Economics: Ch 8.2: How a Profit-Maximizing Monopoly Chooses Output and Price
Using the table below, calculate the total profit (π) for this monopoly at output level Q=4.
$425 To find total profit at output level Q=4, add the marginal profits through Q=4. 200+150+75+0=$425
What is the main difference between a monopoly and monopolistic competition?
**monopoly is a single firm with high barriers to entry. **Monopolistic competition is characterized by an industry with many firms, differentiated products and easy entry and exit, while monopoly is a single firm with high barriers to entry. Monopolistic competition is characterized by an industry with many firms, differentiated products and easy entry and exit, while monopoly is a single firm with high barriers to entry.
While a monopolist can technically charge any price for its product, the price is constrained by
-- the demand for the firm's product -- the market demand
While a monopolist can technically charge any price for its product, the price is constrained by ________________.
-- the demand for the firm's product -- the market demand While a monopolist can charge any price for its product, the demand for the firm's product constrains the price. No monopolist, even one that is thoroughly protected by high barriers to entry, can require consumers to purchase its product. Because the monopolist is the only firm in the market, its demand curve is the same as the market demand curve, which implies that the market demand constrains the monopolist's price as well.
Which of the following best defines imperfect competition?
A market type which falls between the extremes of monopoly and perfect competition; firms have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly would
Looking at the two graphs below, perceived demand for a perfectly competitive firm is flat compared to that of a monopolist. Why?
A perfectly competitive firm is a price taker and can sell either a low quantity or a high quantity at exactly the same price. A perfectly competitive firm perceives the demand curve that it faces to be flat. In perfect competition, a firm is a price taker and the flat shape means that the firm can sell either a low quantity or a high quantity at exactly the same price.
Which of the following scenarios does not represent characteristics of a monopoly?
An individual firm has very little market power. Monopoly is a market with no competition at all and where firms have a great deal of market power. In the case of monopoly, one firm produces all of the output in a market. Since a monopoly faces no significant competition, it can charge any price it wishes. A monopoly can cause barriers to entry, which are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market.
What do economists say is problematic with the allocative efficiency of a monopoly?
Consumers will suffer from a monopoly because it will sell a lower quantity in the market at a higher price compared to a firm in a perfectly competitive market.
False Statement: Allocatively efficient firms are typically monopolists, whereas perfectly competitive firms are allocatively inefficient.
False Statement: Allocatively efficient firms are typically monopolists, whereas perfectly competitive firms are allocatively inefficient. Allocative efficiency can be seen in perfect competition where firms produce in a competitive market and P=MC. Allocative inefficiency can be seen in a monopoly market where there is no competition, and P>MC.
Are those dominated by a small number of firms. Oligopolies are characterized by high barriers to entry with firms choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the market.
Oligopolistic markets
A monopoly is a firm that sells all or nearly all of the goods and services in a given market. What determines if a firm is a monopoly producer?
If a firm produces a product without close substitutes, then we can consider the firm a monopoly producer in a single market. In general, if a firm produces a product without close substitutes, then we can consider the firm a monopoly producer in a single market. However, if buyers have a range of similar—even if not identical—options available from other firms, then the firm is not a monopoly and does not define the market.
Which of the following is a true statement about the relationship between perceived demand and market demand?
In a monopoly, perceived demand equals market demand. The demand curve as perceived by a perfectly competitive firm is not the overall market demand curve for that product. However, the perceived demand curve of a monopoly is the same as the market demand curve.
Marginal profit
Is the profitability of each additional unit sold. We define it as marginal revenue minus marginal cost.
What does the perceived demand curve for a monopolistic competitor look like?
It slopes downward. The demand curve for a monopolistic competitor slopes downward because firms in this industry have market power, which allows them to increases their prices without losing all of their customers. A monopolistic competitor's demand curve is not quite as inelastic as a monopoly's demand curve due to things like product differentiation. However, it is also not quite as elastic as perfectly competitive firm's demand curve. Therefore, it falls somewhere in the middle.
T-Rex Tent Rental has a monopoly on one of its services. The company is currently producing 119 units for a total revenue of $5,950. If the total revenue for producing 120 units is $5,880, what is the marginal revenue of the 120th unit?
