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Section 9: Monopoly
Question 1
1. Each of the following firms possesses market power. Explain its source.
a. Merck, the producer of the patented cholesterol-lowering drug Zetia
b. WaterWorks, a provider of piped water
c. Chiquita, a supplier of bananas and owner of most banana plantations
d. The Walt Disney Company, the creators of Mickey Mouse
Solution 1
Question 2
2. Bob, Bill, Ben, and Brad Baxter have just made a documentary movie about their basketball
team. They are thinking about making the movie available for download on the internet, and
they can act as a single-price monopolist if they choose to. Each time the movie is
downloaded, their internet service provider charges them a fee of $4. The Baxter brothers are
arguing about which price to charge customers per download. The accompanying table shows
the demand schedule for their film.
Price of
download
Quantity of downloads
demanded
$10
0
Price of
download
Quantity of downloads
demanded
8
1
6
3
4
6
2
10
0
15
a. Calculate the total revenue and the marginal revenue per download.
b. Bob is proud of the film and wants as many people as possible to download it. Which price
would he choose? How many downloads would be sold?
c. Bill wants as much total revenue as possible. Which price would he choose? How many
downloads would be sold?
d. Ben wants to maximize profit. Which price would he choose? How many downloads would
be sold?
e. Brad wants to charge the efficient price. Which price would he choose? How many
downloads would be sold?
Solution 2
Question 3
3. Mateo’s room overlooks, from some distance, a major league baseball stadium. He decides to
rent a telescope for $50.00 a week and charge his friends and classmates to use it to peep at
the game for 30 seconds. He can act as a single-price monopolist for renting out “peeps.” For
each person who takes a 30-second peep, it costs Mateo $0.20 to clean the eyepiece. The
accompanying table shows the information Mateo has gathered about the demand for the
service in a given week.
Price of peep
Quantity of peeps
demanded
$1.20
0
1.00
100
0.90
150
0.80
200
0.70
250
0.60
300
0.50
350
0.40
400
0.30
450
0.20
500
0.10
550
a. For each price in the table, calculate the total revenue from selling peeps and the marginal
revenue per peep.
b. At what quantity will Mateo’s profit be maximized? What price will he charge? What will
his total profit be?
c. Mateo’s landlady complains about all the visitors coming into the building and tells him to
stop selling peeps. But, if he pays her $0.20 for every peep he sells, she won’t complain.
What effect does the $0.20-per-peep bribe have on Mateo’s marginal cost per peep? What
is the new profit-maximizing quantity of peeps? What effect does the $0.20-per-peep bribe
have on Mateo’s total profit?
Solution 3
3. a. Total revenue (TR) and marginal revenue (MR) are given in the accompanying table.
Question 4
4. Suppose that De Beers is a single-price monopolist in the market for diamonds. De Beers has
five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will
buy at most one diamond—and only if the price is just equal to, or lower than, her willingness
to pay. Raquel’s willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s, $100; and
Sophia’s, $0. De Beers’s marginal cost per diamond is $100. This leads to the demand
schedule for diamonds shown in the accompanying table.
Price of
diamond
Quantity of diamonds
demanded
$500
0
400
1
300
2
200
3
100
4
0
5
a. Calculate De Beers’s total revenue and its marginal revenue. From your calculation, draw
the demand curve and the marginal revenue curve.
b. Explain why De Beers faces a downward-sloping demand curve and why the marginal
revenue from an additional diamond sale is less than the price of the diamond.
c. Suppose De Beers currently charges $200 for its diamonds. If it lowers the price to $100,
how large is the price effect? How large is the quantity effect?
d. Add the marginal cost curve to your diagram from part a and determine which quantity
maximizes De Beers’s profit and which price De Beers will charge.
Solution 4
4. a. Total revenue (TR) and marginal revenue (MR) are given in the accompanying table.
Question 5
5. Use the demand schedule for diamonds given in Problem 4. The marginal cost of producing
diamonds is constant at $100. There is no fixed cost.
a. If De Beers charges the monopoly price, how large is the individual consumer surplus that
each buyer experiences? Calculate total consumer surplus by summing the individual
consumer surpluses. How large is producer surplus?
Suppose that upstart Russian and Asian producers enter the market and it becomes perfectly
competitive.
b. What is the perfectly competitive price? What quantity will be sold in this perfectly
competitive market?
c. At the competitive price and quantity, how large is the consumer surplus that each buyer
experiences? How large is total consumer surplus? How large is producer surplus?
d. Compare your answer to part c to your answer to part a. How large is the deadweight loss
associated with monopoly in this case?
Solution 5
Question 6
6. Use the demand schedule for diamonds given in Problem 4. De Beers is a monopolist, but it
can now price-discriminate perfectly among all five of its potential customers. De Beers’s
marginal cost is constant at $100. There is no fixed cost.
a. If De Beers can price-discriminate perfectly, to which customers will it sell diamonds and
at what prices?
b. How large is each individual consumer surplus? How large is total consumer surplus?
Calculate producer surplus by summing the producer surplus generated by each sale.
