MONOPOLY PRICI

PRICE MAKERS NG POLICY

MISALLOCATION 0
INEFFICIENCY F RESOURCES
AND DEAD
NATUR AL MON WEIGHT LOSS
OPOLY
PRICE DISCRIMINATION
REGULATION OF MONOPOLIES

JNTRODUCTION
Amonopoly is a market structure where on • I •
y and no
close substitutes exist for consumers. It is i:smg e firm constitutes an entire industr
site end of the market structure conf !ortan t to note that a monopoly is on the oppo-
at the be . . muum an perfect competition, as shown in Figure 7 I
gmrung of Chapter 7. Unlike perfect competition' there are high barners • •
to entry
I
&.
~or a mo th li
nopo"y as o er firms are prevented from entering and competin·g• M onopo es are
"p · ak the
nee ers as opposed to "price takers" as they are both the industry and the firm at
same time- so goodbye side-by-side graphs!

Demand and Marg inal Revenue in a Monopoly

d curves, with
Monopolies (and all imperfectly competitive firms) have downsloping deman
~gin al revenue less than demand. When a monopoly wants to sell more
units, it must lower
its price for all buyers; when price decreases from,
say, $200 to $150, the additional (marginal)
revenue received decreases faster than price, from which the demand curve is derived. See
Mr. Darp
the separate demand and marginal revenue curves in Figure 8.1. So say goodbye to
monopoly.
Where MR = D from perfect competition because he's gone as MR < Dwith a
and demand
Table 8,1 exemplifies the reasoning behind the differing marginal revenue
not equal price
~urves, that marginal revenue is less than price (the demand curve) and does
like in perfect competition. This is because if a monopoly wants to sell more product, it must
than price. Note
lower the price for all units sold, resulting in marginal revenue falling faster
falls below the
that marginal revenue eventually becomes negative. This is why the MR curve
olist will
quantity axis in Figure B. l. and is the inelastic range of the demand curve. Amonop
not produce in this range, as the additional revenue from a sale is negative.
 r I

Fig. 8.1 Monopoly

Marg inal Reve nue

Table a.1 Price and

$6
-
5 5
$5 1
8 3
$4. 2
9 1
$3 3
8 -1
$2 4
5 -3
$1 5

OF A MON OPO LY .
THE NAT URE
• • • firm that . . gl
1s a sm e seIler of a prod uct for whic h there are
A mono poly by definition is a , .• d from perfe ct comp etitio n on the spectrum o f
no close sub sti·tutes• It is at the opposite
· en
market competitiveness.

Perfect Monopolistic
comp etition Comp etition Oligo poly

I \
'Most Competitive

The key to the market power of a monopoly is the difficulty

Least Comp etitiv e

comp etito rs have enten•ng the

industry. Here are a few reasons for these high barri ers to
entry :
• GOVE RNME NT POWE R. The government may • gle firlll•
give sole prod uctio n right s to a sin. fa
• RESOURCE CONT ROL A firm may control the resou rces requ ired for pro ucuon o
d
product, such as a diamond company controlling all the diam
ond mine s. _
IECONOMIES OF SCALE. A firm that beco mes
very large may gain s1gm. . ficant produ. er:c
tion advantages over its rivals by being able to prod uce
with lowe r costs . (Rerniorl
Economies of scale means that long- run average total costs
decr ease as a firrn grows .
• size.) Thus, competitor
1n • s cann ot comp ete as they
costs. may have high er pro duct1° 0

• COPYRIGHTS OR PATENTS. Here the gove rnme

nt gr t l . n'ghts of a prod-
•
uct to a single firm, such as new medical dru an s so e pro d uctio n
gs.

