Questions

1Explain the difference between monopoly and monopsony.

2What are the characteristics of a monopoly market? How does it differ from a market of monopolistic competition? Give examples of both types of markets.

3.Explain why monopoly is not a preferred market system.

Exercise 1

Wealth Transfer Problem.The Organization of the Petroleum Exporting Countries (OPEC) was formed on September 14, 1960 in Baghdad, Iraq.The current membership is comprised of five founding members plus six others: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.OPEC's stated mission is "to bring stability and harmony to the oil market by adjusting their oil output to help ensure a balance between supply and demand." At least twice a year, OPEC members meet to adjust OPEC's output level in light of anticipated oil market developments.OPEC's eleven members collectively supply about 40 per cent of the world's oil output and possess more than three-quarters of the world's total proven crude oil reserves.

To demonstrate the deadweight loss from monopoly problem, imagine that market supply and demand conditions for crude oil are:

Q_S=2P(Market Supply)

Q_D=180 - 4P(Market Demand)

where Q is barrels of oil per day (in millions) and P is the market price of oil.

A.Graph and calculate the equilibrium price/output solution.How much consumer surplus, producer surplus, and social welfare is produced at this activity level?

B.Use the graph to calculate the amount of consumer surplus transferred to the monopoly producer following a change from a competitive market to a monopoly market.How much is the net gain in producer surplus?