Documente Academic
Documente Profesional
Documente Cultură
9 Monopoly
© Tim Wright/Corbis
H ow can a firm monopolize a market? Why aren’t most markets monopo-
lized? Why don’t most monopolies last? Why don’t monopolies charge the
highest possible price? Why do some firms offer discounts to students, senior citi-
zens, and other groups? Why are some airfares lower with a weekend stay? These and
other questions are answered in this chapter, which looks at our second market
structure—monopoly.
Monopoly is from the Greek, meaning “one seller.” In some parts of the United
States, monopolists sell electricity, cable TV service, and local phone service. Mo-
nopolists also sell postage stamps, hot dogs at sports arenas, some patented products,
and other goods and services with no close substitutes.You have probably heard
about the evils of monopoly.You may have even played the board game Monopoly on a rainy
N e t Bookmark day. Now we will sort out fact from fiction.
Like perfect competition, pure monopoly is not as common as other market structures.
For more information about But by understanding monopoly, you will grow more familiar with market structures that
patents—their purpose, what lie between the extremes of perfect competition and pure monopoly.This chapter examines
can be patented, how to apply,
what rights are included—go to
the sources of monopoly power, how a monopolist maximizes profit, differences between
the U.S. Patent and Trademark monopoly and perfect competition, and why a monopolist sometimes charges different
Office’s Web page on General prices for the same product.Topics include:
Information Concerning Patents
at http://www.uspto.gov/web/ • Barriers to entry • Monopoly and resource allocation
offices/pac/doc/general/. How
does the Patent Office treat the
• Price elasticity and marginal • Welfare cost of monopoly
information provided about a revenue • Price discrimination
new invention? Why do you
suppose that some firms prefer • Profit maximization and • The monopolist’s dream
not to seek patent protection for loss minimization
new inventions? What types of
intellectual property, other than
new machines and processes,
can be protected by patents?
Barriers to Entry
As noted in Chapter 3, a monopoly is the sole supplier of a product with no close substitutes.
Why do some markets come to be dominated by a single supplier? A monopolized market
BARRIER TO ENTRY is characterized by barriers to entry, which are restrictions on the entry of new firms into
Any impediment that prevents new an industry. Because of barriers, new firms cannot profitably enter that market. Let’s exam-
firms from entering an industry and ine three types of entry barriers: legal restrictions, economies of scale, and the monopolist’s
competing on an equal basis with
existing firms control of an essential resource.
Legal Restrictions
One way to prevent new firms from entering a market is to make entry illegal. Patents, li-
censes, and other legal restrictions imposed by the government provide some producers
with legal protection against competition.
competitors. For example, many states sell liquor and lottery tickets, and the U.S. Postal Ser-
vice has the exclusive right to deliver first-class mail to your mailbox.
Economies of Scale
A monopoly sometimes occurs naturally when a firm experiences economies of scale, as re-
flected by the downward-sloping, long-run average cost curve shown in Exhibit 1. In such
instances, a single firm can supply market demand at a lower average cost per unit than
could two or more firms each producing less. Put another way, market demand is not great
enough to allow more than one firm to achieve sufficient economies of scale.Thus, a single
firm will emerge from the competitive process as the only supplier in the market. For ex-
ample, even though the production of electricity has become more competitive, the transmis-
sion of electricity still exhibits economies of scale. Once wires are run throughout a com-
munity, the marginal cost of linking additional households to the power grid is relatively
small. Consequently, the average cost of delivering electricity declines as more and more
households are wired into the system.
A monopoly that emerges from the nature of costs is called a natural monopoly, to distin-
guish it from the artificial monopolies created by government patents, licenses, and other
legal barriers to entry. A new entrant cannot sell enough to enjoy the economies of scale
enjoyed by an established natural monopolist, so market entry is naturally blocked. A later
chapter will discuss the regulation of natural monopolies.
E X H I B I T 1
$
Economies of Scale as a
Barrier to Entry
Cost per unit
Long-run
average cost
Quantity
per period
196 Part 3 Market Structure and Pricing
U.S. maker of aluminum from the late 19th century until World War II. Its monopoly power
initially stemmed from production patents that expired in 1909, but for the next three
decades, it controlled the supply of bauxite, the key raw material. (2) Professional sports
leagues try to block the formation of competing leagues by signing the best athletes to long-
term contracts and by seeking the exclusive use of sports stadiums and arenas. (3) China is a
monopoly supplier of pandas to the world’s zoos.The National Zoo in Washington, D.C.,
for example, rents its pair of pandas from China for $1 million a year. As a way of control-
ling the panda supply, China stipulates that any offspring from the pair becomes China’s
property.1 Finally, (4) since the 1930s, the world’s diamond trade has been controlled pri-
marily by De Beers Consolidated Mines, which mines diamonds and also buys most of the
world’s supply of rough diamonds, as discussed in the following case study.
