Chapter 15/Monopoly ❖ 275
students and higher prices to wealthy students; and (5) quantity discounts, which offer lower
prices for higher quantities, capturing more of a buyer’s willingness to pay. Many other
examples are possible.
5. Policymakers can respond to the inefficiencies caused by monopolies in one of four ways:
(1) by trying to make monopolized industries more competitive; (2) by regulating the
behavior of the monopolies; (3) by turning some private monopolies into public enterprises;
or (4) by doing nothing at all. Antitrust laws prohibit mergers of large companies and
Questions for Review
1. Government-created monopoly comes from the existence of patent and copyright laws. Both
2. An industry is a natural monopoly when a single firm can supply a good or service to an
3. A monopolist’s marginal revenue is less than the price of its product because its demand
curve is the market demand curve. Thus, to increase the amount sold, the monopolist must
lower the price of its good for every unit it sells. This cut in price reduces the revenue on the
units it was already selling.
4. Figure 1 shows the demand, marginal-revenue, average-total-cost, and marginal-cost curves
for a monopolist. The intersection of the marginal-revenue and marginal-cost curves
276 ❖ Chapter 15/Monopoly
5. The level of output that maximizes total surplus in Figure 1 is where the demand curve
intersects the marginal-cost curve,
Q
c. The deadweight loss from monopoly is the triangular
6. One example of price discrimination is in publishing books. Publishers charge a much higher
price for hardback books than for paperback books—far higher than the difference in
production costs. Publishers do this because die-hard fans will pay more for a hardback book
when the book is first released. Those who don‘t value the book as highly will wait for the
paperback version to come out. The publisher makes a greater profit this way than if it
charged just one price.
7. The government has the power to regulate mergers between firms because of antitrust laws.
Firms might want to merge to increase operating efficiency and reduce costs, something that
is good for society, or to gain market power, which is bad for society.
8. When regulators tell a natural monopoly that it must set price equal to marginal cost, two
problems arise. The first is that, because a natural monopoly has a marginal cost that is
always less than average total cost, setting price equal to marginal cost means that the price
Chapter 15/Monopoly ❖ 277
Problems and Applications
1. The following table shows revenue, costs, and profits, where quantities are in thousands, and
total revenue, total cost, and profit are in millions of dollars:
Price
Quantity
(1,000s)
Total
Revenue
Marginal
Revenue
Total
Cost
Profit
$100
0
$0
—-
$2
$-2
90
100
9
$9
3
6
80
200
16
7
4
12
a. A profit-maximizing publisher would choose a quantity of 400,000 at a price of $60 or a
quantity of 500,000 at a price of $50; both combinations would lead to profits of $18
million.
c. Figure 2 shows the marginal-revenue, marginal-cost, and demand curves. The marginal–
revenue and marginal-cost curves cross between quantities of 400,000 and 500,000. This
signifies that the firm maximizes profits in that region.
70
300
21
5
5
16
60
400
24
3
6
18
50
500
25
1
7
18
40
600
24
-1
8
16
30
700
21
-3
9
12
20
800
16
-5
10
10
900
-7
11
-2
-9
12
278 ❖ Chapter 15/Monopoly
d. The area of deadweight loss is marked “DWL” in the figure. Deadweight loss means that
the total surplus in the economy is less than it would be if the market were competitive,
because the monopolist produces less than the socially efficient level of output.
3. a. Figure 3 illustrates the market for groceries when there are many competing
supermarkets with constant marginal cost. Output is
Q
C, price is
P
C, consumer surplus is
area A, producer surplus is zero, and total surplus is area A.
Figure 3 Figure 4
b. Figure 4 illustrates the new situation when the supermarkets merge. Quantity declines
from
QC
to
QM
and price rises to
PM
. Consumer surplus falls by areas D + E + F to areas
3. a. The following table shows total revenue and marginal revenue for each price and
quantity sold:
Price
Quantity
Total
Revenue
Marginal
Revenue
Total
Cost
Profit
24
10,000
$240,000
—-
$50,000
$190,000
22
20,000
440,000
$20
100,000
340,000
20
30,000
600,000
150,000
450,000
18
40,000
720,000
200,000
520,000
16
50,000
800,000
250,000
550,000
14
60,000
840,000
300,000
540,000
Chapter 15/Monopoly ❖ 279
b. Profits are maximized at a price of $16 and quantity of 50,000. At that point, profit is
$550,000.
4. a. The table below shows total revenue and marginal revenue for the bridge. The profit–
maximizing price would be where revenue is maximized, which will occur where marginal
revenue equals zero, because marginal cost equals zero. This occurs at a price of $4 and
b. The company should not build the bridge because its profits are negative. The most
revenue it can earn is $1,600,000 and the cost is $2,000,000, so it would lose $400,000.
d. Yes, the government should build the bridge, because it would increase society’s total
surplus. As shown in Figure 5, total surplus has area ½ × 8 × 800,000 = $3,200,000,
which exceeds the cost of building the bridge.
280 ❖ Chapter 15/Monopoly
price
P
L in Figure 6. Curly wants to bring in as much revenue as possible, which occurs where
marginal revenue equals zero, at quantity
QC
and price
PC
. Moe wants to maximize profits,
which occurs where marginal cost equals marginal revenue, at quantity
QM
and price
PM
.
6. a. Figure 7 shows the firm’s average-total-cost curve and marginal-cost curve. Because
average total cost falls continuously as output rises, this firm is a natural monopoly.
