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Monopoly
16
CHECKPOINTS
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Checkpoint 16.1
Problem 1
Problem 2
Clicker
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In the News
Checkpoint 16.2
Checkpoint 16.3 Checkpoint 16.4
Problem 1
Problem 1
Problem 2
Problem 2
Problem 3
In the News
Problem 4
Checkpoint 16.5
Problem 1
Problem 2
Problem 1
In the News
Problem 2
Problem 3
Problem 3
Problem 4
In the News
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In the News
CHECKPOINT 16.1
Practice Problem 1
In which of the six cases might monopoly arise?
a. Coca-Cola cuts its price below that of Pepsi-Cola in
an attempt to increase its market share.
b. A single firm, protected by a barrier to entry, produces
a personal service that has no close substitutes.
c. A barrier to entry exists, but the good has some close
substitutes.
d. A firm offers discounts to students and seniors.
© 2013 Pearson
CHECKPOINT 16.1
In which of the six cases might monopoly arise?
e. A firm can sell any quantity it chooses at the going
price.
f. A firm experiences economies of scale even when it
produces the quantity that meets the entire market
demand.
© 2013 Pearson
CHECKPOINT 16.1
Solution
Monopoly arises when a single firm produces a good or
service that has no close substitutes and a barrier to entry
exists.
Monopoly arises in b and f.
In a, there is more than one firm.
In c, the good has some close substitutes.
In d, a monopoly might be able to price discriminate, but
other types of firms (for example, art museums and pizza
producers) price discriminate and they are not
monopolies.
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CHECKPOINT 16.1
In e, the demand for the good that the firm produces is
perfectly elastic and there is no limit to what the firm could
sell if it wished.
Such a firm is in perfect competition.
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CHECKPOINT 16.1
Practice Problem 2
Of the six cases: Which are natural monopolies? Which
are legal monopolies? Which can price discriminate?
a. Coca-Cola cuts its price below that of Pepsi-Cola in
an attempt to increase its market share.
b. A single firm, protected by a barrier to entry, produces
a personal service that has no close substitutes.
c. A barrier to entry exists, but the good has some close
substitutes.
d. A firm offers discounts to students and seniors.
© 2013 Pearson
CHECKPOINT 16.1
Of the six cases: Which are natural monopolies? Which
are legal monopolies? Which can price discriminate?
e. A firm can sell any quantity it chooses at the going
price.
f. A firm experiences economies of scale even when it
produces the quantity that meets the entire market
demand.
© 2013 Pearson
CHECKPOINT 16.1
Solution
Natural monopoly exists when one firm can meet the
entire market demand at a lower price than two or more
firms could.
So f is a natural monopoly, but b could be also.
Legal monopoly exists when the granting of a right creates
barrier to entry.
b might be a legal monopoly.
Monopoly b could price discriminate because a personal
service cannot be resold.
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CHECKPOINT 16.1
Study Plan Problem
A single firm, protected by a barrier to entry, produces a
personal service that has no close substitutes is an
example of ______.
A. either a natural monopoly or a legal monopoly that can
price discriminate
B. either a natural monopoly or a legal monopoly that
cannot price discriminate
C. a natural monopoly that can price discriminate
D. a legal monopoly that can price discriminate
E. a natural monopoly that cannot price discriminate
© 2013 Pearson
CHECKPOINT 16.1
Study Plan Problem
The government issues Tiger Woods, Inc. an
exclusive license to produce golf balls. Tiger
Woods, Inc. is an example of ______.
A. a natural monopoly that can price discriminate
B. either a natural monopoly or a legal monopoly that can
price discriminate
C. a natural monopoly that cannot price discriminate
D. either a natural monopoly or a legal monopoly that can
price discriminate
E. a legal monopoly that cannot price discriminate
© 2013 Pearson
CHECKPOINT 16.1
Practice Problem 3
Deal raise monopoly concerns
A deal between United Continental and Air Canada looks
like an “effective merger” of all of their Canadian and
U.S. operations. The deal would create a monopoly on
10 major high demand, transborder routes and
substantially reduce competition on nine others. Prices
would be higher and choice restricted.
Source: CBC News, June 27, 2011
What type of monopoly would be created on the 10
major, high demand routes? With higher prices and
restricted choice, what would be the barrier to entry?
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CHECKPOINT 16.1
Solution
This deal would create a legal monopoly on 10 major high
demand transborder routes.
With higher prices, the monopoly might make positive
economic profits, which would be an incentive for other
airlines to offer service on these routes.
