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Mod 61: Introduction to
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2. I. Pure Monopoly: An Introduction
Examples of pure monopolies and “near monopolies.”
1. Public utilities—gas, electric, water, cable TV, and local telephone service companies—are pure monopolies.
2. First Data Resources (Western Union), Wham-o (Frisbees) and the DeBeers diamond syndicate are examples of “near” monopolies. (See Last Word.)
3. Manufacturing monopolies are virtually nonexistent in nationwide U.S. manufacturing industries.
4. Professional sports leagues grant team monopolies to cities.
5. Monopolies may be geographic. A small town may have only one airline, bank, etc.
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3. Key Economic Concepts
The monopolist also maximizes profit at the output level Qm where MR=MC.
The price is found vertically up from the demand curve.
Economic profit is still seen as a rectangle with area equal to: Qm*(Pm – ATC).
When compared to the perfectly competitive outcome, the monopolist produces less, charges a higher price, and earns long-run economic profit.
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4. Module Outline I. The Monopolist’s Demand Curve and Marginal Revenue
II. The Monopolist’s Profit-Maximizing Output and Price
III. Monopoly versus Perfect Competition
IV. Monopoly: the General Picture
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5. I. The Monopolist’s Demand Curve and Marginal Revenue
In perfect competition, market demand for a product is downward sloping. The demand for any one firm’s product is horizontal.
Those firms are price takers.
For both the perfectly competitive firm and the monopoly firm, profit is maximized at the output level where MR=MC.
A monopolist faces a different demand curve.
The monopolist is the only producer in the market, the demand for the good is the demand for the monopolist’s good.
Demand for the monopolist’s product is downward sloping.
The MR curve, one that lies below the demand curve, and thus creates a gap between price and marginal revenue
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6. I. The Monopolist’s Demand Curve and Marginal Revenue
The demand curve for the firm is the demand curve for the industry as well in a monopoly.
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7. I. The Monopolist’s Demand Curve and Marginal Revenue
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8. APE U3 L4 A32 Marginal Revenue for an Imperfect Competitor
Marginal Revenue Pulls Average Revenue Toward it
MR & P are not the same thing, but P and average revenue are the same concept with most applications of demand. With some control over price and output, imperfectly competitive firms realize that the additional revenue garnered from selling extra output changes at a different rate than the price of the good.
Average Revenue—Total Revenue / output
AR falls as the price searching firm increases output.
Marginal Revenue—Change in total revenue / change in output
MR Falls FASTER than AR as output increases.
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9. APE U3 L4 A32
Fill in the blanks on the table, and plot both the D curve and the MR curve.
1. Notice that the price points show $1.50 changes. By how much does MR change for each change in price points?
$3.00
P=AR QD TR
ChTR MR
$13.50 $0
$12.00
100
$1,200
$10.50
200
$2,100
$900
$9.00
300
$2,700
$7.50
400
$6.00
500
$3,000
$4.50
600
-$300
-$3.00
$600 $6
$3,000
$300
$3.00
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10. APE U3 L4 A32 Elastic Inelastic D MR $12 $10 $8 $8 $4 $2 0 -2 -3
Fill in the blanks on the table, and plot both the D curve and the MR curve.
2. For a firm large enough to see the whole D curve, MR is positive when the D curve is PRICE ELASTIC. MR becomes negative then the segment of the D curve becomes P INELASTIC. Will a single-price monopoly ever operate on the inelastic portion?
NO. As long as D is inelastic, MR is negative, and a reduction in output will increase TR and reduce total cost at the same time. An increase in output would decrease TR and increase cost. Therefore, the monopolist would increase price & reduce output until it is on the elastic portion of its D curve.
Elastic
Inelastic
$12 $10 $8 $8 $4 $ D MR
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11. II. The Monopolist’s Profit-Maximizing Output and Price
1. MR=MC (determines output)
2. Output (MR=MC
3. P ? ATC
A. P > ATC-Profit
B. P = ATC-Normal Profit
C. P < ATC-Loss
Total Revenue
MR=MC
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12. II. The Monopolist’s Profit Maximizing Point
The rule to maximize profit is the same, no matter the market structure: find the output where MR=MC.
MR=MC
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13. III. Monopoly versus Perfect Competition
Compared with a competitive industry, a monopolist does the following:
  produces a smaller quantity: QM < QC
  charges a higher price: PM > PC
  earns a profit (long run and short run)
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14. IV. Monopoly: The General PictureCS
DWL PS PS
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15. Key Concepts--Review
The monopolist maximizes profit at the output level Qm where MR=MC.
The price is found vertically up from the demand curve.
Economic profit is still seen as a rectangle with area equal to: Qm*(Pm – ATC).
When compared to the perfectly competitive outcome, the monopolist produces less, charges a higher price, and earns long-run economic profit.
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16. Practice Question #1 1. The monopolist’s profit-maximizing output is
b. 4.
c. 5.
d. 8.
e. 10.
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17. Practice Question #2 2. The monopolist’s total revenue equals a. $80.
b. $160.
c. $240.
d. $300.
e. $480.
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18. Practice Question #3 3. The monopolist’s total cost equals a. $20.
b. $80.
c. $160.
d. $240.
e. $480.
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19. Practice Question #4
4. The monopolist is earning a total profit equal to
a. $0.
b. $40.
c. $80.
d. $160.
e. $240.
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20. Practice Question #5
5. How does a monopoly differ from a perfectly competitive industry with the same costs?    I. It produces a smaller quantity.    II. It charges a higher price.    III. It earns normal profits in the long run.
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III
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21. APE U3 L4 A33 4 $300 $300 $600 $750 $150 $600 ($150X4) Part B:
Part A: Page 169
Figure 33.1 Pure Monopoly: Cost and Revenue Data
Qty TC MC ATC TR MR AR=P
___
1 $900 $900 $900 $1200 $1200 $1200
2 $1600 $700 $800 $2100 $900 $1050
3 $2100 $500 $700 $2700 $600 $900_
4 $2400 $300 $600 $3000 $300 $750_
5 $3000 $600 $600 $ $600_
6 $4200 $1200 $700 $2700 -$300 $450_
Part B:
In this problem, plot the MC and MR data at each quantity.
A profit-maximizing monopolist would produce an output of _____ units.
At this level of output, MC is ______ per unit & MR is ______ per unit.
At this level of output, ATC is ______ per unit, & AR (price) is _____ per unit.
This gives the monopolist an economic profit of ______ per unit for a total economic profit of _____________. 4
$300
$300
$600
$750
$150
$600 ($150X4)
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22. APE U3 L4 A33 P=AR $750 ATC=$600 $150 X 4=$600 MR=MC
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