172 AP MICR OECO NOMl r.~IM a - - - -

 ST 'S D EM A N D C UR VE • .
I

A M O N ~P. O. LI
.
no po ly Will 1 ys Produ • th nd curve
Aprofit-maximIZf1ng mo a wa elastic range of the de ma
ha lf O the de ma nd curve). In th ' rangecernin •e sitive·, as a mo no p·
(the up pe r • . t tal
1s , arg1na1revenue fs po
olist Jow ers pn ce s to in cr ea se
pr of its
, o reven ue in ases. A monopolist wiJJ no t pr od uc e
. l . cre
.
1neJa st1 c ran ge , as th e ma rg ina revenue JS ne f ,. 8 decrease Jn price he re decreases
in the ga ive
total revenue. No te th e po sit io n in Fi gu re 8.2 where th e rnargi·naJ revenue curve travels below
. . th .
all pr ice s be low p I, e inelastic r Al its highest
the qu an aty ruas, at . . an ge. so, total revenue is at
ve nu e is O sh n at P1 1n Figure 8.2.
oint wh en ma rg in al re ' ow
P
p
Elastic ran ge

'
Inelastic ran ge
ii i>
A mo no po ly' s
de ma nd cu rve Is
I •

eq ua l to pr ice an d
av era ge revenue.
Th e tw o dif fer -
en ce s fro m pe rfe ct
Q co mp eti tio n ar e
th at th e de ma nd
ng e ' ' ' cu rv e Is do wn -
ela sti c Ra
Fig. 8.2 El as tic an d In slo pln g an d
MR < D. So th e
de ma nd cu rv e
O PO LY me re ly los t th e MR
GRAPHING A M O N d the industry, an d "price ma
ker." In a lab el fro m pe tfe ct
bo th th e fir m an fer en t
in th at it is try, which is sh arp ly dif co mp eti tio n.
A mo no po ly is un iq ue e th e fir m is th e ind us
on e gr ap h be ca us nd curve. Like all
monopoly,· th er e is on ly sid e gr ap hs an d perfectly elastic de ma
n's sid e-b y- R = MC.
from pe rfe ct co mp eti tio de ter mi ne s pr ice an d ou tp ut at wh ere M
, a mo no po lis t
profit-maximizing firms
ow n in Figure 8.3.
Amonopoly gr ap h is sh

Q
5
MR
its
Fig. 8.3 M on op oly Pr of
- MO NO PO LY 17 3
 'qe No.

verti cal dash ed line at the p

To calculate econ omic proflit in Figure 8•3, ddraw a . Of tofit
d dow n to the quan tity 5 and back ..
iii# maximizing quantity, MR== MC.(point A), ex~en
;ally to the price axis (poi nt G), Where~\)
Whe n answ ering to the dem and curve (point C) ~nd then hor z:nt
mor. opoly grap h he recta ngul ar area , HGCB. The nurnen e
ques tions . the tint
step Is to locat e the
price is $5. The profit Is shown on the grap h to ;
prof it value is calculated by taking (P - ATC) x
($ :... $4) x 5 = 5. Ano ther way to get
5
,' otr reve nue. Total reve nue is calculated s
::1
protl t...,.x lmlzl ng sam e exact answ er is to sub trac t tOtal cost from to a1 .
quan tity at MR • MC, .
takin g the price mulitplied by quan tity at the pro
fl _ axim izing poin t ($5 x 5 = $25). The t by
and find t h e ~ •~ :h prof it-m axim izing quan tity (po· otai
from the clem and cost is calcu lated by head ing to the ATC curv e f~om
curve at that . •e the qua~ tity of 5 Total cost t~nt B)
and then takin g the price at the ATC, $4 (poi nt
quan tity. ,,... ts •v H) t:;e ~st you may be ~ske d to cal : is
to Inter preti ng • $4 x 5 = $20. TR- TC= prof it ($25 - $20
mor. opol ygna pt.
= $5 pro ~- fl~ divi ded by quan tity ($5/Sc ate
per-unit profit, whic h is p -ATC ($5 - $4 = $1) or
tot .pro
Be sure not to confuse per-u nit . . h al rofit' In this case , take tota l prof it divided b::: $1).
wit tot P : , , . . 3/ the
quan tity ($5/5 equa ls a per-u nit profit of $1_).
• ,, ·' ,,
• • •• • ,. ' •i
M o
n o
p o
l i e
s and Effi cien cy (Th e
h t L o
s s
R e
t u
r n
s )

