Charles's Ridiculous
Monopoly
Review Question
1. Explain the relationship between Demand & MR
2. Can the monopolist make Positive economic profits in the LR? Explain
3. Label the area of DWL and explain what it represents.
4. Suppose this monopoly industry becomes perfectly competitive without changing the demand or cost curves. Identify the equilibrium price and quantity that would prevail in the perfectly competitive market.
5. What is the line segment of the demand curve that is elastic? Explain how we know it is elastic.
6. What point on the demand curve is unit elastic? Explain how we find the Unit elastic section of the demand curve.
7. Why does the monopolist not want to produce in the inelastic section of its demand curve? Explain.
8. If the monopolist is producing in the inelastic section of its demand curve what must be provided to keep operating if it isn’t breaking-even?
9. Would the government use a per unit subsidy or lump sum subsidy to cause the monopolist to reduce its DWL. Explain.
10. Label the CS when the monopolist is producing at the Profit maximizing point. If the monopolist produces one more units of the good does CS increase, decrease or stay the same? Explain.
11. If the firm wants to maximize profits what price and quantity would it choose? Explain.
12. If the firm wants to maximize its revenue what price and quantity would it choose? Explain.
13. If the form wants to produce the allocatively efficient quantity what price and quantity would it produce? Explain.
14. If the firm wants to just cover its implicit costs what price and quantity would it find itself? Explain.
15. What is the area of profits or losses achieved by the monopoly?
16. If the monopolist is producing at Q5 and it raises its price will its total revenue increase, decrease or remain unchanged? Explain.
17. If demand for the product increases what happens to the profit maximizing output and total costs? Explain.
18. Where would the monopolist maximize the sum of its consumer and producer surplus? Explain.
19. If the Monopolist is forced to produce at Q4 would its accounting profits be positive, negative or zero? Explain.
20. If the government imposes a lump sum tax what happens to the output, market price and profits? Explain.
21. If the government imposes a per unit subsidy what happens to the output, market price and profits? Explain.
22. If the monopolist could perfectly price discriminate what would be its output? Explain.
23. If the monopolist could perfectly price discriminate label the area of consumer surplus and DWL.
24. If the monopolist could perfectly price discriminate label the area of profits.
25. If the monopolist could perfectly price discriminate label the area of total revenue.
26. What must be true for the monopolist to continue operating in the short run if its making losses? Explain.
27. If the monopolist is making losses why would it choose to continue to operate? Explain.
28. If the demand for the monopolist’s good decreases what happens to the price and quantity produced? Explain.
1. Explain the relationship between Demand & MR.
For the monopoly firm to sell an additional unit of output, the firm must lower price on all units of output. Thus, the extra revenue received from selling an additional unit of output is offset by the selling of other units at a lower price.
2. Can the monopolist make Positive economic profits in the LR? Explain
For the monopoly firm to sell an additional unit of output, the firm must lower price on all units of output. Thus, the extra revenue received from selling an additional unit of output is offset by the selling of other units at a lower price.
3. Label the area of DWL and explain what it represents.
The area of DWL represents a loss of consumer and producer surplus.
4. Suppose this monopoly industry becomes perfectly competitive without changing the demand or cost curves. Identify the equilibrium price and quantity that would prevail in the perfectly competitive market.
The perfectly competitive firms produce where the P = MC
At the allocative efficient quantity
5. What is the line segment of the demand curve that is elastic? Explain how we know it is elastic.
The section of the demand curve is from A to D,
We find it by going to where the MR is 0 and drawing a line straight up
Until it intersects the demand curve and that is the unit elastic point
Everything up the demand curve is elastic, everything down the demand curve is inelastic
6. What point on the demand curve is unit elastic? Explain how we find the Unit elastic section of the demand curve.
Unit elastic is found by drawing a line straight up from where MR = 0
Where it intersects the demand is the unit elastic point
Look at the graph above.
7. Why does the monopolist not want to produce in the inelastic section of its demand curve? Explain.
The monopolist doesn’t want to produce in the inelastic section
Of its demand curve as the MR = Negative
8. If the monopolist is producing in the inelastic section of its demand curve what must be provided to keep operating if it isn’t breaking-even?
A subsidy must be provided for the monopolist to continue to produce in the
Inelastic section of its demand as its MR is negative
Unless it’s at break even then no subsidy is needed.
9. Would the government use a per unit subsidy or lump sum subsidy to cause the monopolist to reduce its DWL. Explain.
Only per unit subsidies (or taxes) effect the MC curve and therefore would
Be useful in changing the quantity produced.
