Chapter 7 Section 2: Monopoly
Objectives: after studying this section you will be able to:
A. Describe characteristics and give examples of Monopoly.
B. Describe how monopolies are formed including government monopolies.
C. Explain how a firm with a monopoly sets output and price, and why companies practice
price discrimination.
Main idea: a firm has a monopoly when it controls an entire market. Because a monopolist
controls the price of its product, a monopoly produces less and charges higher prices than
would a perfectly competent firm.
1. A market dominated by a single seller is called?____________
2. Prescription medicine is one of the many markets where monopolies can develop. TF
3. What is the principal condition that allows monopolies to exist?__________
4. A perfectly competitive market has many buyers in many sellers. T F. A monopoly can have
many buyers but only one seller. T F
5. What is the biggest problem with monopolies? In other words what do they control?_
6. The law of demand tells us the higher the price the less will be the quantity demanded. T F
7. So when a monopoly charges a higher price for a product less of it will be demanded. T F
8. Some monopolistic practices have been outlawed by the United States. T F
Forming a Monopoly
9. All monopolies have one trait in common, what is it?_________
10. Different market___________ can create different types of monopolies.
11. If your startup costs are high, and for every additional unit that you produce, your average
costs fall then you are enjoying economies of____________
12. Economies of scale cause average cost to drop as ___________ rises.
13. Study graph 7.3 on page 157 notice how the average total cost curve decreases as output
increases but then A T C (average total costs) begins to rise again. The graph on the right shows
a decline in A T C as output increases and the curve does not begin to rise again. Explain, what
the left graph does not have that the graph on the right has.
14. As production increases with the graph on the right the firm becomes more efficient with
each and every product that produces. TF
15. The firm on the right, can supply the entire market with its average total cost never
reaching the second stage of a rising?_______ ______ ________
16. In a market with economies of scale is bigger better? In other words, do costs continue to
drop?
17. When one large firm can run more efficiently, than if there were two firms, and provide all
the output this is called a natural____________.
18. A dam is a good example of a natural monopoly. T F
19. For a company to enjoy monopoly status, it must allow the government to
control_________ and what services to provide.
20. Local telephone service use to enjoy monopoly status. T F
21. What technology reduced the high startup costs of setting up telephone lines?___________
22. Instead of expensive telephone lines and telephone poles what do telephone companies set
up now?
Government Monopolies:
23. A monopoly created by the government is called__________ ___________.
24. What is one way that the government can give monopoly power to a company?________
25. Why is a patent desirable? What does a company achieve when it gets one?
26. A contract issued by a local authority that gives a single firm the right to sell its goods
within an exclusive market is called?______________
27. Why would Strongsville high school allow only one vending machine company to sell soft
drinks?__________ why not allow many vending machine companies to sell soft drinks?
28. What federal agency issues special licenses to broadcast stations?_________
29. If you want to start a major league baseball team, in Strongsville, to compete against the
other baseball teams around the country, the only thing that can stop you is money.
30. Who controls the number and location of baseball teams around the country?__________
31. What can a major league team owner do with regards to ticket pricing?_________