Microeconomics: Ch 11 - Pure Monopoly

The demand, marginal-revenue, average-total-cost, and marginal-cost curves are shown in the diagram below. Identify the monopoly price, the fair-return price, and the socially optimal price.

Graph: monopoly point when MR = MC located above it on the demand curve; fair return point located when ATC = D; optimal point located when MC = D

It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices, and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly. Is this proposal as socially desirable as requiring monopolists to equate price with marginal cost or average total cost?

No, it does not consider that the output of natural monopolists would still be at the suboptimal level where P > MC

A new production tech for making vitamins is invented by college professor who decides not to patent it. output: 25000, 50000, 75000, 100000 TC: 55000, 75000, 80000, 85000 a. What is ATC for each level of output listed in the table? b. Each 25,000-bottle per day increase production above 100,000 bottles per day, TC increases by $5,000 (125,000 bottles per day generate total costs of $90,000 and 150,000 bottles per day generate total costs of $95,000). Are there economies of scale at all levels of output? c. Price of a bottle of vitamins is $1.43. Total quantity demanded by consumers is 75,000,000 bottles. How many firms will be in this industry?

a. ATC = 2.2, 1.5, 1.07, 0.85 b. yes c. 1 firm

Assume that the most efficient production technology available for making vitamin pills has the cost structure given in the following table. output: 25100, 50100, 75100, 100100 TC: 101000, 151000, 188500, 276500 MC: 0.51, 1.01, 2.51, 3.01 a. What is ATC per unit for each level of output listed in the table? Enter your answers in the table above. b. Are there economies of scale in production? c. Suppose that the market price for a bottle of vitamins is $2.51. At that price the total market quantity demanded is 82,610,000 bottles. How many firms will be in this industry? d. Suppose that, instead, the market quantity demanded at a price of $2.51 is only 75,100. How many firms will be in this industry? e. Review your answers to parts b, c, and d. Does the level of demand determine this industry's market structure?

a. ATC = 4.02, 3.01, 2.51, 2.76 b. yes c. 1100 firms d. 1 firm e. yes explanation: b. Yes, the ATC does decline for output levels up to 75,000. Beyond this, the ATC increases. c. Since $2.51 is minimum ATC, firms will produce at this level of output. Any firm that deviated from this level would incur a higher ATC and would be unprofitable at the market price of $2.51. The total number of firms can be found by dividing the market quantity demanded by output produced by a firm at the ATC of $2.51, which is 75,100. Number of firms = market quantity demanded ÷ output minimum ATC = 82,610,000 ÷ 75,100 = 1,100. d. The total number of firms under this assumption is: Number of firms = market quantity demanded ÷ output minimum ATC = 75,100 ÷ 75,100 = 1. e. Yes, high demand will result in a competitive industry while very low demand can result in a monopoly industry.

Assume that a pure monopolist and a purely competitive firm have the same unit costs. price: Pm > Pc, Pm < Pc, Pm = Pc output: Qm > Qc, Qm < Qc, Qm = Qc profit: Pm > Pc, Pm < Pc, Pm = Pc a. Using the table and the assumption stated above, determine which of the following conditions are true in this specific case with respect to price, output, profits. b. Using this same assumption, in the case of a pure monopolist, there will be production c. Even though both monopolists and competitive firms follow the MC = MR rule in maximizing profits, there are differences in the economic outcomes because d. The costs of a purely competitive firm and a monopoly may be different because e. If a monopoly can experience economies of scale, it can

a. Pm > Pc; Qm < Qc; Pm > Pc b. inefficiency, because the monopolist does not produce at the point of minimum ATC and does not equate price and MC c. pure competitors are small with no market power d. monopolies might experience economies of scale not available to competitive firms e. reduce the price below a pure competitor and improve resource allocation

Suppose a pure monopolist faces the following cost data, as shown by the table on the left, and the demand schedule, as shown on the right. a. calculate the missing TR and MR amounts b. what is the profit-maximizing price for this monopolist? what is the profit-maximizing output? c. what is the monopolist's profit?

a. TR = 0, 100, 166, 213, 252, 275, 288, 294, 296, 297, 290; MR = 100, 66, 47, 39, 23, 13, 6, 2, 1, -7 b. $63 at 4 units c. $42

Suppose that a price-discriminating monopolist has segregated its market into two groups of buyers, as shown by the following tables. a. Calculate the missing TR and MR amounts for Group 1. b. Assume that MC is $13 in both markets and MC = ATC at all output levels. What price will the firm charge in each market? c. Based solely on these two prices, which market has the higher price elasticity of demand? d. what will be this monopolist's total economic profit?

a. TR = 0, 100, 166, 213, 252, 275, 288, 294, 296, 297, 290; MR = 100, 66, 47, 39, 23, 13, 6, 2, 1, -7 b. Group 1: 6 units for $48; Group 2: 6 units for $33 c. the second market has the higher price elasticity of demand d. $330

