Chapter Fifteen

Chapter 14 – Monopoly and Monopolistic Competition

U Gİ 105 HW 11

MONOPOLY AND MONOPOLISTIC COMPETITION PROBLEM SET


NAME: ________________________________________ DATE: ____ / ____ / ____


Give the best answer to each of the following questions.

1. The graph below represents the demand curve facing a monopolist along with the firm’s average total cost and marginal cost curves.

a . What is the firm’s profit-maximizing output and price?

b. How much profit does the monopolist earn?

c. On the graph above, shade in the area that represents the welfare loss due to this monopoly.

ANS:
a. The monopolist should sell 4 units at a price of $4 each.

b. The monopolist earns $1 of profit on each unit, for a total profit of $4.
c. The graph should look like the one below.



2. Briefly explain why the following statements are TRUE or FALSE:

a . A monopolist produces the quantity at which MC = MR.

b. A monopolist sets a price equal to MR.

c. A monopolist faces a downward sloping MR curve.

d. A monopolist faces a perfectly elastic demand curve.

e. A monopolist must lower price if it produces additional units.

f. A monopolist is always able to price discriminate.

ANS:
a. True. If MC > MR, the monopolist should decrease output; if MC < MR, the monopolist should increase output. Profit is maximized where MC = MR.

b. False. For a monopolist, MR is always less than price.
c. True. The MR curve is downward-sloping and lies below the demand curve.
d. False. A perfectly-competitive firm faces a perfectly elastic demand curve; a monopolist faces a downward-sloping demand curve.
e. True. The monopolist faces a downward-sloping demand curve.
f. False. Only if it can identify and separate consumers according to their demand elasticity (and limit their ability to resell the output) can a monopolist price discriminate.

3 . Why are barriers to entry essential for a monopoly to exist?

ANS
I f there were no barriers to entry, when the firm earned a profit, new firms would enter the market and compete away its profit. Since there would be more than one firm, there would be no monopolist. Two examples are natural ability and economies of scale. Another barrier to entry is government restrictions.

4. Use the following table that shows the demand curve facing a monopolist along with its total cost information. Complete the table by calculating total revenue and profit.