Lecture 8 Quiz

Model Answers Submitted By Students

  1. A monopoly can make be extraordinarily profitable because there is no __________.

A monopoly can be extraordinarily profitable because there is no competition. (Lisa H.)

  1. Provide three specific examples of monopolies and describe briefly what they do.

In the 1600’s, the British East India Company held a government granted monopoly on trade between Britain and India, which at that time was considered to include pretty much all of Southern Asia and the nearby Islands. The company held a complete monopoly on British-Indian trade until about 1700, when the British government withdrew the company’s exclusive trade rights. Probably the two most important events connected with the East India Company are the founding of the British Empire in India and the Boston Tea party. The founding of the British Empire in India occurred as a result of fighting between the company (which had its own armed forces) and native rulers, fighting from which the company usually came out on top. The Boston Tea Party was mainly the result of the Tea Act, which allowed the company to ship its tea directly to the colonies (as opposed to stopping in a British port like other ships had to). (Chris J.)

In the gaming world Nintendo is a big monopoly because they own the copyrights to the Mario, Luigi (his brother) Wario, Yoshi, Peach characters, as well as the patents to the Nintendo Entertainment System (NES), Super Nintendo-Entertainment System (SNES), Nintendo 64 (N64), and the recent Game Cube as well as patents to the Game Boy, Game Boy Pocket, Game Boy Color, Game Boy Advance and Game Boy Advance S.P. handheld game systems. … (Alexandria S.)

… Intel: Holds the major monopoly in creating motherboards and chips. Working with Microsoft, thus making them even more powerful. (Charles A.)

AT&T is a phone company monopoly that held all the phone rights for most of the past century; IBM was a monopoly over the computer industry, mostly for businesses; and John Rockefeller’s Standard Oil controlled what else? The oil industry. (Alyssa G.)

Jersey Central Power & Light provides electricity for the New Jersey area, and they are the only electrical company around. … Elizabethtown Water Company is the only water provider in our area. (Mary Rose B.)

  1. Given an example of how you lose time, money, or efficiency due to a specific monopoly.

We lose time and efficiency while waiting for the phone company to fix a downed line because it does not feel compelled to fix it as fast as if it had competition. (Kevin H.)

Let’s take Microsoft again. That company, and the products it sells, are loaded with flaws. But if you have Windows, you’re going to get Word as well so efficiency is lost in that aspect. You also lose money because there is no competition to drive down prices. I remember when Windows XP came out it was about $150, and still remains expensive. But what other choice do we really have? (Sarah C.)

(assuming that you’re the consumer) You lose money by a monopoly because there is less competition to drive down the price. You are at the mercy of the monopoly’s price. … (Chris R.)

Well, I know Microsoft sucks money out of me. If I buy Linux, it would be MUCH cheaper than Microsoft. But then I probably couldn’t run Microsoft Word, PowerPoint, or Outlook. Not even Microsoft Works would run on my computer, and so I have to buy a Microsoft computer to run these programs on it, even though it’s much more expensive. (Phyllis S.)

  1. Monopolies may be bad, but government regulations of monopolies are even worse! Do you agree? Explain.

I agree that government regulations of monopolies are worse than a monopoly itself. The reason is, with the government regulation included with the monopoly, not only does the monopoly have power, but the government is suddenly in charge of the monopoly. This causes the government to have more power than they should be able to have: power over needed stores! (Anthony B.)

… We don’t want to get started on a slippery slope towards complete regulation … (Sarah B.)

NO, I don’t agree. Although having the government stepping in on things is generally a bad idea, in this case it seems necessary. … (Brandon M.)

According to the invisible hand government regulations on monopolies are worse than monopolies themselves. Suppose a monopoly is extravagantly taking advantage of the consumers by raising prices and such. There are two possible actions to take, have the government regulate the monopoly or allow the monopoly to run its course. At first the government regulations seem to be the better option, this, however, makes the monopoly acceptable and is only a short term solution. The monopoly is no longer extravagantly taking advantage of the consumers, but still the monopoly exists and it is taking advantage of its monopoly. Suppose the monopoly was allowed to run its course. If the consumers saw that it needed regulating, then they already know that the monopoly is taking advantage of them. The monopoly will get more and more inefficient and cost the society money. Rational consumers will soon stop purchasing the product that the monopoly has to offer or more likely someone will start up competition of the monopoly and the consumers will buy from them. Since the consumers already dislike the once monopoly they would purchase from the new competition instead. This in turn would encourage others to compete in the market, thus ending the monopoly on the industry. (Kris T.)

  1. A company raised its price by 10% and its demand fell by only 5%. Why does that demonstrate that the company has at least some monopoly power in some way? Give some examples of what that limited monopoly power may be.

“If a company can raise its prices 10% and yet lose only 5% of its former demand, the company must have some monopoly power. If the aforementioned company were in a perfectly competitive environment, then the company would loose all of its demand if it raised its prices. The fact that this company can raise its prices and still maintain some demand for its products means that the company has some monopoly power, however weak or limited it might be. The companies limited monopoly power might merely be consumer loyalty to the company’s name and reputation, or it might be that while other companies produce very similar products, no other company produces exactly the same good. (Eric J.)

[I]f they didn’t have a monopoly, people wouldn’t keep buying that product. An example of something that has a limited monopoly is cable TV providers. There is usually only one cable TV provider in a particular area, meaning that if people want cable TV, they have to pay whatever the cable companies want. (Daniel L.)

An example of a limited monopoly is when people still buy the product even though it is raised significantly by 10%. One reason for this might be that the item dominates the store shelf with few or no other choices. … (Matt P.)