As1·de from perfect com pet·t··

D e
a d
w e
g

.. on.e of the ~~her mar ket stru ctur es is prod

1 10n, n , • uctively or
alloc ative ly efficient, lead ing to a oiisa lloca tion1
of reso urce s. •
',, •
. . :
1. ALLOCATIVE EFF~CIENCY is prod ucin
g the e~ac t amo unt of outp ut that socie ty wants,
whe re P =MC .Mo nopo lies, how ever ; prod uce
whe re P > MC base d on society's
need s. ·• , .·:.
2. PRODUCTIVE EFFICIENC~ ,is whe n
prod ucts are bein g prod uced at the lowe st
mum cost, whe re P = mini mum ATC. Mon opol mini-
ies, how ever , prod uce whe re P > ATC.
Whi le it is good to be the mon opol ist, both in the . ., •'
. . . boar d gam e and in real life, it is generally
bad for cons ume rs and society overc;ilLThe situa
tion that is pres ent in all impe rfect ly com-
petit ive mark ets (but 0:ot perf ect com petit ion!)
is know n as the dead weig ht loss. To review,
it is the loss of welfare to socie ty _resulting fro~
~ark et inef ficie ncy caus ing a reduction of
cons ume r and prod ucer surpluses.,:. \,, ._ .. : i
•
' ··• , '
•• •
, • •- , . ' ;,#,; ~.

Dead welg ht
Loss MC
$5

$4,

MR Q
Fig. 8.4 Mon opol y and
 111 figur~ 8.4: • •
asu red b •
s is me t
The deadwe igh t los y the area of AC • thJs were a competitive marke
D If
.ing at Qc, th ere wo uld be no d d be pa rt of eit he r
prod uc
ce r su rpl us Th ea weJght Joss, and the area would
consumer or pro du fs no t aUocatJvely efficient
as p MC
als o do es no t ~r o; monopolynim C
•
2- The mo no
.
po ly
• uce at mi um AT
• This means it is no t produc-
um ATC.
tively effi1c1ent as P '¢ mi nim
J. fo r he lp ide nti fyi
ng an d labeling d ead Weight loss' im • •
ag ine drawing an arrow
po int ing
we re a co m pe t' t' t Joss with a
· at the ou tpu t as if it c
1
iv~ ~a rke t. When labeling deadweigh
tic all y
monopoly or mo no po lis ompet1t1ve firm ' it WI·u al ways be below the de ma nd
co st an d t th • • • • S d
curve, above ma rgi na l o e left.of. the profit 1 -maxim1z1ng quantity. tu en ts
, l. .
he l fu tly
have fou nd thi s tec hn iqu e th
in identifying e dead
weight loss, as it is frequen
Mi cro ec on
asked on the AP om1cs exam.

NO PO LY GRAP.H ii i· i
1NTER~RETING A M O A mo r.o po ly gra ph
. le to int • l different versions of a monopoJy gra ph .
era
ll to be ab erp ret sev wi th fta t co st
It is an im po rta nt.ski . phs in thi s ch ap ter .
ure 8 5 loo ks sli gh tly dif ferent tha n the previous gra cu rve s slm lla r
The graph s~ ow n in ~ig
- al aver-
yo u ha ve n't &o und 1·t already, th e margi•n cost, toF lgu re 8.5
ce? We ll , if ha s occ asl on aff y
Do you notice the differen
.11
• for
era ge tot al co st cu rve s h ave all the same perfectly elastic slo pe ap pe ar ed on AP
g- ru n av ba bly
." cos
aae , d lon
. .t, an vious graphs an d pro exams. Be sure to
d to the ir no rm al slope seen in the pre
sunplic1ty s sak e, as op po se basics: firms still pr act ice It.
the se dif fer en t sh ap ed curves distract yo~ from the
in your class. Do n't let ,' . . ., ,,.
fit is sti ll cal culated the same way.
produce at M R= MC , pro ly asked qu est ion s
foi;- qu est ion s an d an sw~rs to several common
Please se e Tabl~ 8.2 • • I,

... .
._
> • I

using Figure 8.5.

