them the most profit after output is adjusted to the tax

What is a Pareto efficient market

When maximum possible total gains to trade are made; nothing else can be done unless one party loses out

In a competitive market, when does pareto efficiency occur?

When P = MC

Who receives most of the welfare there?

Consumers

In a monopoly, what signifies pareto inefficiency

Presence of deadweight loss

Who receives most of the welfare here?

The monopoly because there is decreasing consumer surplus

What is deadweight loss

Lost transactions that would take place in a competitive market but don’t in a monopoly

Would monopolies ever produce just a few items?

Fixed costs are too high, better to produce more so they’ll decrease (not too much tho)

If profits are 0, will firms enter or exit the market

All firms are indifferent

Is P = MC or MR = MC better for consumers?

P = MC because prices will be lower

Can a natural monopoly be forced to use MC pricing?

No because the firm will exit which destroys the market