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12-259
CHAPTER 12
Pure Monopoly
A. Short-Answer, Essays, and Problems
1. What are the major characteristics of pure monopoly?
2. What are the major barriers to entry that explain the existence of monopoly?
3. What are some ways that existing firms the market may attempt to prevent rivals from entering into the
4. What is the relationship between economies of scale and a natural monopoly?
5. Some economists argue that pure monopolists will purposely avoid the price-output combination that will
6. In what ways, if any, do the demand schedules for a purely competitive firm and a pure monopolist differ?
7. Why is marginal revenue less than price for every level of output except the first?
8. Use the graph to answer these questions for a pure monopolist: (a) What price should the monopolist
charge to maximize revenue? (b) What is the elastic and inelastic portion of the demand curve?
9. Use the graph to answer these questions for an unregulated pure monopolist:
10. Why is a monopolist a price maker?
11. How does price elasticity affect the price-quantity combination and segment of the demand curve that the
12. A pure monopolist determines that at the current level of output the marginal cost of production is $2.00,
average variable costs are $2.75, and average total costs are $2.95. The marginal revenue is $2.75. What
13. A pure monopolist sells output for $4.00 per unit at the current level of production. At this level of output,
the marginal cost is $3.00, average variable costs are $3.75, and average total costs are $4.25. The
14. What are the relative values of price, ATC, and AVC when a monopolist experiences:
15. The demand schedule for the product produced by a monopolist is given in the table below. Complete the
table by computing total revenue and marginal revenue.
Quantity
demanded
Price
Total
revenue
Marginal
revenue
1
$325
$_____
$_____
2
300
_____
_____
3
275
_____
_____
4
250
_____
_____
5
225
_____
_____
6
200
_____
_____
7
175
_____
_____
8
150
_____
_____
9
125
_____
_____
10
100
_____
_____
11
75
_____
_____
12
50
_____
_____
13
25
_____
_____
14
0
_____
_____
16. In the following table are demand and cost data for a pure monopolist. Complete the table by filling in the
columns for total revenue, marginal revenue, and marginal cost. Answer these three questions: (a) What
output will the monopolist produce? (b) What price will the monopolist charge? (c) What total profit will
the monopolist receive at the profit-maximizing level of output?
Quantity
Price
Total
revenue
Marginal
revenue
Total
cost
Marginal
cost
0
$34
$_____
$ 20
1
32
_____
$_____
36
$_____
2
30
_____
_____
46
_____
3
28
_____
_____
50
_____
4
26
_____
_____
54
_____
5
24
_____
_____
56
_____
6
22
_____
_____
64
_____
7
20
_____
_____
80
_____
8
18
_____
_____
100
_____
9
16
_____
_____
128
_____
10
14
_____
_____
160
_____
17. Why is there a supply curve in pure competition but no supply curve in pure monopoly?
18. What conditions must exist in order for a pure monopolist to achieve economic profits? Is the profitability
19. Do you agree or disagree with the statement that: “A monopolist always charges the highest possible
20. “Pure monopoly guarantees economic profits.” Discuss whether this is a valid statement.
21. How does monopoly compare with pure competition in terms of price, output, and efficiency?
22. Explain how monopoly causes an inefficient allocation of resources when the competitive firm does not,
23. How do the consumer and producer surpluses in the monopolistic case differ from those in the competitive
24. How does monopoly result in income transfers?
25. How does simultaneous consumption affect economies of scale?
26. What are network effects? How do they contribute to economies of scale?
27. What is X-inefficiency? Why is it likely to occur in monopoly?
28. Draw a graph that illustrates X-inefficiency. Explain the concept of X-inefficiency using the graph.
29. What is the relationship between rent-seeking expenditures and monopoly?
30. Consider the following situations and determine whether they exhibit simultaneous consumption, network
effects, x-inefficiency or rent-seeking behavior. Assume the businesses referenced function as monopolies.
