econ ch. 9 monopolies

A monopoly differs from perfect competition primarily because:

It is the only seller of a good with no close substitutes

For a monopolist with a downward-sloping demand curve:

Price is greater than marginal revenue

The monopolist maximizes profit by choosing the quantity where:

Marginal revenue = Marginal cost

Compared to the efficient quantity (where demand = MC), the monopolist produces:

Less and charges more

Deadweight loss in monopoly exists because:

Output is below the efficient level

A price ceiling below the monopoly price will generally:

Increase output toward efficiency

If demand is very elastic, the monopoly mark-up will be:

Very low

Perfect price discrimination results in:

Output equal to the efficient level

A two-part tariff is most useful when:

All consumers have identical demand and MC is close to zero

Static pricing is different from dynamic pricing because static pricing:

Ignores new information about demand changes

Why is marginal revenue less than price for a monopolist?

Because to sell an additional unit, the monopolist must lower the price on all units sold, so revenue gained on the last unit is less than the price charged.

Explain why monopoly causes a deadweight loss.

The monopolist restricts output below the efficient level (where demand = MC). Some mutually beneficial trades do not occur, reducing total welfare.

How does elasticity of demand affect monopoly pricing?

The less elastic the demand, the greater the mark-up the monopolist can charge above marginal cost.

What condition must be met for price discrimination to be effective?

The monopolist must be able to separate consumers into segments based on willingness to pay and prevent resale (no arbitrage).

How does a per-unit subsidy affect monopoly output and price?

It lowers marginal cost, increases output toward the efficient level, reduces price, and lowers deadweight loss (but must be financed somehow).

On a monopoly diagram, where is deadweight loss found?

The triangular area between the demand curve, marginal cost curve, and monopoly quantity (to the right of monopoly output but left of efficient output).

Draw a demand curve and label MR. Which curve is steeper? Why?

MR lies below demand and is steeper because price reductions apply to all units when selling additional output.

What is a monopoly?

A market with a single seller of a good and no close substitutes; the firm faces the entire downward-sloping market demand curve.

How does the demand curve differ for a competitive firm vs. a monopolist?

Competitive: horizontal demand (price-taker). Monopoly: downward-sloping demand (market power).

Why is marginal revenue less than price for a monopolist?

To sell an extra unit, the monopolist must lower price on all units, so additional revenue is less than price.

Monopoly profit-maximization rule

Choose quantity where MR = MC, then find price on the demand curve.

Market power

The ability to set price above marginal cost.

Monopoly pricing outcome (P vs MC)

Price is above marginal cost → mark-up.

Monopoly output vs. efficient output

Monopoly produces less than the efficient level (where demand = MC).

What causes monopoly deadweight loss?

Mutually beneficial trades do not occur because quantity is restricted below the efficient level.

Deadweight loss of monopoly (definition)

The welfare lost to society as output is too low — the area under demand above MC between monopoly and efficient quantities.

Consumer surplus under monopoly vs. competition

Lower under monopoly due to higher prices and lower quantity.

Relationship between elasticity of demand and mark-up

Less elastic demand → higher mark-up; more elastic demand → lower mark-up.

Why do firms try to reduce substitutability?

To increase market power and raise the mark-up.

How does a price ceiling affect a monopoly?

Reduces monopoly price and increases output toward the efficient level; shrinks deadweight loss.

Why can a price ceiling improve welfare in monopoly (unlike in competition)?

It pushes output closer to the efficient level rather than causing shortages.

Effects of a per-unit subsidy to a monopolist

Reduces marginal cost → more output, lower price, less deadweight loss (but must be financed).

Price discrimination definition

Charging different prices to different groups depending on willingness to pay, preventing resale.

Two requirements for effective price discrimination

Ability to segment consumers + ability to prevent transfers/resale (no arbitrage).

Perfect price discrimination

Each consumer pays their reservation price; output becomes efficient and consumer surplus goes to the monopolist.

Two-part tariff

A pricing scheme with an entry fee + per-unit price.

When is a pure two-part tariff optimal?

When all consumers have identical demand and marginal cost is near zero; set per-unit price = MC and entry fee = full consumer surplus.

Realistic case of two-part tariffs

With varied consumer demand, per-unit price slightly above MC and entry fee based on the lowest consumer who will still purchase.

Static pricing definition

Setting a future price that does not change even when demand changes.

Dynamic pricing definition

Adjusting prices over time as information changes (e.g., demand shocks, competitor actions).

Main inefficiency from static pricing

Firm may leave profit on the table if willingness to pay rises; secondary markets may exploit this.

MR for linear demand P=α−βQ

MR = α−2βQ — MR curve lies below demand.