All Flashcards
In a monopoly graph, where is the profit-maximizing quantity located?
Where marginal revenue (MR) equals marginal cost (MC).
In a monopoly graph, where is the socially optimal quantity located?
Where price (P) equals marginal cost (MC).
How does a per-unit tax affect the MC and ATC curves on a graph?
Both the MC and ATC curves shift upward.
How does a lump-sum tax affect the MC and ATC curves on a graph?
The ATC curve shifts upward, but the MC curve remains unchanged.
On a monopoly graph, how is deadweight loss represented?
The area between the demand curve and the marginal cost curve, from the monopoly's output to the socially optimal output.
On a cost curve graph, how is a per-unit subsidy shown?
A downward shift of the MC and ATC curves.
On a cost curve graph, how is a lump-sum subsidy shown?
A downward shift of the ATC curve only.
In a monopoly graph with a fair-return price ceiling, where is the new quantity produced?
At the intersection of the demand curve and the average total cost curve.
What does the area between the demand curve and MC curve represent?
Total surplus (consumer surplus + producer surplus).
How does a price ceiling affect consumer and producer surplus in a monopoly graph?
A price ceiling can increase consumer surplus and decrease producer surplus, but it depends on the specific level of the price ceiling.
How does a per-unit tax affect a firm's supply curve?
It shifts the supply curve upward (or to the left) because it increases the marginal cost of production.
How does a lump-sum tax affect a firm's decision to shut down in the short run?
It does not affect the shutdown decision because it doesn't change marginal cost. The firm will continue to produce as long as price is greater than average variable cost.
Why might a government choose to regulate a monopoly?
To reduce deadweight loss and increase social welfare by encouraging the monopoly to produce closer to the socially optimal level.
What happens if a regulated monopoly is forced to produce at the socially optimal point?
The monopoly may incur economic losses and require a subsidy to remain in operation.
If a city imposes a license fee on all taxi companies, is this a per-unit or lump-sum tax?
This is a lump-sum tax because it's a fixed fee regardless of how many rides the taxi company provides.
How does a per-unit subsidy affect the marginal cost curve?
A per-unit subsidy decreases marginal cost, shifting the MC curve downward.
How does a lump-sum subsidy affect the average total cost curve?
A lump-sum subsidy decreases average total cost, shifting the ATC curve downward.
Why is the fair-return price considered a compromise?
It allows the monopoly to break even without requiring subsidies, but it doesn't eliminate all deadweight loss.
How does government regulation impact a monopoly's output and price?
Regulation can lead to increased output and lower prices compared to an unregulated monopoly, moving the market closer to allocative efficiency.
What are the potential unintended consequences of regulating a monopoly at the socially optimal point?
The need for ongoing subsidies can create a burden on taxpayers and may lead to political challenges in maintaining the subsidy.
What is a potential drawback of using a per-unit tax to correct a market failure?
It can increase production costs and prices, potentially harming consumers.
What is a potential benefit of using a subsidy to encourage production?
It can lower production costs and prices, potentially benefiting consumers and increasing output.
What are the challenges of implementing a socially optimal price for a natural monopoly?
It often requires government subsidies, which can be difficult to sustain politically and financially.
What are the advantages of implementing a fair-return price for a natural monopoly?
It allows the monopoly to remain profitable without requiring government subsidies, making it a more sustainable regulatory option.
How does a price ceiling impact a monopoly's profits?
It can reduce or eliminate the monopoly's profits, depending on the level at which the ceiling is set.
How does a per-unit tax affect the quantity supplied in a competitive market?
It decreases the quantity supplied.
How does a per-unit subsidy affect the quantity supplied in a competitive market?
It increases the quantity supplied.
What are the potential effects of regulating a monopoly's quality of service?
It can lead to higher costs for the monopoly, potentially resulting in higher prices or reduced output.
What is the impact of a price floor on a monopolistic market?
A price floor above the market price will lead to a surplus, while a price floor below the market price will have no effect.
How can the government encourage competition in a monopolized market?
By breaking up the monopoly into smaller firms, reducing barriers to entry, or encouraging innovation.