ECON 213 TEST 4 REVIEW QUESTIONS
AND ANSWERS
The characteristics of a monopoly - ANSWER-One single seller
Unique product without close substitutes
High Barriers to entry
The seller can control the price, a price maker
Competitive Market in terms of price and quantity - ANSWER-Many firms
Produces an efficient level of output(since P=MC)
Cannot earn long-run economic profits
Has no market power(is a price taker)
Monopoly in terms of price and quantity - ANSWER-One Firm
Produces Less than the efficient level of output(since P>MC)
May earn long-run economic profits
Has significant market power(is a price taker)
Natural Monopoly - ANSWER-Has a lower cost than any potential competitors
I.e. some small town businesses such as a vet
Government Created Barriers to Entry - ANSWER-Licensing
Patents
Copyright Laws
Price maker - ANSWER-The seller can control the price
How to maximize-profit quantity and profit for a monopolist - ANSWER-MR=MC determines the output
The output and demand curve determine the price
Profit=(P-ATC)*Q
Rent Seeking - ANSWER-Securing Monopoly rights through the political process
Price Regulation(ATC pricing and MC pricing)-A potential solution to monopolies - ANSWER-Set P=ATC
Set P=MC
Government needs to subsidy the monopolist
The natural monopolist may not make effort to control the production cost
Conditions for price discrimination - ANSWER-Different price elasticity of demand
No arbitrage
The Benefit of price discrimination to the sellers - ANSWER-have higher PS
make a higher profit
The Benefit of price discrimination to the buyers - ANSWER-Benefit from more units offered for sale
Potential higher CS
Perfect price discrimination - ANSWER-Occurs when a firm sells the same good at a unique price to every
customer
Every consumer pays the highest price he/she is willing to pay
Captures all consumer surplus
No deadweight loss
Examples: airline tickets
Price Discrimination-Elasticity and Price - ANSWER-Charge a higher price to relatively inelastic consumer
group
Charge a lower price to relatively elastic consumer group
Price Discrimination Prequisites - ANSWER-In order to discriminate the firm must be able to distinguish
groups of buyers with different price elasticities of demand
There must not be the potential of arbitrage.
AND ANSWERS
The characteristics of a monopoly - ANSWER-One single seller
Unique product without close substitutes
High Barriers to entry
The seller can control the price, a price maker
Competitive Market in terms of price and quantity - ANSWER-Many firms
Produces an efficient level of output(since P=MC)
Cannot earn long-run economic profits
Has no market power(is a price taker)
Monopoly in terms of price and quantity - ANSWER-One Firm
Produces Less than the efficient level of output(since P>MC)
May earn long-run economic profits
Has significant market power(is a price taker)
Natural Monopoly - ANSWER-Has a lower cost than any potential competitors
I.e. some small town businesses such as a vet
Government Created Barriers to Entry - ANSWER-Licensing
Patents
Copyright Laws
Price maker - ANSWER-The seller can control the price
How to maximize-profit quantity and profit for a monopolist - ANSWER-MR=MC determines the output
The output and demand curve determine the price
Profit=(P-ATC)*Q
Rent Seeking - ANSWER-Securing Monopoly rights through the political process
Price Regulation(ATC pricing and MC pricing)-A potential solution to monopolies - ANSWER-Set P=ATC
Set P=MC
Government needs to subsidy the monopolist
The natural monopolist may not make effort to control the production cost
Conditions for price discrimination - ANSWER-Different price elasticity of demand
No arbitrage
The Benefit of price discrimination to the sellers - ANSWER-have higher PS
make a higher profit
The Benefit of price discrimination to the buyers - ANSWER-Benefit from more units offered for sale
Potential higher CS
Perfect price discrimination - ANSWER-Occurs when a firm sells the same good at a unique price to every
customer
Every consumer pays the highest price he/she is willing to pay
Captures all consumer surplus
No deadweight loss
Examples: airline tickets
Price Discrimination-Elasticity and Price - ANSWER-Charge a higher price to relatively inelastic consumer
group
Charge a lower price to relatively elastic consumer group
Price Discrimination Prequisites - ANSWER-In order to discriminate the firm must be able to distinguish
groups of buyers with different price elasticities of demand
There must not be the potential of arbitrage.