• a

N
PRICE DI SC RI M IN AT IO
, ti" i'f

way,
3 • I

e ea ch cu s-
\

eti tiv e fir m ha d its. it wo·- uld ~h.~g .. '

y
rfe ctl . .co mp
If a monopoly or an y im pe to pay. As a·pr ac ti-
•

um pi; ice tha t ea ch cu sto me r would be ~i ng

:tomer exactly the ma xim the firm wo uld no t kn ow
ve ry dif fic ult or im po ssi ble to do sin ce
al matter, thi s wo uld be ces wo uld be
cu sto me r (th e co sts of identifying the se differen
maximum pr ice fo r ea ch d the policy wo uld likely
fall vic tim to so me
or ma tio n rev eal ed ) an s yo u
relative to an y inf n oth ers for the sa me pro du ct. Pe rh ap
ha d pa id mo re tha
.-o.mers dis co ve rin g the y lin e wh at the y pa id for the ir tic
ke ts un les s yo u
ng ers on an air •

no t as.le ot he r pa sse
• .. •, .. •
.. '
, • J

f
,
•.
very go od
ugh th
pri ce .
e ab ov e su gg es' ts pe rfe ct pr ice dis cri mi na tio n wi th . . ct inf• or
pe rfe ma tio n
mi na tio n. Fo r
.
'
ca n sti ll fin d ma ny ex am ple s of pr ice dis cri
h co ns um er, we mo vie th an fo r a
ma y ch arg e les s for an aft ern oo n (m~tinee)
.movie the ate rs ch arg ed
as ev en ing or nig ht. Se nio r cit ize ns ma y be
ch
a mo re po pu lar tfm e su d tra ns po rta tio n. So me dis
co un ts sim ply
se um att en da nc e, an ute r
for lod gin g, mu as sp ac e on hig hw ay s at co mm
mm od iti es su ch
er all oc ati on of sc arc e co be. st if the following co nd
iti on s are
dis cri mi na tio n wo rks
or·one's tim e. Pr ice . .• I

' relatively elastic

co ns um ers ba sed on different pri ce elasticities
e ma rke ts for v~ ~o re ch oic es of
an s tha t cu sto me rs with elastic de m~ nd ha
This rea lly me sitivity to
me rs wi th rel ati ve ly ine lastic de ma nd ha ve less sen
te pro du cts . cu sto oices.· •
c~ sin ce the y ha ve fewer su ~s tit ute ch
i. pa rti cu lar pr?d_u

MONOPOLY 17 9
••. · · .
 p

$7

$6

$5 G I
I
I I
I I
I I
I I

$4 ----- -~-- ---i-I

i
I I

ATC = LRATC
I ___jl__-\:- - = - - - : - - - - - ~ , - - MC =
$3•
B

20
0 5 10

es
Fig. 8.5 Monopoly Graph with Flat MC, ATC, LRATC Curv
from Figu re 8.5
Table 8.2 Monopoly Graph Questions and Answers
iii·i Question • / Answ er
On the AP test
students are 10, where MR= MC
frequ ently asked to 1. What is the profit-maximizing quantity?
draw a mono poly 2. What is the price at th~ $5
grapli . Make sure to profit -maxi mizin g quant ity?
practi ce It and be
able to locate the 3. Locat e the area and calculate Area: GDAB
pn,flt or loss and the economic profit at the 10 X ($5 - $3) = $20
the deadw eight profit -maxi mizin g quantity.
loss.
4. Locat e the area and calculate Area: DAE
the deadwelght loss at the ½ (20 - 10) X ($5 - $3) : $10
profit -maxi mizin g quantity.
5. Locate the ~rea and calculate Area: COG
the consumer surplus at the 10 = $10
½ X ($7 - $5) X
profit -maxi mizin g quantity.
6. Below what price is marginal revenue $4 as below this MR is negative. A
negat ive and in the Inelastic range of
mono polis t will always produce on e
th
demand?
elastic portio n of the demand curve,
or $4 in this example.
7. At what quantity Is there unit elastlclty? 15; marg inal revenue equa ls zero at QlS,
8. At the profit..maxlm lzlng quant ity, are
there eco,.omles of sc~f• • df s,conomles Constant return s to scale, as LRATC is
of scale, or constant return • t o scale? flat. When LRATC is declining, it's
economies of scale; increasing, it's
9. What Is the alloca tlvely efffcle disec onom ies of scale.
quant ity? nt 2 0, Where p : MC
10. At the alloca tlvely efflclent quan tity
. ,
w hat 1s consumer surplus? Area: EBc
--- --- --- --- --- -L ~½ X( $ ] ... $3) X 20 : $40

