Econ HW Ch 13 Monopoly 1 The United States Postal Service has a monopoly on non urgent First Class Mail and the exclusive right to put mail in private mailboxes Pfizer Inc makes LIPITOR a prescription drug that lowers cholesterol Cox Communications is the sole provider of cable television service in some parts of San Diego Substitutes for the U S Postal Service include Substitutes for LIPITOR include FedEx an UPS exercise and other statin drugs such as Zocor A Substitute is a good that can be used in place of another good Substitutes for Cox Communications include Satellite TV services The United States Postal Service has barrier to entry Pfizer has barrier to entry A legal a legal A Legal Barrier to Entry creates a legal monopoly a market in which competition and entry are restricted by the granting of a public franchise a government license patent or copyright Cox Communications has a barrier to entry regarding the entry of other cable companies into the market Natural The monopolies which profit from price discrimination are Only the United State Postal Service When a firm practices Price Discrimination it sells different units of a good or service for different prices 2 In a natural monopoly the firm Can supply the entire market at a lower cost than two or more firms can A Natural Barrier to Entry creates a natural monopoly a market in which economies of scale enable one firm to supply the entire market at the lowest possible cost 3 The following statements give some information about seven markets 1 Coca Cola cuts its price below that of Pepsi Cola in an attempt to increase its market share 2 A single firm protected by a barrier to entry produces a personal service that has no close substitutes 3 A barrier to entry exists but the good has some close substitutes 4 A firm offers discounts to students and seniors 5 A firm can sell any quantity it chooses at the going price 6 The government issues Nike an exclusive license to produce golf balls 7 A firm experiences economies of scale even when it produces the quantity that meets the entire market demand A monopoly might arise in the markets described in Statements 5 6 and 7 4 A single price monopoly maximizes profit by producing the quantity at which Marginal cost equals marginal revenue A Single Price Monopoly maximizes profit by producing the quantity at which marginal cost equals marginal revenue If Marginal Revenue is greater than marginal cost profit will increase by producing one more unit If marginal cost is greater than marginal revenue profit will increase by producing one less unit Only when marginal revenue equals marginal cost does the monopoly maximize profit 5 Sam s Surfboards is the sole renter of surfboards on Big Wave Island If marginal revenue is positive at the actual number of surfboard rentals made each hour then the demand for surfboard rentals is elastic 6 A monopoly Never produces an output in the inelastic range of the market demand because it could charge a higher price produce smaller quantity and increase its profit 7 The amount of consumer surplus that is transferred from the consumer to the monopoly equals the monopoly price minus the competitive price all multiplied by the monopoly quantity 8 A single price monopoly is because at the quantity produced inefficient marginal social benefit exceeds marginal social cost 9 Rent seeking is the attempt to capture consumer surplus producer surplus or economic profit Rent seeking increases deadweight loss above the original monopoly deadweight loss but the monopoly continues to produce the same inefficient quantity 10 Price discrimination increases a monopoly s economic profit by capturing consumer surplus 11 A perfect price discriminating monopoly produces the same quantity of output as a perfectly competitive market 12 When a monopoly that produces a service practices perfect price discrimination consumer surplus is zero
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