Solution 6
Question 7
7. Download Records decides to release an album by the group Mary and the Little Lamb. It
produces the album with no fixed cost, but the total cost of creating a digital album and paying
Mary her royalty is $6 per album. Download Records can act as a single-price monopolist. Its
marketing division finds that the demand schedule for the album is as shown in the
accompanying table.
Price of album
Quantity of albums
demanded
$22
0
20
1,000
18
2,000
16
3,000
14
4,000
12
5,000
10
6,000
8
7,000
a. Calculate the total revenue and the marginal revenue per album.
b. The marginal cost of producing each album is constant at $6. To maximize profit, what
level of output should Download Records choose, and which price should it charge for each
album?
c. Mary renegotiates her contract and will be paid a higher royalty per album. So the marginal
cost rises to be constant at $14. To maximize profit, what level of output should Download
Records now choose, and which price should it charge for each album?
Solution 7
Question 8
8. This diagram illustrates your local electricity company’s natural monopoly. It shows the
demand curve for kilowatt-hours (kWh) of electricity, the company’s marginal revenue (MR)
curve, its marginal cost (MC) curve, and its average total cost (ATC) curve. The government
wants to regulate the monopolist by imposing a price ceiling.
a. If the government does not regulate this monopolist, which price will it charge? Illustrate
the inefficiency this creates by shading the deadweight loss from monopoly.
b. If the government imposes a price ceiling equal to the marginal cost, $0.30, will the
monopolist make profits or lose money? Shade the area of profit (or loss) for the
monopolist. If the government does impose this price ceiling, do you think the firm will
continue to produce in the long run?
c. If the government imposes a price ceiling of $0.50, will the monopolist make a profit, lose
money, or break even?
Solution 8
Question 9
9. The Collegetown movie theater serves 900 students and 100 professors in town. Each
student’s willingness to pay for a movie ticket is $5. Each professor’s willingness to pay for
a movie ticket is $10. Each will buy only one ticket. The movie theater’s marginal cost per
ticket is constant at $3, and there is no fixed cost.
a. Suppose the movie theater cannot price-discriminate and charges both students and
professors the same price per ticket. If the movie theater charges $5, who will buy tickets
and what will the movie theater’s profit be? How large is consumer surplus?
b. If the movie theater charges $10, who will buy movie tickets and what will the movie
theater’s profit be? How large is consumer surplus?
c. Now suppose that, if it chooses to, the movie theater can price-discriminate between
students and professors by requiring students to show their student ID. If the movie theater
charges students $5 and professors $10, how much profit will the movie theater make?
How large is consumer surplus?
Solution 9
Question 10
10. In the United States, the Federal Trade Commission (FTC) is charged with promoting
competition and challenging mergers that would likely lead to higher prices. Several years
ago, Staples and Office Depot, two of the largest office supply superstores, announced their
agreement to merge.
a. Some critics of the merger argued that, in many parts of the country, a merger between the
two companies would create a monopoly in the office supply superstore market. Based on
the FTC’s argument and its mission to challenge mergers that would likely lead to higher
prices, do you think it allowed the merger?
b. Staples and Office Depot argued that, while in some parts of the country they might create
a monopoly in the office supply superstore market, the FTC should consider the larger
market for all office supplies, which includes many smaller stores that sell office supplies
(such as grocery stores and other retailers). In that market, Staples and Office Depot would
face competition from many other, smaller stores. If the market for all office supplies is
the relevant market that the FTC should consider, would it make the FTC more or less
likely to allow the merger?
Solution 10
Question 11
11. Prior to the late 1990s, the same company that generated your electricity also distributed it to
you over high-voltage lines. Since then, 16 states and the District of Columbia have begun
separating the generation from the distribution of electricity, allowing competition between
electricity generators and between electricity distributors.
a. Assume that the market for electricity distribution was and remains a natural monopoly.
Use a graph to illustrate the market for electricity distribution if the government sets price
equal to average total cost.
b. Assume that deregulation of electricity generation creates a perfectly competitive market.
Also assume that electricity generation does not exhibit the characteristics of a natural
monopoly. Use a graph to illustrate the cost curves in the long-run equilibrium for an
individual firm in this industry.
Solution 11
Question 12
WORK IT OUT Interactive step-by-step help with solving this problem can be found
online.
12. Consider an industry with the demand curve (D) and marginal cost curve (MC) shown in the
accompanying diagram. There is no fixed cost. If the industry is a single-price monopoly, the
monopolist’s marginal revenue curve would be MR. Answer the following questions by
naming the appropriate points or areas.
a. If the industry is perfectly competitive, what will be the total quantity produced? At what
price?
b. Which area reflects consumer surplus under perfect competition?
c. If the industry is a single-price monopoly, what quantity will the monopolist produce?
Which price will it charge?
d. Which area reflects the single-price monopolist’s profit?
e. Which area reflects consumer surplus under single-price monopoly?
f. Which area reflects the deadweight loss to society from single-price monopoly?
g. If the monopolist can price-discriminate perfectly, what quantity will the perfectly price-
discriminating monopolist produce?
