Explain why some markets have only one seller. Describe how a monopoly determines the quantity to produce and the price to charge.

Unlike a competitive company, a monopoly can decrease production in order to charge a higher price.

· Because of this, rather than finding the point where the marginal cost curve intersects a horizontal marginal revenue curve (which is equivalent to good's price), we must find the point where the marginal cost curve intersect a downward-sloping marginal revenue curve.

· Monopolies have downward sloping demand curves and downward sloping marginal revenue curves that have the same y-intercept as demand but which are twice as steep.

· The shape of the curves shows that marginal revenue will always be below demand.

57. Explain how the monopoly’s decisions affect economic well-being. Describe the various public policies aimed at solving the problem of monopoly.

A firm is a monopoly if it is the sole seller of its product and if its product does not have close substitutes. The lack of close substitutes is necessary if the single seller is to have much market power. In addition, there are significant HYPERLINK "http://cstl-hcb.semo.edu/bdomazlicky/ec101text/glossary/glossabc.htm/barrier.htm"barriers to entryHYPERLINK "http://cstl-hcb.semo.edu/bdomazlicky/ec101text/glossary/glossabc.htm/barrier.htm" such that new firms will find it very difficult or even impossible to enter the market. A single seller in a market where entry is easy would have very little market power. If a monopoly seller charged a high price and, as a result, earned economic profits, new sellers would enter the market if no barriers existed. This would obviously erode the monopolist's position very quickly. Clearly, if barriers to entry were present in a monopoly market, the seller will have a much greater degree of market power. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. Because a monopoly is thye sole producer, in its market, it can alter the price of its good by adjusting the quantity it supplies to the market.

58. Describe how monopolies make production and pricing decisions. Explain why monopolies try to charge different prices to different customers.

The market demand curve provides a constraint on a monopoly’s ability to profit from its market power. A monopolist would prefer, if it were possible, to charge the higher price and sell a large quantity at that high price. The market demand curve makes that outcome impossible. In particular, the market demand curve describes the combinations of price and quantity that are available to a monopoly firm. By adjusting the quantity produced (or equivalently the price charged), the monopolist can choose any point on the demand curve, but it cannot choose a point off the demand curve. As with competitive firms, we assume that monopoly’s goal is to maximize the profit.

* A monopolist can often increase profits by charging different prices for the same good based on a buyer’s willingness to pay. This practice of price discrimination can rise economic welfare by getting the good to some consumers who otherwise would not buy it. In the extreme case of perfect price discrimination, the deadweight loss of monopoly is completely eliminated and the entire surplus in the market goes to the monopoly producer. More generally, when price discrimination is imperfect, it can either raise or lower welfare compared to the outcome with a single monopoly price.

59. List the factors which are key determinants of the productivity of labor. For each one, describe how each specifically influences labor productivity.

There are three key determinants of productivity:

*Physical capital: When workers work with a larger quantity of equipment and structures, they produce more.

*Human capital: When workers are more educated, they produce more.

*Technological knowledge: When workers have access to more sophisticated technologies, they produce more.

60. Using the theory of wage determination, explain why wages in developing countries are typically quite low.

Wages are determined by the value of workers to firms. In many developing countries, the level of capital is quite small, and so worker productivity is quite low. As such, workers are not able to contribute as much value to a firm as their counterparts in countries that have more capital to complement their labor efforts. Since marginal productivity is low, wages are low.

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