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Monopoly Quiz Recap
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Assume that this profit-maximizing monopolist is unregulated
Assume that this profit-maximizing monopolist is unregulated. Identify each of the following:
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i) The monopolist’s quantity of output
10
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ii) The monopolist’s price
$30
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iii) The profit earned by the monopolist
$150
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iv) The deadweight loss
$75
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b) Can the profit-maximizing monopolist continue to earn profit in the long run?
Yes!
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= MR c) Now assume that the monopolist can perfectly price discriminate. Identify each of the following:
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= MR i) The quantity produced 20
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= MR ii) The profit earned by the monopolist $250
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= MR iii) The consumer surplus None!
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d) Now, assume instead that the monopolist cannot price discriminate and is regulated to produce the socially optimal (allocatively efficient) quantity. Identify each of the following:
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i) The socially optimal quantity
20
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ii) The consumer surplus
$250
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Earning zero economic profit
e) Is the monopolist facing the regulation in part (d) earning a positive economic profit, earning zero economic profit, or incurring a loss? Earning zero economic profit
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f) Now, assume instead that the monopolist cannot price discriminate and is regulated to produce the break-even (zero economic profit) quantity. Identify each of the following:
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i) The monopolist’s quantity of output
20
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ii) The monopolist’s price
$15
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g) Is the dot marked by the delicious slice of pecan pie on the elastic, inelastic, or unit elastic portion of the demand curve? elastic
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h) What is the meaning of life?
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h) What is the meaning of life? ____________ pie
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Monopolistic Competition
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Examples: Everything
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Differentiated Products
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Characteristics of Monopolistic Competition:
Perfect Competition Monopolistic Competition Monopolistic Competition Pure Monopoly Pure Monopoly Oligopoly Oligopoly Characteristics of Monopolistic Competition: Relatively Large Number of Sellers Differentiated Products Some control over price Easy Entry and Exit (Low Barriers) A lot of non-price competition (Advertising)
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“Monopoly” + ”Competition”
Monopolistic Qualities Control over price of own good due to differentiated product D greater than MR Plenty of Advertising Not efficient Perfect Competition Qualities Large number of smaller firms Relatively easy entry and exit Zero Economic Profit in Long-Run since firms can enter
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Differentiated Products
Goods are NOT identical. Firms seek to capture a piece of the market by making unique goods. Since these products have substitutes, firms use NON-PRICE Competition. Examples of NON-PRICE Competition Branding Unique Product Attributes Advertising (Two Goals) 1. Increase Demand 2. Make demand more INELASTIC
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Warm Up What are the differences between monopolistic competition and perfect competition? What are the differences between monopolistic competition and monopoly? What are the differences between Donald Trump and this dog?
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Graphing Monopolistic Competition
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In the short-run, it is the same graph as a monopoly making profit
Monopolistic Competition is made up of price makers so MR is less than Demand In the short-run, it is the same graph as a monopoly making profit P MC ATC P1 In the long-run, new firms will enter, driving down the DEMAND for firms already in the market. D MR Q Q1 30
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New firms enter => demand for firm’s product falls until there is no economic profit
MC ATC P1 D MR Q Q1 31
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Price and quantity falls and TR=TC
New firms enter => demand for firm’s product falls until there is no economic profit Price and quantity falls and TR=TC P MC ATC PLR D MR Q QLR 32
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Quantity where MR =MC up to Price = ATC
LONG-RUN EQUILIBRIUM Quantity where MR =MC up to Price = ATC P MC ATC PLR D MR Q QLR 33
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Why does DEMAND shift? When short-run profits are made…
New firms enter. New firms mean more close substitutes and less market share for each existing firm. Demand for each firm’s product falls. When short-run losses are made… Firms exit. Result is fewer substitutes and larger market share for remaining firms. Demand for each firm’s product rises.
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What happens when there is a loss?
In the short-run, the graph is the same as a monopoly making a loss ATC P MC P1 In the long-run, firms will leave, driving up the DEMAND for firms already in the market. D MR Q Q1 35
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Firms leave so demand increases until there is no economic profit
ATC P MC P1 D MR Q Q1 36
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Firms leave so demand increases until there is no economic profit
Price and quantity increase and TR=TC ATC P MC PLR D MR QLR Q 37
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Side Note The elasticity of demand for a monopolistically competitive firm’s product varies with the number of competitors: If there are many competitors (and therefore many substitutes), demand for the firm’s product will tend to be more elastic If there are fewer competitors and substitutes, demand will tend to be less elastic
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Are Monopolistically Competitive Firms Efficient?
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LONG-RUN EQUILIBRIUM Not Allocatively Efficient because P MC
Not Productively Efficient because not producing at Minimum ATC P ATC MC PLR D MR Q QLR QSocially Optimal 40
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This firm also has EXCESS CAPACITY
LONG-RUN EQUILIBRIUM This firm also has EXCESS CAPACITY P ATC MC PLR D MR Q QLR QSocially Optimal 41
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Excess Capacity The firm can produce at the lowest per unit cost (minimum ATC) but it chooses not to. Excess capacity = the gap between the minimum ATC output and the profit maximizing output.
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LONG-RUN EQUILIBRIUM The firm can produce at a lower cost but it holds back production to maximize profit P ATC MC PLR D Excess Capacity MR Q QLR QProd Efficient 43
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MONOPOLISTIC COMPETITION
Advantages of MONOPOLISTIC COMPETITION Large number of firms and product variation meets society’s needs. Nonprice Competition (product differentiation and advertising) may result in sustained profits for some firms. Ex: Nike might continue to make above normal profit because they are a well-known brand.
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