1、SOLUTIONSTOTEXTPROBLEMS:QuickQuizzes1. Amarketmighthaveamonopolybecause:akeyresourceisownedbyasinglefirm;(2)thegovernmentgivesasinglefirmtheexclusiverighttoproducesomegood;and(3)thecostsofproductionmakeasingleproducermoreefficientthanalargenumberofproducers.Examplesofmonopoliesinclude:thewaterproduc

2、erinasmalltown,whichownsakeyresource,theonewellintown;(2)pharmaceuticalcompanieswhoaregivenapatentonanewdrugbythegovernment;and(3)abridge,whichisanaturalmonopolybecause(ifthebridgeisuncongested)havingjustonebridgeisefficient.Manyotherexamplesarepossible.2. Amonopolistchoosestheamountofoutputtoproduc

3、ebyfindingthequantityatwhichmarginalrevenueequalsmarginalcost.Itfindsthepricetochargebyfindingthepointonthedemandcurveatthatquantity.3. Amonopolistproducesaquantityofoutputthatslessthanthequantityofoutputthatmaximizestotalsurplusbecauseitproducesthequantityatwhichmarginalcostequalsmarginalrevenuerat

4、herthanthequantityatwhichmarginalcostequalsprice.4. Policymakerscanrespondtotheinefficienciescausedbymonopoliesinoneoffourways:bytryingtomakemonopolizedindustriesmorecompetitive;(2)byregulatingthebehaviorofthemonopolies;(3)byturningsomeprivatemonopoliesintopublicenterprises;and(4)bydoingnothingatall

5、.Antitrustlawsprohibitmergersoflargecompaniesandpreventthemfromcoordinatingtheiractivitiesinwaysthatmakemarketslesscompetitive,butsuchlawsmaykeepcompaniesfrommergingtogainfromsynergies.Somemonopolies,especiallynaturalmonopolies,areregulatedbythegovernment,butitishardtokeepamonopolyinbusiness,achieve

6、marginal-costpricing,andgivethemonopolistincentivetoreducecosts.Privatemonopoliescanbetakenoverbythegovernment,butthecompaniesarenotlikelytobewellrun.Sometimesdoingnothingatallmayseemtobethebestsolution,butthereareclearlydeadweightlossesfrommonopolythatsocietywillhavetobear.5. Examplesofpricediscrim

7、inationinclude:(1)movietickets,forwhichchildrenandseniorcitizensgetlowerprices;(2)airlineprices,whicharedifferentforbusinessandleisuretravelers;(3)discountcoupons,whichleadtodifferentpricesforpeoplewhovaluetheirtimeindifferentways;(4) financialaid,whichofferscollegetuitionatlowerpricestopoorstudents

8、andhigherpricestowealthystudents;and(5)quantitydiscounts,whichofferlowerpricesforhigherquantities,capturingmoreofabuyerswillingnesstoMpay.otherexamplesarepossible.Perfectpricediscriminationreducesconsumersurplus,increasesproducersurplusbythesameamount,andhasnoeffectontotalsurplus,comparedtoacompetit

9、ivemarket.Comparedtoamonopolythatchargesasingleprice,perfectpricediscriminationreducesconsumersurplus,increasesproducersurplus,andincreasestotalsurplus,sincethereisnodeadweightloss.QuestionsforReview1. Anexampleofagovernment-createdmonopolycomesfromtheexistenceofpatentandcopyrightlaws.Bothallowfirms

10、orindividualstobemonopoliesforextendedperiodsoftime20yearsforpatents,foreverforcopyrights.Butthismonopolypowerisgood,becausewithoutit,noonewouldwriteabook(becauseanyonecouldprintcopiesofit,sotheauthorwouldgetnoincome)andnofirmwouldinvestinresearchanddevelopmenttoinventnewproductsordrugs(sinceanyothe

11、rcompanycouldproduceorsellthem,andthefirmwouldgetnoprofitfromitsinvestment).2. Anindustryisanaturalmonopolywhenasinglefirmcansupplyagoodorservicetoanentiremarketatasmallercostthancouldtwoormorefirms.Asamarketgrowsitmayevolvefromanaturalmonopolytoacompetitivemarket.3. Amonopolistsmarginalrevenueisles

12、sthanthepriceofitsproductbecause:(1)itsdemandcurveisthemarketdemandcurve,so(2)toincreasetheamountsold,themonopolistmustlowerthepriceofitsgoodforeveryunititsells.(3)Thiscutinpricesreducesrevenueontheunitsitwasalreadyselling.Amonopolistsmarginalrevenuecanbenegativebecausetogetpurchaserstobuyanaddition

13、alunitofthegood,thefirmmustreduceitspriceonallunitsofthegood.Thefactthatitsellsagreaterquantityincreasesrevenue,butthedeclineinpricedecreasesrevenue.Theoveralleffectdependsontheelasticityofthedemandcurve.Ifthedemandcurveisinelastic,marginalrevenuewillbenegative.4. Figure1showsthedemand,marginal-reve

14、nue,andmarginal-costcurvesforamonopolist.Theintersectionofthemarginal-revenueandmarginal-costcurvesdeterminestheprofit-maximizinglevelofoutput,Qm.Thedemandcurvethenshowstheprofit-maximizingprice,Pm.5. ThelevelofoutputthatmaximizestotalsurplusinFigure1iswherethedemandcurveintersectsthemarginal-costcu

15、rve,Qc.ThedeadweightlossfrommonopolyisthetriangularareabetweenQcandQmthatisabovethemarginal-costcurveandbelowthedemandcurve.Itrepresentsdeadweightloss,sincesocietylosestotalsurplusbecauseofmonopoly,equaltothevalueofthegood(measuredbytheheightofthedemandcurve)lessthecostofproduction(givenbytheheighto

