Monopoly

Chapter | 12 |

Managerial Decisions for Firms with Market Power

Learning Objectives

After reading Chapter 12 you should be able to:

12.1 Define market power and describe how own-price elasticity, cross-price elasticity, and the Lerner index are used to measure market power.

12.2 Explain why barriers to entry are necessary for market power in the long run and discuss the major types of entry barriers.

12.3 Find the profit-maximizing output and price for a monopolist.

12.4 Find the profit-maximizing input usage for a monopolist.

12.5 Find the profit-maximizing price and output under monopolistic competition.

12.6 Employ empirically estimated or forecasted demand, average variable cost, and marginal cost to calculate profit-maximizing output and price for monopolistic or monopolistically competitive fi rms.

12.7 Select production levels at multiple plants to minimize the total cost of producing a given total output for a firm.

Key Formulas

* Lerner index ,

where the higher the value of the Lerner index, the greater the degree of market power. This is also related to price elasticity of demand, where the less elastic demand is the higher the degree of market power.

Matching Definitions of Key Terms

consumer lock-in 459

Lerner index 452

marginal revenue product (MRP) 473

market definition 451

market power 449

monopolistic competition 450

monopoly 450

network externalities (or network effects) 459

strong barriers to entry 454

switching costs 459

total marginal cost curve (MCT) 489

1. ____________________ Ability of a firm to raise price without losing all its sales.

2. ____________________ Firm that produces a good for which there are no close substitutes in a market that other firms are prevented from entering because of entry barriers.

3. ____________________ Market consisting of a large number of firms selling a differentiated product with low barriers to entry.

4. ____________________...