… a core topic in Economic Analysis and Atlas102
This topic deals with monopoly and price discrimination.
The treatment of this topic on the Atlas follows almost precisely that in Chapter 11, Monopoly , and Chapter 12, Price Discrimination , in the open access Principles of Microeconomics course offered by Tyler Cowen and Alex Tabarrok at the Marginal Revolution University online education platform (http://www.mruniversity.com/courses/principles-economics-microeconomics , accessed 7 May 2016).
Topic learning outcome Appropriately utilize and interpret results of applying to the analysis of public policy and management problems the basic principles of monopoly and price discrimination, including following core concepts.
Core concepts associated with this topic Readings
We believe that this topic and its core concepts can be mastered to the MPP/MPA level by watching and re-watching the 69 minutes of MRU course videos listed below and doing the 36 sample questions associated with these video segments and reproduced at the bottom of this page and repeated on the appropriate concept pages.
Atlas pages: Monopoly and Price Discrimination and associated Concepts.
Alex Tabarrok, Maximizing Profit under Monopoly (11-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/monopoly-profit-maximization-price-aids-medication , accessed 7 May 2016.
Alex Tabarrok, The Monopoly Markup (9-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/monopoly-profit-maximization-price-aids-medication , accessed 7 May 2016.
Alex Tabarrok, The Costs and Benefits of Monopoly (9-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/costs-benefits-monopoly-pharmaceutical-companies , accessed 8 May 2016.
Tyler Cowen, Introduction to Price Discrimination (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-discrimination-examples-airlines-arbitrage , accessed 8 May 2016.
Tyler Cowen, The Social Welfare of Price Discrimination (8-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-discrimination-social-welfare , accessed 8 May 2016.
Tyler Cowen, Tying (7-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/tying-economics-example , accessed 8 May 2016.
Alex Tabarrok, Bundling (15-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/bundling-economics-examples , accessed 8 May 2016.
Textbook readings in MPP and MPA courses
Recommended Reading
Harvard Kennedy School: API-101
Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012. Chapters 12 and 13.
University of Toronto: PPG-1002
Varian, Hal R., and Jack Repcheck. Intermediate microeconomics: a modern approach. Vol. 6. New York, NY: WW Norton & Company, 2010. Chapter 24.
Carleton Unversity: PADM-5111
Frank, Robert, Ian Parker, and Igela Alger. Microeconomics and Behaviour, 5th Canadian Edition. New York: McGraw-Hill, 2013. Chapter 12.
Harvard Kennedy School: API-101
Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012. Chapter 10, pp. 357-385, 389-392.
NYU Wagner: GP-1018
Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapters 11 (333-337), 13, and 14 (up to p. 413).
Ford School of Public Policy: Public Policy 555
Pindyck, Robert S., and D. Rubinfeld. Microeconomics, 7th edition. Upper Saddle River: Patience-Hall, 2007. Chapters 10 – 12.
George Washington: PPPA-6003
Mankiw, N. Gregory. Principles of Microeconomics, 6th edition. Mason: South-Western College Publishers, 2011. Chapters 15 and 17.
Dixit, Avinash K., Susan Skeath, and David Reiley. Games of strategy. New York: Norton, 1999. Chapter 4.
American: PAUD-630
Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapters 13 and 15.
Rutgers- Economics in Public Policy
Pindyck, Robert S., and D. Rubinfeld. Microeconomics, 7th edition. Upper Saddle River: Patience-Hall, 2007. Chapters 10 – 13.
Axelrod, Robert M.The Evolution of Cooperation. New York: Basic Books, 1984. Pages 27-54.
Assessment questions (from MRU Practice Questions for Chapters 5 and 6)
From http://www.mruniversity.com/node/267321 , http://www.mruniversity.com/node/267374 , http://www.mruniversity.com/node/267427 , http://www.mruniversity.com/node/301739 , http://www.mruniversity.com/node/301751 , http://www.mruniversity.com/node/301752 , http://www.mruniversity.com/node/301753 , accessed 8 May 2016.
AQ102.09.01. In the textbook, The Applied Theory of Price, D. N. McCloskey refers to the equation MR= MC as the rule of rational life. Who follows this rule: monopolies, competitive firms, both or neither?
