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(d) Will the monopoly utility providing for all 200 residents actually charge a price equal to this minimum cost on its own, or might the government have to regulate it? Comment on last problem. All the cost curves (MC, AVC, ATC) already assume a "reasonable profit" to the entrepreneur, in addition to labor costs (salaries), capital and natural resource costs. Think of an "economic profit" as above and beyond a "reasonable, normal" return for the risks taken by the firm/entrepreneur and Comment on last problem. Generally, economists like competitive industries since they are "efficient" and opportunity costs to the firm/entrepreneur. produce products at the lowest cost. Yet sometimes it turns out that one producer, a "natural monopoly", can produce at lower costs if they have "economies of scale" - I think I just gave you the answer to part (c). Question 05: The below curves show (a) a competition market supply and demand curves, and (b) a monopoly market. In the competitive market the price is Pc and the equilibrium quantity is Qc. For Question 03: Use the graph to the right to calculate total P the monopoly market the monopolist firm will charge a [ higher OR lower ] price of PM, and produce a revenue for several price & output combinations. 100 [ higher OR lower ] quantity QM. Elastic 1. If the industry becomes a Quantity Price Total Revenue Unit elastic Price If the industry is perfect the demand and supply curves becomes the mortonscore and arginal cost curve. 0 60 10 $80 Inelastic 20 $1,200 40 0 25 3. and charges $50 20 marginal revenue equals 30 40 50 10 20 30 40 50 MR Quantity Quantity (a) Would it ever make sense for a monopoly to charge a price in the inelastic region of its demand (@) Perfect competition (b ) Monopoly curve - for example if the current price was $50, should the monopoly lower the price to $40? We see that monopolies charge a higher price Price and produce less output than competitive and cos markets. This is good for the monopolist, but (b) Explain why or why not for your answer in Part (a). First, what would happen to Total Revenue bad for the consumer! The loss to society due with prices in the inelastic region, and second, what would happen to Total Cost as the monopoly to an under-allocation of resources and less produces more output? output of this good is a "deadweight loss". Question 06: The diagram to the right shows a monopoly market. What quantity of output does the monopolist produce - remember this is the quantity where MR = MC? [ Q1 or Q2 ] Question 04: Why does the Marginal Revenue (MR) curve always fall below the demand curve for a monopoly? Look at the above graph from the last problem. If the monopoly currently priced its What price does the monopolist charge? product at $80 it would have 10 customers. To gain more customers and produce a quantity of 20 [ P1, P2, or P3 ] units of output, the monopoly will have to [ raise OR lower ] its price to $_ But it has to What area represents the deadweight loss - it Demand change the price for everyone including existing customers. will be a combination of two letters? . The extra revenue from having 10 new customers paying $60 is $. Quantity . But the loss in revenue from having to charge your current 10 customers $20 less (the price was $80, now it's $60) is $_ Notice in a competitive market area A would have been part of consumer surplus, now in a monopoly Therefore, the change in total revenue, ATR = $_ _. The change is quantity, AQ was market it is part of producer surplus - a transfer of wealth from the consumer to the producer! Monopolist like this transfer of wealth. In fact, they will devote resources to maintain their monopoly 10. So, the marginal revenue due to the increase in production from 10 to 20 units) is ATR / power - resources which could otherwise be devoted to production. Such behavior is called 1Q = $_
