Study Questions on Monopoly

  1. a. Use the following the table to find TR, MR and MC:

P Q TR MR TC MC

$10 0 0 .

$9 1 $1 .

. $8 2 $4 .

$7 3 $9 .

$6 4 $16 .

$5 5 $25 .

$4 6 $36 .

$3 7 $49 .

$2 8 $64 .

$1 9 $81 .

$0 10 $100 .

b. What is profit-maximizing output? What is monopoly price? What is profit?

  1. True or False questions. Explain.
  1. A monopolist necessarily makes a positive profit.
  2. At any given quantity, MR < P for a monopolist.
  3. A monopolist maximizes profit by producing where MR = AC.
  1. See Figure 1.

Figure 1.

$ per unit

$10

$8

$7

$6

$5

Quantity

50 80 100

  1. Label the above curves.
  2. What is monopoly output? What is monopoly price? What is monopoly profit?

4 . Draw in the market demand curve, MR curve, and the MC curve. Assume that the MC is consant.

On this graph, show monopoly output and price and competitive output price.

  1. What is the economic definition of price discrimination? What conditions enable a firm to price discriminate? Under what circumstances is price discrimination profitable?
  2. Assume there are two types of buyers of airline tickets—business travelers (inelastic demanders) and vacation travelers (elastic demanders). On a set of graphs, find the profit-maximizing price charged to each group. Assume that MC is constant.
  3. What is cartel? On a set of graphs, show the cartel outcome.
  4. Why are cartels so unstable?

ANSWERS

1. Use the following the table to find TR, MR and MC:

P Q TR MR TC MC

$10 0 0 --- 0 --- .

$9 1 9 9 $1 1 .

. $8 2 16 7 $4 3 .

$7 3 21 5 $9 5 .

$6 4 24 3 $16 7 .

$5 5 25 1 $25 9 .

$4 6 24 -1 $36 11 .

$3 7 21 -3 $49 13 .

$2 8 16 -5 $64 15 .

$1 9 9 -7 $81 17 .

$0 10 0 -9 $100 19 .

b. Q = 3 (where MR=MC). P = $7. Profit = 21-9=$12.

  1. a. False. The AC curve may lie everywhere above the demand curve. In this case, the monopolist will not be able to make positive profit. See graph below.

b. True. To sell additional units of output, a (single-price) monopolist must cut the price on ALL units.

Thus, MR is below P.

c. False. Profit is maximized at the quantity where MR = MC.

  1. See Figure 1.

Figure 1.

$ per unit MC

AC

$10

$8

$7

$6

$5

D

Q

50 80 100

MR

b. Q = 50. P = $10. Profit = (10-7)(50)= $150.

4.

$ per unit

Pmonopoly

Pcomp. MC

D

Q

Qmon Qcomp

MR

5.Definition: (P1/MC1) = (P2/MC2). Conditions are i. Firm must have some degree market power, ii. The firm must be able identify the different groups of buyers and iii. Resale of the good must be difficult.

It is profitable if the different groups of buyers have different elasticity of demands. For example,

Tourists generally have more inelastic demands than locals, or business travelers, in general, have more inelastic demands than other travelers.

6. P P

Business Trav. Other travelers

(inelastic demand) (elastic demand)

P1

P2

D2

MC MC

D1 MR2

Q1 Q2

MR1

  1. Cartel: a group of firms or individuals who engage in collusion. Collusion is an agreement to

restrict competition.

$ per unit Firm P Market SRSM=SRSf=MC

MC=SRSf AC

Pcartel

ACcartel

Pcomp D=MR Pcomp

MCcartel

MRcartel D

qcartel qcomp Qcartel Qcomp.

Notice that profit rises from zero under perfect competition to some positive amount (P>AC) under

the cartel.

8. Cartels are unstable because:

a. There is an incentive to cheat on the cartel by producing than is agreed upon. The incentive to do so can be understood by looking at the above graph of the firm. At the cartel output, P>MC. This tells us that a firm could increase its profit by producing another unit (any given firm in the cartel is a price taker).

b. The existence positive economic profit (P>AC) will tend to attract new into the industry. As new firms enter, supply rises which drives price down.

c. The development substitute goods will lower the demand for the cartelized good.

d. Disagreements over quota assignments.

e. Non-price competition among the firms.