Monopolies
Competitive firms
Both
Neither
AQ102.09.02. Rapido, the shoe company, is so popular that it has monopoly power. It’s selling 20 million shoes per year. The marginal cost of making extra shoes is quite low, and it doesn’t change much if they produce more shoes. Rapido’s marketing experts tell the CEO of Rapido that if it decreased prices by 20%, it would sell so many more shoes that profits would rise. If the expert is correct, at its current output, is MC=MR, is MC >MR, or is MC < MR?
MC=MR
MC greater than MR
MC less than MR
AQ102.09.02. If the expert is correct and Rapido’s CEO follows the experts’ advice, will Rapido’s total revenue rise, fall, or be unchanged?
Total revenue will rise
Total revenue will fall
Total revenue will remain unchanged
AQ102.09.03. Apollo, another highly profitable shoe company, also has market power. It’s selling 15 million shoes per year, and it faces marginal costs quite similar to Rapido. Apollo’s marketing experts conclude that if they increased prices by 20%, profits would rise. For Apollo, is MC=MR, is MC greater than MR, or is MC less than MR?
MC=MR
MC greater than MR
MC less than MR
AQ102.09.04. When selling e-books, music on iTunes, and downloadable software, the marginal cost of producing and selling one more unit of output is essentially zero: MC = 0. Let’s think about a monopoly in this kind of market. If the monopolist is doing its best to maximize profits, what will marginal revenue equal at a firm like this?
Greater than 0
Less than 0
0
Indeterminate from the given information
AQ102.09.05. All firms are trying to maximize their profits (profit = TR – TC). The rule from the previous question tells us that in the special case where marginal cost is zero, “profit maximization” is equivalent to which of the following statements?
“Maximize total revenue”
“Minimize total cost”
“Minimize average cost”
“Maximize average revenue”
AQ102.09.06. Which of the following is true when a monopoly is producing the profit-maximizing quantity of output? More than one may be true.
a. Marginal revenue = Average cost
b. Total cost = Total revenue
c. Monopoly Price = Marginal cost
d. Marginal revenue = Marginal cost
e. a and c
f. c and d
AQ102.09.07. For the following statements, decide whether it is true or false. When a monopoly is maximizing its profits, price is greater than marginal cost.
True
False
AQ102.09.08. For a monopoly producing a certain amount of output, price is less than marginal revenue.
True
False
AQ102.09.09. What’s the rule: Monopolists charge a higher markup when demand is highly elastic or when it’s highly inelastic?
Highly elastic
Highly inelastic
AQ102.09.10. What’s the rule: Monopolists charge a higher markup when customers have many good substitutes or when they have few good substitutes?
Customers have many good substitutes
Customers have few good substitutes
AQ102.09.11. For the following pairs of goods, which producer is more likely to charge a bigger markup?
Someone selling new trendy shoes
Someone selling ordinary tennis shoes
AQ102.09.12. For the following pairs of goods, which producer is more likely to charge a bigger markup?
A movie theater selling popcorn
New York City street vendor selling popcorn
AQ102.09.13. For the following pairs of goods, which producer is more likely to charge a bigger markup?
A pharmaceutical company selling a new powerful antibiotic
A firm selling a new powerful cure for dandruff
AQ102.09.14. A patent is a government-created monopoly.
True
False
AQ102.09.15. Just based on self-interest, who is more likely to support strong patents on pharmaceuticals: Young people or old people?
Young people
Old people
AQ102.09.16. Who is more likely to support strong patent and copyright protection on video games: People who really like old-fashioned videogames or people who want to play the best, most advanced videogames?
Old-fashioned video-gamers
Cutting edge video-gamers
AQ102.09.17. It’s very difficult to build and operate a new power plant largely because new plants have to comply with a long list of environmental and safety regulations. Compared with a world with fewer such regulations, how do these rules change the average total cost of building and operating a power plant?
Increase average cost
Decrease average cost
Does not affect average cost
AQ102.09.18. Do these regulations make it more or less likely that you will build a new power plant?