17f; AD Mlr.Dn s:r.nM nM1re - ,.,. .. __ _

 There must not be opportunities for th
•
• differences
,._ The pnce e resale of the product ·
are not based O
J. . . n cost differences.
The firm 1s a pnce maker-it has a p • .
• more profits.
4. and reahze ricing strategy that looks to charge a higher price

pRICE DISCRIMINA TION SHOWN GRAPHICALLY

por a 111onopoli5t who practices perfect price discrimination, the monopoly graph has a few
·nctive features that are commonly asked on the AP exam··
(iistl

DEMAND = MARGINAL REVENUE. An important distinction to make is that with perfect

s
price discrimination, demand and marginal revenue are no longer separate curves. ee
Figure 8.6. . .
2- NO CONSUMER SURPLUS. Every consumer is paying the highest price he or she is willing
to pay.
J. PROFITS INCREASE.

All of these are shown in Figure 8.6.

MC

ATC
PM ---

D=MR
Q
QM
t Price Discrimination
with Per1ec .
Fig 8.6 Monopoly
• • • •
e profit-maxim1z1ng pomt
• ificantlY a t th th
d into profit for e
) increases sign turne
Note that profit (shaded area h s disappeared and
the consumer s urplus a
(MR == MC) while
lllonopoly.
NATURAL MONOPOLIE S AND REGULATIO N OF MONOPoua :s
hen only one firm produces in a rn
Occasionally there is significant cost ad vantage w . f atket A
1 and realizes economies o scale, wher L •C\
firm in this situation is a natural mottopo Y h"gh fix d e RA1c
. Due to this and very 1 e costs that
continues to decrease as output increases.
wer costs than several firms. Ele tserve
• . as
barriers to entry, one firm can serve a marke t a t lo c nc1ty or
water companies are examples of natural monopolies.
. . • f h • g one producer in these industries
Due· to the significant cost savings o avtn , govern.
ments allow some monopolies such as utility companies t~ operate. H_owever: that's not the
end of the story. Due to the fear of high prices and poor quality ~d s~rvice (typical of markets
with no competition), governments regulate natural monopolies with the goal of increasing
efficiency and reducing deadweight loss.
Here are the two scenarios available for regulating a monopoly, with unregulated monop.
olies included for comparison.
1. SOCIALLv OPTIMAL PRICING. Here government regulators will force the monopoly to
have allocatively efficient pricing at P =MC. However, socially optimal is likely below
the average total cost of production, which may force a firm to go out of business or
require a large subsidy from taxpayers.
2. FAIR-RETURN PRICING. Regulators set the price =ATC wishing to let the monopoly break
even and earn a normal profit, covering its implicit and explicit costs. However, this
price is higher than is socially optimal, but is less than the unregulated monopoly price.
3. U~REGULATED MONOPOLY. The bulk of this chapter has discussed unregulated monop-
olies, who produce at the profit-maximizing quantity of MR= MC, and unde roduce
and overcharge. rp

Unregulated

PM - - ---- --------- icing

Fair-Return

~rg

PFR ----
:=-~
ATC
PSO ------------ -------TI -----

MC

QM I D
QFR QSO
Q

Fig. 8.7 Mono I MR •

po y with Price Discrbnin ti
a on
 p h Will 1
se d it, this g ra
-
fferent th an opoly graphse,
Yes, you g u es g W it hi n th o o k slightly di uction Fl previous monso m e o f th es
al ly fallin e range o f pro
d gure 8.7 show
s
as J\TC is continu s. gie
•

..a..t'IPP. pricing strate

optf 1
fer to socially P = ATC.
U P "" -

• Pso a n d Q so re
g u la te d tna pricin·g at MC.
a n d Q M re fe r to u n re m o n o p o ly , 0 u tp u t where MR =
• PM

A
AISTICS OP MONOPOLY
CHARACTBnlqu
lling 8 u • Product
O n e fi rm se d D
..h nd cu rv e Is g, with MR<
• , , e d e m aie rs to e n tr y ownslopln
H ig h b a rr .
r"
F ir m is a "p ri c e m a k e
• long. run
ro fi ts In th e
E c o n o m ic p t CP > MC)
v e ly e ff ic ie n
N o t a ll o c a ti t CP > minimum A
TC)
e ff ic ie n
P ro d u c ti v e ly

bstitutes
her e th er e are no close su
1ERMS r industry w
co nstit1 ;1t~ s th e ID3!ket o maker
n e firm olist is a price vide
.lfODOpoly o m e rs ; a m o n o p
s o f sc ale a n d c a n pro
c o n su ve econ o m ie
available fo r s th a t have extensi
o n o p o li e
p o li e s m s
Mdllnll M o n o r c o st th a n c a n several firm s d if ferent prices
for th e
t a lo w e st o m er
a p ro d u c t a tice charges
different cu
n th is p ra c
mfnado
ft.Ice .DJscrf
t a n d D = MR
same p ro d u c

