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Econ 22060 Principles of Microeconomics
Fall, 2004
Dr. Kathryn Wilson
Due: Tuesday, October 26
Homework #4
1. The graph below depicts the demand curve and cost curves of a monopolist.
Monopoly
80
70
Price
60
50
D
ATC
MC
40
30
20
ATC
MC
D
10
0
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
Quantity
a) Draw the marginal revenue curve. If the monopolist were to sell 40 units, what price would it charge?
What would be the marginal revenue associated with the 40th unit of output? Explain why the two are
not the same.
b) What output would a monopolist produce at to maximize profit?
c) What price would a monopolist charge to maximize profit?
d) What would be the monopolist’s profits if it is maximizing profit?
e) Would the monopolist’s level of output be efficient (no deadweight loss)? If not, what level of output
would be efficient? Explain.
2. The table below shows the demand for a product. Assume that the marginal cost of producing the
product is zero.
Quantity
0
2
4
6
8
10
12
14
16
18
20
22
24
price
$12
11
10
9
8
7
6
5
4
3
2
1
0
TR (and total profit)
$0
$220
$400
$560
$640
$700
$720
$700
$640
$540
$400
$220
$0
a) If the product were supplied by firms in perfect competition, what quantity would be sold, what would
be the price, and what would be the profits for the industry?
b) If the product were supplied by a monopoly, what quantity would be sold, what would be the price,
and what would be the profits for the firm?
c) If the product were supplied by two firms in oligopoly who worked as a cartel and split everything
evenly, what would be the quantity sold, what would be the price, and what would be the profits for the
firms?
d) What would happen to the profits of one of the firms in part c if the firm increased its quantity by
two? What would happen to the price in the industry and the profit of the firm that sold the additional
two?
3. Assume that University Bookstore and DuBois are the only two places where students can buy
textbooks and both stores carry all the books that students need.
a) Describe what market structure these bookstores operate in (monopoly, monopolistic competition,
oligopoly, or perfect competition). Why?
b) Without worrying about using numbers, describe what would be the maximum joint month profits of
the University Bookstore and DuBois. How would they get these maximum joint profits?
c) Do you expect the outcome you put in b to be what we see really happen? Why?
d) Describe how the prisoners dilemma relates to an oligopoly market structure.
4. The following graph is for a firm in an industry characterized by Monopolistic Competition.
Monopolistic Competition
Price
160
140
120
100
80
60
40
20
0
D
MC
ATC
ATC
MC
D
750
700
650
600
550
500
450
400
350
300
250
200
150
100
50
0
Quantity
a) What are the assumptions that characterize this market (what makes it monopolistic competition)?
b) What does the firm’s marginal revenue curve look like? (draw it on the graph)
c) What quantity and price would the firm produce at in short run equilibrium?
d) What would we expect to happen to the firm’s demand curve over time? Why?
e) Will the firm in a market of monopolistic competition be efficient (no deadweight loss)?
5. Answer the following statements true or false and explain.
a. Firms in monopolistic competition can continue earning big profits forever because there are barriers
to entry.
b. A monopoly is similar to monopolistic competition in that in monopolistic competition each firm has
a slightly differentiated product so it is like the firm is a mini-monopoly.
c. Government wants to regulate monopolies because they don’t want the monopoly taking advantage of
its power and sell too much of the product.
d. Excess capacity means a firm has deadweight loss.
e. When a monopoly has deadweight loss, this means it could make higher profits if it produced a bigger
quantity.
f. Customers will pay lower prices if an industry has perfect competition than if it is an oligopoly.