Monopoly, monopolistic competition, oligopoly, and game theory as taught in the AP course.
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- What is a natural monopoly?
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An industry where one firm can produce the entire market output at a lower average total cost than any combination of multiple firms, typically because of extremely high fixed costs or economies of scale.- How does a monopolist's marginal revenue curve relate to its demand curve?
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The monopolist's MR curve lies below its demand curve because price must be lowered to sell additional units, so MR is less than price.- Explain why a monopoly produces at a point where P > MC in equilibrium.
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A monopoly charges a price on the demand curve that corresponds to the profit-maximizing quantity where MR = MC, and since MR < P for a monopolist, price must exceed marginal cost.- What is allocative inefficiency in a monopoly?
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The monopoly produces less output and charges a higher price than the socially optimal level, resulting in deadweight loss because the value to society (price) exceeds the cost to produce (MC) for the last units not produced.- What is productive inefficiency in a monopoly?
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The monopoly does not produce at the lowest point of its average total cost curve, resulting in higher average costs than would occur at the competitive output level.- Define rent-seeking behavior in the context of monopoly.
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The use of resources to acquire or maintain monopoly power, such as spending on lobbying, legal barriers, or other activities that do not increase productive output.- What distinguishes a price taker from a price maker?
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A price taker is a firm that accepts the market price and cannot influence it (perfect competition), while a price maker can set its own price because it has market power (monopoly or imperfect competition).- How does consumer surplus change when a market shifts from perfect competition to monopoly?
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Consumer surplus decreases because the monopoly charges a higher price and produces less output, leaving consumers with less benefit relative to what they pay.- What is deadweight loss in a monopoly market?
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The loss of total economic surplus because the monopoly underproduces relative to the socially efficient level, resulting in forgone mutually beneficial trades.- Why do firms in monopolistic competition earn zero economic profit in the long run?
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Entry of new competitors in response to positive economic profit drives down market share and price until each firm's price equals its average total cost, leaving only normal profit.- What role does product differentiation play in monopolistic competition?
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Product differentiation allows firms to have some control over price (demand is downward-sloping) and to compete on quality, design, or brand rather than price alone.- Why is monopolistic competition productively inefficient?
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Each firm produces at an output level where average total cost is not minimized, leaving unused excess capacity because the firm produces less than the minimum-ATC quantity.- Define excess capacity in monopolistic competition.
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The difference between the firm's actual output and the output at which average total cost is minimized, representing underutilized production potential.- How do firms in monopolistic competition compete?
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Through product differentiation, advertising, brand loyalty, and non-price competition rather than direct price competition, since each firm produces a slightly different product.- What happens to price in long-run equilibrium for a firm in monopolistic competition?
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Price falls from the short-run level as new firms enter with similar products, reducing each firm's market share and forcing price down until it equals average total cost.
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