Part-3 Chapter-11 

Aplia Homework: Monopoly

1. Sources of monopoly power

A monopoly, unlike a perfectly competitive firm, has some market power. Thus, it can raise its price, within limits, without quantity demanded falling to zero. The main way monopolies retain their market power is through barriers to entry, which prevent other companies from entering monopolized markets and competing for customers.

Consider the market for computer technology. Patents are granted to inventors of products or processes for a certain number of years to encourage innovation. Without patents, research and development needed to improve computer technology are unlikely to occur, as nothing would then prevent other firms from stealing ideas and copying products.

Which of the following best explains the barriers to entry that exist in this scenario?

            Economies of scale

            Control of a necessary resource

            Legal restrictions

2. When fewer firms are better

Web Slinger is an Internet service provider. In the long run, Web Slinger can provide Internet service for 20,000 homes each month at a total cost of $700,000, Internet service for 30,000 homes at a total cost of $900,000, or Internet service for 40,000 homes at a total cost of $1,000,000.

Use the purple points (diamond symbol) on this graph to plot points of the long-run average cost curve at outputs of 20,000, 30,000, and 40,000 homes.

Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

Suppose that Web Slinger provides Internet service for all 40,000 homes that purchase Internet service in the metropolitan area.

This situation can best be characterized as:

            A natural monopoly

            Decreasing returns to scale

3. Profit maximization and loss minimization

BYOB is a monopolist in beer production and distribution in the imaginary economy of Hops Ville. 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 cost (AC), and demand (D) for beer in this market.

Place the black point (plus symbol) on the 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 its loss.

Note: Dashed drop lines will automatically extend to both axes. Select and drag the rectangles from the palette to the graph. To resize, select one of the points on the rectangle and move to the desired position.

Suppose that BYOB charges $2.75 per can. Your friend Jacques says that since BYOB is a monopoly with market power, it should charge a higher price of $3.00 per can because this will increase BYOB's profit.

 Complete the following table to determine whether Jacques is correct.

Given the earlier information, Jacques _______   correct in his assertion that BYOB should charge $3.00 per can.

Suppose that a technological innovation decreases BYOB's costs so that it now faces the marginal cost (MC) and average cost (AC) given on the following graph. Specifically, the technological innovation causes a decrease in average fixed costs, thereby lowering the AC 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. Monopoly versus perfect competition

Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium, with many 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 (S = MC) curves in the market for hot dogs.

Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from perfect competition.

Note: Dashed drop lines will automatically extend to both axes.

Now suppose 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 marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm.

Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist.

In the following table, enter the price and quantity that would arise in a perfectly competitive market; then enter the profit-maximizing price and quantity that would be chosen if a monopolist controlled this market.

This analysis assumes that the demand for hot dogs remains unchanged under both market structures. This need not be true because the monopoly may seek to:

            Shift the demand curve inward

            Influence the demand curve through advertising

5. Examples of price discrimination

Susan and Becky are debating the pricing strategy of several airlines. Susan argues, “When airlines restrict discounted tickets to people who book well in advance and stay over on a Saturday, it is not price discrimination, because the restrictions have nothing to do with individual buyers' willingness to pay.” However, Becky says, “The airlines' stay-over restrictions are a form of price discrimination, because they roughly split the market into two separate groups that are willing to pay two different amounts.”

Economists generally agree with ________.

6. Price-discriminating monopolist

Sharon owns a plot of land in the desert that isn't worth much. One day, a giant meteorite falls on her property, making a large crater. The event attracts scientists and tourists, and Sharon decides to sell non-transferable admission tickets to the meteor crater to both types of visitors: scientists (Market A) and tourists (Market B). The following graphs show daily demand (D) curves and marginal revenue (MR) curves for the two markets. Sharon’s marginal cost of providing admission tickets is zero.

Suppose that at first, Sharon charges the same price of $8 per admission in both markets so that the total number of admissions demanded is ____ tickets.

Suppose now that Sharon decides to charge a different price in each market. To maximize revenue (and therefore, profits), Sharon should charge $10 per admission in Market A and $6 per admission in Market B. At these prices, she will sell a total quantity of 24 admission tickets per day.

Complete the following table by calculating Sharon's total revenue from selling in both markets under the non-discriminatory as well as the discriminatory price policy.

Sharon charges a lower price in the market with a relatively ______ price elasticity of demand.