1. Sources of monopoly power A monopoly, unlike a perfectly competitive firm, has some market power. Thus, it can raise its price, within limits, without quantity demanded falling to zero. The main way monopolies retain their market power is through barriers to entry, which prevent other companies from entering monopolized markets and competing for customers. Consider the market for tanzanite. The mines for this blue-purple gemstone, found only in Tanzania, are owned by the local government. Given that no one is allowed into the mines without government permission, the market structure for tanzanite highly resembles that of a monopoly Which of the following best explains the barriers to entry that exist in this scenario? Legal barriers Exclusive ownership of a vital resource Economies of scale 2. Marginal analysis and profit maximization Suppose Kathy gives haircuts on Saturdays to make extra money. She is the only person in town cutting hair on Saturdays and therefore has some market power. Assume that she does not incur fixed costs, and the only significant variable cost to Kathy is her time. As she gives more haircuts, Kathy must increasingly forgo other valuable Saturday activities. For example, if she gives one haircut, she forgoes reading the paper after breakfast. If she gives two haircuts, she gives up reading the paper and sleeping an extra half-hour. Kathy's clients are a varied group willing to pay between $16.00 and $28.00 for a haircut. Assume that Kathy cannot price discriminate, l.e., charge different clients different prices. If Kathy charges $28.00 per haircut, she will have one client per week; if she charges $24.00, she will have two; if she charges $20.00, three, and so forth. The following table contains data on the revenues and costs of Kathy's haircut business as a function of her price-quantity choice. (The costs are based on the value of Kathy's alternative activities, in dollar terms. For example, the total cost of the first haircut is $4-the value Kathy places on reading the newspaper after breakfast.) Fill in the missing cells of the table and then use them to answer the questions that follow. Output (Haircuts per week) Price (Dollars per haircut) Total Revenue (Dollars per week) Marginal Revenue (Dollars per haircut) Total Cost (Dollars per week) Marginal Cost (Dollars per haircut) Profit (Dollars per week) 0 0 0 28.00 4.00 Fill in the missing cells of the table and then use them to answer the questions that follow. Output Price Total Revenue (Haircuts per week) (Dollars per haircut) (Dollars per week) Marginal Revenue (Dollars per haircut) Total Cost (Dollars per week) Marginal Cost (Dollars per haircut) Profit (Dollars per week) 0 0 1 28.00 28.00 2 24.00 48.00 3 20.00 60.00 4 18.00 AAAAA 0 0 28.00 4.00 4.00 24.00 20.00 8.00 12.00 36.00 12.00 8.00 20.00 40.00 36.00 8.00 20.00 5 16.00 80.00 56.00 24.00 On the following graph, use the blue points (circle symbol) to plot Kathy's total revenue curve, use the orange points (square symbol) to plot her tw cost curve, and use the purple points (diamond symbol) to plot her profit curve. Be sure to graph from left to right, starting with zero haircuts and ending with five. Line segments will automatically connect the points. On the following graph, use the blue points (circle symbol) to plot Kathy's total revenue curve, use the orange points (square symbol) to plot her total cost curve, and use the purple points (diamond symbol) to plot her profit curve. Be sure to graph from left to right, starting with zero haircuts and ending with five. Line segments will automatically connect the points. TOTAL REVENUE, TOTAL COST, AND PROFIT (Dollars per week) 16 12 32 g 2 3 QUANTITY OF OUTPUT (Haircuts per week) Total Revenue -D- Total Cost Profit maminal revenue (MR) curve, and then use the orange points (square symbol) On the following graph, use the blue points (circle symbol) to plot her marginal revenue (MR) curve, and then use the orange points (square symbol) to plot Kathy's marginal cost (MC) curve for the first five haircuts. Be sure to plot from left to right and to plot between integers. For example, if Kathy's marginal cost of increasing her production from one haircut to two haircuts is x, then you would plot a point at (1.5, x). Line segments will automatically connect the points. 30 R 25 20 20 15 15 PRICE AND COST (Dollars per haircut) 10 10 5 Marginal Revenue -D Marginal Cost 2 3 QUANTITY OF OUTPUT (Haircuts per week) sof 0 . QUANTITY OF OUTPUT (Haircuts per week) Kathy maximizes her profit by serving, per week and charging, per haircut. If Kathy gave more haircuts than her optimal quantity of haircuts, which of the following statements would be true? Check all that apply Kathy's marginal revenue would be less than her marginal cost. Kathy's profit (total revenue minus total cost) would decline