Why does monopolization have the potential to increase prices and profitability significantly in the short run? Do you think this market will remain a monopoly in the long run?

Review questions for Week 6
  • Read the WSJ article on the attempted monopolization of the plastic clothes hanger market in this week’s notes. Why does monopolization have the potential to increase prices and profitability significantly in the short run? Do you think this market will remain a monopoly in the long run? Discuss your answer.

 

 

 

 

 

 

2) The graph below represents the monthly demand for a specialized laser-cutting tool. Assume that there is only 1 firm in the world that manufactures this laser tool. Its marginal and average cost curves are shown. Answer the questions below based on this information.

 

 

  1. Draw the firm’s marginal revenue schedule. (or describe its location)

 

 

 

  1. What is the price that leads to the highest level of profits for this firm?

 

 

  1. Show (or describe) the area on the graph that represents the above normal profits earned at the profit maximizing price output combination.

 

  1. d)Is this market a “natural monopoly?” Explain you answer.

 

  1. e)Is the minimum efficient scale of production large relative to the market, absolutely large or both relatively& absolutely large?

 

  1. f)What does your answer to (e) suggest about the height of barriers to entry?

 

  1. g)If threatened with entry, how would this firm’s pricing strategy likely change?

3) Why does the government create monopoly power via its patent system, when elsewhere it spends millions trying to prevent the emergence of or regulate monopoly power?

4) What combination of cost conditions tends to generate an absolutely large MES? Explain why the “IT” (information technology) revolution has the potential to generate a number of new natural monopoly markets.

 

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