To reduce DWL we need more quantity so a per unit subsidy
Would shift the MC curve to the right
Increasing quantity and lowering the price
10. Label the CS when the monopolist is producing at the Profit maximizing point. If the monopolist produces one more units of the good does CS increase, decrease or stay the same? Explain.
The monopolist can choose the price or the quantity but not both
As the monopolist produces an additional unit its price must fall
As the monopolist produces an additional unit its price must fall
To produce one more unit at Q2 the price falls to P4
If price decreases then CS must increase.
If price decreases then CS must increase.
11. If the firm wants to maximize profits what price and quantity would it choose? Explain.
Price = P5
Quantity = Q1
Explain = MR = MC
12. If the firm wants to maximize its revenue what price and quantity would it choose? Explain.
Price = P3
Quantity = Q3
Explain = MR = 0
13. If the form wants to produce the allocatively efficient quantity what price and quantity would it produce? Explain.
Price = P4
Quantity = Q2
Explain = P = MC
14. If the firm wants to just cover its implicit costs what price and quantity would it find itself? Explain.
Price = P2
Quantity = Q4
Explain = P = ATC, Break-Even, Zero Economic Profit (Normal Profit)
15. What is the area of profits or losses achieved by the monopoly?
16. If the monopolist is producing at Q5 and it raises its price will its total revenue increase, decrease or remain unchanged? Explain.
If the monopolist raises his price when producing in the
Inelastic section of the demand curve
Total revenue will increase
17. If demand for the product increases what happens to the profit maximizing output and total costs? Explain.
If the Demand increases price and quantity (output) increases
More quantity = more costs
18. Where would the monopolist maximize the sum of its consumer and producer surplus? Explain.
Consumer surplus and producer surplus is maximized
Where the P = MC (Allocative Efficiency)
Recognize that the MC curve is the supply curve
Where supply and demand come together CS & PS is maximized
19. If the Monopolist is forced to produce at Q4 would its accounting profits be positive, negative or zero? Explain.
At Q4 the monopolist is breaking even, making a zero economic profit
This implies that it is covering all of its explicit and implicit costs
If implicit costs are being covered then Acct Profits must be positive
As accountants consider only Explicit costs
20. If the government imposes a lump sum tax what happens to the output, market price and profits? Explain.
Lump sum’s do not effect the MC curve
Therefore quantity and price do not change
Profits would decrease as the firm has to pay the tax.
21. If the government imposes a per unit subsidy what happens to the output, market price and profits? Explain.
Per units do effect the MC
A per unit subsidy would shift the MC curve to the right
Think of the MC curve as the supply curve subsidies shift supply right
We would produce more of this good
Price falls and quantity increases at the new profit max point
Profits would increase as receiving the subsidy
22. If the monopolist could perfectly price discriminate what would be its output? Explain.
Output = Q2
Price Discriminating Monopolists have there MR curve
Align with it demand curve and it will produce where MR = MC
23. If the monopolist could perfectly price discriminate label the area of consumer surplus and DWL.
Trick Question
As there is no DWL or CS for the Price Discriminator
The Price Discriminating Monopolist charges the highest price for each unit sold
So no consumer surplus
And since the MR = Demand
It last unit produced is where MR = MC therefore it produces the
Allocatively efficient quantity = NO DWL
24. If the monopolist could perfectly price discriminate label the area of profits.
The Price Discriminating Monopolist
sells its last unit where the MR = MC
It also charges the highest price for each unit of the good sold
therefore the Profits are all areas above their costs.
The Price Discriminating Monopolist
sells its last unit where the MR = MC
It also charges the highest price for each unit of the good sold
therefore the Profits are all areas above their costs.
25. If the monopolist could perfectly price discriminate label the area of total revenue.
Total Revenue = P x Q
Every price charged is the highest price
all of the shaded above would be total revenue.
26. What must be true for the monopolist to continue operating in the short run if its making losses? Explain.
P > minimum of the AVC
27. If the monopolist is making losses why would it choose to continue to operate? Explain.
The monopolist would continue to operate as long as its covering some
of its Fixed Costs, if it shuts down it would owe all of its fixed costs
as long as the P> minimum of the AVC
it is covering some of its fixed costs and would stay in business.
28. If the demand for the monopolist’s good decreases what happens to the price and quantity produced? Explain.
If demand decreases
Price and Quantity decrease
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