MR = -$70 Marginal Revenue (MR) is the change in total revenue from the sale of one additional unit. The formula for marginal revenue is: MR=change in total revenue/change in quantity Since the problem asks for the marginal revenue of the 120th unit, we will calculate the change in Total Revenue going from 119 units to 120 units. MR=change in total revenuechange in quantity=5,880−5,950120−119=−701=$(−70) An increase in the quantity sold of 1 unit will result in the loss of 70 dollars of revenue.
The table shows the demand schedule for a product produced by a monopolist. What is the marginal revenue of the 12th unit?
MR= -7 Marginal revenue (MR) is the change in total revenue from the sale of one additional unit. The formula for marginal revenue is: MR=change in total revenue/change in quantity Since the problem asks for the marginal revenue of the 12th unit, we will calculate the change in total revenue going from 11 units to 12 units. Total revenue (TR) is calculated by multiplying price (P) by the quantity sold (Q). To find the total revenue (TR1) for the 11th unit, Q1=11 and P1=5: TR1=Q1P1=(11)(5)=$55 Total revenue (TR2) for the 12th unit is Q2=12 and P2=4: TR2=Q2P2=(12)(4)=$48 Change in total revenue from the 11th to 12th unit: TR2−TR1=$48−55=$(−7) But we are not finished because we need to use the marginal revenue equation. Using the total revenue from the 11th and 12th units, calculate marginal revenue (MR) for the 12th unit: MR=48−5512−11=−71=$(−7)
Using the table below, calculate the total profit (π) for this monopoly at output level Q=10. Note that the table includes marginal revenue and marginal cost for each group of 5 units: for example, the marginal revenue of the first 5 units together is $1,500. Adding another group of 5 units yields additional revenue of $1,200
Marginal profit is the profitability of each additional unit sold. We define it as marginal revenue minus marginal cost. Finally, total profit is the sum of marginal profits. To calculate this firm's total profits, first, solve for marginal profit at Q=10, and then solve for total profit by adding the marginal profits through Q=10. At Q=5 MP =MR5−MC5=$1500−$1000=$500 At Q=10 MP =MR10−MC10=$1200−$500=$700 Add marginal profits through Q=10 to find total profit. π=500+700=$1,200
Using the table below, calculate the total profit (π) for this monopoly at output level Q=3
Marginal profit is the profitability of each additional unit sold. We define it as marginal revenue minus marginal cost. Finally, total profit is the sum of marginal profits. To calculate this firm's total profits, first, solve for marginal profit at Q=3, and then solve for total profit by adding the marginal profits through Q=3. At Q=1 MP =MR1−MC1=$1150−$400=$750 At Q=2 MP =MR2−MC2=$1000−$250=$750 At Q=3 MP =MR3−MC3=$650−$200=$450 Add marginal profits through Q=3 to find total profit. π=750+750+450=$1,950
Using the table below, determine the profit-maximizing output (Q) for a monopolist.
Q = 4 Total profit is maximized where marginal revenue equals marginal cost. In this example, maximum profit occurs at 4 units of output where MR=MC=175
At which quantity does this firm produce the least marginal revenue?
Q = 8 To figure out which quantity produces the least marginal revenue first solve for each revenue. MR=change in total revenue/change in quantity Using this formula you will find that the quantity that produces the least marginal revenue is at Q=8 where marginal revenue is actual negative at $−300. MR=6200−65008−7=−3001=$−300
Looking at the two graphs below, perceived demand for a monopolist is downward-sloping compared to that of a firm in perfect competition. Why? -- The monopolist is a price taker and sells either a low quantity or a high quantity at exactly the same price. -- The monopolist perceives the demand curve that it faces to be different from the market demand curve. -- The monopolist perceives the demand curve that it faces to be the same as the market demand curve. -- The monopolist perceives the demand curve that it faces to be the same as the market supply curve.
The monopolist perceives the demand curve that it faces to be the same as the market demand curve. A monopolist perceives the demand curve that it faces to be the same as the market demand curve, which for most goods is downward-sloping. Thus, if the monopolist chooses a high level of output, it can charge only a relatively low price. Conversely, if the monopolist chooses a low level of output, it can then charge a higher price. The challenge for the monopolist is to choose the combination of price and quantity that maximizes profits.
