Objectives Assessed in Chapter 24 – Pure Monopoly
Part A - The Characteristics of Monopoly
1. Identify the characteristics of a monopolistic market.
2. Explain the market and long-run cost conditions that lead to the creation of a natural
monopoly.
Part B – The Monopolist’s Demand Curve
1. Explain why the monopolist’s demand curve is downward-sloping.
2. Explain what it means to say a monopolist is a “price maker.”
3. Explain the relationship between output and price for the monopolist.
4. Distinguish between a monopoly and a perfectly competitive firm regarding the relationship
between output and price.
5. How is the marginal revenue curve different for a monopolist and a perfectly competitive
firm?
6. Explain why marginal revenue is less than price for a monopolist (why does the marginal
revenue curve lie below the demand curve?).
7. Explain the relationship between marginal revenue and elasticity of demand.
8. Explain the relationship between total revenue and elasticity of demand.
Part C – Output and Price Determination for the Monopoly
1. Identify the profit-maximizing rule for a monopoly.
2. Explain why the monopolist chooses to set output in the elastic region of its demand curve.
3. Given a graph of a monopoly:
- Identify the area and/or amount of economic profit (loss).
- Identify the profit-maximizing price and quantity.
4. Identify the change in output and price for a monopoly when marginal cost changes. (Drawing
a graph helps with this.)
5. Explain how changes in output affect a monopoly’s price, revenue, and profit (given
appropriate data).
6. Under what conditions should a monopoly (or any other firm) shut down in the short-run?
In the long-run?
7. What should a monopolist do if marginal revenue at current output is negative?
8. At what output would a monopolist produce in order to maximize total revenue (rather than
profit)?
Part D – The Inefficiency of Monopoly
1. What is it about the output decisions and pricing decisions that make a monopoly inefficient
from society’s point of view?
2. Differentiate between the allocatively efficient level of output and the profit-maximizing level
of output for a monopolist.
3. Explain the effect that monopoly has on consumer surplus.
4. Given a graph of a monopoly:
- Identify the area of consumer surplus at a given price and quantity.
- Identify the socially optimal (allocatively efficient) level of output and price.
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Part E – Price Discrimination
1. Explain the concept of price discrimination.
2. Identify and explain the necessary conditions for a firm to practice price discrimination.
3. Define “perfect price discrimination.”
4. Identify the effects of price discrimination on profit, production, and consumer surplus.
5. What accounts for the differences in price that a monopolist charges different customers
when practicing price discrimination?
Part F – Regulation of Monopoly
1. Define “socially optimal price.”
2. Define “fair return price.” At what price must price be set to guarantee that the monopolist
makes only normal profit?
3. Identify the consequences of the government imposing either socially optimal price or fair
return price on monopoly.
4. Assume that a monopolist can practice perfect price discrimination. Given a graph with
appropriate data, find the level of output and total revenue for the monopolist.
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