Microeconomics study guide #12

Compared to an unregulated natural monopoly, what is true about the price charged and quantity produced when a natural monopoly is regulated?

Price is lower and Quantity is higher

Referring to the graph, assume the government wants to regulate the market for cable television, a natural monopoly. Match the price to the unregulated monopoly price, the regulated normal profit price, and the regulated competitive price.

Unregulated monopoly price $60 Regulated Normal Profit price $40 Regulated competitive price $30

Second-degree price discrimination is also known as ___ pricing.

block

Second-degree price discrimination is also known as:

block pricing.

By charging consumers the highest price they are willing and able to pay, the pure monopoly:

extracts all surplus from consumers.

Total revenue minus the ___ cost and ___ costs of production is economic profit.

implicit ; economic or explicit

Third-degree price discrimination charges different prices to different consumers in order to:

increase profits.

Demand and Revenues for a Monopoly Using the demand schedule, what is the total revenue (TR) for the 15th unit?

$375 To find total revenue, multiply the price and the quantity at 15 units. TR = ($25)(15) = $375.

The practice of charging different prices per unit for different quantities, or blocks, of a good or service is called:

- block pricing. - second-degree price discrimination.

The practice of charging each and every consumer the price she is willing and able to pay for a good or service describes:

- first-degree price discrimination. - personal pricing.

Use the demand, costs, and revenues in the table to answer the following question for a pure monopoly. What is the profit maximizing quantity in the pure monopoly?

15 To find the profit maximizing quantity, find where MR = MC. That occurs here at 15 units.

Firms use price discrimination to:

increase their profits.

Using the graph, what price should the monopoly charge for the profit-maximizing level of output?

$6

The practice of charging each and every consumer the price that she is willing and able to pay for a good or service describes first-degree ___ discrimination.

price

Governments usually ___ monopolies when the fixed costs associated with the production of a(n) ___ good or service are relatively high and it may not make sense to have multiple firms duplicating these fixed costs.

regulate or regulates ; necessary, necessity, or essential

Demand and Revenues for a Monopoly Using the demand schedule, what is the marginal revenue (MR) for the 10th unit?

$25 To find MR, you will first need to find Total Revenue at 5 units and 10 units. TR = P × Q. TR at 5 = (35)(5) = $175. TR at 10 = (30)(10) = $300. MR = change in TR/change in Q. At 10 units, MR = (300 − 175)/(10 − 5) = (125)/(5) = $25.

Price discrimination is best described as:

the practice of selling the same good or service to different consumers at different prices.