The barrier would be the granting of landing slots and
boarding gates.
© 2013 Pearson
CHECKPOINT 16.2
Practice Problem 1
Minnie’s Mineral Springs is a
single-price monopoly.
The table shows the demand
schedule for Minnie’s spring
water (columns 1 and 2), and
the firm’s total cost scheduled
(columns 3 and 4).
Calculate Minnie’s total
revenue and marginal revenue
schedules.
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CHECKPOINT 16.2
Solution
Total revenue equals price
multiplied by quantity sold.
Marginal revenue equals the
change in total revenue when
the quantity sold increases by
one unit.
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CHECKPOINT 16.2
Practice Problem 2
Minnie’s Mineral Springs is a
single-price monopoly.
The table shows the demand
schedule for Minnie’s spring
water and the firm’s total cost
scheduled.
Draw the demand curve and
Minnie’s marginal revenue
curve.
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CHECKPOINT 16.2
Solution
The figure shows the market
demand curve for spring
water and Minnie’s marginal
revenue curve.
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CHECKPOINT 16.2
Practice Problem 3
Minnie’s Mineral Springs is a
single-price monopoly.
The table shows the demand
schedule for Minnie’s spring
water and the firm’s total cost
scheduled.
Calculate Minnie’s profitmaximizing output, price, and
economic profit.
© 2013 Pearson
CHECKPOINT 16.2
Solution
A monopoly maximizes
economic profit by producing
the quantity at which
MR = MC.
Marginal cost, MC, is the
change in total cost when the
quantity produced increases
by 1 bottle. See table.
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CHECKPOINT 16.2
Minnie’s maximizes its
economic profit by producing
3 bottles an hour at the
intersection of the MR curve
and the MC curve.
The profit-maximizing price is
$7 a bottle.
Economic profit equals total
revenue ($21) minus total
cost ($7), which is $14 an
hour.
© 2013 Pearson
CHECKPOINT 16.2
Practice Problem 4
Minnie’s Mineral Springs is a
single-price monopoly.
The figure illustrates the demand
for Minnie’s spring water and
Minnie’s marginal revenue and
marginal cost.
If Minnie’s is hit with a
conservation tax of $14 an hour,
what are Minnie’s new profitmaximizing output, price, and
economic profit?
© 2013 Pearson
CHECKPOINT 16.2
Solution
With a conservation tax of $14
an hour, Minnie’s fixed cost
increases, but marginal cost
doesn’t change.
So Minnie’s profit-maximizing
output remains at 3 bottles an
hour and the price is unchanged
at $7 a bottle.
Economic profit is zero.
© 2013 Pearson
CHECKPOINT 16.2
Practice Problem 5
Comcast offers faster home broadband in some U.S.
cities
Comcast, the largest U.S. internet-service provider,
introduced a new home-broadband package called
Extreme 105, which can download files many times faster
than most connections
Source: CNN, April 14, 2011
How does Comcast determine the price of its broadband
service?
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CHECKPOINT 16.2
Solution
Comcast is the only supplier of broadband service in many
cities.
Comcast undertakes a marketing survey to estimate the
demand for its new faster service.
Comcast knows its production costs, so to calculate its
total costs it adds its marketing costs.
Then Comcast calculates its profit-maximizing quantity of
service.
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CHECKPOINT 16.2
From its estimated demand for the service, Comcast
calculates the highest price at which it expects it can sell
the profit-maximizing quantity of the service.
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CHECKPOINT 16.3
Practice Problem 1
The Township Gazette is the only
source of news is a small isolated
community.
The figure shows the marginal cost
of printing the Township Gazette
and the market for it.
If the Township Gazette is a
single-price monopoly, how many
copies are printed each day and
what is the price?
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CHECKPOINT 16.3
Solution
The newspaper maximizes profit
by producing 150 copies a day,
where marginal revenue equals
marginal cost.
The profit-maximizing price is
70¢ a copy.
© 2013 Pearson
CHECKPOINT 16.3
Practice Problem 2
The Township Gazette is the only
source of news is a small isolated
community.
The figure shows the marginal
cost of printing the Township
Gazette and the market for it.
What is the efficient number of
copies and what is the price at
which the efficient number of
copies could be sold?
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CHECKPOINT 16.3
Solution
The efficient quantity of copies is
250, where demand (marginal
benefit) equals marginal cost.
The efficient quantity would be
could be sold for 50¢ a copy.
