l. . 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 following table by indicating which barrier to entry appropriately expiains why a monopoiy exists in each scenario. Barriers to Entry Exclusive Government- Dwnership of a Created Economies Scenario Key Resource Monopolies of Scale The Northern Aluminum Company formerly controlled all Canadian sources of bauxite, a key component in the production of aluminum. Given that the Northern Aluminum Company did not sell baUXite to any other companies, the Northern O O 0 Aluminum Company was a monopolist in the Canadian aluminum industry from the late nineteenth century until the 19505. In the public water industry, low average total costs are obtained only through large scale production. In other words, the initial cost of setting up all the necessary pipes O O 0 makes it risky and, most likely, unprotable for competitors to enter the market. In order to own and operate a taxi, drivers are required to obtain a taxi licence. 0 O O 2 . Calculating marginal revenue from a linear demand curve 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 ? 50 Market for Goods 45 Quantity Demanded 25 (Units) Demand Price 25.00 (Dollars per unit) PRICE (Dollars per unit) 20 15 Demand O 0 5 10 15 20 25 30 35 40 45 50 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. 630 A 567 Total Revenue 504 441 378 315 TOTAL REVENUE (Dollars) 252 189 126 63 0 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 10.) 50 40 Marginal Revenue 30 MARGINAL REVENUE (Dollars) 20 10 0 -10 5 10 15 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 isEdison's Fire Engines is the sole seller of re engines in the fictional country of Pyrotania. Initially, Edison produced eight re engines, but he has decided to increase production to nine re engines. The following graph shows the demand curve Edison faces. As you can see, to sell the additional engine, Edison must lower his price from $80,000 to $60,000 per re engine. Note that while Edison gains revenue from the additional engine he sells, he also loses revenue from the initial eight 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 eight engines by selling at $60,000 rather than $80,000. Then use the green rectangle (triangle symbols) to shade the area representing the revenue gained from selling an additional engine at $60,00 0. 100 Demand 80 __ + Revenue Lost 70 -- 60 + Revenue Gained 50 -- 40 -- 30 20 -- PRICE (Thousands of dollars per fire engine) 10 QUANTITY (Fire engines) Edison 7 increase production from 8 to 9 re engines because the V dominates in this scenario. True or False: If Edison's Fire Engines were a competitive rm instead and $80,000 were the market price for an engine, decreasing its price from $80,000 to $60,000 would result in the same change in the production quantity and, thus, total revenue. 0 True 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 pomt ( plus symbol) on the graph to indicate the protmaxlmrzrng price and quantity for BYOB. If BYOB l5 making a prot, use the green rectangle ( triangle symbols) to shade in the area representing its prot. On the other hand, if BYOB ls suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing its loss. (9 4.00 -- '1' 3.50 - Monopoly Outcome 3.00 E\" 8 2.50 3 Prot CI. 9 2 2.00 M E Lu 9 150 L055 [I ll 1.00 050 U 0.5 1.0 1.5 20 25 3.0 3.5 4.0 QUANTITY (Thousands of cans of beer) Suppose that BYOB charges $2.00 per can. Your friend Felix says that since BYOB is a monopoly with market power, it should charge a higher price of $2.25 per can because this will increase BYOB's profit. Complete the following table to determine whether Felix is correct. Price Quantity Demanded Total Revenue Total Cost Profit (Dollars per can) (Cans) (Dollars) (Dollars) (Dollars) 2.00 2.25 Given the earlier information, Felix correct in his assertion that BYOB should charge $2.25 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 1.50 Loss ATC 1.00 0.50 MC MR D 0 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;r market for hot dogs in a small city. Suppose that this market is in longrun competitive equilibrium with many;r 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 (8 = MC) curves in the market for hot dogs. Place the bfack point (plus symbol) on the graph to indicate the market price and quantity that wit! result from competition. 6*) Competitive Market PC Outcome PRICE (Dollars per hot dog) 0 1|] 2|] 3|] 4!] 50 60 7'0 30 90 100 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 marginalcost 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 rm. Place the black point {plus symbol) on the following graph to indicate the profitmaximizing price and quantity of a monopolist. Monopoly "I- Monopoly Outcome Deadweigm Loss PRICE (Dollars per hot dog) 0 1|] 2|] 3U 4U 5U 60 70 30 '30 100 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 lower under aCompiete the foiiowing tabie by indicating whether or not each scenario is an example 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 different prices for the same good. two groups that pay outSide. All sweaters are marked as 70% off. Price Discrimination Scenario Yes No 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 onlyr for seats not sold before the clay of the performance. A local boutique is having a sale on sweaters, but customers are not aware of the sale until they are already in the store. In other words, there is no advertising of the sale other than signs in the back of the store that cannot be seen from the O O If . 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 marginalrevenue (MR) curves Barefeet faces, as well as its marginal cost (MC), which is constant at $40 per pair of Ooh boots. For simpIICIty, 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) curve. First, suppose that Barefeet cannot price-discriminate because it is a singleprice monopoly. That is, it must charge each consumer the same price for Ooh boots regardless of the consumer's willingness and ability to pay. On the following graph, use the black point (plus symbol) to indicate the profit-maximizing 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 plus symbol) to shade the deadweight loss 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 BC 70 60 Profit A PRICE (Dollars per pair of Ooh boots) 50 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 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 Demand 0 20 40 60 80 100 0 120 140 160 0 200 QUANTITY (Pairs of boots)Consider the welfare effects when the industry operates under a monopoly and cannot pricediscriminate versus when it can pricediscriminate. 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 singieiprice monopolies or perfect price discrimination, leave the entire row unchecked.) Check all that apply. Statement Single-Price Monopoly Perfect Price Discrimination Total surplus is not maximized. D C] Barefeet produces a quantity more than the efficient quantity of Ooh boots. D C] There is not deadweight loss associated with the profitmaximizing output. D C]