More likely to build a new power plant
Less likely to build a new power plant
AQ102.09.19. Do these regulations increase or decrease the market power of power plants that already exist?
Increases market power of existing power plants
Decreases market power of existing power plants
AQ102.09.20. True or False? A business that price discriminates will generally charge some customers more than marginal cost, and it will generally charge other customers less than marginal cost.
True
False
AQ102.09.21. Two customers, Fred and Lamont, walk into a Grady’s Used Pickups. Who probably has a more inelastic demand for one of Grady’s pickups: people like Lamont, who are good at shopping around, or people like Fred, who know what they like and just buy it?
People like Lamont
People like Fred
AQ102.09.22. Who probably gets charged more for a Hertz rental car: Someone who reserves a car online weeks before a trip, or someone who walks up to a Hertz counter after he walks off a 4-5 hour airplane flight?
Someone who reserves the car online weeks before a trip
Someone who walks up to a Hertz counter after a 4-5 hour plane flight
AQ102.09.23. Where will you see more price discrimination: In monopoly-type markets with just a few firms or in competitive markets with many firms?
Monopoly-type markets
Competitive markets
AQ102.09.24. When both kinds of people, the Convenience Shoppers and the Bargain Shoppers, are shopping at the same Wal-Mart, who is more likely to stick to their prearranged shopping list rather than splurging on something on a whim?
Convenience Shoppers
Bargain Shoppers
AQ102.09.25. Which group does Wal-Mart have monopoly power over?
Convenience Shoppers
Bargain Shoppers
Both
Neither
AQ102.09.26. Does this mean that Darth Vader really did kill Anakin Skywalker?
Yes
No
It depends on your point of view
AQ102.09.27. When arbitrage is easy in a market of would-be price discriminators, who is more likely to get priced out of the market: those with elastic demand or those with inelastic demand?
Elastic demanders
Inelastic demanders
AQ102.09.28. If Congress passed a privacy law making it illegal for colleges to ask for parents’ tax returns, would that tend to help students from high-income families or students from low-income families?
Students from high-income families
Students from low-income families
AQ102.09.29. When will a monopoly create more output: When the government bans price discrimination or when the monopoly is allowed to and can perfectly price discriminate?
When the government bans price discrimination
When the monopoly can perfectly price discriminate
AQ102.09.30. Some razors, like Gillette’s Fusion and Venus razors, have disposable heads. The razor comes with an initial pack with a razor handle plus three or four heads; after that, you need to buy refills separately. Where do you think Gillette gets more revenue: By selling the initial pack or by selling the refills?
The initial pack
The refills
AQ102.09.31. The next time you buy a new razor, are you going to spend more time looking at the price of the razor or at the price of the refills?
The price of the razor
The price of refills
AQ102.09.32. Where are you more likely to see businesses “bundling” a lot of goods into one package: In industries with high fixed costs and low marginal costs (like computer games or moviemaking), or in industries with low fixed costs and high marginal costs (like doctor visits, where the doctor’s time is expensive)?
High-fixed-cost and low-marginal-cost industries
L ow-fixed-cost and high-marginal-cost industries
AQ102.09.33. Isn’t it surprising that movies, with tickets that cost around $10, often use vastly more economic resources than stage plays where tickets can easily cost $100? Compare, for example, a live stage performance of Shakespeare’s Hamlet with a movie of Hamlet. In which field is the marginal cost of one more showing lower: on stage or on screen?
on stage
on screen
AQ102.09.34. “Bundling” in a movie or stage performance might show up in the form of adding special effects, expensive actors, or fancy costumes: Some customers might not be too interested in an Elizabethan revenge drama, but they show up to see Liam Neeson waving an authentic medieval dagger. Is it better to think of these extra expenses as “fixed costs” or “marginal costs?”
fixed costs
marginal costs
AQ102.09.35. In which setting will it be easier for a business to cover its total costs: In a “bundled” stage production or in a “bundled” movie production?
Bundled stage production
Bundled movie production
Page created by: Ian Clark, last modified on 16 May 2016.
Image: Minute 10:31 of MRU Video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/monopoly-profit-maximization-price-aids-medication , accessed 3 May 2016.
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