Economics Principles, Problems, and Policies

Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn

Chapter 10

Pure Monopoly - all with Video Answers

Educators

Chapter Questions

Problem 1

"No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then pure monopoly does not exist." Do you agree? Explain. How might you use Chapter 6 's concept of cross elasticity of demand to judge whether monopoly exists?

Marcus Esteban

Marcus Esteban

Numerade Educator

Problem 2

Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable?

Marcus Esteban

Numerade Educator

Problem 3

How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? Why does it differ? Of what significance is the difference? Why is the pure monopolist's demand curve not perfectly inelastic?

Marcus Esteban

Numerade Educator

Problem 4

Use the demand schedule to the upper right to calculate total revenue and marginal revenue at each quantity. Plot the demand, total-revenue, and marginal revenue curves and explain the relationships between them. Explain why the marginal revenue of the fourth unit of output is $\$ 3.50$, even though its price is $\$ 5 .$ Use Chapter 6 's total-revenue test for price elasticity to designate the elastic and inelastic segments of your graphed demand curve. What generalization can you make as to the relationship between marginal revenue and elasticity of demand? Suppose the marginal cost of successive units of output was zero. What output would the profit-seeking firm produce? Finally, use your analysis to explain why a monopolist would never produce in the inelastic region of demand.

Marcus Esteban

Numerade Educator

Problem 5

Suppose a pure monopolist is faced with the demand schedule shown below and the same cost data as the competitive producer discussed in question 4 at the end of Chapter $9 .$ Calculate the missing total-revenue and margina lrevenue amounts, and determine the profit-maximizing price and profit-earning output for this monopolist. What is the monopolist's profit? Verify your answer graphically and by comparing total revenue and total cost.

Marcus Esteban

Numerade Educator

Problem 6

Suppose that a price-discriminating monopolist has segregated its market into two groups of buyers, the first group described by the demand and revenue data that you developed for question $5 .$ The demand and revenue data for the second group of buyers is shown in the accompanying table. Assume that $\mathrm{MC}$ is $\$ 13$ in both markets and $\mathrm{MC}=\mathrm{ATC}$ at all output levels. What price will the firm charge in each market? Based solely on these two prices, what can you conclude about the relative elasticities of demand in the two markets? What will be this monopolist's total economic profit?

Marcus Esteban

Numerade Educator

Problem 7

Assume that a pure monopolist and a purely competitive firm have the same unit costs. Contrast the two with respect to $(a)$ price, $(b)$ output, $(c)$ profits, $(d)$ allocation of resources, and $(e)$ impact on the distribution of income. since both monopolists and competitive firms follow the $M C=M R$ rule in maximizing profits, how do you account for the different results? Why might the costs of a purely competitive firm and those of a monopolist be different? What are the implications of such a cost difference?

Marcus Esteban

Numerade Educator

Problem 8

Critically evaluate and explain each statement:
a. Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will pay.
b. The pure monopolist seeks the output that will yield the greatest per-unit profit.
c. An excess of price over marginal cost is the market's way of signaling the need for more production of a good.
d. The more profitable a firm, the greater its monopoly power.
e. The monopolist has a pricing policy; the competitive producer does not.
f. With respect to resource allocation, the interests of the seller and of society coincide in a purely competitive market but conflict in a monopolized market.
g. In a sense the monopolist makes a profit for not producing; the monopolist produces profit more than it does goods.

Marcus Esteban

Numerade Educator

Problem 9

Assume a monopolistic publisher has agreed to pay an author 15 percent of the total revenue from the sales of a text. Will the author and the publisher want to charge the same price for the text? Explain.

Marcus Esteban

Numerade Educator

Problem 10

U.S. pharmaceutical companies charge different prices for prescription drugs to buyers in different nations, depending on elasticity of demand and government-imposed price ceilings. Explain why these companies, for profit reasons, oppose laws allowing reimportation of drugs to the United States.

Marcus Esteban

Numerade Educator

Problem 11

Explain verbally and graphically how price (rate) regulation may improve the performance of monopolies. In your answer distinguish between $(a)$ socially optimal (marginalcost pricing and $(b)$ fair-return (average-total-cost) pricing. What is the "dilemma of regulation"?

Marcus Esteban

Numerade Educator

Problem 12

It has been proposed that natural monopolists should be allowed to determine their profit-maximizing outputs and prices and then government should tax their profits away and distribute them to consumers in proportion to their purchases from the monopoly. Is this proposal as socially desirable as requiring monopolists to equate price with marginal cost or average total cost?

Marcus Esteban

Numerade Educator

Problem 13

How was De Beers able to control the world price of diamonds over the past several decades even though it produced only 45 percent of the diamonds? What factors ended its monopoly? What is its new strategy for earning economic profit, rather than just normal profit?

Marcus Esteban

Numerade Educator