1. Francis Clines, “Capital Exults Over Pandas,” New York Times, 7 December 2000.
Chapter 9 Monopoly 197
the world’s largest, stopped selling to De Beers in 1996. And Yellowknife, a huge Canadian
mine, began operations in 1998, but De Beers is guaranteed only about one-third of its out-
put. As a result of all this erosion, DeBeers’ share of the world’s uncut diamond supply
slipped from nearly 90 percent in the mid-1980s to about 62 percent in 2002.Worse still for
De Beers, newly developed synthetic diamonds are starting to appear on the market. To
counter that threat, De Beers is supplying precision equipment to jewelers so they can spot
synthetic diamonds.
A monopoly that relies on the control of a key resource, as De Beers does, loses its power
once that control slips away. In a reversal of policy, De Beers now says it will abandon efforts
to control the world diamond supply and will instead become the “supplier of choice” by
promoting the DeBeers brand of diamonds. But as of 2004 there are only a few DeBeers
retail stores worldwide, in London and in Tokyo. De Beers is now trying to settle U.S. an-
titrust charges so it can open stores in the states. (Americans account for only 5 percent of
the world’s population but for half the world’s diamond purchases.) In an effort to differen-
tiate its diamonds, De Beers is etching the company name and an individual security num-
ber on some diamonds.Whether this branding effort will work remains to be seen.
Sources: Phyllis Berman and Lea Goldman, “The Billionaire Who Cracked De Beers,” Forbes, 15 September 2003;
Rob Walker, “The Right-Hand Diamond Ring,” New York Times, 4 January 2004; Joshua Davis, “The New Diamond
Age,” Wired Magazine, September 2003; John Wilke, “De Beers Is in Talks to Settle Charges of Price Fixing,” Wall
Street Journal, 24 February 2004; and the De Beers home page at http://www.adiamondisforever.com/.
Local monopolies are more common than national or international monopolies. In rural
areas, monopolies may include the only grocery store, movie theater, or restaurant for miles
around.These are natural monopolies for products sold in local markets. But long-lasting mo-
nopolies are rare because, as we will see, a profitable monopoly attracts competitors.Also, over
time, technological change tends to break down barriers to entry. For example, the develop-
ment of wireless transmission of long-distance calls created competitors to AT&T.Wireless
transmission will soon erase the monopoly held by local cable TV providers and even local
phone service. Likewise, fax machines, email, the Internet, and firms such as FedEx now com-
pete with the U.S. Postal Service’s monopoly, as we will see in a later case study.
E X H I B I T 2
$7,000 Loss
6,750
A Monopolist’s Gain and
Loss in Total Revenue from
What’s the monopolist’s marginal revenue from selling a fourth diamond? When De
Beers drops the price from $7,000 to $6,750, total revenue goes from $21,000 to $27,000.
Thus, marginal revenue—the change in total revenue from selling one more diamond—is
$6,000, which is less than the price, or average revenue, of $6,750. For a monopolist, marginal
revenue is less than the price, or average revenue. Recall that for a perfectly competitive firm,
marginal revenue equals the price, or average revenue, because that firm can sell all it wants
to at the market price.
E X H I B I T 3
(1) (2) (3) (4)
1-Carat Diamonds Price Total Revenue Marginal Revenue
per Day (average revenue) (TR 5 p 3 Q) (MR 5 ∆TR/∆Q)
(Q) (p)
Revenue Schedules
Let’s flesh out more fully the revenue schedules behind the demand curve of Exhibit 2. Col-
umn (1) of Exhibit 3 lists the quantity of diamonds demanded per day, and column (2) lists
the corresponding price, or average revenue. The two columns together are the demand
schedule facing De Beers for 1-carat diamonds.The price in column (2) times the quantity
in column (1) yields the monopolist’s total revenue, shown in column (3). So TR = p 3 Q.
As De Beers expands output, total revenue increases until quantity reaches 15 diamonds.
