
A pure monopolist is the sole supplier of a product Or service for which there are no close substitute.

A monopoly survives because of entry barriers such as economies of scale, patents and licenses, the ownership of essential resources and strategic actions to exclude rivals.

The monopolist’s demand curve is down sloping and its marginalrevenue curve lies below its demand curve.

The downloading demand curve means that the monopolist is a price maker.

The monopolist will operate in the elastic region of demand since in the inelastic region it can increase total revenue and reduce total cost by reducing output.

The monopolist maximize the profit (or minimize loss) at the output where MC=MR and charges the price that correspond to that output on its demand curve.

The monopolist has no supply curve, since any of several prices can be associated with a specific quantity of output supplied.

Assuming identical costs, a monopolist will be less efficient than a purely competitive industry because the monopolist produce less output and charges a higher price.


The inefficiencies of monopoly may be effect OR lessened by economies of scale and less likely by technological progress but they may be intensified by the presence of X-inefficiency and rent-seeking expenditures.

Price discrimination occurs when a firm sells a product at different price that are not based on cost differences.

The conditions necessary for price discrimination are: a. monopoly power b. the ability to segregate buyers on the basis of demand elasticities and c. the inability of buyers to resell the product.

Compared with single pricing by a monopolist, perfect Price discrimination returns in greater profit and greater output. Many consumer pay higher prices but other buyers pay prices below the single price.

Monopoly price can be reduced and output increased through government regulations.

The socially optimal price (P=MC) achieves allocative efficiency but may result in losses; the fair-return price (P=ATC) yield a normal profit but fails to achieve allocative efficiency.

I.
At a monopolist's current output, ATC = $10, P = $11, MC = $8 and
MR = $7. This firm is realizing: o
An Economic profit that could be increased by producing more output o
An economic profit that could be increased by producing less output o
An economic loss that could be reduced by producing more output o
An economic loss than could be reduced by producing less output
II.
Use the following graph to answer the next question: Refer to the diagram. At output q
2
: o
Marginal revenue exceeds marginal cost by the greatest amount o
Demand is inelastic o
Profit is maximized o
Marginal revenue is zero
III.
In long run equilibrium, profit-maximizing competitive firms and a monopolistic firms both: o
Earn zero economic profits o
Set price equal to marginal revenue o
Produce at minimum average total cost o
Produce the output at which marginal revenue equals marginal cost

IV.
Use the following diagram to answer the next question: Refer to the diagram. This non-discriminating monopolist will produce: o
M units at price A and make a profit o
N units at price B and earn zero profits o
M units at price C and incur a loss o
Q units at price J and earn zero profits
V.
Use the following diagram to answer the next question: Refer to the diagram. If this firm produces its profit-maximizing output, its potential profit is: o
Zero o
Area afhc o
Area afgb o
Area bghc
VI.
Suppose a monopolist could segment its market into two distinct submarkets and prevent resale between them. Its profits would increase if it charged a higher price to the group whose: o
Demand is more elastic o
Demand is more inelastic o
Demand is greater o
Cost is lower
VII.
Answer the next question on the basis of the following table showing the demand schedule facing a non-discriminating monopolist.
Refer to the data. The marginal revenue of the fourth unit of output is: o
$10 o
$8 o
$4 o
$2

VIII.
Use the following diagram to answer the next question. Refer to the diagram. A regulatory commission that wished to establish a socially optimum output level for this firm would set price at: o
P
2
and the firm would break even o
P
3
and the firm would earn a profit o
P
1
but the firm would incur a loss o
P
2
but the firm would incur a loss
IX.
Use the following diagram of a pure monopolist to answer the next question.
Refer to the diagram.
Which of the following is a correct statement? o
Maximum profits are obtained by selling at price $a o
Maximum profits are obtained by producing output g o
The firm's per-unit profits are $c – $a o
Demand is elastic at price $c
X.
The allocative inefficiency of non-discriminating monopoly arises from the fact that: o
Price exceeds marginal cost o
Output falls short of the output at which average cost is minimized o
Output exceeds that at which average cost is minimized o
Price exceeds minimum average cost
B
B
D
D
D
C
A
D
C
A

