Download Monopoly - I can be contacted at

John R. Swinton, Ph.D.
Center for Economic Education
Georgia College
& State University
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Question Take from 2013 AP Free Response
Section:
The graph below illustrates the demand, marginal revenue (MR), marginal
cost (MC), and average total cost (ATC) curves for a profit-maximizing
monopolist.
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Assumptions (before getting to the question):
◦ Price setter
◦ Barriers to entry
◦ Large Number of Buyers (I will discuss Monopsony if
time permits)
◦ Unique Product
◦ Complete Information
◦ Profit-maximizing Behavior
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Barriers to entry
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Patent and Copyright
Government Contract
Economies of Scale
Access to Unique Resource
Illegal Activity
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(a) Assume that the profit-maximizing monopolist
is unregulated. Using the labeling in the graph,
identify each of the following.
i. The monopolist’s quantity of
output
ii. The monopolist’s price
iii. The profit earned by the monopolist
iv. The deadweight loss
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Individual Firm Decision:
◦ Rule #1: Set Output such that MC=MR
 MR not the same as Market Price (because the demand
curve is downward sloping)
◦ There is no guarantee that a monopoly will be
profitable
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Determine Marginal Revenue (given in graph
by line MR):
Price
25
23
Demand
400 440
Quantity
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Determine Marginal Revenue (given in graph
by line MR):
Price
40
Demand
400
800
Quantity
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Answer part (a):
Setting MR = MC we see that the profit
maximizing level of output is Q1
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Answer part (a):
The price that will clear the market (Qs=Qd)
is P3
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Answer part (a):
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Profit will be area P1P3 ac
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Answer part (a):
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The deadweight loss will be area caf.
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(b) Now assume that the monopolist can perfectly
price discriminate. Using the labeling of the
graph, identify each of the following.
i. The quantity produced = Q3
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(b) Now assume that the monopolist can perfectly
price discriminate. Using the labeling of the
graph, identify each of the following.
ii. The total revenue received by the monopolist
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(c) Instead, assume the monopolist charges a single
price and is regulated to produce the socially
efficient quantity. Using the labeling of the graph,
identify each of the following.
◦ i. The social efficient quantity
◦ ii. The consumer surplus at the socially efficient
quantity
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(c) Instead, assume the monopolist charges a single
price and is regulated to produce the socially efficient
quantity. Using the labeling of the graph, identify each
of the following.
◦ i. The socially efficient quantity.
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(c) Instead, assume the monopolist charges a single price and
is regulated to produce the socially efficient quantity. Using
the labeling of the graph, identify each of the following.
ii. The consumer surplus at the socially efficient quantity =
P1P4f.
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(d) Is the monopolist facing the regulation in part
(c) earning a positive economic profit, earning zero
economic profit, or incurring a loss? Explain.
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(e) Is point f in the elastic, inelastic, or unit elastic
portion of the demand curve? Explain.
elastic
Unit elastic
inelastic
Key diagrammatic difference:
Price
Marginal Cost
Supply
P1
Derived Demand
(MRP)
Q1
Quantity