Marginal revenue, the change in total revenue from selling one more diamond, appears in
column (4). In shorthand, MR = ∆TR/∆Q, or the change in total revenue divided by the
change in quantity. Note in Exhibit 3 that after the first unit, marginal revenue is less than
price. As the price declines, the gap between price and marginal revenue widens because
the loss from selling all diamonds for less increases (because quantity increases) and the gain
from selling another diamond decreases (because the price falls).
Revenue Curves
The data in Exhibit 3 are graphed in Exhibit 4, which shows the demand and marginal rev-
enue curves in panel (a) and the total revenue curve in panel (b). Recall that total revenue
equals price times quantity. Note that the marginal revenue curve is below the demand curve and
200 Part 3 Market Structure and Pricing
16 32 1-carat diamonds
per day
$60,000
Total dollars
Total revenue
0 16 32 1-carat diamonds
per day
that total revenue reaches a maximum when marginal revenue reaches zero.Take a minute now to
study these relationships—they are important.
Again, at any level of sales, price equals average revenue, so the demand curve is also the
monopolist’s average revenue curve. In Chapter 5 you learned that the price elasticity for a
Chapter 9 Monopoly 201
straight-line demand curve decreases as you move down the curve.When demand is elas-
tic—that is, when the percentage increase in quantity demanded more than offsets the per-
centage decrease in price—a decrease in price increases total revenue.Therefore, where de-
mand is elastic, marginal revenue is positive, and total revenue increases as the price falls. On the
other hand, where demand is inelastic—that is, where the percentage increase in quantity
demanded is less than the percentage decrease in price—a decrease in price reduces total
revenue. In other words, the loss in revenue from selling all diamonds for the lower price
overwhelms the gain in revenue from selling more diamonds.Therefore, where demand is in-
elastic, marginal revenue is negative, and total revenue decreases as the price falls.
From Exhibit 4, you can see that marginal revenue turns negative if the price drops be-
low $3,750, indicating inelastic demand below that price. A profit-maximizing monopolist
would never willingly expand output to where demand is inelastic because doing so would reduce total
revenue. It would make no sense to sell more just to see total revenue drop. Also note that
demand is unit elastic at the price of $3,750. At that price, marginal revenue is zero and to-
tal revenue reaches a maximum.
exceeds 10 diamonds per day, marginal cost exceeds marginal revenue. An 11th diamond’s
marginal cost of $3,250 exceeds its marginal revenue of $2,500. For simplicity, we say that
the profit-maximizing output occurs where marginal revenue equals marginal cost, which, you will
recall, is the golden rule of profit maximization.
Graphical Solution
The cost and revenue data in Exhibit 5 are graphed in Exhibit 6, with per-unit cost and rev-
enue curves in panel (a) and total cost and revenue curves in panel (b).The intersection of
the two marginal curves at point e in panel (a) indicates that profit is maximized when 10 di-
amonds are sold.At that quantity, we move up to the demand curve to find the profit-maxi-
mizing price of $5,250.The average total cost of $4,000 is identified by point b. The average
profit per diamond equals the price of $5,250 minus the average total cost of $4,000. Eco-
nomic profit is the average profit per unit of $1,250 multiplied by the 10 diamonds sold, for
a total profit of $12,500 per day, as identified by the shaded rectangle. So the profit-maximizing
rate of output is found where the rising marginal cost curve intersects the marginal revenue curve.
Chapter 9 Monopoly 203
E X H I B I T 6
(a) Per-unit cost and revenue
Marginal cost
Monopoly Costs and
Average total cost Revenue
Dollars per unit
Total cost
Maximum
profit
$52,500
Total dollars
40,000
Total revenue
15,000
In panel (b), the firm’s profit or loss is measured by the vertical distance between the to-
tal revenue and total cost curves. De Beers will expand output as long as the increase in to-
tal revenue from selling one more diamond exceeds the increase in total cost. The profit-max-
imizing firm will produce where total revenue exceeds total cost by the greatest amount. Again, profit
is maximized where De Beers sells 10 diamonds per day. Note again that in panel (b), total
profit is measured by the vertical distance between the two total curves, and in panel (a), total
204 Part 3 Market Structure and Pricing
profit is measure by the shaded area formed by multiplying average profit per unit by the
number of units sold.
One common myth about monopolies is that they charge the highest price possible. But
the monopolist is interested in maximizing profit, not price.The monopolist’s price is lim-
ited by consumer demand. De Beers, for example, could charge $7,500 but would sell only
one diamond at that price and would lose money. Indeed, De Beers could charge $7,750 or
more but would sell no diamonds. So charging the highest possible price is not consistent
with maximizing profit.