Problem 1:
Suppose a monopoly's demand schedule is given by the first two columns of the following table. Its total cost of production is given in the next column.
Output Price
0 $24
1
2
3
4
5
$21
$18
$15
$12
$9
Total Cost
$10
$14
$20
$28
$38
$50
Total Revenue MC a) Fill in the Total Revenue column by computing the firm's total
MR revenue associated with each output level. b) By comparing total cost and total revenue, find the output level that maximizes the firm's profit. c) What price should the firm set to achieve maximum profit? d) Complete the final two columns to verify that the same conclusions are reached using the MR = MC rule.
Answer: a) Total revenue is the product of output and price. For example, if the firm wishes to sell two units, it sets a price of $18 and its total revenue is 2 x $18 = $36. The completed table is shown below.
Output Price
0 $24
1
2
$21
$18
3
4
5
$15
$12
$9
Total Cost Total Revenue MC
$10
$14
$20
$28
$38
$50
$0
$21
$36
$45
$48
$45 b) The table is presented below total profit at each unit of output.
MR

Output
0
1
2
3
4
5
Total Cost
$10
$14
$20
$28
$38
$50
Total Revenue
$0
$21
$36
$45
$48
$45
The profit is maximized at an output of 3 units.
Total Profit
$0
$7
$16
$17
$10
$ -5 c) According to the demand schedule, price must be set at $15 to sell three units. d) Comparing MR to MC,
Output Price
0 $24
1
2
$21
$18
3
4
$15
$12
Total Cost Total Revenue MC
$10
$14
$20
$28
$38
$0
$21
$36
$45
$48
$4
$6
$8
$10
5 $9 $50 $45 $12 $ -3
Output should be expanded to produce the third unit, but not the
MR
$21
$15
$9
$3 fourth. The marginal revenue of the fourth unit is less than its marginal cost, and will cause profit to decrease.
Problem 2:
Suppose a price-discriminating monopoly has segregated its market into two submarkets and can prevent resale between the two. Assume that its marginal cost is constant and equal to its average total cost of
$8. The firm's demand schedule for the first group is given by the first two columns of the following table.
Output Price Total Revenue MR
0 $24
1
2
$22
$20
3
4
$18
$16
5 $14

6
7
$12
$10
8 $8 a) Find the firm's total revenue schedule for this submarket, entering the data into the table where indicated. Use these data to determine the marginal revenue schedule in this submarket. b) What output level and price will maximize the firm's profit in this submarket? c) The firm's demand schedule for the second group is given by the first two columns of the following table.
Output
0
1
2
3
4
5
6
7
8
Price
$33
$30
$29
$24
$21
$18
$15
$12
$9
Total Revenue MR
Find the firm's total and marginal revenue schedules in this second submarket. What output level and price will maximize the firm's profit in this submarket? d) Based on these prices, which submarket has the more elastic demand? e) What is this firm's total economic profit?
Answer: a) The completed table is shown below:
Output Price Total Revenue MR
0 $24 $0
1
2
$22
$20
$22
$40
$22
$18
3
4
$18
$16
$54
$64
$14
$10

5
6
7
8
$14
$12
$10
$8
$70
$72
$70
$64
$6
$2
$ -2
$ -6 b) Using the MR = MC rule, profit is maximized at 4 units of output, implying a price of $16. c) The completed table is shown below.
Output Price Total Revenue MR
0 $33 $0
1
2
3
$30
$29
$24
$30
$54
$72
$30
$24
$18
4
5
6
7
$21
$18
$15
$12
$84
$90
$90
$84
$12
$6
$0
$ -6
8 $9 $72 $ -12 d) Since the price is higher in the second submarket, demand is more elastic in the first submarket. e) The firm earns revenue of 4x$16 = $64 in the first submarket and revenue of 4x$21 = $84 in the second. Its total revenue is then $64 +
$84 = $148. Its total cost is 8x$8 = $64, so its total economic profit is
$148 – $64 = $84.

