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Chapter 9: Monopoly

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Chapter 9: Monopoly

6 problems · 0 figures

9-1 §9.1 source ↗

Classify the following as a government-enforced barrier to entry, a barrier to entry that is not government-enforced, or a situation that does not involve a barrier to entry.

a. A patented invention

b. A popular but easily copied restaurant recipe

c. An industry where economies of scale are very small compared to the size of demand in the market

d. A well-established reputation for slashing prices in response to new entry

e. A well-respected brand name that has been carefully built up over many years

Answer

a. A patent is a government-enforced barrier to entry.

b. This is not a barrier to entry.

c. This is not a barrier to entry.

d. This is a barrier to entry, but it is not government-enforced.

e. This is a barrier to entry, but it is not directly government enforced.

9-2 §9.1 source ↗

Classify the following as a government-enforced barrier to entry, a barrier to entry that is not government-enforced, or a situation that does not involve a barrier to entry.

a. A city passes a law on how many licenses it will issue for taxicabs

b. A city passes a law that all taxicab drivers must pass a driving safety test and have insurance

c. A well-known trademark

d. Owning a spring that offers very pure water

e. An industry where economies of scale are very large compared to the size of demand in the market

Answer

a. This is a government-enforced barrier to entry.

b. This is an example of a government law, but perhaps it is not much of a barrier to entry if most people can pass the safety test and get insurance.

c. Trademarks are enforced by government, and therefore are a barrier to entry.

d. This is probably not a barrier to entry, since there are a number of different ways of getting pure water.

e. This is a barrier to entry, but it is not government-enforced.

9-3 §9.1 source ↗

Suppose the local electrical utility, a legal monopoly based on economies of scale, was split into four firms of equal size, with the idea that eliminating the monopoly would promote competitive pricing of electricity. What do you anticipate would happen to prices?

Answer

Because of economies of scale, each firm would produce at a higher average cost than before. (They would each have to build their own power lines.) As a result, they would each have to raise prices to cover their higher costs. The policy would fail.

9-4 §9.1 source ↗

If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?

Answer

Shorter patent protection would make innovation less lucrative, so the amount of research and development would likely decline.

9-5 §9.2 source ↗

Suppose demand for a monopoly’s product falls so that its profit-maximizing price is below average variable cost. How much output should the firm supply? Hint: Draw the graph.

Answer

If price falls below AVC, the firm will not be able to earn enough revenues even to cover its variable costs. In such a case, it will suffer a smaller loss if it shuts down and produces no output. By contrast, if it stayed in operation and produced the level of output where MR = MC, it would lose all of its fixed costs plus some variable costs. If it shuts down, it only loses its fixed costs.

9-6 §9.2 source ↗

Imagine a monopolist could charge a different price to every customer based on how much the customer is willing to pay. How would this affect monopoly profits?

Answer

This scenario is called “perfect price discrimination.” The result would be that the monopolist would produce more output, the same amount in fact as would be produced by a perfectly competitive industry. However, there would be no consumer surplus since each buyer is paying exactly what they think the product is worth. Therefore, the monopolist would be earning the maximum possible profits.

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Problems and answers are adapted from Principles of Microeconomics 3e by Steven A. Greenlaw, David Shapiro and Daniel MacDonald, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-microeconomics-3e/pages/1-introduction. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.