31. “Monopolists are not technologically competitive.” Explain.
32. What are three policy options for dealing with pure monopolies that are entrenched and inefficient?
33. Price discrimination is often used by businesses. Explain the conditions under which price discrimination
34. Are the pricing schemes below examples of price discrimination? Explain.
35. Explain the relationship between the price elasticity of demand and price discrimination. Give two
36. (Consider This) Why does price discrimination work in the sale of seats to children and adults at baseball
37. What are the consequences of price discrimination for the producer, the consumer, and for society?
38. What is the dilemma of regulation in the case of a regulated monopoly?
39. In the table below are cost and demand data for a pure monopolist.
Quantity
demanded
Price
Marginal
revenue
Average
cost
Marginal
cost
0
$35.00
1
32.00
$ 32.00
$48.00
$48.00
2
29.00
26.00
30.00
12.00
3
26.00
20.00
23.34
10.00
4
23.00
14.00
21.00
14.00
5
20.00
8.00
20.00
16.00
6
17.00
2.00
19.50
17.00
7
14.00
−4.00
19.28
18.00
8
11.00
−10.00
18.68
18.50
9
8.00
−16.00
18.72
19.00
40. In the table below are cost and demand data for a pure monopolist.
Quantity
demanded
Price
Marginal
revenue
Average
cost
Marginal
cost
0
$105.00
1
96.00
$ 96.00
$144.00
$144.00
2
87.00
78.00
90.00
36.00
3
78.00
60.00
70.34
30.00
4
69.00
42.00
63.00
42.00
5
60.00
24.00
60.00
48.00
6
51.00
6.00
58.50
51.00
7
42.00
−12.00
57.86
54.00
8
33.00
−30.00
57.50
55.50
9
24.00
−48.00
57.33
56.00
41. Draw a graph that illustrates the dilemma of regulation for a natural monopoly. On the graph, show the:
4 2. (Last Word) Discuss how the vast amount of information available on the internet allows for companies to
43. (Last Word) What is online price discrimination companies use? Can it be overcome?
B. Answers to Short-Answer, Essays, and Problems
1. What are the major characteristics of pure monopoly?
2. What are the major barriers to entry that explain the existence of monopoly?
3. What are some ways that existing firms the market may attempt to prevent rivals from entering into the
industry? Discuss an example.
A firm may prevent new firms from entering into a market by slashing prices, increasing advertising, or
strategic behavior that would make it difficult for new firms to succeed. Some examples include Dentsply
4. What is the relationship between economies of scale and a natural monopoly?
5. Some economists argue that pure monopolists will purposely avoid the price-output combination that will
maximize their profits. Explain how this less-than-maximum profit behavior could be rational.
12-266
6. In what ways, if any, do the demand schedules for a purely competitive firm and a pure monopolist differ?
What significance does this have for the price-output behavior of each?
7. Why is marginal revenue less than price for every level of output except the first?
8. Use the graph to answer these questions for a pure monopolist: (a) What price should the monopolist
charge to maximize revenue? (b) What is the elastic and inelastic portion of the demand curve?
9. Use the graph to answer these questions for an unregulated pure monopolist:
(a) What is the price and quantity that will be charged by the monopoly?
(b) What area represents the efficiency loss?
(c) Suppose the government were to break-up the monopoly and create a purely competitive market. What
is the price and quantity will the market move toward? Will this outcome be more or less efficient?
10. Why is a monopolist a price maker?
11. How does price elasticity affect the price-quantity combination and segment of the demand curve that the
monopolist would prefer for price and output?
12. A pure monopolist determines that at the current level of output the marginal cost of production is $2.00,
average variable costs are $2.75, and average total costs are $2.95. The marginal revenue is $2.75. What
would you recommend that the monopolist do to maximize profits?
13. A pure monopolist sells output for $4.00 per unit at the current level of production. At this level of output,
the marginal cost is $3.00, average variable costs are $3.75, and average total costs are $4.25. The
marginal revenue is $3.00. What is the short-run condition for the monopolist and what output changes
would you recommend?
