Deck 23: Monopoly

Question 1

If the market demand curve has constant price elasticity of -1,the monopolist's price should approach infinity.

Answer 1

True
Constant price elasticity of -1 implies that price can always be raised without revenue changing.This implies that,whatever price the monopolist charges,he can always to better by increasing his price (so long as MC>0).

Question 2

If a monopolist were allowed (and able)to first degree price discrimination,there would be no efficiency/equity tradeoff so long as the government can tax the profits of the firm and redistribute the tax revenues in a lump sum way.

Answer 2

True
The efficient output level is produced under first degree price discrimination -- and neither a profits tax nor a lump sum subsidy creates inefficiencies.Thus,one could achieve a more "equitable" outcome without any efficiency distortions.

Question 3

For any constant-elasticity market demand curve,a monopolist is profit maximizing regardless of what quantity he produces so long as marginal costs are zero.

Answer 3

False
This is true only if the constant price elasticity is -1.

Question 4

Depending on the shape of the marginal cost curve,a monopolist might produce an output level on the elastic or the inelastic part of demand.

Question 5

The more profit a monopolist makes,the more inefficient is the monopoly outcome.

Question 6

The more consumer surplus is generated in a market dominated by a single monopoly,the more efficient the outcome.

Question 7

Since revenue increases with increases in price when demand is relatively inelastic,monopolists produce on the inelastic part of demand.

Question 8

A monopolist will not produce at all if the intersection of marginal revenue and marginal cost occurs at a quantity at which average cost lies above the demand curve.

Question 9

A (non-price discriminating)monopolist with zero marginal cost but recurring fixed costs may end up not producing even if it would be efficient for him to produce.

Question 10

Unlike perfectly competitive firms,monopolists produce where marginal revenue intersects marginal cost.

Question 11

First degree price discrimination is efficient and therefore preferred by everyone to no price discrimination on the part of a monopolist.

Question 12

In the absence of recurring fixed costs,a monopolist will always produce a positive output quantity.

Question 13

Suppose a monopolist has zero marginal cost.If he faces a market demand curve with constant price elasticity of -2,the profit maximizing output level approaches infinity.

Question 14

If a monopolist has no marginal costs and only recurring fixed costs,then,if he produces,any quantity that he produces is profit maximizing if the price elasticity of market demand is -1.

Question 15

Low demand consumers are indifferent between second degree and first degree price discrimination.

Question 16

In the presence of positive production externalities,a monopolist might produce the efficient output level.

Question 17

Suppose a monopolist produces a positive level of output.If marginal costs are zero,this output level will occur where price elasticity of demand is exactly -1 unless there are recurring fixed costs.

Question 18

Consumers prefer inefficient third degree price discrimination to efficient first degree price discrimination.

Question 19

When perfect price discrimination comes in the form of a two-part tariff,one part of the "tariff" just covers marginal costs.

Question 20

Under second degree price discrimination,the average price per unit paid by high demand consumers is not equal to marginal willingness to pay for one additional unit.

Question 21

How would a regulator of a monopoly think differently about regulating price discrimination depending on whether the regulator's objective is to maximize efficiency or to maximize consumer surplus?

Question 22

Suppose a monopolist has marginal cost of zero but recurring fixed costs.Then the monopolist will produce the efficient level of output so long as he can first degree price discriminate.

Question 23

Explain what the Saudi oil minister meant when he warned OPEC of using its market power too much by saying "Remember,the Stone Age did not end because we ran out of stones."

Question 24

Suppose a monopolist has zero marginal cost but positive recurring fixed costs.Then,if it is efficient to produce,the efficient quantity to produce occurs where demand crosses the horizontal (quantity)axis.

Question 25

What are some obstacles to price discrimination that a monopolist who is protected by high barriers to entry might face?

Question 26

Suppose a single firm has constant marginal cost and faced the demand curve
a.Illustrate in this graph how a monopolist who cannot price discriminate would price this good.What is the monopoly price and quantity?
b.Assuming no recurring fixed costs,how much profit does the monopolist make? How much consumer surplus is generated?
c.If the monopolist were able to first-degree price discriminate instead,how much would he produce? How much profit would he make? How much consumer surplus is generated?
d.Which outcome is more efficient and why?

Question 27

If a monopolist has downward sloping average costs,he will not produce if he cannot price discriminate.

Question 28

Consider a commonly owned fishery in a market with no other fisheries.Given the Tragedy of the Commons,it is more efficient to let a single firm take over the fishery even if that gives the firm monopoly power.

Question 29

One way to deal with the efficiency problem of monopolies is to tax the profits of monopolists.

Question 30

Because of the monopoly power that comes with being the only firm to produce a product,it is always more efficient to have multiple firms in an industry.

Question 31

If a monopolist faced a downward sloping average cost curve that lies fully above market demand,he will not produce if he can only charge a single per-unit price,but it would also be inefficient for him to produce.

Question 32

Explain why the deadweight loss from monopoly power may be exacerbated if the barrier to entry that creates monopoly power is created through exclusive government granting of a monopoly.For what types of government grants of monopoly power might this not be the case?