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5. Monopoly outcome versus com petition outcome Consider the daily market for hot dogs in a small city. Suppose that this market is in longrun competitive equilibrium with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power. The following graph shows the demand (D) and supply (5 = MC) curves in the market for hot dogs. Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from competition. (23 Competitive Market PC Outcome PRICE (Dollars per hot dog) 0 20 40 60 80 100 120 140 160 180 200 QUANTITY (Hot dogs) Assume that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't affect demand and that the new monopoly's marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm. Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. Monopoly 5.0 + 4.5 Monopoly Outcome 4.0 3.5 3.0 Deadweight Loss 2.5 PRICE (Dollars per hot dog) 2.0 MC 1.5 1.0 05 MR D 0 0 20 40 60 80 120 140 160 180 200 QUANTITY (Hot dogs)Consider the welfare effects when the industry operates under a competitive market versus a monopoly. 0n the monopoly graph, use the black points (plus symbol) to shade the area that represents the loss of welfare, or deadweight loss, caused by a monopoly. That is, show the area that was formerly part of total surplus and now does not accrue to anybody. Deadweight loss occurs when a monopoly controls a market because the resulting equilibrium is different from the competitive outcome, which is efficient. In the following table, enter the price and quantity that would arise in a competitive market; then enter the prot-maximizing price and quantity that would be chosen if a monopolist controlled this market. Price Quantity Market Structure (Dollars) (Hot dogs) competitive Monopoly competitive market Given the summary table of the two different market structures, you can infer that, in general, the price is higher under a V and the quantity is higher under a v . Consider the welfare effects when the industry operates under a competitive market versus a monopoly. 0n the monopoly graph, use the black points (plus symbol) to shade the area that represents the loss of welfare, or deadweight loss, caused by a monopoly. That is, show the area that was formerly part of total surplus and now does not accrue to anybody. Deadweight loss occurs when a monopoly controls a market because the resulting equilibrium is different from the competitive outcome, which is efficient. In the following table, enter the price and quantity that would arise in a competitive market; then enter the prot-maximizing price and quantity that would be chosen if a monopolist controlled this market. Price Quantity Market Structure (Dollars) (Hot dogs) Competitive - competitive market and the quantity is higher under a v . Monopoly Given the summary table of the t ctures, you can infer that, in general, the price is higher under a V 7. Price discrimination and welfare Suppose Barefeet is a monopolist that produces and sells Ooh boots, an amazingly trendy brand with no close substitutes. The following graph shows the market demand and marginal revenue (MR) curves Bareieet faces, as well as its marginal cost (MC), which is constant at $20 per pair of Ooh boots. For simplicity, assume that xed costs are equal to zero; this, combined with the fact that Barefeet's marginal cost is constant, means that its marginal cost curve is also equal to the average total cost (ATC) curve. First, suppose that Bareieet cannot price discriminate. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer's willingness and ability to pay. 0n the following graph, use the black point (plus symbol) to indicate the prot-maximizing price and quantity. Next, use the purple points (diamond symbol) to shade the prot, the green points (triangle symbol) to shade the consumer surplus, and the black points (plus symbol) to shade the deadweight loss in this market without price discrimination. (Note: If you decide that consumer surplus, prot, or deadweight loss equals zero, indicate this by leaving that element in its original position on the palette.) 100 - "I- 90 I Monopoly Outcome A 80 .o A J: 70 0 '5 60 ConsumerSurpIus "5 ~ .. I m D. In E 40 Prot 0 9 30 w I 9 E 20 . Deadwelght Loss 10 MR D O i i i i : \"wand'l 0 20 40 60 80 100 120 140 160 180 200 QUANTITY (Pairs of Ooh boots) Now, suppose that Barefeet can practice perfect price discriminationthat is, it knows each consumer's willingness to pay for each pair of Ooh boots and is able to charge each consumer that amount. 0n the following graph, use the black paint (plus symbol) to indicate the profit-maximizing quantity sold and the lowest price at which the rm sells its boats. Next, use the purple points (diamond symbol) to shade the prot, the green points (triangle symbol) to shade the consumer surplus, and the black points (plus symbol) to shade the deadweight loss in this market with perfect price discrimination. (Note: If you decide that consumer surplus, prot, or deadweight loss equals zero, indicate this by leaving that element in its original position on the palette.) 100 "I- 90 I Monopoly Outcome 3; 80 '5 B I J: 70 8 "6 50 Prot \"i ._ 50 A a: Q. E L.\" 40 ConsumerSurplus 9'1 w 3 I 9 E 20 . Deadwelght Loss 10 Demand: 0 0 20 40 60 80 100 120 140 160 180 200 QUANTITY (Pairs of Ooh boots) Consider the welfare effects when the industry operates under a monopoly and cannot price discriminate versus when it can price discriminate. Complete the following table by indicating under which market conditions each of the statements is true. (Note: If the statement isn't true for either single-price monopolies or perfect price discrimination, leave the entire row unchecked.) Check all that apply. Statement Single-price Monopoly Perfect Price Discrimination Barefeet produces a quantity less than the efficient quantity of Ooh boots. C] C] There is deadweight loss associated with the profitmaximizing output. C] C] Total surplus is maximized. C] C] 8. Natural monopoly analysis The following graph shows the demand (D) for electricity services in the imaginary town of Utilityburg. The graph also shows the marginal revenue (MR) curve, the marginal cost (MC) curve, and the average total cost (ATC) curve for the local electricity company, a natural monopolist. 0n the following graph, use the black point (plus symbol) to indicate the prot-maximizing price and quantity for this natural monopolist. 40 32 __ Monopoly Outcome 24 -- 20 16 -- PRICE (Cents per Kilowatl-hour) o 1 2 3 4 5 6 7 8 9 10 QUANTITY (Thousands of kilowatt-hours) Which of the following statements are true about this natural monopoly? Check all that apply. C] The electricity company is experiencing diseconomies of scale. C] The electricity company is experiencing economies of scale. [:1 In order for a monopoly to exist in this case, the government must have intervened and created it. [:1 It is more efcient on the cost side for one producer to exist in this market rather than a large number of producers. True or False: Without government regulation, natural monopolies can earn positive profit in the short run. 0 True 0 False