E X H I B I T 7
Marginal cost
For example, suppose the monopoly relies on a patent. Patents last only so long and even
while its product is under patent, the monopolist often must defend it in court (patent liti-
gation has increased more than half in the last decade). On the other hand, a monopolist
may be able to erase a loss (most start-up firms lose money initially) or increase profit in the
long run by adjusting the scale of the firm or by advertising to increase demand. A monop-
olist unable to erase a loss will leave the market.
E X H I B I T 8
a
society of producing the final unit sold. As noted in the previous chapter, when the mar-
ginal benefit that consumers derive from a good equals the marginal cost of producing that
good, that market is said to be allocatively efficient and to maximize social welfare.There is
no way of reallocating resources to increase the total value of output or to increase social
welfare. Because consumers are able to purchase Qc units at price pc, they enjoy a net benefit
from consumption, or a consumer surplus, measured by the entire shaded triangle, acpc.
monopoly, consumer surplus shrinks to the smaller triangle ampm, which in this example is
only one-fourth as large.The monopolist earns economic profit equal to the shaded rectan-
gle. By comparing the situation under monopoly with that under perfect competition, you
can see that the monopolist’s economic profit comes entirely from what was consumer sur-
plus under perfect competition. Because the profit rectangle reflects a transfer from con-
sumer surplus to monopoly profit, this amount is not lost to society and so is not consid-
ered a welfare loss.
Notice, however, that consumer surplus has been reduced by more than the profit rec-
tangle. Consumers have also lost the triangle mcb, which was part of the consumer surplus
under perfect competition.The mcb triangle is called the deadweight loss of monopoly DEADWEIGHT LOSS
because it is a loss to consumers but a gain to nobody.This loss results from the allocative in- OF MONOPOLY
efficiency arising from the higher price and reduced output of monopoly. Again, society would be Net loss to society when a firm
uses its market power to restrict
better off if output exceeded the monopolist’s profit-maximizing quantity, because the mar- output and increase price
ginal benefit of more output exceeds its marginal cost. Under monopoly, the price, or mar-
ginal benefit, always exceeds marginal cost. Empirical estimates of the annual deadweight
loss of monopoly in the United States range from about 1 percent to about 5 percent of na-
tional income.Applied to national income data for 2004, these estimates imply a deadweight
loss ranging from about $400 to $2,000 per capita, not a trivial amount.
valuable, numerous applicants spend millions on lawyers’ fees, lobbying expenses, and other
costs associated with making themselves appear the most deserving.The efforts devoted to
securing and maintaining a monopoly position are largely a social waste because they use
up scarce resources but add not one unit to output. Activities undertaken by individuals or
firms to influence public policy in a way that will directly or indirectly redistribute income
RENT SEEKING to them are referred to as rent seeking.
Activities undertaken by individuals The monopolist, insulated from the rigors of competition in the marketplace, might also
or firms to influence public policy grow fat and lazy—and become inefficient. Because some monopolies could still earn an
in a way that will increase their
incomes economic profit even if the firm is inefficient, corporate executives might waste resources
creating a more comfortable life for themselves. Long lunches, afternoon golf, plush offices,
corporate jets, and extensive employee benefits might make company life more pleasant, but
they increase the cost of production and raise the price.
Monopolists have also been criticized for being slow to adopt the latest production tech-
niques, being reluctant to develop new products, and generally lacking innovation. Because
monopolists are largely insulated from the rigors of competition, they might take it easy. It’s
been said “The best of all monopoly profits is a quiet life.”
The following case study discusses the performance of one of the nation’s oldest monop-
olies, the U.S. Postal Service.
C a s e Study
The Mail Monopoly
The U.S. Post Office was granted a monopoly in 1775
and has operated under federal protection ever since. In
Public Policy 1971, Congress converted the Post Office Department
into a semi-independent agency called the U.S. Postal
eActivity
How has the U.S. Postal Service
Service, or USPS, with total revenue of about $70 bil-
USPS has been fighting back, trying to leverage its monopoly power while increasing ef-
ficiency. On the electronic front, USPS tried to offer online postage purchases, online bill-
paying service, and secure online document transmission service. But by December 2003,
these new products had been scrapped as failures. In more successful efforts, USPS has part-
nered with eBay to confirm delivery of auctioned items and expedite payments. USPS also
provides some local delivery service—the so-called “last mile”—for several major shippers
including DHL, Emery, and FedEx. Despite these efforts, changing technology and compe-
tition are eroding the government-granted monopoly power.
