Suppose that there is a single seller of gasoline in a particular town. Suppose that policymaker

step 1 So hi everyone, this is problem three from chapter 15 monopoly. So this question is letting us t

Suppose that there is a single seller of gasoline in a...

Key Concepts

Monopoly

A monopoly is a market structure in which a single seller dominates the market, facing little or no competition. This unique position allows the firm to set prices above marginal cost, leading to reduced output and higher prices compared to competitive markets. The monopolist maximizes profit by equating marginal revenue to marginal cost rather than setting price equal to marginal cost, which is why monopoly pricing often results in less output than is socially optimal.

Price Ceiling

A price ceiling is a government-imposed limit on the price that can be charged for a good or service. It is intended to make goods more affordable to consumers by preventing sellers from charging excessively high prices. However, when applied to a monopoly, a binding price ceiling – one set below the monopolist’s profit-maximizing price – can force the seller to lower prices, potentially altering the firm’s production incentives.

Binding vs Non-binding Regulations

It is important to distinguish between binding and non-binding price ceilings. A non-binding price ceiling is set above the monopolist’s chosen price, thus having no effect on the market outcome. In contrast, a binding price ceiling is set below the monopolist’s profit-maximizing price, which can compel the firm to adjust its pricing and output decisions. Under a binding ceiling, the monopolist might be required to increase output if the regulated price forces production to the level where marginal cost equals the ceiling price.

Marginal Cost and Marginal Revenue Analysis

The decision framework for a monopolist is based on equating marginal revenue (MR) with marginal cost (MC). In an unregulated setting, the monopolist restricts output to where MR equals MC, often resulting in a price that exceeds MC. When a binding price ceiling is introduced, the firm is forced to charge a lower price. If this ceiling is above MC, the monopolist may increase production until the MC curve reaches the ceiling price, thereby increasing output relative to the unregulated level.

Transcript

00:01 So hi everyone, this is problem three from chapter 15 monopoly.

00:07 So this question is letting us to analyze.

00:13 What if a monopoly is fixed cost increases, the price will increase, decrease will stay the same, and the profit will increase, decrease will stay the same? and i think as some of you may notice that, you cannot find direct answer and direct references from the textbook to answer this question, not like the problem two.

00:43 You got a nice thing from a nice conclusion from the test book.

00:48 But we do have something that we can analyze.

00:52 First, we need to understand what makes a monopoly to decide it at which price is a profit maximization price, right? and how we can answer this, how we can just answer the question i just ask about, right? so actually we can look at this, it's like the top left picture.

01:25 You know, we know, first thing we know that this point, point a, it's a profit maximizing point.

01:35 And also this point, how we can, in what kind of way we got this point is the intersection, intersect between marginal cost curve and the margin revenue curve.

01:50 So what does this mean? it means that it has nothing to do with the total cost.

01:55 So we know the total cost is here, although it's average total cost, but it's total cost, right? but this question is asking that what if the fixed cost increase? so what going to happen after a fixed cost increases? so this curve will shift, this curve, this blue curve will shift.

02:16 So this curve will go up, right? so this curve will go up.

02:22 But none of this curve, marginal cost curve and margin will change.

02:27 So this point will stay the same.

02:28 So it means the price.

02:31 So it means what? it means the price, well, like to say.

02:37 The price means the p stands for price and the state the same.

02:43 And also, the nothing that's after creeping this in mind...