To maximize profit a pure monopolist must

Pure Monopoly

A. Short-Answer, Essays, and Problems

1. What are the major characteristics of pure monopoly?

2. What are the major barriers to entry that explain the existence of monopoly?

3. What is the relationship between economies of scale and a natural monopoly?

4. Some economists argue that pure monopolists will purposely avoid the price-output combination that will maximize their profits. Explain how this less-than-maximum profit behavior could be rational.

5. In what ways, if any, do the demand schedules for a purely competitive firm and a pure monopolist differ? What significance does this have for the price-output behavior of each?

6. Why is marginal revenue less than price for every level of output except the first?

7. How does price elasticity affect the price-quantity combination and segment of the demand curve that the monopolist would prefer for price and output?

8. A pure monopolist determines that at the current level of output the marginal cost of production is $2.00, average variable costs are $2.75, and average total costs are $2.95. The marginal revenue is $2.75. What would you recommend that the monopolist do to maximize profits?

9. A pure monopolist sells output for $4.00 per unit at the current level of production. At this level of output, the marginal cost is $3.00, average variable costs are $3.75, and average total costs are $4.25. The marginal revenue is $3.00. What is the short-run condition for the monopolist and what output changes would you recommend?

10. The demand schedule for the product produced by a monopolist is given in the table below. Complete the table by computing total revenue and marginal revenue.

Quantity Total Marginal

demanded Price revenue revenue

1 $325 $______

2 300 ______ $______

3 275 ______ ______

4 250 ______ ______

5 225 ______ ______

6 200 ______ ______

7 175 ______ ______

8 150 ______ ______

9 125 ______ ______

10 100 ______ ______

11 75 ______ ______

12 50 ______ ______

13 25 ______ ______

14 0 ______ ______

(a) What do the data in the table indicate about the relationship between total revenue and marginal revenue? Explain.

(b) What do the data in the table indicate about the elasticity of demand?

11. In the following table are demand and cost data for a pure monopolist. Complete the table by filling in the columns for total revenue, marginal revenue, and marginal cost. Answer these three questions: (a) What output will the monopolist produce? (b) What price will the monopolist charge? (c) What total profit will the monopolist receive at the profit-maximizing level of output?

Total Marginal Total Marginal

Quantity Price revenue revenue cost cost

0 $34 $______ $ 20

1 32 ______ $______ 36 $______

2 30 ______ ______ 46 ______

3 28 ______ ______ 50 ______

4 26 ______ ______ 54 ______

5 24 ______ ______ 56 ______

6 22 ______ ______ 64 ______

7 20 ______ ______ 80 ______

8 18 ______ ______ 100 ______

9 16 ______ ______ 128 ______

10 14 ______ ______ 160 ______

12. Why is there a supply curve in pure competition but no supply curve in pure monopoly?

13. What conditions must exist in order for a pure monopolist to achieve economic profits? Is the profitability of a firm’s operation a good index of the degree of monopoly power it possesses?

14. Do you agree or disagree with the statement that: “A monopolist always charges the highest possible price.” Explain.

15. “Pure monopoly guarantees economic profits.” Discuss whether this is a valid statement.

16. How does monopoly compare with pure competition in terms of price, output, and efficiency?

17. Explain how monopoly causes an inefficient allocation of resources when the competitive firm does not, even when both seek to maximize profits.

18. How does monopoly result in income transfers?

19. How does simultaneous consumption affect economies of scale?

20. What are network effects? How do they contribute to economies of scale?

21. What is X-inefficiency? Why is it likely to occur in monopoly?

22. Draw a graph that illustrates X-inefficiency. Explain the concept of X-inefficiency using the graph.

23. What is the relationship between rent-seeking expenditures and monopoly?

24. What are three policy options for dealing with pure monopolies that are entrenched and inefficient?

25. Price discrimination is often used by businesses. Explain the conditions under which price discrimination is practiced and the economic consequences of price discrimination.

