MICROECONOMIC PRINCIPLES

Questions on
Topic:

Monopoly

The Economics Threshold Concepts engaged in this topic:

Markets Structures & Interactions

Elasticity

ECONOMICS IS
R RE-CAP & REMIND
E ECONOMICS EVERYDAY
A APPLICATION & AWARENESS
L LEARNING LIFE LESSONS

RE-CAP & REMIND

PURPOSE OF THE QUESTION to show you how to tie the theory of monopoly to the
graph (model) of a monopoly.
Draw the diagram of a monopoly making short run economic profits, step-by-step:
1. Draw the demand curve. Why is this drawn first?
2. Draw the MR curve. Why is this drawn next?
3. Draw the MC curve. Why is this drawn next?
4. Mark the profit-maximization point.
5. Draw a dashed vertical line through the point of -max.
6. Mark Q*.
7. Mark P* from the demand curve. Why?
8. Draw the ATC curve below P*. Why?
9. Mark ATC* where the ATC curve cuts the dashed line in #5.
10. Shade the area of supernormal (economic) profit = (P ATC) x Q
Does a profit-maximising monopoly produce in the elastic or inelastic region of demand?

2016 Prashan Karunaratne, Macquarie University

ECONOMICS EVERYDAY

PURPOSE OF THE QUESTION to appreciate an everyday monopoly in our lives; compare

and contrast this to perfect competition.

a) By referring to the characteristics of a monopoly, explain why the demand curve for Sydney Water

a monopoly is downward sloping, while the demand curve of an individual firm in a perfectly
competitive market is perfectly horizontal.
b) What does the marginal revenue curve for a monopoly such as Sydney Water look like? Explain

why it has this shape. Contrast its shape with that of a perfectly competitive firms marginal revenue
curve.

PLEASE TURN OVER

2016 Prashan Karunaratne, Macquarie University

APPLICATION & AWARENESS

PURPOSE OF THE QUESTION to be aware of the regulatory issues of a monopoly that

results when there is a natural barrier to entry.

NSW Government to sell Ausgrid for $16bn to Australian consortium

http://www.news.com.au/finance/business/other-industries/nsw-government-to-sell-ausgrid-for16bn-to-australian-consortium/news-story/241c15edc1442b9270f0bd324dcf294e
-

October 20, 2016

THE NSW Government will sell the states electricity distributor to an all-Australian consortium
after a previous bid by a duo of Chinese firms was knocked backed on security grounds.
Premier Mike Baird on Thursday announced poles and wires operator Ausgrid will be sold for
$16.189 billion to a consortium of IFM Investors and superannuation fund AustralianSuper.

The NSW Government will retain a 49.6 per cent of Ausgrid and will have an ongoing role as the lessor
of the business and an investor. Ausgrid will continue to be regulated by the Australian Energy Regulator
which determines network prices.

On Thursday, the 20th of October, the NSW Government announced the aforementioned partial sale of
Ausgrid. The graph on the next page shows a situation of an electricity company.

Why would we say that the situation in the graph on the next page exhibits a natural barrier to
entry (also known as an economies of scale barrier to entry)?
2016 Prashan Karunaratne, Macquarie University

Using the graph above, what quantity will the company produce and what is the price of electricity,
if the electricity monopoly is:

a) An unregulated profit-maximising firm? (Hint: what is the profit-maximizing rule?)

b) A regulated entity that is to make zero economic profit? (Hint: what is the condition for zero
economic profit?)
c) A regulated entity that is to be allocatively efficient? (Hint: who decides the price in perfect
competition?)

PLEASE TURN OVER

2016 Prashan Karunaratne, Macquarie University

LEARNING LIFE LESSONS

PURPOSE OF THE QUESTION to analyse what happens to a monopoly if a rival breaks a

barrier and does enter the market.

HBO signs Apple TV deal allowing greater access to Game of Thrones

In a nutshell, HBO will launch its standalone streaming service, HBO Now, in April
HBO is making moves that could remove the monopoly Foxtel
The Sydney Morning Herald, March 10, 2015
Read

more:

http://www.smh.com.au/entertainment/tv-and-radio/hbo-signs-apple-tv-deal-allowing-greater-

access-to-game-of-thrones-20150310-13zoqr.html#ixzz3VTqwHwzh

a) In early 2015, Foxtel used to have a monopoly on the broadcast of the TV Series, Game of Thrones.

Use a graph to illustrate Foxtels economic profit.

b) With the launch of HBO Now in April 2015, how would this change affect Foxtels profit? Illustrate

the changes on a new diagram.

2016 Prashan Karunaratne, Macquarie University