Sources: Rick Brooks, “New UPS Service Sends Packages Through the Post Office,” Wall Street Journal, 6 Novem-
ber 2003; Angela Kean, “Modernizing USPS,” Traffic World, 9 June 2003; Mark Fitzgerald, “USPS’ Snail-Mail
Spam,” Editor & Publisher, 14 April 2003; Rick Brooks, “Postal Service to Discontinue Online Bill-Payment Service,”
Wall Street Journal, 14 November 2003; and the USPS home page at http://www.usps.com.
Not all economists believe that monopolies, especially private monopolies, manage their
resources with any less vigilance than perfect competitors do. Some argue that because mo-
nopolists are protected from rivals, they are in a good position to capture the fruits of any
innovation and therefore will be more innovative than competitive firms are. Others believe
that if a private monopolist strays from the path of profit maximization, its share price will
drop enough to attract someone who will buy controlling interest and shape up the com-
pany.This market for corporate control is said to keep monopolists on their toes.
Price Discrimination
In the model developed so far, a monopolist, to sell more output, must lower the price. In
reality, a monopolist can sometimes increase profit by charging higher prices to those who
value the product more.This practice of charging different prices to different groups of con-
sumers is called price discrimination. For example, children, students, and senior citizens
often pay lower admission prices to ball games, movies, plays, and other events. Firms offer
PRICE DISCRIMINATION
certain groups reduced prices because doing so boosts profits. Let’s see how and why.
Increasing profit by charging differ-
ent groups of consumers different
Conditions for Price Discrimination prices when the price differences
are not justified by differences in
To practice price discrimination, a firm’s product must meet certain conditions. First, the production costs
demand curve for the firm’s product must slope downward, indicating that the firm is a
price maker—the producer has some market power, some control over the price. Second,
there must be at least two groups of consumers for the product, each with a different price
elasticity of demand.Third, the firm must be able, at little cost, to charge each group a dif-
ferent price for essentially the same product. Finally, the firm must be able to prevent those
who pay the lower price from reselling the product to those who pay the higher price.
the group with the more elastic demand. Despite the price difference, the firm gets the same
marginal revenue from the last unit sold to each group. Note that charging both groups
$3.00 would eliminate any profit from that right-hand group of consumers, who would be
priced out of the market. Charging both groups $1.50 would lead to negative marginal rev-
enue from the left-hand group, which would reduce profit. No single price could generate
the profit achieved through price discrimination.
(a) (b)
Dollars per unit
Dollars per unit
$3.00
$1.50
1.00 LRAC, MC 1.00 LRAC, MC
D'
MR D MR'
0 400 Quantity per period 0 500 Quantity per period
Chapter 9 Monopoly 211
weekend stay.The airlines sort out the two groups by limiting discount fares to travelers
who buy tickets well in advance and who stay over Saturday night. Airline tickets for busi-
ness class costs much more than for coach class.
Here’s another example of price discrimination: IBM wanted to charge business users of
its laser printer more than home users.To distinguish between the two groups, IBM decided
to slow down the home printer to 5 pages a minute (versus 10 for the business model).To
do this, they added an extra chip that inserted pauses between pages.2 Thus, IBM could sell
the home model for less than the business model without cutting into sales of its business
model.
Here’s a final example. Major amusement parks, such as Disney World and Universal Stu-
dios, distinguish between local residents and out-of-towners when it comes to the price of ad-
mission. Out-of-towners typically spend a substantial amount on airlines and lodging just to
be there, so they are less sensitive to the admission price than are local residents.The problem
is how to charge a lower price to locals.The parks do this by making discount coupons avail-
able at local businesses, such as dry cleaners, which vacationers are less likely to visit.
2. Carl Shapiro and Hal Varian, Information Rules: A Strategic Guide to the Network Economy (Boston: Harvard
Business School Press, 1999), p. 59.
212 Part 3 Market Structure and Pricing
E X H I B I T 10
a
Perfect Price
Discrimination
Examples of attempts to capture consumer surplus include pricing schemes for Internet
service, cable television, and cellular phone service. For example, a cellular phone service
offers several pricing alternatives, such as (1) price per minute with no basic fee, (2) a flat
rate for the month plus a price per minute, and (3) a flat rate for unlimited calls.These alter-
natives allow the company to charge those who use fewer minutes more per minute than
those who call more frequently. Such suppliers are trying to convert some consumer surplus
into profit.
