1. Sources of monopoly power A monopolist, unlike a competitive rm, has some market power. It can raise its price, within limits, without the quantity demanded falling to zero. The main way it retains its market power is through barriers to entrythat is, other companies cannot enter the market to create competition in that particular industry. Compiete the foiiowing tabie by indicating which barrier to entry apprqcv'iateiyr expiains why a monopoiy exists in each scenario. Barriers to Entry each geographic area. Exclusive Government- Ownership of a Created Economies Scenario Key Resource Monopolies of Scale In the electricity industry, low average total costs are obtained only through largescale production. In other words, the initial cost of setting up all the C' O O J necessary wiring makes it risky and, most likely, unprotable for competitors to enter the market. Throughout much of the twentieth century, many people viewed South Africa's De Beers group as a monopoly because it controlled a large percentage of O O O diamond production and sales. At the national level, the Canadian Radiotelevision and Telecommunications Commission licenses only a certain number of radio and television stations in C) O O The blue curve on the following graph represents the demand curve facing a firm that can set its own prices. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Graph Input Tool ? 100 Market for Goods 90 Quantity 25 Demanded 80 (Units) 70 Demand Price 50.00 (Dollars per unit) 60 50 PRICE (Dollars per unit) 40 30 Demand 20 10 0 5 10 15 20 25 30 35 40 45 5 QUANTITY (Units)On the previous graph, change the number found in the Quantity Demanded field to determine the prices that correspond to the production of 0, 10, 20, 25, 30, 40, or 50 units of output. Calculate the total revenue for each of these production levels. Then, on the following graph, use the green points (triangle symbol) to plot the results. 1250 1125 Total Revenue 1000 875 750 625 TOTAL REVENUE (Dollars) 500 375 250 125 5 10 15 20 25 30 35 40 45 50 QUANTITY (Number of units) Calculate the total revenue if the firm produces 10 versus 9 units. Then, calculate the marginal revenue of the 10th unit produced. The marginal revenue of the 10th unit produced is |$Calculate the total revenue if the firm produces 20 versus 19 units. Then, calculate the marginal revenue of the 20th unit produced. The marginal revenue of the 20th unit produced is |$ Based on your answers from the previous question, and assuming that the marginal-revenue curve is a straight line, use the black line (plus symbol) to plot the firm's marginal-revenue curve on the following graph. (Round all values to the nearest increment of 20.) 100 -+ 80 Marginal Revenue 60 MARGINAL REVENUE (Dollars) 40 20 0 20 5 10 15 20 25 30 35 40 45 50 QUANTITY (Units) Comparing your total-revenue graph to your marginal-revenue graph, you can see that when total revenue is increasing, marginal revenue isKenji's Fire Engines is the sole seller of re engines in the fictional country of Pyrotania. Initially, Kenji produced seven re engines, but he has decided to increase production to eight fire engines. The following graph shows the demand curve Kenji faces. As you can see, to sell the additional engine, Kenji must lower his price from $100,000 to $50,000 per fire engine. Note that while Kenji gains revenue from the additional engine he sells, he also loses revenue from the initial seven engines because he sells them all at the lower price. Use the purple rectangle (diamond symbols) to shade the area representing the revenue lost from the initial seven engines by selling at $50,000 rather than $100,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at $50,000. 250 - 225 + M g Revenue Lost '5, 200 + C 'D E 175 - c a u; 150 + Revenue Gained E E U 125 + "6 on Demand E 100 _ + {U (13 :5 2 is + L: a so + + E D. 25 + n ., l l l l l l l l l o 1 2 3 4 5 s 7 3 9 1o QUANTITY {Fire engines) Kenji V increase production from 7 to 8 re engines because the V dominates in this scenario. True or False: If Kenji's Fire Engines were a competitive rm instead and $100,000 were the market price for an engine, increasing its production would not affect the price at which he can sell engines. O Tme 0 False BYOB is a monopolist in beer production and distribution in the imaginary economy of Hopsville. Suppose that BYOB cannot price discriminate; that is, it sells its beer at the same price per can to all customers. The following graph shows