FORMULAS u t
rofit-maximizing level o f o u tp
•=MC p

AT):
ONOPOLIES (PRICING
-~..~o M
e and average total cost curve)
•Jletam PrJce
:
• tersection o
f demand curv
• o s t (at 1n
average total c
rve)
ce, nd curve and marginal cost cu
O p d m e l PrJ f dema
cost (at th e
. rsect1. on
1nte °

' .
 No.

MU LT IP LE -C HO IC E RE
VI EW QU ES TIO NS r J

I I Use the figu re beloiu to ans we

r que stio ns 1 Use the figure bel ow to ans we
r questions 3, 4,
an d 2.
p an d 5.
p
A

ATC
--- --- --- -
B

C
E --- --- --- --- --- ~.;
__ --- -
H

P2
I
I p3
o-------- I
---L-.\--
----1----
MR Q2 Q p4 --- --- --- --- --- ~I
One firm con stitu tes the I
mar ket
Ql

1. Th e tot al pro fits

for thi s mo nop oli st are
ide nti fie d by
(A) CE FL .
3. Th e soc iall y op tim al pri ce wo uld be
(B) ABJK.
(C) BC LE (A) P3.
(D) CE HG . (B) P2.

(E) BEFJ. (C) P1.

(D) P4.
2. Th e tot al cos ts for the mo
nop oli st are (E) no ne of the abo ve. .
ide nti fie d by
4. Th e un reg ula ted mo no
(A) CE FL . po lis t's pri ce would be
(B) CE HG . (A) P3.

(C) ABJK. (B) P2.

(D) EOQ1E (C) P1.

(E) BOQ1J. (D) P4.

I (E) no ne of the abo ve.

5. Th e "fa ir-r etu rn" pri ce of

mo no po lis t wo uld be
the reg ula ted

(A) P3.
(B) P2.
(C) P1.
(D) P4.
(E) no ne of the abo ve.
 . 6 7.
answer questto
vse the figure below to ns
, , 9 the followtng are true about pr
ofit-
. . . . • Whicb of
antJB. lies?
max.Jmizlng monopo
of
the inelastic portion
I. th ey produce on
p

A their demand curves.

and.
11• Marginal revenue is less than dem
ers."
III. !h ey are "price tak
minimum ATC.
N. Price is greater th an
c+ -- ~ ;. _ _ ~ -- - ATcanc1Mc (AJ I an d II only
(BJ I, II, an d III only
(CJ II an d N only
(D) I an d III only
,
(EJ I, III, an d N only
ra l
wing is tru e of a na tu
10. Which of th e follo
D=AR monopoly?
erage
ses, th e lo ng -ru n av
, (A) As ou tp ut increa
eases.
ke t, th e original • total cost curve decr erage
6. In a pe rf ec ~y co m pe tit iv e m ar ses, th e lo ng -ru n av
(BJ As ou tp ut increa
consumer surplus is total cost curve incr
eases.
n average
G. (C ) As ou tp ut in creases, th e lo ng -ru
(A) AB co ns ta nt .
) AC E to ta l cost curve re m ai ns
ic e is wh er e an
(B
(C) BCEE (D~ The fair-return pr
op ol y will
un re gulated na tu ra l m on
(D) COKE
produce. te r
(E) GEE pt ab le pr ic e is gr ea
(E) The socially ac ce
ns um er st.
is t ta ke s over, th e co th an th e m ar gi na l co
7. After th e m on op ol
swplus is
·.•
\ .
(

tAJ ABG. ,·
(B) ACE
(C) BCEG.
'COKE
GEE .