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CHECKPOINT 16.3
Practice Problem 3
The Township Gazette is the
only source of news is a small
isolated community.
The figure shows the marginal
cost of printing the Township
Gazette and the market for it.
Is the number of copies printed
the efficient quantity? Explain
your answer.
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CHECKPOINT 16.3
Solution
The number of copies
printed (150 a day) is not
efficient because the
marginal benefit of the 150th
copy (70¢ a copy) exceeds
marginal cost of producing it
(40¢ a copy).
© 2013 Pearson
CHECKPOINT 16.3
Practice Problem 4
The Township Gazette is the only
source of news is a small isolated
community.
The figure shows the marginal cost
of printing the Township Gazette
and the market for it.
Show the consumer surplus that is
redistributed to the Township
Gazette and the deadweight loss
that arises from the monopoly.
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CHECKPOINT 16.3
Solution
In the figure, the blue rectangle
 shows the consumer surplus
transferred from the consumers
to the Township Gazette.
The gray triangle  shows the
deadweight loss.
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CHECKPOINT 16.3
Practice Problem 5
Ticketmaster’s near monopoly challenged as
technology changes
In the 1990s, to see Michael Jordan or Garth Brooks live
you had to buy the ticket through Ticketmaster, or from a
scalper. Today, Ticketmaster no longer controls the sale of
tickets to sports and music events, and more changes are
coming. Concert promoter Live Nation, Ticketmaster’s
biggest client, will sell its own tickets. Also, sports and
music events tickets are now sold through Internet auction
markets.
© 2013 Pearson
CHECKPOINT 16.3
How will the increased competition in the sale of tickets
affect the service fee component of the price and the
efficiency of the market?
Will scalpers survive?
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CHECKPOINT 16.3
Solution
The price you pay for a ticket to an event is made up of the
price of the event plus a service fee.
As a monopoly, Ticketmaster charged the profitmaximizing fee.
As the monopoly weakens and competition increases,
sellers will still charge the profit-maximizing fee, but the
fee will be lower.
The ticket-selling market will be more efficient. Scalpers
will have to compete with resale auctions and might have
a hard time surviving.
© 2013 Pearson
CHECKPOINT 16.4
Practice Problem 1
Village, a small isolated town, has one doctor.
For a 30-minute consultation, the doctor charges a rich
person twice as much as much as a poor person.
Does the doctor practice price discrimination?
Is the doctor using resources efficiently?
Does the doctor’s pricing scheme redistribute consumer
surplus? If so, explain how.
© 2013 Pearson
CHECKPOINT 16.4
Solution
The doctor practices price discrimination because rich
people and poor people play a different price for the same
service: a 30-minute consultation.
The doctor provides the profit-maximizing number of
consultations and charges rich people more than poor
people.
As a monopoly, the total number of consultations is less
than that at which marginal benefit equals the marginal cost
of providing the medical service.
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CHECKPOINT 16.4
Because marginal benefit does not equal marginal cost, the
doctor is not using resources efficiently.
With price discrimination, the doctor takes some of the
consumer surplus.
So some consumer surplus is redistributed to the doctor as
profit.
© 2013 Pearson
CHECKPOINT 16.4
Practice Problem 2
Village, a small isolated town, has one doctor.
For a 30-minute consultation, the doctor charges a rich
person twice as much as much as a poor person.
If the doctor decided to charge everyone the maximum price
that he or she would be willing to pay, what would be the
consumer surplus?
Would the market for medical service in Village be efficient?
© 2013 Pearson
CHECKPOINT 16.4
Solution
The doctor decides to practice perfect price discrimination.
With perfect price discrimination, marginal revenue equals
price.
To maximize economic price, the doctor increases the
number of consultations to make the lowest price charged
equal to the marginal cost of providing the service.
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CHECKPOINT 16.4
The doctor takes the entire consumer surplus, so consumer
surplus is zero.
Marginal benefit equals price so resources are being used
efficiently.
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CHECKPOINT 16.4
Practice Problem 3
Feast on these great dining deals
Entrées at Patina in Los Angeles start at $40, but the fourcourse fixed menu is $59. And pair that with the waived
corkage fee on Tuesdays. At Michael Mina, San Francisco,
enjoy a three-course, prix-fixe lunch for $49 or pay up to $65
when ordering the same items individually at dinner.
Source: USA Today, July 29, 2011
Are Patina and Michael Mina price discriminating? Explain
your answer.