Marginal revenue, marginal cost, average cost, and demand for a monopolist can be seen on the graphs below. Assume the firm is producing at the profit-maximizing level of output. Select the graph with the shading that represents this monopolist's profit.
The one with the most Pink (shading). This is determined by finding where MR=MC and then moving up to the demand curve to determine the price. This price times the quantity equals total revenue. To determine the profit subtract the total cost from the total revenue. Total cost for this firm is equal to the average cost at MR=MC times the quantity. The shaded box is what is left of the total revenue after these total costs are subtracted: this is the firm's profit.
Which of the following are characteristics of oligopolistic markets?
There are high barriers to entry. They are dominated by a small number of firms.
Use the graph below to calculate this monopolist's profit.
To calculate profit, we must first determine the firm's total cost and total revenue at the given level of production. For total revenue, Total revenue=Price×Quantity Given that this monopolist is producing at the profit-maximizing level, where MR=MC and P=$38 and Q=2.25, TR=$38×2.25=$85.50 For total cost, Total cost=Average cost×Quantity From the average cost curve on the graph, we can see that at Q=2.25, AC=$31. TC=$31×2.25=$69.75 Finally, we can calculate profit, Profit=Total revenue−Total cost π=$85.50−$69.75=$15.75
What is the total profit of this monopolist? You may use this formula when solving the question: Profit = Total Revenue − Total Cost
To calculate profit, we must first determine the firm's total cost and total revenue at the given level of production. For total revenue, Total revenue=Price×Quantity Given that this monopolist is producing at the profit-maximizing level, where MR=MC and P=$130 and Q=15, TR=$130×15=$1950 For total cost, Total cost=Average cost×Quantity From the average cost curve on the graph, we can see that at Q=15, AC=$50. TC=$50×15=$750 Finally, we can calculate profit, Profit=Total revenue−Total cost π=$1950−$750=$1200
Can a perfectly competitive firm sell any quantity along its demand curve at the same price?
Yes, it can sell either a relatively low quantity or a relatively high quantity at the set market price. The demand curve as it is perceived by a perfectly competitive firm is flat. The flat perceived demand curve means that, from the viewpoint of the perfectly competitive firm, it could sell either a relatively low quantity or a relatively high quantity at the market price. Perfectly competitive firms are price takers.
Which of the following is not a characteristic of oligopoly?
a large number of competing firms selling non-identical products A large number of competing firms selling non-identical products is a characteristic of monopolistically competitive markets, not oligopolies.
Which of the following best defines imperfect competition
a market type which falls between the extremes of monopoly and perfect competition; firms have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly would
Which of the following is not a characteristic of monopolistic competition?
a single firm dominates the market Monopolistically competitive markets feature a large number of competing firms, but the products that they sell are not identical. Because of the large number of firms in the market, no single firm has dominance in the market. Monopolistically competitive firms have more influence over the price they charge than perfectly competitive firms do, but not as much as a monopoly.
The term monopoly best fits which of the following descriptions?
a situation in which one firm produces all of the output in a market
What is the name for the legal, technological, or market forces that discourage or prevent potential competitors from entering a monopoly market?
barriers to entry Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive.
What does the perceived demand curve for a perfectly competitive firm look like?
flat A perfectly competitive firm perceives the demand curve that it faces to be flat. The flat shape means that the firm can sell either a low quantity or a high quantity at exactly the same price.
Barriers to entry occur in a monopoly market because ________.
legal, technological, or market forces discourage or prevent potential competitors from entering the market. Barriers to entry in a monopoly market occur because of the legal, technological, or market forces that discourage or prevent potential competitors from entering the market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive.
A monopolist's perceived demand curve is the same as the market demand curve. The price the monopolist firm charges is constrained by what?
market demand While a monopolist can theoretically charge any price for its product, the demand for the firm's product constrains the price. No monopolist, even one that is thoroughly protected by high barriers to entry, can require consumers to purchase its product. Because the monopolist is the only firm in the market, its demand curve is the same as the market demand curve, which is, unlike that for a perfectly competitive firm, downward-sloping.
The following graph is a perceived demand curve for which type of firm? (Flat)
perfectly competitive A perfectly competitive firm perceives the demand curve that it faces to be flat. The flat shape means that the firm can sell either a low quantity or a high quantity at exactly the same price. Perfectly competitive firms are price takers.