Only $2.99/month

ECON1123-CH14-MONOPOLY

Terms in this set (27)

Incorrect. A natural monopoly occurs when one firm can produce at a lower average cost than several smaller firms due to economies of scale. Which graph here shows economies of scale? Double-check your other choices too.

Incorrect. Single price monopolists produce the quantity where MR=MC. Which firm earns a profit of $2 when producing a quantity of 2? Double- check your other choices too.

Natural Monopoly: The bottom left graph shows a regulated natural monopoly that is earning zero economic profit. A natural monopoly occurs when economies of scale lead to one firm being able to produce at a lower average cost than could several smaller firms. Tap water is an example of this kind of a good, where the large fixed costs associated with cleaning/processing water and constructing a piping system imply that the lowest-cost method to produce the good is with one firm. The bottom left graph is the only one showing a declining average cost curve, indicating that this is the natural monopoly. Perfect Price Discriminating Monopoly: Perfect price discrimination occurs when firms charge each person the absolute most that they would be willing to pay for the good. As the demand curve shows the most that consumers will pay, the demand curve for these types of firms is also marginal revenue curve. Profit is the area between the demand curve and the average total cost curve for all units. Profit for the firm characterized by the bottom right graph is $12.50 (calculated as 1/2($9-$4)(5)) indicating that this is the perfect price discriminating firm. Single Price Monopoly: The single price monopolist is shown in the top right graph. At the profit maximizing output of 2, the firm is able to charge a price of $7 and has an average total cost of $6 (these are the heights of the demand curve and average total cost curve, respectively, at the quantity of 2). Subtracting the cost from the price that the firm gets for each unit and multiplying by the number of units sold leaves this firm with a profit of $2. Price Discriminating Monopoly: The top left graph shows the firm can charge some people $8 and others $6. Knowing that the firm is earning a profit of $5 is critical here because this is only way to conclude that top left graph shows the price discriminating firm. To calculate profit here, add the profit that the firm gets for units sold at each price. At a price of $8, the demand curve shows that the firm can sell 1 unit. The cost of this first unit is $5, meaning the firm profits $3 from units sold at the higher price. Lowering the price to $6, the firm sells two more units at an additional cost of $5 each. The firm therefore earns an additional $2 of profit on units sold for $6. Add the profit for all of the units sold for firms\' total profit of $5. The top left graph is only one in which a firm charging these two prices will earn $5 of profit.

DECLINING AVERAGE COST CURVE = NATURAL MONOPOLY
Perfect Competition: In any market, consumer surplus and producer surplus depend on market price. To find consumer surplus in a perfectly competitive market, find the equilibrium price and compare it to the demand curve. The area below demand and above the equilibrium price is consumer surplus. To find producer surplus in a perfectly competitive market, find the equilibrium price and compare it to the supply curve. The area above the supply curve and below the equilibrium price is producer surplus. In most graphs these will both be triangles. Total surplus, the sum of consumer and producer surplus is maximized in a perfectly competitive market. Therefore, there is not deadweight loss or loss of economic efficiency in a perfectly competitive market. As with a perfectly competitive market, producer and consumer surplus are dependent on market price. However, the market price is derived by finding the optimal quantity supplied and price charged by the monopolist. The monopolist maximizes profits where marginal revenue (MR) of the final output equals marginal cost (MC) of the final output. The graph includes both of these lines and the optimal quantity can be found where these two line intersect. Since monopolists have market power, they are able to charge a price greater than their marginal cost. To find optimal price, find the price on the demand curve associated with the optimal quantity. Monopoly: Consumer surplus in a monopoly is found in the exact same way as in a perfectly competitive market. The area below the demand curve and above the market price is consumer surplus. Producer surplus is the area below price and above the supply curve. For a monopolist, the supply curve is equal to its marginal cost curve. The area above the marginal cost curve and below the price is producer surplus. Since the monopolist does not produce output greater than MR equal to MC, the producer surplus does not include the area to the right of the optimal quantity and below price. This area is a loss of economic efficiency compared to the perfectly competitive market and is referred to as DWL. Because monopolies exhibit a DWL, they do not maximize total surplus in the market and are therefore less efficient than a perfectly competitive market.