14.2 What output level would be produced by this industry under perfect competition (where price = marginal cost)?

Calculate the consumer surplus obtained by consumers in case (b). Show that this exceeds the sum of the monopolist’s proits and the consumer surplus received in case (a). What is the value of the ‘deadweight loss’ from monopolisation?

A single firm monopolises the entire market for widgets and can produce at constant average and marginal costs of €10.

Originally, the firm faces a market demand curve given by Q = 60 − P.

a.

Calculate the proit-maximising price and quantity for the monopoly. What are the irm’s proits?

b.

c.

If the demand curve shifts to Q = 45 − 0.5P determine the new equilibrium. Calculate the irm’s proits.

Graph the different situations of parts

(a) and (b).

Explain why there is no real supply curve for a monopoly.

loss in consumer supply represents a deadweight loss of overall economic welfare.

● Monopolists may opt for different levels of quality than would perfectly competitive irms. Durable goods monopolists may be constrained by markets for used goods.

● A monopoly may be able to increase its proits further through price discrimination – that is, charging different prices to different categories of buyers. The ability of the monopoly to practice price discrimination depends on its ability to prevent arbitrage among buyers.

● Governments often choose to regulate natural monopolies

(irms with diminishing average costs over a broad range of output levels). The type of regulatory mechanisms adopted can affect the behaviour of the regulated irm.