14. What are the relative values of price, ATC, and AVC when a monopolist experiences:
(d) a profit
(e) a loss but continues to produce
(f) a loss but ceases production
15. The demand schedule for the product produced by a monopolist is given in the table below. Complete the
table by computing total revenue and marginal revenue.
Quantity
demanded
Price
Total
revenue
Marginal
revenue
1
$325
$_____
$_____
2
300
_____
_____
3
275
_____
_____
4
250
_____
_____
5
225
_____
_____
6
200
_____
_____
7
175
_____
_____
8
150
_____
_____
9
125
_____
_____
10
100
_____
_____
11
75
_____
_____
12
50
_____
_____
13
25
_____
_____
14
0
_____
_____
12-269
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
(a) As total revenue rises to a maximum, marginal revenue falls toward zero. As total revenue falls from
its maximum, marginal revenue becomes negative.
(b) Demand is elastic as price falls from $325 to $175 because total revenue rises. Demand is inelastic as
price falls from $175 to $0 because total revenue also falls.
16. In the following table are demand and cost data for a pure monopolist. Complete the table by filling in the
columns for total revenue, marginal revenue, and marginal cost. Answer these three questions: (a) What
output will the monopolist produce? (b) What price will the monopolist charge? (c) What total profit will
the monopolist receive at the profit-maximizing level of output?
Quantity
Price
Total
revenue
Marginal
revenue
Total
cost
Marginal
cost
0
$34
$_____
$ 20
1
32
_____
$_____
36
$_____
2
30
_____
_____
46
_____
3
28
_____
_____
50
_____
4
26
_____
_____
54
_____
5
24
_____
_____
56
_____
6
22
_____
_____
64
_____
7
20
_____
_____
80
_____
8
18
_____
_____
100
_____
9
16
_____
_____
128
_____
10
14
_____
_____
160
_____
Quantity
Price
Total
revenue
Marginal
revenue
Total
cost
Marginal
cost
0
$34
$ 0
$ 20
1
32
32
$ 32
36
$ 16
2
30
60
28
46
10
3
28
84
24
50
4
4
26
104
20
54
4
5
24
120
16
56
2
6
22
132
12
64
8
7
20
140
8
80
16
8
18
144
4
100
20
9
16
144
0
128
28
10
14
140
−4
160
32
(a) The monopolist will produce 6 units of output because MR is closest to equality with MC.
(b) The monopolist will charge a price of $22.
(c) The monopolist will make a profit of $68 ($132 − 64).
17. Why is there a supply curve in pure competition but no supply curve in pure monopoly?
18. What conditions must exist in order for a pure monopolist to achieve economic profits? Is the profitability
of a firm’s operation a good index of the degree of monopoly power it possesses?
19. Do you agree or disagree with the statement that: “A monopolist always charges the highest possible
price.” Explain.
20. “Pure monopoly guarantees economic profits.” Discuss whether this is a valid statement.
21. How does monopoly compare with pure competition in terms of price, output, and efficiency?
22. Explain how monopoly causes an inefficient allocation of resources when the competitive firm does not,
even when both seek to maximize profits.
23. How do the consumer and producer surpluses in the monopolistic case differ from those in the competitive
case?
24. How does monopoly result in income transfers?
25. How does simultaneous consumption affect economies of scale?
26. What are network effects? How do they contribute to economies of scale?
12-272
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
network. These firms, however, may not be natural monopolies because they achieve minimum efficient
scale at less than the full size of the market.
27. What is X-inefficiency? Why is it likely to occur in monopoly?
28. Draw a graph that illustrates X-inefficiency. Explain the concept of X-inefficiency using the graph.
29. What is the relationship between rent-seeking expenditures and monopoly?
30. Consider the following situations and determine whether they exhibit simultaneous consumption, network
effects, x-inefficiency or rent-seeking behavior. Assume the businesses referenced function as monopolies.
