Question

6. When monopolies waste resources attempting to prevent other firms from competing with them, it is referred to as:

A.

rent seeking.

B.

price fixing.

C.

cream skimming.

D.

price discriminating.

7. Price discrimination by a monopolist leads to the firm earning higher profits but it also delivers benefits to:

A.

competitors, because the good produced by the monopolist becomes more expensive.

B.

consumers, because consumer surplus increases because of the monopolist’s pricing actions.

C.

consumers, because prices are lowered to potential consumers who otherwise might not have been able to buy the good.

D.

competitors, because production techniques for the good produced are improved by the monopolist and the knowledge is shared.

True/False Questions

After watching the Market Power video lecture, consider the question(s) below. Then “submit” your response.

1. Market power reaches its maximum potential in a monopoly.

A.

True

B.

False

2. A profit-maximizing monopolist can charge any price to consumers.

A.

True

B.

False

3. All monopolies earn profits.

A.

True

B.

False

Answer 1

6. Price discrimination is a way to charge different prices from different buyers. This tends to both a whole spectrum of buyers and hence keeps competition away. So, when monopolies waste resources attempting to prevent other firms from competing with them, it is referred to as price discrimination.

7. Price discrimination lowers the price of goods for certain customers who otherwise might have not been able to buy the goods at the monopolistic level of price. So, price discrimination by a monopolist leads to the firm earning higher profits but it also delivers benefits to consumers, because prices are lowered to potential consumers who otherwise might not have been able to buy the good.

True/False:

1. Market power reaches its maximum potential in a monopoly. This is true. Because there is only one seller, who is free to set both prices and quantities. A monopoly actually controls a large portion of the market this way.

2. A profit-maximizing monopolist can charge any price to consumers. This is not true (false). Though a monopolist can choose the price he charges, he cannot control the demand curve of the good. So a monopolist faces the choice between either maximizing the quantity or the price.

3. A monopoly's marginal revenue curve lies below the demand curve, which means that price is always above the marginal cost. This means that a monopolist always makes a profit. This statement is, therefore, true.