Pure Monopoly

The market for electricity is a naturally monopolistic market. The graph below depicts the monthly demand and marginal revenue curves for this market and the marginal cost and average total cost curves of the monopolist supplier. The quantity of electricity is measured in kilowatt-hours (kWh) per month, and the price is measured as the price per kilowatt-hour of electricity.

1. Identify the profit-maximizing quantity of electricity that the monopolist should produce, and the monopoly price per kilowatt-hour.
2. Suppose that the monopolist produces the profit-maximizing quantity of electricity and charges the monopoly price that you identified in Part 1. What is the amount of consumer surplus that is generated by this market?
3. Suppose that the monopolist produces the profit-maximizing quantity of electricity and charges the monopoly price that you identified in Part 1. What is the amount of profit that the monopolist earns?
4. Suppose that the monopolist produces the profit-maximizing quantity of electricity and charges the monopoly price that you identified in Part 1. What is the amount of total surplus (calculated by adding consumer surplus and profit) that is generated by this market?
5. Suppose that the monopolist produces the profit-maximizing quantity of electricity and charges the monopoly price that you identified in Part 1. What is the amount of deadweight loss that arises due to monopoly? Explain why the deadweight loss exists under monopoly.

$0.70 Price $0.60 $0.50 $0.40 $0.30 4- ATC - $0.20 MC $0.10 MR Demand 40 80 120 160 200 220 240 Quantity (millions of KWh)