the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) for beer in this market. Place the black point (plus symbol) on the graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing its loss. 4.00 3.50 Monopoly Outcome 3.00 2.50 ATC Profit 2.00 PRICE (Dollars per can) 1.50 LOSS 1.00 MC 0.50 MR 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 QUANTITY (Thousands of cans of beer)Suppose that BYOB charges $2.50 per can. Your friend Alex says that since BYOB is a monopoly with market power, it should charge a higher price of $3.00 per can because this will increase BYOB's profit. Complete the following table to determine whether Alex is correct. Price Quantity Demanded Total Revenue Total Cost Profit ( Dollars per can) (Cans) (Dollars) (Dollars) (Dollars) 2.50 3.00 Given the earlier information, Alex correct in his assertion that BYOB should charge $3.00 per can. Suppose that a technological innovation decreases BYOB's costs so that it now faces the marginal cost (MC) and average total cost (ATC) given on the following graph. Specifically, the technological innovation causes a decrease in average fixed costs, thereby lowering the ATC curve and moving the MC curve.Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing the loss. 4.00 - + 3.50 Monopoly Outcome 3.00 2.50 Profit PRICE (Dollars per unit) 2.00 ATC 1.50 Loss 1.00 0.50 MC MR 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 QUANTITY (Thousands of cans of beer)Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run 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 (S = 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. Competitive Market 5.0 .+ 4.5 PC Outcome 4.0 3.5 3.0 2.5 PRICE (Dollars per hot dog) 2.0 S=MC 1.5 1.0 0.5 D 0 50 100 150 200 250 300 350 400 450 500 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 rm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't aect 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}, marginalrevenue {MR}, and marginalcost (MC) curves for the monopoly firm. Place the black point (plus symbol) on the following graph to lno'lcafe the protmaXl'mlzlng price and quantlty of a monopolist. Monopoly 5.0 - "I- 4.5 - . 4 o Monopoly Outcome Deadilveighi Loss 3.5 3.0 PRICE (Dollars per not clog) M 0'! O 50 100 150 200 250 300 3-50 400 450 500 QUANTITY (Hot dogs) Consider the welfare effects when the industry operates under a competitive market versus a monopoly. On the monopoly graph, use the black points (plus symbol) to shade the area that represents the loss of welfare from a monopoly or deadweight loss. That is, show the area that was formerly 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 profit-maximizing price and quantity that would be chosen if a monopolist controlled this market. Price Quantity Market Structure (Dollars) (Hot dogs) Competitive Monopoly Given the summary table of the two different market structures, you can infer that, in general, the price is lower under a and the quantity is higher under aComplete the following table by indicating whether or not each scenario is an exampie of price discrimination. Hint: In order to determine if a scenario is an example of price discrimination, think about if the market can be segmented into two groups that pay different prices for the same good. Price Discrimination Scenario Yes No Hotels charge a higher price for rooms with a nicer View, such as a skyline view or a coastal View. Assume that all consumers 0 receive a higher utility when staying in a room with a nicer View. Lastminute "rush" tickets can be purchased for some theatre shows at a discounted price. They are typically distributed via lottery or on a firstcome, firstserved basis a few hours before the show. Assume that the theatre in question does not hold 0 0 seats in reserve for this purpose, but rather offers rush tickets only for seats not sold before the clay of the performance. Suppose Eiarefeet 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 marginalrevenue (MR) curves Bareteet faces, as well as its marginal cost (MC}, which is constant at S40 per pair of Ooh boots. For simplicity, assume that fixed costs are equal to zero; this. combined with the fact that Barefeet's marginal cost is constant, means that its marginalcost curve is also equal to the averagetotalcost (ATE) cu hie. First, suppose that Barefeet cannot price-discriminate because it is a single-price monopoly. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer's willingness and ability.i to pay. On the following graph, use the black point (plus symbol) to indicate the profitmaximizing price and quantity. Next, use the purple points ( diamond symbol) to shade the profit, the green points ( triangle symbol) to shade the consumer surplus, and the black points (white pius symbol) to shade the deadweight ioss in this market without price discrimination. (Note: If you decide that consumer surplus, profit, or deadweight loss equals zero, indicate this by leaving that element in its original position on the palette. ) 100 90 Monopoly Outcome 80 70 60 Profit 50 A PRICE (Dollars per pair of Ooh boots) MC = ATC 40 Consumer Surplus 30 20 Deadweight Loss 10 MR Demand 0 20 40 60 80 100 120 140 160 180 200 QUANTITY (Pairs of boots) Now, suppose that Barefeet can practise perfect price discrimination-that is, it knows each consumer's willingness to pay for each pair of Ooh boots and is able to charge each consumer that amount.On the following graph, use the black point (plus symbol) to indicate the profit-maximizing quantity sold and the lowest price at which the firm sells its boots. Next, use the purple points (diamond symbol) to shade the profit, the green points (triangle symbol) to shade the consumer surplus, and the black points (white plus symbol) to shade the deadweight loss in this market with perfect price discrimination. (Note: If you decide that consumer surplus, profit, or deadweight loss equals zero, indicate this by leaving that element in its original position on the palette.) 100 90 80 Monopoly Outcome 70 60 Profit 50 PRICE ( Dollars per pair of Ooh boots) A MC = ATC 40 Consumer Surplus 30 20 Deadweight Loss 10 Demand 20 40 60 80 100 120 140 160 180 200 QUANTITY (Pairs of 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. O O There is not deadweight loss associated with the profit-maximizing output. 0 Total surplus is not maximized. 0 OThe following graph shows the demand {D} for gas services in the imaginary town of Utilityburg. The graph also shows the marginalrevenue {MR} curve, the marginalcost {MC} curve, and the averagetotalcost (ATE) curve for the local gas company, a natural monopolist. On the following graph, use the black point (plus symbol) to lhdicate the protmaximizing price and quantity for this natural monopolist. 20 18 - ' 16 ' Monopolyr Outcome 12- 10- PRICE (Dollars per hundred wblc melres) MR D 01 l l l l l l l l O 1 2 3 4 5 S 7 8 9 1O QUANTITY (Hundreds of cubic metres) Which of the following statements are true about this natural monopoly? Check all that apply. It is more efficient on the cost side for one producer to exist in this market rather than a large number of producers. In order for a monopoly to exist in this case, the government must have intervened and created it. O The gas company is experiencing economies of scale. O The gas company is experiencing diseconomies of scale. True or False: Without government regulation, natural monopolies can earn positive profit in the short run. O True O FalseConsider the local cable company, a natural monopoly. The following graph shows the monthly demand curve for cable services, the company's marginal-revenue (MR), marginal-cost (MC), and average-total-cost (ATC) curves. 100 90 BO 70 60 PRICE (Dollars per subscription) 50 40 ATC 30 MC 20 10 MR D 2 6 8 10 12 14 16 18 20 QUANTITY (Thousands of subscriptions)Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints. Complete the first row of the following table. Short Run Quantity Price Pricing Mechanism (Subscriptions) (Dollars per subscription) Profit Long-Run Decision Profit Maximization Marginal-Cost Pricing Average-Cost Pricing Suppose that the government forces the monopolist to set the price equal to marginal cost. Complete the second row of the previous table. Suppose that the government forces the monopolist to set the price equal to average total cost. Complete the third row of the previous table. True or False: Under the average-cost pricing policy, the cable company has no incentive to cut costs. O True O FalseSuppose that the government is concerned that an electric utility company is taking advantage of consumers with unfair pricing policies. The government views electricity as a public good that is likely to be produced inefficiently by the private sector. which of the following policy options might most effectively enable the government to achieve its objectives in this situation? 0 Regulate the pricing behaviour: O Turn the company into a public enterprise. C) Use the lawI to increase competition. O Do nothing at all