Question 1:
Use the demand schedule to the upper right to calculate total revenue and marginal revenue at each quantity. a) Plot the demand, total-revenue, and marginal-revenue curves and explain the relationships between them. b) Explain why the marginal revenue of the fourth unit of output is
$3.50, even though its price is $5.00. c) Use Chapter 6's total-revenue test for price elasticity to designate the elastic and inelastic segments of your graphed demand curve. d) What generalization can you make as to the relationship between marginal revenue and elasticity of demand? e) Suppose the marginal cost of successive units of output was zero.
What output would the profit-seeking firm produce? f) Finally, use your analysis to explain why a monopolist would never produce in the inelastic region of demand:
Answers:
Table of total revenue and marginal revenue is below:

Price (P)
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
$2.50 a) See the Graph:
Quantity
Demanded (Q)
3
4
5
6
0
1
2
7
8
9
Total Revenue
$0
$6.50
$12
$16.50
$20
$22.50
$24
$24.50
$24
$22.50
Marginal
Revenue
$1
$6.50
$5.50
$4.50
$3.50
$2.50
$1.50
$0.50
$ -1.50
Because TR is increasing at a diminishing rate, MR is declining. When
TR turns downward, MR becomes negative. Marginal revenue is below
D because to sell an extra unit, the monopolist must lower the price on the marginal unit as well as on each of the preceding units sold. b) Four units sell for $5.00 each, but three of these four could have been sold for $5.50 had the monopolist been satisfied to sell only three.
Having decided to sell four, the monopolist had to lower the price of the first three from $5.50 to $5.00, sacrificing $.50 on each for a total of
$1.50. This “loss” of $1.50 explains the difference between the $5.00 price obtained on the fourth unit of output and its marginal revenue of
$3.50.

c) Demand is elastic from P = $6.50 to P = $3.50, a range where TR is rising. The curve is of unitary elasticity at P = $3.50, where TR is at its maximum. The curve is inelastic from then on as the price continues to decrease and TR is falling. d) When MR is positive, demand is elastic. When MR is zero, demand is of unitary elasticity. When MR is negative, demand is inelastic. e) If MC is zero, the monopolist should produce 7 units where MR is also zero. f) It would never produce where demand is inelastic because MR is negative there while MC is positive.
Question2:
Suppose a pure monopolist is faced with the demand schedule shown below and the same cost data as the competitive producer discussed in question 4 at the end of Chapter 9. a) Calculate the missing total-revenue and marginal-revenue amounts, b) Determine the profit-maximizing price and profit-earning output for this monopolist. c) What is the monopolist's profit? Verify your answer graphically and by comparing total revenue and total cost:

Answers: a) Table of total revenue and marginal revenue is below:
Price (P)
$115
$100
$83
$71
$63
$55
$48
$42
$37
$33
$29 b) See the Graph:
Quantity
Demanded (Q)
0
1
5
6
7
8
2
3
4
9
10
Total Revenue
$0
$100
$166
$213
$253
$275
$288
$294
$296
$297
$290
Marginal
Revenue
$100
$66
$47
$39
$23
$13
$6
$2
$1
$ -7
Question3:
Suppose that a price-discriminating monopolist has segregated its market into two groups of buyers, the first group described by the demand and revenue data that you developed for question 2. The demand and revenue data for the second group of buyers is shown in the accompanying table. a) Assume that MC is $13 in both markets and MC = ATC at all output levels. What price will the firm charge in each market? b) Based solely on these two prices, what can you conclude about the relative elasticities of demand in the two markets? c) What will be this monopolist's total economic profit?

Answers: a) Group 1 (from Question 2) will be sold 6 units at a price of $48; group 2 will buy 5 units at a price of $37. b) Based solely on the prices, it would appear that group 1’s demand is more inelastic than group 2’s demand. . c) The monopolist’s total profit will be $330 ($210 from group 1 and
$120 from group 2).
Question 4:
It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly. Is this proposal as socially desirable as requiring monopolists to equate price with marginal cost or average total cost?
Answers:
No, the proposal does not consider that the output of the natural monopolist would still be at the suboptimal level where P > MC. Too little would be produced and there would be an under allocation of resources. Theoretically, it would be more desirable to force the natural monopolist to charge a price equal to marginal cost and subsidize any losses. Even setting price equal to ATC would be an improvement over this proposal. This fair-return pricing would allow for a normal profit and ensure greater production than the proposal would.