8 Monopoly

8.1 an introduction to monopoly

Review Activities

No review activities for this section.

Problems

No problems for this section.

External Resources

Khan Academy: Perfect and Imperfect Competition

Khan Academy: Monopolies vs. Perfect Competition

 

8.2 barriers to entry

Review Activities

Problems

No problems for this section.

External Resources

No videos for this section.

8.3 monopolies and profit-maximization

Review Activities

Problems

Problem 8.3.1: A monopolist faces the following demand curve. Complete the table below.

Q P TR AR MR
0 30 XX XX
1 25
2 20
3 15
4 10
5 5

Solutions: $0; $25, $25, $25; $40, $20, $15; $45, $15, $5; $40, $10, -$5; $25, $5, $-15

Problem 8.3.2: A monopolist faces the following demand curve. Complete the table below.

Q P TR AR MR
0 30 XX XX
1 26
2 20
3 17
4 12

Solutions: $0; $26, $26, $26; $40, $20, $14; $51, $17, $11; $48, $12, -$3

Problem 8.3.3: A monopolist faces the following demand and cost schedules. Complete the table below. Find the profit-maximizing level of production as well as the profit-maximizing price. Be sure to use the profit-maximization condition. What is the maximum possible profit?

Q P TR TC Tπ MR MC
0 50 20
1 45 25
2 40 33
3 35 45
4 30 60
5 25 80
6 20 110
7 15 150
8 10 200

Solutions: See video for table. P=$30, Q=4, π=$60

Problem 8.3.4: A monopolist faces the following demand and cost schedules.

Q P TR TC Tπ MR MC
7 90 210
8 87 230
9 84 260
10 81 300
11 78 348
12 74 408
13 70 475
  1. Complete the table below.
  2. Find the profit-maximizing level of production as well as the profit-maximizing price. Be sure to use the profit-maximization condition. What is the maximum possible profit?
  3. Re-consider problems 1 and 2. Instead of a monopolist, the firm is now in a perfectly competitive market where the market price is $60. What is this firm’s profit-maximizing price and level of output? How much profit will it earn? Calculate the difference between the monopolist’s profit and the competitive firm’s profit. You do not need to make a new table, but can if you want to.

Solutions: See video for table; Q=11, P=$78, π=$510; P=$60, Q=12, π=$312, Monopolist earns $198 more than in PC.

Problem 8.3.5: Use the graph below to determine the profit-maximizing price and output for the monopolist.

Solution: Q=4, P=$60

Problem 8.3.6: Use the graph below to determine the profit-maximizing price and output for the monopolist.

Solution: Q=4, P=$18

External Resources

Khan Academy: Types of Competition and Marginal Revenue

Khan Academy: Marginal Revenue and Marginal Cost in Imperfect Competition

Khan Academy: Economic Profit for a Monopoly

Khan Academy: Monopolist Optimizing Price – Revenue

Khan Academy: Monopolist Optimizing Price – Marginal Revenue

Khan Academy: Review of Revenue and Cost Graphs for a Monopoly

8.4 The power and inefficiency of monopoly

Review Activities

Problems

Problem 8.4.1: Consider the market given below:

  1. What is the consumer surplus, producer surplus, total welfare, and deadweight loss when the market is in equilibrium.
  2. What is the consumer surplus, producer surplus, total welfare, and deadweight loss when a monopolist controls the market?
  3. How much consumer surplus was lost to the producers? How much consumer surplus was lost to the inefficiency of the market?
  4. How much producer surplus was transferred from the consumers? How much producer surplus was lost to the inefficiency of the market?

Solutions: CS=A+B+E, PS=C+D+F, TW=A+B+C+D+E+F, DWL=0; CS=A, PS=B+C+D, TW=A+B+C+D, DWL=E+F; Area B was consumer surplus but became producer surplus, Area E was consumer surplus but became DWL; Area B was consumer surplus that was transferred to producers and became producer surplus; producers lost area F to the inefficiency of the market.

Problem 8.4.2: Calculate the Lerner Index for the following situations. In addition, calculate the elasticity of demand.

  1. P=$3, MC=$2
  2. P=$6, MC=$6
  3. P=$15, MC=$3

Solutions: LI=0.33, εD=-3; LI=0 εD=-∞; LI=0.8 εD=-1.25

External Resources

Khan Academy: Monopolist Optimizing Price – Deadweight Loss

8.5 price discrimination

Review Activities

Problems

Problem 8.5.1: Suppose a monopolist faces the following demand schedule. Further, assume the marginal cost of production is constant at $10. Complete the tables below for both a single-price monopolist and a price discriminating monopolist.

Single-Price Monopolist

Q P TR TC Tπ
5 14
10 12
15 10
20 8

Price Discriminator

Q P TR TC Tπ
5 14
10 12
15 10
20 8

Solutions: See video for tables. For a single-price monopolist, greatest possible profit is $20. For a price discriminator, greatest possible profit is $30.

External Resources

Khan Academy: Price Discrimination

Khan Academy: Monopoly Price Discrimination

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Student Companion for Introduction to Microeconomics Copyright © by J. Zachary Klingensmith is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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