Chapter 13 Problems

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Chapter 13 problems:

1. What is a monopoly and what is the chief distinction between that and a competitive market?

A monopoly is a firm that is the sole seller of a product without any close substitutes as competition. A monopoly has market power, unlike a competitive firm.

2. Why do monopolies arise and what are the three underlying sources for that reason?

Monopolies can arise due to a firm owning a key resource, government giving the firm exclusive rights (ex. Patents, copyright laws), and naturally due to making a product at a lower cost than other firms can.

3. How does a monopolist’s demand curve compare with a competitive firm’s demand curve?

A competitive demand curve slopes downward, however a monopolist’s demand curve is horizontal at the market price.

4. Describe the Marginal Revenue curve for a monopolist as depicted in Active Learning #1.

A marginal revenue curve for a monopolist is consistent at a downward slope.

5. What is the profit maximization point for a monopolist and how is profit shown graphically.

A monopolist maximizes the profit by producing a quantity where MR = MC. Once the quantity is found, it sets the highest price consumers are willing to pay for that quantity. This price is found from the D curve.

6. Comment about monopolies and supply curves.

Monopolies do not have an S curve due to Q not depending on P.

7. Comment about monopolies and new drugs and generic drugs.

Patents on new drugs give a temporary monopoly to the seller. Once the patent expires, the market becomes competitive and generic drugs appear.

8. What are the Welfare Costs of monopolies?

In a monopoly, the area between the MC point, Price point, and the Qc is the deadweight loss.

9. What are four public policy responses to monopolies?

The four public policy responses to monopolies are increasing competition with antitrust laws, regulation by setting the price, public ownership like...
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