Refer to the demand schedule below. a. Use the following demand schedule to calculate total revenue and marginal revenue at each quantity. b. Plot the demand, TR, and MR curves c. Use Chapter 6's total-revenue test for price elasticity to designate the elastic and inelastic segments of your graphed demand curve. d. In general, when marginal revenue is positive, demand is _________. When marginal revenue is negative, demand is _______. e. Suppose the marginal cost of successive units of output is zero. What output would the profit-seeking firm produce? (Assume the firm can only produce whole units.)

a. TR = 0, 6.5, 12, 16.5, 20, 22.5, 24, 24.5, 14, 22.5; MR = 6.5, 5.5, 4.5, 3.5, 2.5, 1.5, 0.5, -0.5, -1.5 b. plot based on answers from part a c. demand is elastic from $6.5 to $3.5 demand is inelastic from $3 to $2.5 d. elastic; inelastic e. 7 units

Answer the following questions about the barriers to entry that shield monopolies from competition. a. Which of the following is not a major barrier to entry into an industry? b. Which of the following is a true statement?

a. diminishing marginal returns b. unfair competition is a barrier with no social justification

a. How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? The demand curve faced by a purely monopolistic seller is b. Why does it differ? Of what significance is the difference? The demand curve facing a c. Complete the following statement. The pure monopolist's demand curve is not

a. downward sloping, whereas that facing the purely competitive firm is perfectly elastic b. purely competitive firm is perfectly elastic, because it may sell all that it wishes at the equilibrium price c. perfectly inelastic, because MR is negative when demand is inelastic, so MR = MC < 0.

True or False. Evaluate each statement. a. Because they can control product price, monopolists can guarantee profitable production by simply charging the highest price consumers will pay. b. The pure monopolist seeks the output that will yield the greatest per-unit profit. c. An excess of price over marginal cost is the market's way of signaling the need for more production of a good. d. The more profitable a firm, the greater its monopoly power e. The monopolist has a pricing policy; the competitive producer does not f. With respect to resource allocation, the interests of the seller and of society coincide in a purely competitive market but conflict in a monopolized market.

a. false b. false c. true d. cannot be determined e. true f. true

Regulating a single monopoly firm that sells 50-pound bags of concrete. The firm has fixed costs of $30 million per year and a variable cost of $2 per bag no matter how many bags are produced. a. If this firm keeps increasing its output level, will ATC per bag ever increase? Are there economies of scale at all levels of output? b. If you wished to regulate this monopoly by charging the socially optimal price, what price would you charge? Will the firm want to exit the industry? c. You find out that if you set the price at $3 per bag, consumers will demand 30 million bags. d. If consumers instead demanded 40 million bags at a price of $3, how big would the firm's profit/loss be? e. Suppose that demand is perfectly inelastic at 40 million bags, so that consumers demand 40 million bags no matter what the price is. What price should you charge if you want the firm to earn only a fair rate of return?

a. no; yes b. $2 per bag with size of firm's loss being $30 million; yes c. $0 million d. size of firm's profit would be $10 million e. $2.75

d. Instead, market quantity demanded at a price of $1.43 is only 75,000. How many firms will be in this industry? e. Review parts b, c, and d. Does the level of demand determine industry's market structure? f. Compare answer part d of prblm 21 to part d of prblm 4. Do both production technologies show constant returns to scale?

d. 1 firm e. no f. no, the second technology (this problem) has increasing returns to scale

The MR curve of a perfectly competitive firm is horizontal. The MR curve of a monopoly firm is:

downward sloping

The socially optimal price (P = MC) is socially optimal because:

it achieves allocative efficiency

U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. These companies, for profit reasons, oppose laws allowing re-importation of drugs to the United States because it would

make it much more difficult to maintain the different prescription drug prices

The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially optimal price:

may be so low that the regulated monopoly can't break even

How often do perfectly competitive firms engage in price discrimination?

never

Which of the following could explain why a firm is a monopoly?

patents, economies of scale, and government licenses

"No firm is completely sheltered from rivals; all firms compete for consumer dollars. Therefore, pure monopoly does not exist." A monopoly is more likely to exist if the cross price elasticity of demand is

positive and less than 1

Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a book. Will the author and the publisher want to charge the same price for the book?

the author would prefer a lower price than the publisher explanation: The publisher is a monopolist seeking to maximize profits. This will occur at the quantity of output where MR = MC. The author, who will receive 10 percent of the total revenue, will maximize his payment if the book is priced where MR = 0. This will occur where the price elasticity of demand is equal to 1 and total revenue is maximum. The author would prefer a lower price than the publisher.

Suppose that a monopoly firm can segregate its buyers into two different groups to which it can charge two different prices. To maximize profit, the monopoly should charge a higher price to the group that has:

the lower elasticity of demand