Economics: Market Equilibrium and Monopoly - Prof. Jose J. Vazquez, Study notes of Microeconomics

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Week 11

Cong / Shirley

Competitive market Review

• Optimal Rule

--P=MR=MC

• Shut-Down Rule

--P=Minimum AVC

• Every Firm Break-even in the Equilibrium

--0=Profit=TR-TC=(P-ATC)*Q

Monopoly

• Monopoly Definition

--An industry controlled by a single producer

--There is no close substitutes to the good in this industry

• Strategy: Reduce Output (Why?)

--By doing so, it drives the market price above the competitive level, so gets higher profit

--The ability of changing market price is called the market power of monopolist

Comparison

• Individual perfectly competitive producer --Can’t change market price (What’s his demand curve?) --Optimal rule: P=MR=MC --No deadweight loss
• Monopolist --Has the market power to change the price --Optimal rule: MR=MC --Raise market price such that P>MR --Induce deadweight loss

Q2. A monopoly is a market characterized by:

a. a single seller.

b. a product with many close substitutes.

c. a large number of small firms.

d. a small number of large firms.

Q3. A competitive firm operating in the short run is maximizing profits and just breaking even. Its costs include a monthly license fee of $100 that is imposed by the state and must be paid for as long as the firm is in existence. The license fee is now raised to $150. To continue to maximize profits in the short run, the firm should:

a. increase price. b. increase output. c. reduce output. d. not change output.

Q5. Suppose that a monopoly firm is required to pay a new annual license fee just for the privilege of doing business in its city and that the fee is somewhat less than the economic profit the firm is now earning. In response to the increase in fees, the firm will:

a. raise its price, but by less than the amount of the license fee. b. raise its price by the amount of the license fee. c. raise its price by somewhat more than the license fee. d. not change its price.