Economics 111.3 Winter 14 March 31 st , 2014 Lecture 29 Ch. 13: Pure monopoly
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Economics 111.3 Winter 14
March 31st, 2014Lecture 29
Ch. 13: Pure monopoly
FINAL EXAM is based on chapters 3, 4, 5 (up to p. 116), 6 (up to p. 138), 8, 9, 10 (up to p. 230, 11, 12, 13, and 14Its format: 100 Multiple-Choice Questions When and Where: April 21, from 7:00 p.m. to 10:00 p.m; STM 140Extra Office Hours: April 19, from1:00 p.m. to 3:00 p.m.
Final Exam:
Monopoly Demand: a summary
1. Marginal revenue is less than price2. The monopolist is a price-maker3. The monopolist sets prices in the
elastic region of demand
Q P TR0 $172
1 162
2 152
3 142
4 132
5 122
6 112
7 102
8 92
9 82
10 72
Demand (AR) and MR: calculation
Q P TR0 $172 $ 0
1 162 162
2 152 304
3 142 426
4 132 528
5 122 610
6 112 672
7 102 714
8 92 736
9 82 738
10 72 720
MR
Q P TR0 $172 $ 0
1 162 162
2 152 304
3 142 426
4 132 528
5 122 610
6 112 672
7 102 714
8 92 736
9 82 738
10 72 720
MR
$162]
Q P TR0 $172 $ 0
1 162 162
2 152 304
3 142 426
4 132 528
5 122 610
6 112 672
7 102 714
8 92 736
9 82 738
10 72 720
MR
$162
142
122
102
82
62
42
22
2
-18
Notice that MR < pNotice that MR < p
]]]]]]]]]]
The Monopolist’s Price and Output Graphically
• To determine the profit-maximizing price and quantity: – one first finds output (where MC = MR), and then – extends a vertical line for that output, up
to the demand curve to find the price (Pm).
Q
D
MR
200
175
150
125
100
75
50
25 0 1 2 3 4 5 6 7 8 9 10
P
MCfind qfind q
MR = MCQ
D
MR
200
175
150
125
100
75
50
25 0 1 2 3 4 5 6 7 8 9 10
P
MC
$122= p
find pfind p
Q
D
MR
200
175
150
125
100
75
50
25 0 1 2 3 4 5 6 7 8 9 10
P
MCfind ATCfind ATC
Q
D
MR
200
175
150
125
100
75
50
25 0 1 2 3 4 5 6 7 8 9 10
P
ATC$122= p
MC
ATC$94=ATC
Q
D
MR
200
175
150
125
100
75
50
25 0 1 2 3 4 5 6 7 8 9 10
P
$122= p
MC
Profit
profit=(p - ATC) X q=(122-94) X 5=140
profit=(p - ATC) X q=(122-94) X 5=140
$94=ATC
Q
D
MR
200
175
150
125
100
75
50
25 0 1 2 3 4 5 6 7 8 9 10
P
ATC$122= p
MC
p
qMR D
q1
p1
q1 supplied at p1q1 supplied at p1
No Monopoly Supply Curve
MC
p
qq1
p1
p2
DMR
q1 supplied at p2 under different D
conditions
q1 supplied at p2 under different D
conditions
No Monopoly Supply Curve
MC
p
qq1
p1
p2
DMR
No Monopoly Supply Curve
A Monopolist Making a Profit
Price
ATC
MC
Quantity
PM
0MR D
QM
ProfitCM
A
B
A Monopolist Breaking Even
Price MC
Quantity
PM
0MR D
QM
ATC
A Monopolist Making a Loss
Price ATCMC
Quantity0MR D
QM
LossPM
CMB
A
Comparing Monopoly and Perfect Competition
• Profit-maximizing output for the monopolist, like profit maximizing output for the competitor in a perfectly competitive market is where MC = MR.
• Because the monopolist’s marginal revenue is below its price, its equilibrium output is less than, and price is higher than that of a perfectly competitive market.
Q
P
D
Pc
Qc
S = MC
Price & output if the industry
were competitive
Price & output if the industry
were competitive
p=MC=minimum ATCp=MC=minimum ATC
Comparing Monopoly and Perfect Competition
Q
P
DMR
Pc
Qc
Pm
Qm
Monopolistwill sell fewer
units at ahigher pricethan in purecompetition
Monopolistwill sell fewer
units at ahigher pricethan in purecompetition
S = MCComparing Monopoly and Perfect Competition
The Monopolist’s Price and Output Graphically
$3630241812
606
12
Price MC
1 2 3 4 5 6 7 8 9 10D
MR
Monopolist price and
output20.50
5.17
Perfectly competitive price and output
Q
P
D=MB
Pc
Qc
S = MC
consumersurplus
producersurplus
efficientoutput
efficientoutput
outcomes withpure competition
outcomes withpure competition
Q
P
D=MBMR
Pc
Qc
Pm
Qm
S = MC
consumersurplus
producersurplus
monopoly’s gain B
C
outcomes withpure monopoly
outcomes withpure monopoly
deadweightloss
deadweightloss
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