Download Points to Remember:

Monopoly
PRACTICE PROBLEM ANSWERS:
1. Why is there only one graph to draw for a monopoly? (HINT: Think about why you have to draw 2
separate graphs in perfect competition. Then analyze the differences between perfect competition
and monopoly.)
Since there is only 1 seller, the market graph and firm’s graph will be the same graph. (No
point in drawing it twice!)
Some of the other differences between perfect competition and monopoly:
o Perfectly competitive firms are price-takers whereas monopolists are price-setters
o There are no barriers to entry/exit in a perfectly competitive market, but they exist in
the monopoly market
o The products offered by firms in a perfectly competitive market are homogenous (so it
doesn’t matter if you buy from Firm A or Firm B), but the product offered by a
monopoly has no close substitutes available
2. Can a monopolist charge the highest price possible? Why or why not?
No they cannot because they still face a demand constraint. The demand curve indicates the
willingness to buy – if the price is set above that, then consumers will not buy.
3. Graphically depict a monopolist earning a positive economic profit.
P
MC
PM
ATC
PROFIT
ATC
D
MR
QM
Q
4. Can the profit shown in #3 be sustained in the long run? Why or why not?
Yes. Since barriers to entry exist in a monopoly market, other firms cannot enter. So the price
will not get driven down like in a perfectly competitive market. As long as ATC stay below PM,
then the monopolist will continue to earn an economic profit.
5. Caitlin says that monopolies are very good while David insists that monopolies are bad. Analyze both
sides of this argument and provide support for why both Caitlin and David are correct.
Caitlin:
 Sometimes it makes more sense to have only 1 seller, as in the case of Natural Monopolies.
They occur when there are natural barriers to entry, and the low point of LRATC occurs at
a high level of output. So due to economies of scale, one firm can operate at a lower
average cost than two or more firms. (Can also allow a firm to take advantage of
economies of scope>)
 Legal barriers such as patents, copyrights and trademarks, which can lead to monopoly
power, provide an incentive for innovation, as well as research and development. This
helps to improve the average standard of living, etc
David:
 The market quantity from a monopoly market, QM, will be lower that the market quantity
from a perfectly competitive market, Q*. The market price from a monopoly market, PM,
will be higher than the market price from a perfectly competitive market, P*.
 The consumer’s options are limited (because no close substitutes).
 A monopoly market will also be inefficient – productive inefficiency because PM > ATC, and
allocative inefficiency because PM > MC, which results in deadweight loss.