Homework – November 6th
Review pages 438 – 444.
1. Explain what it means to say that the monopolist is a
“price maker.”
2. Explain the relationship between output and price for the monopolist.
3. Explain why the monopolist has no supply curve.
4. Draw a graph of a monopoly like the one on page
445. Include all the curves shown on figure 24.4. Use your graph to answer the following questions: a. Identify the monopolist’s profit-maximizing price and level of output on your graph.
b. Shade in and label the area of economic profit (or loss) on your graph.
c. If the monopolist’s marginal cost decreases, how will price and quantity be affected? Show this on your graph.

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Economies of Scale
Patents and licenses
Others

A monopoly is a price maker .
P1
What does this mean?
Because the firm is the entire industry, it decides output levels for the entire market.
It then sets price based on market demand for the product at that level of output.
P2
0
Q1
D The demand curve, for the monopoly is downward sloping.
Q2
Quantity

• In monopoly, price and marginal revenue are not the same .
• This is because of the monopoly’s downwardsloping demand curve.
• To increase output, the monopolist must lower price, not just for the next unit, but for all units.
• Example: if the monopolist could sell 10 units at
$100 each, but had to lower the price to $99 to sell 11 units, what is the marginal revenue of the eleventh unit?

• Example: if the monopolist could sell 10 units at
$100 each, but had to lower the price to $99 to sell 11 units, what is the marginal revenue of the eleventh unit?
10 x 100 = $1000
11 x 99 = $1089
• Total revenue goes up by $89, so marginal revenue is $89, not the $99 price.

For a monopoly, marginal revenue is always less than price.
0
Marginal
Revenue
Demand
Quantity

How does a monopolist maximize profit?
Set output where MR = MC.
MC
0
Q
M
MR
D
Quantity

What price does the monopolist charge?
Follow the quantity where MR = MC up to the demand curve.
MC
P
M
0
Q
M
MR
D
Quantity

Notice the inefficiency in a monopoly:
1. Output is less than where MC = Demand (MB to consumers)
2. Price is greater than marginal cost.
MC
P
M
0
Q
M
MR
D
Quantity

What is the area of profit or loss for the monopolist?
MC
ATC
P
M
Profit
0
Q
M
MR
D
Quantity

Does the monopolist always make a profit?
MC
ATC
P
M
Loss
0
Q
M
MR
D
Quantity

And finally, what happens to output when a monopoly’s costs change?
MC
ATC
P
M
P
2
0
D
Q
M
Q
2
MR
Quantity

For the profit-maximizing monopolist, identify: a. Output b. Price c. Total Profit d. Socially optimal (efficient) output e. Socially optimal (efficient) price

P
M
Consumer
Surplus
Producer
Surplus
Price Discrimination
MC
0
ATC
Q
M
Deadweight
Loss
Marginal Revenue
QUANTITY
Demand

I.
Conditions:
A. Monopoly power.
B. Market segregation: separate your customers into groups based on how much they’re willing to pay.
C. No resale (customers cannot re-sell their purchase to someone else at the lower price).
II. Results:
A. Firm can charge each customer as much as they are willing to pay.
B. Increases profit and output.
C. Decreases consumer surplus (perfect price discrimination completely eliminates consumer surplus).

P
M
P
D
Price Discrimination Examples?
MC
ATC
0
Q
M
Q
D
Marginal Revenue
QUANTITY
Demand

Perfect Price Discrimination Examples?
MC
ATC
P
M
0
Q
M
Q
D
Marginal Revenue
QUANTITY
Demand