Chapter 15/Monopoly ❖ 281
b. If price is equal to $0, each person would visit the museum 10 times (= 10 – 0). Figure 8
shows the value (consumer surplus) the resident would get. Consumer surplus is equal to
½ 10 $10 = $50 minus the tax ($24) = $26.
c. The table below shows the total revenue and profit for the town at various prices:
Price
Qd per resident
Total Revenue
Profit
$2
8
1,600,000
800,000
3
7
2,100,000
300,000
4
6
2,400,000
0
5
5
2,500,000
100,000
d. At a price of $4, each consumer would earn consumer surplus equal to ½ 6 6 = $18.
(See Figure 9.) Consumers would be worse off. The town would gain revenue of $24 per
person, but it would not offset the drop in consumer surplus. Therefore, there would be
a deadweight loss.
282 ❖ Chapter 15/Monopoly
e. In the real world, it is unlikely that all residents have the same demand. Thus, an
admission price would push more of the cost on those who would use the museum.
7. a. Long-distance phone service was originally a natural monopoly because the installation of
phone lines across the country meant that one firm’s costs were much lower than if two
or more firms did the same thing.
8. a. A monopolist always produces a quantity at which demand is elastic. If the firm produced
a quantity for which demand was inelastic, then if the firm raised its price, quantity
would fall by a smaller percentage than the rise in price, so revenue would increase.
Because costs would decrease at a lower quantity, the firm would have higher revenue
and lower costs, so profit would be higher. Thus the firm should keep raising its price
until profits are maximized, which must happen on an elastic portion of the demand
curve.
c. Total revenue is maximized where marginal revenue is equal to zero (
QTR
on Figure 10).
9. Because the socially optimal output level is greater than the monopoly output level, the
government should use a subsidy to encourage the monopoly to increase production. The
Chapter 15/Monopoly ❖ 283
10. a. The marginal revenue from selling to each type of consumer is shown in the following
tables:
Price
Quantity of Adult
Tickets
Total Revenue from Sale
of Adult Tickets
Marginal Revenue from
Sale of Adult Tickets
10
0
0
—-
9
9
8
7
7
5
6
5
4
3
2
1
0
0
Price
Quantity of Child
Tickets
Total Revenue from Sale
of Child Tickets
Marginal Revenue from
Sale of Child Tickets
10
0
0
—-
9
0
0
0
8
0
0
0
7
0
0
0
5
5
4
3
3
2
1
0
0
To maximize profit, you should charge adults $7 and sell 300 tickets. You should charge
children $4 and sell 200 tickets. Total revenue will be $2,100 + $800 = $2,900. Because
total cost is $2,000, profit will be $900.
b. If price discrimination were not allowed, you would want to set a price of $7 for the
tickets. You would sell 300 tickets and profit would be $100.
c. The children who were willing to pay $4 but will not see the show now that the price is
284 ❖ Chapter 15/Monopoly
11 a. The monopolist would set marginal revenue equal to marginal cost and then plug the
profit-maximizing quantity into the demand curve:
10 – 2
Q
= 1 +
Q
9 = 3
Q
b. The firm becomes a price taker at a price of $6 and no longer has monopoly power. The
firm will export soccer balls because the world price is greater than the domestic price (in
the absence of monopoly power). As Figure 11 shows, domestic production will rise to 5
soccer balls, domestic consumption will rise to 4, and exports will be 1.
c. The price actually falls even though Wickham will now export soccer balls. Once trade
begins, the firm no longer has monopoly power and must become a price taker.
However, the world price of $6 is greater than the competitive equilibrium price ($5.50)
so the country exports soccer balls.
12. a. Figure 12 shows the firm’s demand, marginal revenue, and marginal cost curves. The
firm’s profit is maximized at the output where marginal revenue is equal to marginal cost.
Therefore, setting the two equations equal, we get:
Chapter 15/Monopoly ❖ 285
The monopoly price is
P
= 1,000 – 10
Q
= 700 Ectenian dollars.
b. Social welfare is maximized where price is equal to marginal cost:
1,000 – 10
Q
= 100 + 10
Q
900 = 20
Q
Q
= 45
At an output level of 45, the price would be 550 Ectenian dollars.
c. The deadweight loss would be equal to (0.5)(15)(300 cents) = 2,250 Ectenian dollars.
d. i. A flat fee of $20 would not alter the profit-maximizing price or quantity. The
deadweight loss would be unaffected.
ii. A fee of 50 percent of the profits would not alter the profit-maximizing price or
quantity. The deadweight loss would be unaffected.
286 ❖ Chapter 15/Monopoly
13. a. Figure 13 shows the cost, demand, and marginal-revenue curves for the monopolist.
Without price discrimination, the monopolist would charge price
PM
and produce quantity
QM
.
Figure 13
b. The monopolist’s profit consists of the two areas labeled X, consumer surplus is the two
areas labeled Y, and the deadweight loss is the area labeled Z.
c. If the monopolist can perfectly price discriminate, it produces quantity
QC
, and has profit
equal to X + Y + Z.
e. A monopolist would pay the fixed cost that allows it to discriminate as long as Y + Z (the
increase in profits) exceeds C (the fixed cost).
f. A benevolent social planner who cared about maximizing total surplus would want the
monopolist to price discriminate only if Z (the deadweight loss from monopoly) exceeded
C (the fixed cost) because total surplus rises by Z – C.