Monopoly 6 Consumer/Producer Surplus & DWL

Monopoly 6 Consumer/Producer Surplus & DWL

Consumer/Producer Surplus

Notice that where Allocative efficiency occurs Consumer Surplus and Producer surplus is maximized.

2008 AP Microeconomics Exam

Answer (D)

As we know that Profit max is a higher price and a lower output,, and allocative efficient level has a lower price (good for consumers) and more output (good for consumers), then we know that consumer surplus has increased. Think of this problem by focusing on what has changed.

2008B AP Microeconomics Exam FRQ, Q1

2006 AP Microeconomics Exam FRQ, Q1

Look at (iii) The museum maximizes the consumer/producer surplus.

Notice that where Allocative efficiency occurs Consumer Surplus and Producer surplus is maximized.

Answer (P4, Q3), where P=MC

DWL (Dead Weight Loss)

Remember that a monopoly is a form of market failure, thus it has DWL.

Welfare Loss, or dead weight loss - refers to decreases in producer and/or consumer surplus as a result of either more or less than the socially optimal level of output produced and consumed.

2003 AP Microeconomics Exam FRQ, Q2

Look at (C)(ii) Deadweight loss

Monopoly - 5 Max Revenue & the Socially Efficient Quantity

Monopoly - 5 Max Revenue & the Socially Efficient Quantity

Some times a monopoly firm may choose to produce where revenue is maximized not profits. Why? In some situations managers might receive bonuses for sales, so we can expect them to act accordingly and sell where revenue is maximized. Notice, that when Max Rev is chosen that price is lower than Max Profit and more quantity is produced.

2008 AP Microeconomic Exam

Answer (C) P3/Q3

To max revenue, simply find where the MR curve crosses the bottom axis and draw a dotted line straight up until bumping into the demand curve and then turn left to get the rev max price. Do not assume that where MC crosses the Demand curve is automatically the Max Rev p/q,  as it is drawn like that quite often, but as we see above, not always.

2008B AP Microeconomics FRQ, Q1

Again, to find max revenue, simply find where the MR curve crosses the bottom axis and draw a dotted line straight up until bumping into the demand curve and then turn left to get the rev max price.

2004B AP Microeconomics Exam FRQ, Q1

Socially Efficient Quantity/Socially Optimal Level/Allocative Efficient Level

(The AP will/can use any of the above for where the MC curve meets the Demand Curve)

Notice, the SOQ/SEQ or allocative efficient level is below Max Rev/Profit and produces more output.

2013 AP Microeconomics Exam FRQ, Q1

MC = D, A monopoly firm would never choose to operate at this level.

2009 AP Microeconomics Exam, FRQ, Q1

Monopoly 4 - Break-even & Shut-down

Monopoly 4 - Break-even & Shut-down 

Break-even

A monopolist with its price exactly equal to its ATC, Notice the ATC is just kissing the Demand curve.

• MR = MC
• TR = TC
• Covering all of its implicit and explicit costs.
• Earning a normal profit but not any positive economic profit

2006 AP Microeconomics FRQ, Q1

Look at (IV) The museum maximizes its attendance, as long as it breaks even. (As long as it covers its costs) Look at where the ATC crosses the Demand curve, remember the Demand curve is also the Average Revenue curve, so TR = TC at P2 & Q5.

2010B AP Microeconomics FRQ, Q1

Again, break-even where ATC crosses the Demand curve.

2008B AP Microeconomics FRQ, Q1

Again, break-even where ATC crosses the Demand curve.

Shut-down

Shut-down if:

• price can sell for is lower than the firms average variable cost, or
• if total losses are greater than the firms's fixed costs.

in the graph:

• firm is producing at MR=MC level of output, price is lower than the firm's AVC
• firm cannot afford to even pay its workers for each unit they produce
• Shut-down to minimize losses

No shut-down FRQ,s I've found in the last ten years,, anyone know anything different leave a comment.

Monopoly 3 Loss Minimization

Monopoly 3 Loss Minimization 

Yes, monopolists can have losses, 

• demand for its product could fall
• costs could rise
• governments might demand they make losses (while providing subsidies)

Notice, the firm is producing at profit max, MR = MC, but the ATC is higher than the price it can sell its good. 

2012 AP Microeconomics Exam, FRQ, Q1

Monopoly video - Louis CK - Monopoly Loss

Monopoly 2 - Profit Maximization

Monopoly 2 - Profit Max

1995 AP Microeconomics Exam

Answer (D) Less than the socially optimal level, since the price paid by consumers exceeds the                        firms marginal cost. (To answer this question you must know what a profit                                    maximizing monopoly firm actually looks like, and what the socially optimal level                         is.(Discuss Later))

Just like a perfectly competitive firm a monopolistic company wants to produce where profit maximization occurs. (Profit Max is where MR = MC)

First, find the Profit Max, where MR and MC intersect, draw a dotted line straight up until you bounce off of the Demand (price) curve and continue until your line bumps into the Price axis. This is your Profit Max price. Go back to where MR and MC intersect and draw a dotted line down to the output axis. This will be the amount of product that will be produced (Output) at that price.  Notice, in the graph above the section of the ATC curve (where it intersects with the dotted line) is below the price. Costs are being covered, as price is above ATC's. Profit is to be shaded in and labeled profit, In the long term due to barriers of entry the monopoly firm can continue making profits in the long term.

1995 AP Microeconomics Exam

Answer (B) charge a higher price than is necessary to maximize revenues. (Remember a monopoly can choose price or output not both.)

2000 AP Microeconomics Exam

Answer (A) Price exceeds MR marginal revenue (the demand curve (price) is greater than marginal revenue simply because to sell more, the monopolist must lower its price which applies to all of the previous units as well.)

2000   2000 AP Microeconomics Exam

Answer (B) its profit max output is 200 units. (Did you choose (A) because you followed the Max profit across to $5. Remember, Profit max price is found by tracing the line up to the Demand curve and then turning left, Profit max price is $20) 

Economic profits = (P-ATC) x Q   ($20-$10) x 200 = $2000 profits are sustainable in the Long-run due to barriers to entry.

(Monopoly with a straight MC curve, don't let that confuse you.)

2013 AP Microeconomic FRQ, Q1

2011 AP Microeconomics FRQ, Q1

Economic profits = (P-ATC) x Q  but we are looking for profit for 1 unit, so, ($24-$18) x 1 = 6

                                  (P-ATC) x Q if we were looking for Total Profit = (24-18) x 8 = $56