Principles of Microeconomics for AP® Courses

Steven A. Greenlaw, David Shapiro, Timothy Taylor

Chapter 9

Monopoly - all with Video Answers

Educators

Chapter Questions

Problem 1

Classify the following as a government-enforced barrier to entry, a barrier to entry that is not governmentenforced, or a situation that does not involve a barrier to entry.
a. A patented invention
b. A popular but easily copied restaurant recipe
c. An industry where economies of scale are very small compared to the size of demand in the market
d. A well-established reputation for slashing prices in response to new entry
e. A well-respected brand name that has been carefully built up over many years

Daniel Cisneros

Daniel Cisneros

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Problem 2

Classify the following as a government-enforced barrier to entry, a barrier to entry that is not governmentenforced, or a situation that does not involve a barrier to entry.
a. A city passes a law on how many licenses it will issue for taxicabs
b. A city passes a law that all taxicab drivers must pass a driving safety test and have insurance
c. A well-known trademark
d. Owning a spring that offers very pure water
e. An industry where economies of scale are very large compared to the size of demand in the market

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Problem 3

Suppose the local electrical utility, a legal monopoly based on economies of scale, was split into four firms of equal size, with the idea that eliminating the monopoly would promote competitive pricing of electricity. What do you anticipate would happen to prices?

Daniel Cisneros

Daniel Cisneros

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Problem 4

If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?

Mihir Nayar

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Problem 5

Suppose demand for a monopoly’s product falls so that its profit-maximizing price is below average variable cost. How much output should the firm supply? Hint: Draw the graph.

Daniel Cisneros

Daniel Cisneros

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Problem 6

Imagine a monopolist could charge a different price to every customer based on how much he or she were willing to pay. How would this affect monopoly profits?

Mihir Nayar

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Problem 7

How is monopoly different from perfect competition?

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Daniel Cisneros

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Problem 8

What is a barrier to entry? Give some examples.

Mihir Nayar

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Problem 9

What is a natural monopoly?

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Daniel Cisneros

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Problem 10

What is a legal monopoly?

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Problem 11

What is predatory pricing?

Xiaomin Bian

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Problem 12

How is intellectual property different from other property?

Mihir Nayar

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Problem 13

What legal mechanisms protect intellectual property?

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Problem 14

In what sense is a natural monopoly “natural”?

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Problem 15

How is the demand curve perceived by a perfectly competitive firm different from the demand curve perceived by a monopolist?

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Daniel Cisneros

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Problem 16

How does the demand curve perceived by a monopolist compare with the market demand curve?

Mihir Nayar

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Problem 17

Is a monopolist a price taker? Explain briefly

Daniel Cisneros

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Problem 18

What is the usual shape of a total revenue curve for a monopolist? Why?

Mihir Nayar

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Problem 19

What is the usual shape of a marginal revenue curve for a monopolist? Why?

Daniel Cisneros

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Problem 20

How can a monopolist identify the profitmaximizing level of output if it knows its total revenue and total cost curves?

Mihir Nayar

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Problem 21

How can a monopolist identify the profitmaximizing level of output if it knows its marginal revenue and marginal costs?

Daniel Cisneros

Daniel Cisneros

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Problem 22

When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge?

Mihir Nayar

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Problem 23

Is a monopolist allocatively efficient? Why or why not?

Daniel Cisneros

Daniel Cisneros

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Problem 24

How does the quantity produced and price charged by a monopolist compare to that of a perfectly competitive firm?

Mihir Nayar

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Problem 25

ALCOA does not have the monopoly power it once had. How do you suppose their barriers to entry were weakened?

Aditya Sood

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Problem 26

Why are generic pharmaceuticals significantly cheaper than name brand ones?

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Problem 27

For many years, the Justice Department has tried to break up large firms like IBM, Microsoft, and most
recently Google, on the grounds that their large market share made them essentially monopolies. In a global market, where U.S. firms compete with firms from other countries, would this policy make the same sense as it might in a purely domestic context?

Daniel Cisneros

Daniel Cisneros

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Problem 28

Intellectual property laws are intended to promote innovation, but some economists, such as Milton
Friedman, have argued that such laws are not desirable. In the United States, there is no intellectual property protection for food recipes or for fashion designs. Considering the state of these two industries, and bearing in mind the discussion of the inefficiency of monopolies, can you think of any reasons why intellectual property laws might hinder innovation in some cases?

Mihir Nayar

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Problem 29

Imagine that you are managing a small firm and thinking about entering the market of a monopolist. The
monopolist is currently charging a high price, and you have calculated that you can make a nice profit charging 10% less than the monopolist. Before you go ahead and challenge the monopolist, what possibility should you consider for how the monopolist might react?

Daniel Cisneros

Daniel Cisneros

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Problem 30

If a monopoly firm is earning profits, how much would you expect these profits to be diminished by entry in the long run?

Mihir Nayar

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Problem 31

Return to Figure 9.2. Suppose P0 is $10 and P1 is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the graph what the new firm’s average cost of producing output would be. If the incumbent continues to produce 6,000 units, how much output would the two firms supply to the market? Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant. Approximately how much profit would each firm earn?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

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Problem 32

Draw the demand curve, marginal revenue, and marginal cost curves from Figure 9.6, and identify
the quantity of output the monopoly wishes to supply and the price it will charge. Suppose demand for the monopoly’s product increases dramatically. Draw the new demand curve. What happens to the marginal revenue as a result of the increase in demand? What happens to the marginal cost curve?Identify the new profit-maximizing quantity and price. Does the answer make sense to you?

Mihir Nayar

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Problem 33

Draw a monopolist’s demand curve, marginal revenue, and marginal cost curves. Identify the
monopolist’s profit-maximizing output level. Now, think about a slightly higher level of output (say Q0 + 1). According to the graph, is there any consumer willing to pay more than the marginal cost of that new level of output? If so, what does this mean?

Daniel Cisneros

Daniel Cisneros

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