Monopoly disadvantages (a) Perfectly competitive firm (D) Monopolist MC MC Price, costs and revenue Price, costs and revenue (dollars) (dollars) Domand - MR! Domand Quantity of output Quantity of outout STUDY QUESTIONS AND PROBLEMS 1 Using the three characteristics of 3 In spite of the finding that monopolists monopoly, explain why each of the charge higher prices and produce less following is a monopolist in relation to at output than competitive firms, some least some of the output it produces: economists argue that monopolists a the supplier of water to your home. benefit society (they raise economic b the only butcher in a country town. welfare). What are some of the reasons c Telstra. that these economists give for taking this 2 Suppose an investigation reveals that the position? prices charged for drinks at a tourist 4 Define barriers to entry. Give two resort are significantly higher than the examples of monopolies that you know prices charged for the same drinks at something about and explain what types hotels in the nearby village. What might of barriers to entry enable them to the explanation for this situation be? maintain their monopoly.5 Suppose the average cost of producing a 9 Suppose the demand and the cost curves kilowatt hour of electricity is lower for for a monopolist are as shown in Exhibit one firm than for another finn serving the 4.7. Explain what price the morecoast same market. Without the government whould charge and how much output it granting a franchise to one of these should produce, competing power companies, explain why 10 Explain why a monopolist would never a single seller is likely to emerge in the produce in the inelastic range of the long run, demand curve Use the following demand schedule for a monopolist to calculate total revenue and Exhibit n.7 A monopolist in the marginal revenue. For each price, indicate whether demand is elastic, unit elastic or inelastic. Using the data from the domand MC schedule, graph the demand curve, the marginal revenue curve and the total revenue curve. Identify the elastic, unit clastic and inclestic segments along the demand curve. Price, costs and revenue (dollars Marpins demanded of demand 55.00 1.50 MR Quantity of output 3 00 2 50 11 Suppose the lawn-mowing industry 2/00 approximates a perfectly competitive industry. Suppose alto that a single firm 1,00 buys all the assets of the lawn mowing firms and establishes a monopoly. Contrast these two market structures with respect to prion, output and allocation of resources, Draw a 7 Make the unrealistic assumption graph of the market demand and market that production is costless for the supply for lawn mowing services before and monopolist in question 6, Given the data after the takeover. Would you expect the from the demand schedule in question 6, monopoly to survive? what price will the monopolist charge, 12 Typicaly, retail prices for clothing and shoes and how much output should the ol a particular brand and style are the same firm produce? How much economic regardless of size, Yet larger sizes use more profit will the firm earn? What will be the new material in their production and are thurs affect on the price and output of the more costly to produce. Why do you think monopolist when marginal cost is this occurs? Are firms that sell these above zoro? products at a single price regardless of size In each of the following cases, state engaging in price discrimination? whether the monopolist would increase or 13 There are many durable consumer goods decrease output that require a highly specific complementary a Marginal revenue exceeds marginal good to enable them to be used, Examples cost at the level of output being include labelling machines that use produced. particular tape for the labels, game b Marginal cost exceeds marginal comicles that require specialised software, revenue at the level of output being and coffee machines that use particular produced. prepacked coffee sechela. In these cases economists and others have observed that