# Marginal-Cost Pricing

```and Policies regarding Monopolies
P116-119
1.
2.
3.
4.
Explain, using diagrams, why the profit maximizing choices
of a monopoly firm lead to allocative inefficiency (welfare
loss) and productive inefficiency.
Explain why, despite inefficiencies, a monopoly may be
considered desirable for a variety of reasons, including the
ability to finance research and development (R&amp;D) from
economic profits, the need to innovate to maintain
economic profit, and the possibility of economies of scale.
Evaluate the role of legislation and regulation in reducing
monopoly power.
Draw diagrams and use them to compare and contrast a
monopoly market with a perfectly competitive market, with
reference to factors including efficiency, price and output,
research and development (R&amp;D) and economies of scale.
Where S = D in the market, (i.e MC =
 For a competitive firm, price equals
marginal cost.
 For a monopoly firm, price exceeds
marginal cost.
AR)
Price
Allocative inefficient price
and quantity
Marginal cost
Monopoly
price
Allocative efficient price
and quantity
PC
price
Marginal
revenue
0
Monopoly
PC
quantity quantity
Demand
Quantity
What do the
following
areas or
points
represent :
1. A
2. B
3. C
4. D
5. G
6. CFAO
7. DGBO
1. A = monopoly output
2. B = perfect comp output
3. C = monopoly price
4. D = perfect comp price
5. G= perfect comp equilibrium point
6. CFAO = monopoly total revenue
7. DGBO= perfect comp total revenue
8.But what is triangle FGH?

While a market
with perfect
competition will
always move to
the output where
demand =supply
(AR=MC), a
monopoly will
operate where
MC=MR which
restricts output
and increases the
price causing a
1.
Pass Antitrust laws



2.
3.
4.
5.
To prevent formation of mergers.
To break up large companies.
To prevent companies from performing activities
which make markets less competitive.
In NZ the Commerce Commission aims to
promote competition in markets.
Turning some private monopolies into public
enterprises (usually natural monopolies).
Regulate pricing
Doing nothing at all – why not?
1.
2.
Regulating the price to Allocative
Efficiency (e.g. in NZ the government
runs the Rail Service) – but may have to
subsidise a loss.
Regulate the price to a low or normal
profit situation. (no subsidy required but
neither is it allocatively efficient.)
Price
Marginal cost
Average
total cost
Average total cost
Regulated
price
Loss
Demand
0
Quantity
Price
Marginal cost
Regulated
price
Average total cost
Demand
0
Quantity
Markup pricing
mc
AC pricing
ac
MC pricing
mr
ar
Explain and illustrate why, despite
inefficiencies, a monopoly may be
considered desirable for a variety of
reasons, including:
◦ the ability to finance research and
development (R&amp;D) from economic profits
◦ the need to innovate to maintain economic
profit, and
◦ economies of scale that results in lower
prices than a competitive market (even at
mark-up pricing).
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