Monopoly 107 - 112

Question 1

Assume single selling price

Answer 1

Downward slope, single selling price means a monop must -P to +Qs (Downward D slope means a firm must determine P to charge in finding PxQ combo that max’s profit)

Question 2

Possible Monopoly Price Strategies (single price, price discrimination)

Answer 2

Single price

Price Discrimination; consumers can’t resell product or service to each other

Question 3

Single Price Profit Max (Q x MR=MC)

Answer 3

Expand Q until MR=MC

No new firms will enter on the long run econ profit max that monopolies enjoy

Do monopolists charge Max P?? No. That is because monopolists max PROFIT, not max PRICE.

To ensure profit. Demand curve (Q x MR=MC) > ATC so that P > ATC and the optimal profit (visualize, or graph this) will be in the elastic range of the demand curve.

Question 4

Monop SR C’s and R’s (Economic profit = (P - ATC) x Q where PxQ=Demand

Answer 4

Monopolists are price searchers and have imperfect info - they alter P and Q to max econ Profi

Price Discrimination;different P’s to diff. consumers to capture consumer surplus as econ profit.

Conditions in order for P disc. to work
-P Demand curve, customers w/ diff. P elas. of D, Prevent customers that pay low P to resel to customers that pay +P = met = economic profit = capturing consumer surplus

Question 5

DWL; Inefficient; Reduced output (monopolys initiative) and +P which will -Consumer surp and prod. surp

Answer 5

However, price discrim. reduces DWL by inc. Q toward Q1, where MB=MC by providing a +P to inelastic customers, but maintaining P for elastic customers.

Perfect price discrim: No DWL and Qs = perfect comp, where every consumer pays the price they’re willing to expend, which means there would be 0 consumer surplus as the monopoly captures all of it.

Question 6

Monop compared to perfect comp

Answer 6

The monop firm will produce less total output and charge a higher price

Perfect comp efficient Q, where consumer surp and producer surp are equal, as Q=D=MC=MR (MB)

Further monop loss: Rent Seeking: When producers spend time and resources trying to acquire or become a monopoly.

Question 7

Natural Monopoly (When avg cost of prod. decreases through econs of scale)

Answer 7

There is a potential gain from monopoly because of lower average cost production when LRAC is decreasing so that econs of scale lead to a single supplier

Question 8

Natural Monop: Avg cost and Marginal Cost Pricing (gov. efforts to stim. monop Q, which is produced well below efficient Q)

Answer 8

Average Cost Pricing: P = DxATC, which will +output, social welfare (allocative efficiency), and ensures a normal profit as P = ATC

Marginal Cost Pricing;efficient regulation: P = MC x D, +Q, -P, causes monopolist to incur a loss because ATC>P but gov subsidiezes monops loss to provide a normal profit and keep it in business so that it doesnt exit

Another way gov deals w/ monops: Sell its rights to the highest bidder