eadweight loss is
•
f.
EG.
•
.' .
,. '

j ' •

l.'
 QUES TION S . co .
SPONSE REVIE W gulated rnonopoly earron g e nonuc Profits,
FREE· RE h of an unre
l. Draw a correctly Jat~edf:i~:~1ng on your grapb-b I d QM and
PM
and identify each o t e l and price, la e e
i lng quant ty
(a) The profit-maxim z flt shaded in
(b) The area o eco
f notnic pro '
al haded in
(c) The deadweight loss so s tity labeled Qc
ffi • nt quan ,
(d) The allocatively e cie geogra phic monop oly due to it
ating as a
2 Grant's Gas Guzzlers ts a
. used car lot oper , Gas Guzzlers contin ues to proctucs
• tition. Grants e
remote location Wl'thout any compe
d esp1'te hauina
...... economic losses. • 1 ?
.n open desp1·te the econom ic oss.
(a) Why might Grant's Gas Guzzlers re~atarning econom ic profits.
(b) Now assume Grants' Gas Guzzlers is e nt of the demand curve 1s .
. . price at what segme the finn
(i) At the profit-maxim1Z1n~ . ' lastic, or elastic range'?
operating at: the inelastic, unit e . . what will happe n to total revenue?
• creases its pnces,
(ii) If Grant's Gas Guzzlers in . ase What will happe n to its profit-
(c) Now assume Grant's Gas Guzzlers' fixed costs incre •
maximizing quantity? Explain.

Multiple-Choice Review Answers

I. (B) 4. (C) 7. (A) 10. (A)
2. (E) 5. (A) 8. (E)
3. (D) 6. (B) 9. (C)

1. (B) From the MR = MC quantity of Qi, head up to the deman d curve (K), down to
the
ATC (J), then over to the price axis (B), and up to the price (A). If you were asked
to calcu-
late the dollar value of the profit, take Q x (P - ATC).

2. (E) From the MR= MC quantity of Q1, head up to the ATC curve (J), then
to the monopo-
list's price (B), and down to the x-axis (0). If you were asked to calcul ate the dollar
of total costs, take ATC x Q.
value

3. (D) The socially optimal price is where p = MC, or Q ..

4
4. (C) An unregulated profit-maximizing mono .
quantity· head up to the d 1Ywill produ ce where · the
d po MR= MC. Qi 1s
, eman curve and o t th
ver o e price axis where price is P4·
5. (A) The fair-return price is where p = A'T
n C, or P3.
6. (B) In a perfectly competitive m k .
price is C. The consumer surpl ~r &et, quanti ty comes from where p - MC or
. us is ,ound b 1 K, and the
e ow the deman d curve, above the price, and
left of quantity (K), and is ABG. - '

7. (A) The monopolist MR= MC u .

curve and over to th . q antity is J, and fr
demand curve b e Price axis, the Price is B Th om heading straight up to the dellland
• a ove the price (BJ' and left i
e consu mer surplu s is found beloW Ille
o quanti ty (Jl, and is ABG.
182 AP MICROECONOM1c~,..... __
 d .
8. (E) In qu est ion 6 the dea Weight lo
ss Was part of consumer su l b . now gone as
consumer sur plu s has shr un k as shown in
.
question 7 Th e loss ofrp us ut Is
• . shown in area
surplus IS
GEE

9. (C) . Ma rginal revenue falls faster than th

. . ncy . e demand curve, and p > MC at the long-run
equilibnum. Allocative efficie is pre t when p = MC ' aod as such a monopoly is not
sen
efficient.

a nat al
10. (A) The eco no mi c cas e for ur monopolY(like a utility or an energy company) is
C dec rea ses as ou tp t.
that its LRAT u increases.

swers
free-Response Re vi ew An
p
I.

D
Q

e variable cost.
fit- ma xim izi ng lev el of out put, price must be above averag
2. (a) At thi s pro some of the fixed costs
s pri ce the firm can at lea st pay all the variable costs and
At thi
by sta yin g in bu sin ess .
(i) The ela stic ran ge their dem and
(b)
-m on op oli es alw ays pro duce on the elastic portion of
(ii) De cre ase stic range.
al revenue decreases in the ela
curve. As pri ce increases, tot
e or marginal cost, the
ain the sam e. Fix ed cos ts don't affect marginal revenu
(c) It wil l rem al costs and fixed costs.
fit- ma xim izi ng qua nti ty. Fixed costs only change the tot
pro

183