16、fthemarginal-costcurve),forthequantitiesbetweenQmandQc.6. Thegovernmenthasthepowertoregulatemergersbetweenfirmsbecauseofantitrustlaws.Firmsmightwanttomergetoincreaseoperatingefficiencyandreducecosts,somethingthatisgoodforsociety,ortogainmonopolypower,whichisbadforsociety.7. Whenregulatorstellanatura

17、lmonopolythatitmustsetpriceequaltomarginalcost,twoproblemsarise.Thefirstisthat,becauseanaturalmonopolyhasaconstantmarginalcostthatislessthanaveragecost,settingpriceequaltomarginalcostmeansthatthepriceislessthanaveragecost,sothefirmwilllosemoney.Thefirmwouldthenexittheindustryunlessthegovernmentsubsi

18、dizedit.However,gettingrevenueforsuchasubsidywouldcausethegovernmenttoraiseothertaxes,increasingthedeadweightloss.Thesecondproblemofusingcoststosetpriceisthatitgivesthemonopolynoincentivetoreducecosts.8. Oneexampleofpricediscriminationisinpublishingbooks.Publisherschargeamuchhigherpriceforhardbackbo

19、oksthanforpaperbackbooksfarhigherthanthedifferenceinproductioncosts.Publishersdothisbecausedie-hardfanswillpaymoreforahardbackbookwhenthebookisfirstreleased.Thosewhodontvaluethebookashighlywillwaitforthepaperbackversiontocomeout.Thepublishermakesgreaterprofitthiswaythanifitchargedjustoneprice.Asecon

20、dexampleisthepricingofmovietickets.Theatersgivediscountstochildrenandseniorcitizensbecausetheyhavealowerwillingnesstopayforaticket.Chargingdifferentpriceshelpsthetheaterincreaseitsprofitabovewhatitwouldbeifitchargedjustoneprice.ProblemsandApplications1. Thefollowingtableshowsrevenue,costs,andprofits

21、,wherequantitiesareinthousands,andtotalrevenue,totalcost,andprofitareinmillionsofdollars:PriceQuantity(1,000s)TotalRevenueMarginalRevenueTotalCostProfit$1000$0$2$-2901009$93680200167412703002155166040024361850500251718406002439122080016-5106109009-711-201,0000-912-12a. Aprofit-maximizin

22、gpublisherwouldchooseaquantityof400,000atapriceof$60oraquantityof500,000atapriceof$50;bothcombinationswouldleadtoprofitsof$18million.b. Marginalrevenueisalwayslessthanprice.Pricefallswhenquantityrisesbecausethedemandcurveslopesdownward,butmarginalrevenuefallsevenmorethanpricebecausethefirmlosesreven

23、ueonalltheunitsofthegoodsoldwhenitlowerstheprice.c. Figure2showsthemarginal-revenue,marginal-cost,anddemandcurves.Themarginal-revenueandmarginal-costcurvescrossbetweenquantitiesof400,000and500,000.Thissignifiesthatthefirmmaximizesprofitsinthatregion.4C0 5001.000QuantityFigure2d. Theareaofdeadweightl

24、ossismarkedDWLDeaewgigretlossmeansthatthetotalsurplusintheeconomyislessthanitwouldbeifthemarketwerecompetitive,sincethemonopolistproduceslessthanthesociallyefficientlevelofoutput.e. Iftheauthorwerepaid$3millioninsteadof$2million,thepublisherwouldnprice,sincetherewouldbenochangeinmarginalcostormargin

25、alrevenue.Theonlythingthatwouldbeaffectedwouldbethefirmsprofit,whichwouldfall.f. Tomaximizeeconomicefficiency,thepublisherwouldsetthepriceat$10perbook,sincethatsthemarginalcostofthebook.Atthatprice,thepublisherwouldhavenegativeprofitsequaltotheamountpaidtotheauthor.Figure 3(DnLISASH。5 0U6。一dQuantity

26、2. Figure3川ustratesanaturalmonopolistsettingprice,Patc,equaltoaveragetotalcost.TheequilibriumquantityisQatc.MarginalcostpricingwouldyieldthepricePmcandquantityQmc.ForquantitiesbetweenQatcandQmc,thebenefittoconsumers(measuredbythedemandcurve)exceedsthecostofproduction(measuredbythemarginalcostcurve).

27、Thismeansthatthedeadweightlossfromsettingpriceequaltoaveragetotalcostisthetriangularareashowninthefigure.3. Maildeliveryhasanalways-decliningaverage-total-costcurve,sincetherearelargefixedcostsforequipment.Themarginalcostofdeliveringaletterisverysmall.However,thecostsarehigherinisolatedruralareastha

28、ntheyareindenselypopulatedurbanareas,sincetransportationcostsdiffer.Overtime,increasedautomationhasreducedmarginalcostandincreasedfixedcosts,sotheaverage-total-costcurvehasbecomesteeperatsmallquantitiesandflatterathighquantities.4. Ifthepriceoftapwaterrises,thedemandforbottledwaterincreases.ThisisshowninFigure4asashifttotherightinthedemandcurvefromDitoD2.Thecorrespondingmarginal-revenuecurvesareMR1andMR2.Theprofit-maximizinglevelofoutputiswheremarginalcostequalsmarginalrevenue.Priortotheincreaseinthepriceoftapwater,theprofit-maximizinglevelofoutputisQi;afterthepriceincrease,itrisest