Conclusion
Pure monopoly, like perfect competition, is not that common. Perhaps the best examples
are firms producing patented items with unique characteristics, such as certain prescription
drugs. Some firms may have monopoly power in the short run, but the lure of economic
profit encourages rivals to hurdle seemingly high entry barriers in the long run. Changing
technology also works against monopoly in the long run. For example, the railroad monop-
oly was erased by the interstate highway system.AT&T’s monopoly on long-distance phone
service crumbled as microwave technology replaced copper wire.The U.S. Postal Service’s
monopoly on first-class mail is being eroded by overnight delivery, fax machines, and email.
De Beers is losing its grip on the diamond market. And cable TV service is losing its local
monopoly to technological breakthroughs in fiber-optics technology, wireless broadband,
and the Internet.
Although perfect competition and pure monopoly are relatively rare, our examination of
them yields a framework to help understand market structures that lie between the two ex-
tremes.As we will see, many firms have some degree of monopoly power—that is, they face
downward-sloping demand curves. In the next chapter, we will consider the two market
structures that lie in the gray region between perfect competition and monopoly.
Chapter 9 Monopoly 213
SUMMARY
1. A monopolist sells a product with no close substitutes. 4. In the short run, a monopolist, like a perfect competitor,
Short-run economic profit earned by a monopolist can can earn economic profit but will shut down unless price
persist in the long run only if the entry of new firms is at least covers average variable cost. In the long run, a mo-
blocked.Three barriers to entry are (a) legal restrictions, nopolist, unlike a perfect competitor, can continue to earn
such as patents and operating licenses; (b) economies of economic profit as long as entry of other firms is blocked.
scale over a broad range of output; and (c) control over a
5. Resources are usually allocated less efficiently under mo-
key resource.
nopoly than under perfect competition. If costs are simi-
2. Because a monopolist is the sole supplier of a product lar, the monopolist will charge a higher price and supply
with no close substitutes, its demand curve is also the less output than will a perfectly competitive industry. Mo-
market demand curve. Because a monopolist that does not nopoly usually results in a deadweight loss when com-
price discriminate can sell more only by lowering the pared with perfect competition because the loss of con-
price for all units, marginal revenue is less than the price. sumer surplus exceeds the gains in monopoly profit.
Where demand is price elastic, marginal revenue is posi-
6. To increase profit through price discrimination, the mo-
tive and total revenue increases as the price falls.Where
nopolist must have at least two identifiable groups of cus-
demand is price inelastic, marginal revenue is negative and
tomers, each with a different price elasticity of demand at
total revenue decreases as the price falls.A monopolist
a given price, and must be able to prevent customers
will never voluntarily produce where demand is inelastic
charged the lower price from reselling to those charged
because charging a higher price would increase total
the higher price.
revenue.
7. A perfect price discriminator charges a different price for
3. If the monopolist can at least cover variable cost, profit is
each unit of the good sold, thereby converting all con-
maximized or loss is minimized in the short run by find-
sumer surplus into economic profit. Perfect price discrim-
ing the output rate that equates marginal revenue with
ination seems unfair because the monopolist “cleans up,”
marginal cost.At the profit-maximizing quantity, the price
but this approach is as efficient as perfect competition be-
is found on the demand curve.
cause the monopolist has no incentive to restrict output.
1. (Barriers to Entry) Complete each of the following sen- 3. ( C a s e S t u d y : Is a Diamond Forever?) How did the
tences: De Beers cartel try to maintain control of the price in the
diamond market? How has this control been threatened?
a. A U.S. _______ awards inventors the exclusive right
to production for 20 years. 4. (Revenue for the Monopolist) How does the demand curve
b. Patents and licenses are examples of government- faced by a monopolist differ from the demand curve faced
imposed ______ that prevent entry into an industry. by a perfectly competitive firm?
c. When economies of scale make it possible for a single
5. (Revenue for the Monopolist) Why is it impossible for a
firm to satisfy market demand at a lower cost per unit
profit-maximizing monopolist to choose any price and
than could two or more firms, the single firm is con-
any quantity it wishes?
sidered a _______.
d. A potential barrier to entry is a firm’s control of a(n) 6. (Revenue Schedules) Explain why the marginal revenue
______ critical to production in the industry. curve for a monopolist lies below its demand curve, rather
than coinciding with the demand curve, as is the case for a
2. (Barriers to Entry) Explain how economies of scale can be a
perfectly competitive firm. Is it ever possible for a monop-
barrier to entry.