(a) A pharmaceutical company discovers a vaccine for the common cold. The company puts a significant
effort into tests to get it FDA-approved and into hiring lawyers to obtain a patent.
(b) An Internet service provider adds thousands of new customers.
(c) The head of a family-owned, major hotel chain decides to hire his wild, socialite niece to work as an
executive of the company after her reality TV career ends.
(d) An online profile company helps college and high school students from across the country to connect
with each other.
31. “Monopolists are not technologically competitive.” Explain.
32. What are three policy options for dealing with pure monopolies that are entrenched and inefficient?
33. Price discrimination is often used by businesses. Explain the conditions under which price discrimination
is practiced.
34. Are the pricing schemes below examples of price discrimination? Explain.
(a) Sending out coupons in the local newspaper.
(b) Charging the same price for a train ticket, regardless of how far the customer is travelling.
(c) Offering a senior citizen discount at a restaurant.
(d) Sunday newspapers, which include additional coupons and comics, often are more expensive than the
weekly version.
35. Explain the relationship between the price elasticity of demand and price discrimination. Give two
examples.
36. (Consider This) Why does price discrimination work in the sale of seats to children and adults at baseball
games, but not to the sale of food at concession stands to children and adults at baseball games?
37. What are the consequences of price discrimination for the producer, the consumer, and for society?
12-275
38. What is the dilemma of regulation in the case of a regulated monopoly?
39. In the table below are cost and demand data for a pure monopolist.
Quantity
demanded
Price
Marginal
revenue
Average
cost
Marginal
cost
0
$35.00
1
32.00
$ 32.00
$48.00
$48.00
2
29.00
26.00
30.00
12.00
3
26.00
20.00
23.34
10.00
4
23.00
14.00
21.00
14.00
5
20.00
8.00
20.00
16.00
6
17.00
2.00
19.50
17.00
7
14.00
−4.00
19.28
18.00
8
11.00
−10.00
18.68
18.50
9
8.00
−16.00
18.72
19.00
(a) What is the level of price, output, and amount of profit for an unregulated monopolist?
(b) Using the data in the table, what are the price, output, and profit for a regulated monopolist that sets
price equal to marginal cost compared with an unregulated monopolist?
(c) Using the data in the table, what are the price, output, and profit for a regulated monopolist that
charges a “fair-return” price compared with an unregulated monopolist?
(d) Analyze the effect of regulation on the allocation of resources. Which situation is most efficient?
Which situation is most likely to be chosen by government? Why?
12-276
40. In the table below are cost and demand data for a pure monopolist.
Quantity
demanded
Price
Marginal
revenue
Average
cost
Marginal
cost
0
$105.00
1
96.00
$ 96.00
$144.00
$144.00
2
87.00
78.00
90.00
36.00
3
78.00
60.00
70.34
30.00
4
69.00
42.00
63.00
42.00
5
60.00
24.00
60.00
48.00
6
51.00
6.00
58.50
51.00
7
42.00
−12.00
57.86
54.00
8
33.00
−30.00
57.50
55.50
9
24.00
−48.00
57.33
56.00
(a) What is the level of price, output, and amount of profit for an unregulated monopolist?
(b) Using the data in the table, what are the price, output, and profit for a regulated monopolist that sets
price equal to marginal cost compared with an unregulated monopolist?
(c) Using the data in the table, what are the price, output, and profit for a regulated monopolist that
charges a “fair-return” price compared with an unregulated monopolist?
(d) Analyze the effect of regulation on the allocation of resources. Which situation is most efficient?
Which situation is most likely to be chosen by government? Why?
41. Draw a graph that illustrates the dilemma of regulation for a natural monopoly. On the graph, show the:
42. (Last Word) Discuss how the vast amount of information available on the internet allows for companies to
collect all consumer surplus for themselves.
43. (Last Word) What is online price discrimination companies use? Can it be overcome?
