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Monopoly

Monopoly. John R. Swinton, Ph.D. Center for Economic Education Georgia College & State University. Monopoly. Question Take from 2013 AP Free Response Section:

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Monopoly

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  1. Monopoly John R. Swinton, Ph.D. Center for Economic Education Georgia College & State University

  2. Monopoly • 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.

  3. Monopoly • 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

  4. Monopoly • Barriers to entry • Patent/ Copy write • Government Contract • Economies of Scale • Access to Unique Resource • Illegal Activity

  5. Monopoly • (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

  6. Monopoly • 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

  7. Monopoly • Determine Marginal Revenue (given in graph by line MR): Price 25 23 Demand 400 440 Quantity

  8. Monopoly • Determine Marginal Revenue (given in graph by line MR): Price 40 Demand 400 800 Quantity

  9. Monopoly • Answer part (a): • Setting MR = MC we see that the profit maximizing level of output is Q1

  10. Monopoly • Answer part (a): • The price that will clear the market (Qs=Qd) is P3

  11. Monopoly • Answer part (a): • Profit will be area P1P3 ac

  12. Monopoly • Answer part (a): • The deadweight loss will be area caf.

  13. Monopoly • (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

  14. Monopoly • (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

  15. Monopoly • (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

  16. Monopoly • (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.

  17. Monopoly • (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.

  18. Monopoly • (d) Is the monopolist facing the regulation in part (c) earning a positive economic profit, earning zero economic profit, or incurring a loss? Explain.

  19. Monopoly • (e) Is point f in the elastic, inelastic, or unit elastic portion of the demand curve? Explain. elastic Unit elastic inelastic

  20. Monopsony (extra credit) Key diagrammatic difference: Price Marginal Cost Supply P1 Derived Demand (MRP) Q1 Quantity

  21. What are your questions

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