Monopoly: Potential costs and benefits of monopoly

Overview

Recall questions on The potential costs and benefits of monopoly.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Under third-degree price discrimination, which group is charged the higher price and why?

   Model answer

   The group whose demand is more price inelastic, because it will cut back its purchases least when the price rises, so the firm's revenue increases.

2. 2

   What happens to consumer and producer surplus when a firm price discriminates?

   Model answer

   Consumer surplus falls and part of it is transferred to the firm as additional producer surplus and profit, with perfect price discrimination extracting all of it.

3. 3

   Give two ways in which price discrimination can benefit consumers.

   Model answer

   Consumers in the more elastic market pay a lower price than they would under a single price, and the extra revenue can keep services running that would otherwise be closed as unprofitable.

4. 4

   Define natural monopoly.

   Model answer

   An industry in which long-run average cost falls continuously across the whole range of market demand, so one firm can supply the market more cheaply than two or more firms could.

5. 5

   Why would competition in a natural monopoly waste resources?

   Model answer

   Rivals would have to duplicate extremely costly infrastructure, raising average costs for everyone, so the total cost of supplying the market would rise.

6. 6

   How can a monopoly deliver a lower price than an industry of many small firms?

   Model answer

   If economies of scale are large, the monopolist's average costs may be so much lower that even after adding a profit margin its price is below what small firms could charge.

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