26. Explain the relationship between the price elasticity of demand and price discrimination. Give two examples.

New 27. (Consider This) Why does price discrimination work in the sale of seats to children and adults at baseball games, but not to the sale of food at concession stands to children and adults at baseball games?

28. Assume that a pure monopolist is able to engage in perfect price discrimination and sell each unit of the product at a price equal to the maximum price the buyer of that unit of the product would be willing to pay. Complete the table below by computing total revenue and marginal revenue for the price discriminating monopolist.

Total Marginal Total Marginal

Quantity Price revenue revenue cost cost

0 $34 $______ $ 20

1 32 ______ $______ 36 $______

2 30 ______ ______ 46 ______

3 28 ______ ______ 50 ______

4 26 ______ ______ 54 ______

5 24 ______ ______ 56 ______

6 22 ______ ______ 64 ______

7 20 ______ ______ 80 ______

8 18 ______ ______ 100 ______

9 16 ______ ______ 128 ______

10 14 ______ ______ 160 ______

(a) What is the marginal revenue that the discriminating monopolist obtains from the sale of each additional unit?

(b) How many units would be produced and what would be the total revenue for the perfectly discriminating monopolist? What would economic profits be?

(c) Compare the economic effects of price discrimination to no price discrimination for the pure monopolist in terms of profits and the level of output.

29. What are the consequences of price discrimination for the producer, the consumer, and for society?

30. What is the dilemma of regulation in the case of a regulated monopoly?

31. In the table below are cost and demand data for a pure monopolist.

Quantity Marginal Average Marginal

demanded Price revenue cost cost

0 $35.00

1 32.00 $ 32.00 $48.00 $48.00

2 29.00 26.00 30.00 12.00

3 26.00 20.00 23.34 10.00

4 23.00 14.00 21.00 14.00

5 20.00 8.00 20.00 16.00

6 17.00 2.00 19.50 17.00

7 14.00 –4.00 19.28 18.00

8 11.00 –10.00 18.68 18.50

9 8.00 –16.00 18.72 19.00

(a) What is the level of price, output, and amount of profit for an unregulated monopolist?

(b) Using the data in the table, what are the price, output, and profit for a regulated monopolist that sets price equal to marginal cost compared with an unregulated monopolist?

(c) Using the data in the table, what are the price, output, and profit for a regulated monopolist that charges a “fair-return” price compared with an unregulated monopolist?

(d) Analyze the effect of regulation on the allocation of resources. Which situation is most efficient? Which situation is most likely to be chosen by government? Why?

32. In the table below are cost and demand data for a pure monopolist.

Quantity Marginal Average Marginal

demanded Price revenue cost cost

0 $105.00

1 96.00 $ 96.00 $144.00 $144.00

2 87.00 78.00 90.00 36.00

3 78.00 60.00 70.34 30.00

4 69.00 42.00 63.00 42.00

5 60.00 24.00 60.00 48.00

6 51.00 6.00 58.50 51.00

7 42.00 –12.00 57.86 54.00

8 33.00 –30.00 57.50 55.50

9 24.00 –48.00 57.33 56.00

(a) What is the level of price, output, and amount of profit for an unregulated monopolist?

(b) Using the data in the table, what are the price, output, and profit for a regulated monopolist that sets price equal to marginal cost compared with an unregulated monopolist?

(c) Using the data in the table, what are the price, output, and profit for a regulated monopolist that charges a “fair-return” price compared with an unregulated monopolist?

(d) Analyze the effect of regulation on the allocation of resources. Which situation is most efficient? Which situation is most likely to be chosen by government? Why?

33. Draw a graph that illustrates the dilemma of regulation for a natural monopoly. On the graph, show the: (a) “socially optimal” price; (b) “fair-return” price; and (c) profit-maximizing price for the unregulated monopolist.

New 34. (Last Word) How was the original DeBeers diamond company an example of classic monopoly behavior? How did it manipulate demand and supply?

New 35. (Last Word) What market forces made DeBeers change its monopoly behavior and end its attempts to control the diamond market?