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 MarketPC Outcome0204060801001201401601802005.04.54.03.53.02.52.01.51.00.50PRICE (Dollars per gyro)QUANTITY (Gyros)DS=MC

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.

MonopolyMonopoly OutcomeDeadweight Loss0204060801001201401601802005.04.54.03.53.02.52.01.51.00.50PRICE (Dollars per gyro)QUANTITY (Gyros)DMRMC

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.

Market Structure	Price	Quantity
(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 a .