Chapter 15/Monopoly ❖ 257
5. Policymakers can respond to the inefficiencies caused by monopolies in one of four ways: (1)
Chapter Quick Quiz
1. d
Questions for Review
1. Government-created monopoly comes from the existence of patent and copyright laws. Both
allow firms or individuals to be monopolies for extended periods of time—20 years for
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
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
258 ❖ Chapter 15/Monopoly
Figure 1
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
7. The government has the power to regulate mergers between firms because of antitrust laws.
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
Chapter 15/Monopoly ❖ 259
Problems and Applications
1. The following table shows revenue, costs, and profits:
Price
Quantity
Total
Revenue
Marginal
Revenue
Total Cost
Profit
$100
0
$0
—-
$2,000,000
$-2,000,000
90
100,000
9,000,000
$90
3,000,000
6,000,000
80
200,000
70
4,000,000
12,000,000
70
300,000
50
5,000,000
16,000,000
60
400,000
30
6,000,000
18,000,000
50
500,000
10
7,000,000
18,000,000
40
600,000
-10
8,000,000
16,000,000
30
700,000
-30
9,000,000
12,000,000
20
800,000
-50
10,000,000
10
900,000
-70
11,000,000
-2,000,000
-90
12,000,000
a. A profit-maximizing publisher would choose a quantity of 400,000 at a price of $60 or a
d. The area of deadweight loss is marked “DWL” in the figure. Deadweight loss means that
260 ❖ Chapter 15/Monopoly
e. If the author were paid $3 million instead of $2 million, the publisher would not change
b. Figure 4 illustrates the new situation when the supermarkets merge. Quantity declines
3. a. The following table shows total revenue and marginal revenue for each price and
quantity sold:
Price
Quantity
Total
Total
Profit
b. Profits are maximized at a quantity where MR=MC. The quantity at which MC is closest
Chapter 15/Monopoly ❖ 261
c. As Johnny’s agent, you should recommend that he demand $550,000 from them, so he
4. a. The table below shows total revenue and marginal revenue for the bridge. The profit-
Price
Quantity
Total Revenue
Marginal
c. If the government were to build the bridge, it should set price equal to marginal cost to
be efficient. Since marginal cost is zero, the government should not charge people to use
5. a. A monopolist always produces a quantity at which demand is elastic. If the firm produced
262 ❖ Chapter 15/Monopoly
b. As Figure 6 shows, another way to see this is to note that on an inelastic portion of the
demand curve, marginal revenue is negative. Increasing quantity requires a greater
percentage reduction in price, so revenue declines. Because a firm maximizes profit
6. a. The profit-maximizing outcome is the same as maximizing total revenue in this case
because there are no variable costs. The total revenue from selling to each type of
consumer is shown in the following tables:
Price
Quantity of Adult
Total Revenue from Sale
Chapter 15/Monopoly ❖ 263
Price
Quantity of Child
Tickets
Total Revenue from Sale
of Child Tickets
b. If price discrimination were not allowed, you would want to set a price of $7 for the
7. a. The museum’s average-total-cost curve and marginal-cost curve are shown in Figure 7
below. Because all of the cost is fixed, the average-total-cost curve is downward-sloping
264 ❖ Chapter 15/Monopoly
c. If the museum finances itself by charging an admission fee, the lowest price the museum
can charge without incurring a loss is $4, as shown in the following table.
Price
Number of Visits
per Person
Museum Profit
𝜋 = (𝑃 × 𝑄)−𝑇𝐶
e. The real world considerations that might favor an admission fee include the
8 a. Figure 8 below illustrates the demand, marginal revenue, and marginal cost curves.
Figure 8
Assuming Mr. Potter profit-maximizes, he sets MR=MC and solves for the profit
maximizing quantity. Then he substitutes the profit-maximizing quantity into the demand
curve:
Price
$70
MC
Chapter 15/Monopoly ❖ 265
c. Uncle Billy is incorrect. Price ceilings cause shortages when the ceiling price is lower than
d. If the ceiling is set 50% below the profit-maximizing price, at $25, the quantity
9. a. The monopolist would set marginal revenue equal to marginal cost and then substitute
the profit-maximizing quantity into the demand curve to find the price:
b. The firm becomes a price taker at a price of $6 and no longer has monopoly power. In a
competitive equilibrium, the price equals marginal cost so,
266 ❖ Chapter 15/Monopoly
c. The price actually falls even though Wiknam will now export soccer balls. Once trade
d. Yes. The country would still export balls at a world price of $7. The firm is a price taker
10. a. Figure 10 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 ❖ 267
Figure 10
b. Social welfare is maximized where price is equal to marginal cost:
268 ❖ Chapter 15/Monopoly
11. Larry wants to sell as many drinks as possible without losing money, so he wants to set
quantity where price (demand) equals average total cost, which occurs at quantity
Q
L and
Figure 11
12. a. Figure 12 shows the cost, demand, and marginal-revenue curves for the monopolist.
Without price discrimination, the monopolist would charge price
PM
and produce quantity
QM
.
Chapter 15/Monopoly ❖ 269