When Is It Sensible for a Monopolist Not to Take

question 345

Multiple Choice

When is it sensible for a monopolist not to take measures to prevent other firms from entering the market? In
1945, Reynolds International Pen Corporation introduced a revolutionary product: the ballpoint pen. The
new type of pen could be produced with a very simple production technology. For three years, Reynolds
earned enormous profits on this innovative product. In 1948, Reynolds stopped producing pens, dropping
out of the market entirely. What happened? The key to solving this puzzle is the fact that Reynolds earned
enormous profits for a short time. The simple technology of the ballpoint pen could be copied easily by other
producers, so the price required to deter entry–the limit price–was low. The limit price was so low that it was
better for Reynolds to charge a high price and squeeze out as much profit as possible from a short-lived
monopoly. Reynolds sold its pens for $12.50, about 16 times the average production cost of $0.80. By 1948, a
total of 100 firms had entered the ballpoint market, and the price had fallen to the average cost of production,
so each firm made zero economic profit.
SOURCE: Thomas Whiteside, ʺWhere Are They Now?ʺ New Yorker, February 17, 1951, pp. 39—58.
-Recall the Application ʺReynolds International Takes the Money and Leaves the Market.ʺ In 1945 Reynolds International Pen Corporation invented the ball point pen, but by 1948 were not longer producing ball point pens because:

• A)the technology was easy to copy.
• B)the limit price was very low to earn a high profit.
• C)the deterrence quantity was too high to earn a high profit.
• D)all of the above

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Definitions:

Diminishing Marginal Product

The economic principle stating that, holding all else constant, as more of a certain input is employed in a production process, the incremental increase in outputs will eventually decrease.

Bushels of Wheat

A unit of measure used in agriculture, particularly in the United States, for trading and pricing wheat.

Workers

Individuals engaged in a task or activity for wages or salary.

Diminishing Marginal Product

The decrease in the additional output gained from using an extra unit of a production input, holding all other inputs constant, beyond a certain point.