Michael Parkin
ISBN #9780133872279
12th Edition
839 Questions
Homework Questions
Monopolies arise when a single firm is the sole provider of a good or service due to the lack of close substitutes and significant barriers to entry. They set prices differently from competitive firms by using the market demand curve, leading to an output where marginal revenue equals marginal cost; however, this results in a higher price and reduced output compared to perfect competition. Additionally, firms with monopoly power often engage in price discrimination to extract greater producer surplus. While this increases their profit, it can also lead to inefficiency and deadweight losses, prompting the need for regulatory intervention in natural monopolies.
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The U.S. Postal Service has a monopoly on nonurgent First Class Mail. Pfizer Inc. makes LIPITOR, a prescription drug that lowers cholesterol. Cox Communications is the sole provider of $\mathrm{ca}-$ ble television service in some parts of San Diego. Are any these firms protected by a barrier to entry? Do any of these firms produce a good or service that has a substitute? Might any of them be able to profit from price discrimination? Explain your answers. Use the following table to work Problems 2 to 4 Minnie's Mineral Springs is a single-price monopoly. Columns 1 and 2 of the table set out the market demand schedule for Minnie's water and columns 2 and 3 set out Minnie's total cost schedule. $$\begin{array}{ccc} \begin{array}{c} \text { Price } \\ \text { [dollars } \\ \text { per bottle) } \end{array} & \begin{array}{c} \text { Quantity } \\ \text { (bottles } \\ \text { per hour) } \end{array} & \begin{array}{c} \text { Total cost } \\ \text { (dollars } \\ \text { per hour) } \end{array} \\ \hline 10 & 0 & 1 \\ 8 & 1 & 3 \\ 6 & 2 & 7 \\ 4 & 3 & 13 \\ 2 & 4 & 21 \\ 0 & 5 & 31 \end{array}$$
Calculate Minnie's marginal revenue schedule and draw a graph of the market demand curve and Minnie's marginal revenue curve. Explain why Minnie's marginal revenue is less than the price.
At what price is Minnie's total revenue maximized and over what price range is the demand for water elastic? Why will Minnie not produce a quantity at which the market demand is inelastic?
Calculate Minnie's profit-maximizing output and price and economic profit.
Use the data in Problem 2 to work Problem 5 a. Use a graph to illustrate the producer surplus generated from Minnie's Mineral Springs' water production and consumption. b. Is Minnie's an efficient producer of water? Explain your answer. c. Suppose that new wells were discovered nearby to Minnie's and Minnie's faced competition from new producers. Explain what would happen to Minnie's output, price, and profit.