If that company had no monopoly then when the prices went up the demand would have dropped even farther down than they did. (Abigail L.)

  1. List ways that monopolies can be established.

Government sometimes creates a monopoly by operation of law. There are several barriers to entry that prevent competition. They are: licensing of professionals, control of valuable resources, large economies of scale, and finally but most importantly the government grants patents and copyrights that prevent people from making a substitute good. (Zack S.)

The government operation of law, the licensing of professionals, the control of a valuable resource, large economies of scale, and government grants of monopoly, are all ways to create monopolies (especially that last one!). (Gregory J.)

  1. Suppose Katie likes to paint for money or even for free, but will not pay extra to paint. Suppose also that the monthly demand for her paintings is P = $500 – 50Q. How many paintings does she create each month?

To get the maximum profit of $1250, Katie paints 5 paintings each month. (Cara M.)

She would create five paintings a month. Doing this she would receive a profit of $1250. If she paints any more or any less she will get less money, unless she doesn’t care how much she makes. (Kris T.)

She should paint 5 paintings a month. Remember, find Q when P=0. Then take half of Q and that is how much you should produce in order to increase marginal revenue. … (Kirstin L.)

  1. List some differences between a monopoly and a competitive industry.

The main difference is that there is no competition with a monopoly while a competitive industry allows almost anyone to compete in the market. This competition results in lower prices but since there is no competition in a monopoly the price is higher. Another difference is that in a competitive industry almost anyone can create a competitive company without hardly any restrictions. However, a monopoly creates barriers to entry that limit the amount of competition that may arise against them. The monopoly might own these barriers, like patents, copyrights, or necessary resources, or they might just use their power to undersell competitors. Efficiency and quality are other major differences. … (Chris B.)

In a monopoly there is no competition, which is the #1 qualification in a competitive industry. A monopoly has market power, in which it can set its own prices, while a competitive firm must take the price consumers are willing to pay and thus had no market power. Additionally, a competitive firm will produce where MR=MC, P=MR (because of no market power) and P=MC. Conversely, a monopolistic firm will produce where MR=MC, but P>MC. (Rebecca B.)

  1. Suppose Anthony owns a company having marginal costs of $5 for all his units. If he sells only one, then he reaps $11; selling two fetches a price of $10 piece; selling 3 attains a price of $9; selling four reaps $8; Q=5 would have P=$7; Q=6 has P=$6, etc. A competitive firm would have the same cost and demand numbers. What does Anthony sell at, and what is the social cost of his monopoly?

He sells four at eight dollars and the social cost is $6. (Alyssa G.)

If Anthony’s company has monopoly and a marginal cost of $5 per widget, then using the described demand curve, his company should sell three widgets at $9 apiece. This will give Anthony’s company a profit of $12. By increasing his production to four widgets, Anthony would not increase his profits at all, and consequently will not produce the fourth widget. Instead of spending his time producing a fourth widget that has a marginal profit of $0, Anthony should go on vacation, or spend his time in some productive manner. … (Eric J.)

Instructor’s explanation of second half of the problem is as follows. From the Lecture, For a monopoly, its social cost is defined as Price minus marginal cost (P-MC) summed over all of the output not sold by the monopoly that would have been sold in a competitive industry. If Anthony sells only four widgets, then that is four less than what a competitive market would sell. But look at the demand curve. You can’t just multiply Q=4 times the P-MC of $9-$5. Instead, you have to sum the (P-MC) over each of the withheld units, because each one has a different P. One would have sold at $6 (P-MC=$6-$5=$1), one at $7 (P-MC=$2), one at $8 and one at $9. That total is $1 + $2 + $3 + $4 = $10 social cost. If Anthony sold 5 units at $8, then the social cost is $1 + $2 + $3 = $6.

  1. Estimates are not very accurate about homeschooling, but some guess that 1 out of every 25 students is homeschooled. At what level or fraction would homeschooling end the public school monopoly? Discuss.

I think that the public school’s monopoly would be ended if 1/4 (25%) of all students were homeschooled. (Tim S.)

I believe that home schooling has already ended the public school monopoly. … The reason I believe that the public school monopoly is over is because, to get an education that is more than equivalent to public school, not much money need be spent. … (Michael N.)

The public school monopoly could be broken by making homeschooolers a significant minority block, which would mobilize support for removing many of the legal barriers to entry in the education market. … Assuming that all homeschoolers’ parents vote, but in the population as a whole only 50% vote, … at 3/25 [homeschool voting percentage] becomes 24%. At this point homeschoolers become a significant minority that could potentially decide elections, especially in states where they are concentrated. … (Joseph S.)

You can’t really end the public school monopoly until you only have to pay taxes to the public school when you are enrolled. … (Ben S.)

  1. Microsoft has a monopoly over Windows, the operating system needed to run most computers. It then used that monopoly to sell Internet Explorer, Microsoft Word, and other products. What would you propose, if anything, to reduce or eliminate Microsoft’s monopoly?

I would promote Apple computers instead of using a computer that uses Windows. Cons: … It is easier to get products for a computer running Windows. … Pros: I have found that an Apple computer doesn’t freeze a lot. (Jessica H.)

I would create another operating system that can run on the Intel processors, can use Word and Excel documents, and does not have as many problems, sell it at a much cheaper price, and advertise and get people to endorse the new operating system. (Scott J.)

  1. Suppose you live in a valley where water flows freely and abundantly from a spring. Suppose your entire family uses on average 80 gallons a day. But then a company bought the spring. If the demand curve is a straight line from P=$100, Q=0 to P=$0, Q=80, at what price and quantity would the company sell water?

They would sell it for $50 for 40 gallons or $1.25 a gallon. (Sarah S.)