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Unformatted text preview: A n s w e r s t o t h e R e v i e w Q u i z z e s Page 301 1. How does monopoly arise? Monopoly arises if a firm is selling a good that has no close substitutes and if the firm is protected from competition by a barrier to entry. As a result, a monopoly is the only firm in its market. 2. How does a natural monopoly differ from a legal monopoly? The barrier to entry protecting a natural monopoly is the firms cost. For a natural monopoly, the costs are such that one firm can supply the entire market at lower cost than could two or more firms. The barrier to entry protecting a legal monopoly is a legal prohibition preventing competitors from entering the market. Copyrights, patents, government licenses, and public franchises are legal barriers to entry. 3. Distinguish between a price-discriminating monopoly and a single-price monopoly. A single-price monopoly charges every consumer the same price for each unit of the good or service the consumer buys. A price-discriminating monopolist might charge different consumers different prices for the same good or service or charge the same consumer different prices for different units of the good or service. When a firm practices price discrimination, it sells different units of a good or service for different prices. Page 305 1. What is the relationship between marginal cost and marginal revenue when a single-price monopoly maximizes profit? A single-price monopoly firm maximizes profit by producing an amount of output so that marginal cost equals marginal revenue ( MR = MC ). 2. How does a single-price monopoly determine the price it will charge its customers? The market demand curve is the monopolists demand curve. The demand curve shows the maximum price at which the monopoly can sell its profit-maximizing level of output. 3. What is the relationship between price, marginal revenue, and marginal cost when a single- price monopoly is maximizing profit? MR &lt; P for every level of output. A profit-maximizing monopoly firm produces the amount of output that sets MR = MC. As a result, MC must be below price: MC = MR &lt; P . 13 MONOPOLY C h a p t e r 2 3 8 4. Why can a monopoly make a positive economic profit even in the long run? Barriers to entry prevent the monopoly firm from enduring the pressure of competition, and allow it to choose the quantity of output that is associated with the profit-maximizing market price. This allows a monopoly firm to potentially enjoy positive economics profit, even in the long run. Page 309 1. Why does a single-price monopoly produce a smaller output and charge more than the price that would prevail if the industry were perfectly competitive? The market supply curve for a competitive industry is the horizontal sum of the individual firms marginal cost curves. Equilibrium output in this competitive market is determined where the market supply curve intersects the market demand curve, and at this point market price equals marginal cost. Equilibrium output for a single-price monopoly is determined at the intersection of cost....
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This note was uploaded on 07/21/2011 for the course ECON 201 taught by Professor Weeks during the Spring '11 term at Southwestern Michigan College.
- Spring '11