2 . Monopoly outcome versus competition outcome Consider the weekly market for gyros in a popular neighborhood close to campus. Suppose this market is operating in long-run competitive equilibrium with many gyro vendors in the neighborhood, each offering basically the same gyros. Due to the structure of the market, the vendors act as price takers and each individual vendor has no market power. The following graph displays the supply (S = MC) and demand (D) curves in the weekly market for gyros. Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from competition. Competitive Market 4.5 40 PC Outcome PRICE (Dollars per gyro) 25 20 S=MC 1.5 0.5 0 40 0 90 100 120 140 160 180 200 QUANTITY (Gyros) Now assume that one of the gyro vendors successfully petitions the neighborhood development board to obtain exclusive rights to sell gyros in the neighborhood. This firm buys up all the rest of the gyro food trucks in the area and begins to operate as a monopoly. Assume that this change does not affect demand and that the marginal cost curve of the new monopoly corresponds exactly to the supply curve from the previous graph. The following graph reflects this new set of assumptions, and shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly vendor. Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. (?) Monopoly 6.0 4.5 4.0 Monopoly Outcome 3.5 Deadweight Loss PRICE (Dollars per gyro) MC 1.0 0.5 MR 30 90 100 120 140 160 180 200 QUANTITY (Gyros) Consider the welfare effects that result from the industry operating as 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, 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 market is controlled by a monopoly because the resulting equilibrium is different from the (efficient) competitive outcome. 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) (Gyros) 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 lower under aStep 1 of 2 Competitive market outcomes are shown in the diagram as follows. It is a competitive market ? Competitive Market 5.0 45 PC Outcome 4.0 3.5 3.0 2.5 PRICE (Dollars per gyro) 2.0 S=MC 1.5 1.0 0.5 35 70 105 140 175 210 245 280 315 350 QUANTITY (Gyros) In this diagram, equilibrium point is achieved when demand intersects with the supply curve. Explanation In this step, first part of the problem is solved.Step 2 of 2 Monopoly market outcome is as follows. It is a monopoly market outcome. ? Monopoly 5.0 -+ 45 Monopoly Outcome 4 0 3.5 3.0 Deadweight Loss 2.5 PRICE (Dollars per gyro) 2.0 MC 1.5 1.0 0.5 MR 35 70 105 140 175 210 245 280 315 350 QUANTITY (Gyros) For a competitive market structure : ( on the basis of first diagram) Price = $1.5 Quantity = 245 gyros Now, For a monopoly market structure : ( on the basis of second diagram) Price = $3 Quantity = 140 gyros Correct Answer: competitive competitive Explanation: In the competitive market, more output is produced and lower price is kept. In contrast to it, in monopoly market, price is high and quantity is low. So, it can be said that price is lower and quantity is higher in a competitive market