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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