© 2013 Pearson
CHECKPOINT 16.4
Solution
A restaurant meal cannot be resold, so price discrimination
is possible.
Offering a four-course fixed menu at a lower price than the
sum of the prices of the individual items is price
discrimination.
Diners who want fewer than four courses and want to be
more selective about what they eat pay more.
© 2013 Pearson
CHECKPOINT 16.4
Waiving the corkage fee on Tuesdays is not price
discrimination.
Demand is lower on Tuesdays, so the profit-maximizing
price is lower.
Waiving the corkage fee is a way of price cutting without
reprinting the menu.
© 2013 Pearson
CHECKPOINT 16.5
Practice Problem 1
An unregulated natural
monopoly bottles Elixir. The
monopoly’s total fixed cost is
$150,000, and its marginal cost
is 10 cents a bottle. The figure
illustrates the demand for Elixir.
How many bottles of Elixir does
the monopoly sell and what is
the price of a bottle of Elixir?
Is the monopoly’s use of
resources efficient?
© 2013 Pearson
CHECKPOINT 16.5
Solution
The monopoly will produce
1 million bottles a year—the
quantity at which marginal
revenue equals marginal
cost.
The price is 30 cents a
bottle— the highest price at
which the monopoly can sell
the 1 million bottles a year.
© 2013 Pearson
CHECKPOINT 16.5
The monopoly’s use of
resources is inefficient.
If resource use were efficient,
the monopoly would produce
the quantity at which marginal
benefit (price) equals marginal
cost: 2 million bottles a year.
© 2013 Pearson
CHECKPOINT 16.5
Practice Problem 2
An unregulated natural monopoly
bottles Elixir. The monopoly’s
total fixed cost is $150,000, and
its marginal cost is 10 cents a
bottle.
If the government introduces a
marginal cost pricing rule.
What is the price of Elixir, the
quantity sold, and the monopoly’s
economic profit?
© 2013 Pearson
CHECKPOINT 16.5
Solution
With a marginal cost pricing rule,
the price is set equal to marginal
cost (10 cents a bottle) and 2
million bottles a year are sold.
The monopoly incurs an economic
loss equal to its total fixed costs of
$150,000 a year.
The monopoly would need a
subsidy to keep it in business.
© 2013 Pearson
CHECKPOINT 16.5
Practice Problem 3
An unregulated natural monopoly
bottles Elixir. The monopoly’s total
fixed cost is $150,000, and its
marginal cost is 10 cents a bottle.
If the government introduces an
average cost pricing rule.
What is the price of Elixir, the
quantity sold, and the monopoly’s
economic profit?
© 2013 Pearson
CHECKPOINT 16.5
Solution
With an average cost pricing rule,
the firm produces the quantity at
which price equals average total
cost.
ATC = AFC + AVC.
AVC equals marginal cost and is
10 cents a bottles.
AFC equals $150,000 divided by
the quantity produced.
© 2013 Pearson
CHECKPOINT 16.5
With an average cost pricing rule,
the firm produces the quantity at
which price equals average total
cost.
ATC = AFC + AVC.
AVC equals marginal cost and is
10 cents a bottles.
AFC equals $150,000 divided by
the quantity produced. For
example, at 1 million bottles,
AFC is 15 cents.
© 2013 Pearson
CHECKPOINT 16.5
If 1.5 million bottles are produced,
AFC is 10 cents a bottle.
That is, 1.5 million bottles are
produced:
ATC = 10 cents + 10 cents
= 20 cents
The monopoly can sell 1.5 million
bottles at 20 cents a bottle.
So the monopoly produces 1.5
million bottles a year and makes
zero economic profit.
© 2013 Pearson
CHECKPOINT 16.5
Practice Problem 4
Mexicans protest the plan to end the state oil
monopoly
Thousands of protesters have demonstrated to fight the
plan to open Mexico’s state oil monopoly to private
investment. In Mexico, the government sets the price,
currently $2.48 a gallon, while the U.S. average is $3.37 a
gallon. The government taxes the state monopoly’s profit
90 percent.
Source: USA Today, April 13, 2008
Describe how the Mexican government regulates the
domestic oil market.
© 2013 Pearson
CHECKPOINT 16.5
Solution
The price is not set equal to marginal cost (marginal cost
pricing) because the oil company does not receive a
subsidy.
The price is not set equal to average total cost (average
cost pricing) because the oil company does not break
even.
The government operates a price cap regulation and the
company pays a profit tax of 90 percent.
© 2013 Pearson