ECON 356

In Class Exercise Twelve - The Mainstream Model of Monopoly 

1.     1.  What does “market structure” mean?

2.     2.  Explain why, under the mainstream model of monopoly, how one defines the industry (what is included) is very important.

3.     3. Explain why cross price elasticity is often used to determine “monopoly power” (this relates to question 2).

4.     4. Since the monopolist does not face competition (according to mainstream theory), can’t he charge any price he wants?  Explain by discussing how the monopolist chooses his price (and output).  Draw this on a graph:

5.     5. Explain why the monopolist’s demand curve = average revenue.

6.     6. In the mainstream model of monopoly, explain why network economies are considered a source of monopoly – give an example in your answer.

7.     7. Why wouldn’t the monopolist operate in the inelastic portion of their demand curve?  Hint:  talk about what happens when the monopolist increases price in this range.

8.     8. Draw a situation where a monopolist is making a positive economic profit.  Shade in the area of the profit.

9.     9. Will a monopolist ever lose money?  Explain and draw a graph that illustrates your answer.

      10. Graphically and in words, compare a monopolist to a perfectly competitive firm.  Be sure to address:

a.    Is the monopolist efficient?

b.    If there a welfare loss?

c.  How does rent seeking create a loss with monopoly (and with what kind of monopoly only)?