Chapter 12 – Pure Monopoly
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Chapter 12 – Pure Monopoly
McConnell Brue Flynn 21e
DISCUSSION QUESTIONS
1. “No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is
so, then pure monopoly does not exist.” Do you agree? Explain. How might you use Chapter 6’s
concept of cross elasticity of demand to judge whether a monopoly exists? LO1
2. Discuss the major barriers to entry into an industry. Explain how each barrier can foster either
monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially
justifiable? LO2
Chapter 12 – Pure Monopoly
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Patents and licenses are legal barriers to entry that also, to some extent, are justifiable. If
inventions were not protected at all from immediate copying by those who bore none of
the costs, the urge to invent and innovate would be lessened and the costly secrecy that is
enforced already would have to be much greater and more costly. However, this does not
mean that abuses do not exist in the present system and a case can be made for reducing
the present seventeen years for which patents are granted.
Ownership of essential raw materials is another barrier to entry. It has little social
justification except to the extent that the hope of gaining a monopoly in the supply of an
essential raw material leads to more prospecting. The Last Word on De Beers is an
example.
Unfair competition is the last of the barriers and has no social justification at all, which is
why price-cutting to bankrupt a rival is illegal. The problem here, though, is to prove that
cutthroat competition truly is what it appears to be.
3. How does the demand curve faced by a purely monopolistic seller differ from that confronting
a purely competitive firm? Why does it differ? Of what significance is the difference? Why is the
pure monopolist’s demand curve not perfectly inelastic? LO3
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4. Assume that a pure monopolist and a purely competitive firm have the same unit costs.
Contrast the two with respect to (a) price, (b) output, (c) profits, (d) allocation of resources, and
(e) impact on income transfers. Since both monopolists and competitive firms follow the MC =
MR rule in maximizing profits, how do you account for the different results? Why might the costs
of a purely competitive firm and those of a monopolist be different? What are the implications of
such a cost difference? LO5
Chapter 12 – Pure Monopoly
5. Critically evaluate and explain each statement: LO5
a. Because they can control product price, monopolists are always assured of profitable
production by simply charging the highest price consumers will pay.
b. The pure monopolist seeks the output that will yield the greatest per-unit profit.
c. An excess of price over marginal cost is the market’s way of signaling the need for more
production of a good.
d. The more profitable a firm, the greater its monopoly power.
e. The monopolist has a pricing policy; the competitive producer does not.
f. With respect to resource allocation, the interests of the seller and of society coincide in a purely
competitive market but conflict in a monopolized market.
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6. Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue
from the sales of a text. Will the author and the publisher want to charge the same price for the
text? Explain. LO5
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7. U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in
different nations, depending on elasticity of demand and government-imposed price ceilings.
Explain why these companies, for profit reasons, oppose laws allowing reimportation of drugs to
the United States. LO6
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8. Explain verbally and graphically how price (rate) regulation may improve the performance of
monopolies. In your answer distinguish between (a) socially optimal (marginal-cost) pricing and
(b) fair-return (average-total–cost) pricing. What is the “dilemma of regulation”? LO7
9. It has been proposed that natural monopolists should be allowed to determine their profit–
maximizing outputs and prices and then government should tax their profits away and distribute
them to consumers in proportion to their purchases from the monopoly. Is this proposal as
socially desirable as requiring monopolists to equate price with marginal cost or average total
cost? LO7
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10. LAST WORD Using Big Data to set personalized prices cannot be done with 100 percent
precision. What would happen if personalized prices were set higher than customers’ reservation
prices? Would this possibility reduce the incentive to set the highest possible personalized
prices? How can consumers protect themselves from personalized prices?
Answer: If personalized prices are set higher than a customer’s reservation price, two
things could happen. If the company is truly a monopoly, the customer may not purchase
REVIEW QUESTIONS
1. Which of the following could explain why a firm is a monopoly? Select one or more answers
from the choices shown. LO2
a. Patents
b. Economies of scale.
c. Inelastic demand.
d. Government licenses.
e. Downsloping market demand.
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2. The MR curve of perfectly competitive firm is horizontal. The MR curve of monopoly firm is:
LO3
a. Horizontal, too.
b. Upsloping.
c. Downsloping.
d. It depends.
3. Use the demand schedule below to calculate total revenue and marginal revenue at each
quantity. Plot the demand, total-revenue, and marginal-revenue curves, and explain the
relationships between them. Explain why the marginal revenue of the fourth unit of output is
$3.50, even though its price is $5. Use Chapter 6’s total-revenue test for price elasticity to
designate the elastic and inelastic segments of your graphed demand curve. What generalization
can you make as to the relationship between marginal revenue and elasticity of demand? Suppose
the marginal cost of successive units of output was zero. What output would the profit-seeking
firm produce? Finally, use your analysis to explain why a monopolist would never produce in the
inelastic region of demand. LO3
Chapter 12 – Pure Monopoly
Answer: To calculate Total Revenue multiply price (P) by Quantity Demanded (Q): TR
= P x Q.
To calculate Marginal Revenue find the change in total revenue for each unit demanded:
MR = Δ TR = TR (i+1) – TR(i).
See table below.
Price (P)
Quantity
Demanded
(Q)
Total
Revenue
(TR)
Marginal
Revenue
(MR)
$7.00
0
$0
NA
6.50
1
6.50
$6.50
6.00
2
12.00
5.50
5.50
3
16.50
4.50
5.00
4
20.00
3.50
4.50
5
22.50
2.50
4.00
6
24.00
1.50
3.50
7
24.50
0.50
3.00
8
24.00
-0.50
2.50
9
22.50
-1.50
Because TR is increasing at a diminishing rate, MR is declining. When TR turns
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4. How often do perfectly competitive firms engage in price discrimination? LO6
a. Never.
b. Rarely.
c. Often.
d. Always.
5. Suppose that a monopolist can segregate his buyers into two different groups to which he can
charge two different prices. In order to maximize profit, the monopolist should charge a higher
price to the group that has: LO6
a. The higher elasticity of demand.
b. The lower elasticity of demand.
c. Richer members.
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6. The socially optimal price (P = MC) is socially optimal because: LO7
a. It reduces the monopolist’s profit.
b. It yields a normal profit.
c. It minimizes ATC.
d. It achieves allocative efficiency.
7. The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the
socially optimal price: LO7
a. May be so low that the regulated monopoly can’t break even.
b. May cause the regulated monopoly to engage in price discrimination.
c. May be higher than the monopoly price.