AK For Chap 15

15 MONOPOLY
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Problems and Applications
1. The following table shows revenue, costs, and profits:
Price Quantity Total Marginal Total Cost Profit

Revenue Revenue
$100 0 $0 ---- $2,000,000 $-2,000,000
90 100,000 9,000,000 $90 3,000,000 6,000,000
80 200,000 16,000,000 70 4,000,000 12,000,000
70 300,000 21,000,000 50 5,000,000 16,000,000
60 400,000 24,000,000 30 6,000,000 18,000,000
50 500,000 25,000,000 10 7,000,000 18,000,000
40 600,000 24,000,000 -10 8,000,000 16,000,000
30 700,000 21,000,000 -30 9,000,000 12,000,000
20 800,000 16,000,000 -50 10,000,000 6,000,000
10 900,000 9,000,000 -70 11,000,000 -2,000,000
0 1,000,000 0 -90 12,000,000 -12,000,000
a. A profit-maximizing publisher would choose a quantity of 400,000 at a price of $60 or a

quantity of 500,000 at a price of $50; both combinations would lead to profits of $18
million.
b. Marginal revenue is less than price. Price falls when quantity rises because the demand
curve slopes downward, but marginal revenue falls even more than price because the
firm loses revenue on all the units of the good sold when it lowers the price.
c. Figure 2 shows the marginal-revenue, marginal-cost, and demand curves. The marginal-
revenue and marginal-cost curves cross between quantities of 400,000 and 500,000. This
signifies that the firm maximizes profits in that region.
244
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Chapter 15/Monopoly ❖ 245
Figure 2
d. The area of deadweight loss is marked “DWL” in the figure. Deadweight loss means that
the total surplus in the economy is less than it would be if the market were competitive,
because the monopolist produces less than the socially efficient level of output.
e. If the author were paid $3 million instead of $2 million, the publisher would not change
the price, because there would be no change in marginal cost or marginal revenue. The
only thing that would be affected would be the firm’s profit, which would fall.
f. To maximize economic efficiency, the publisher would set the price at $10 per book,
because that is the marginal cost of the book. At that price, the publisher would have
negative profits equal to the amount paid to the author.
2. a. Figure 3 illustrates the market for groceries when there are many competing
supermarkets with constant marginal cost. Output is QC, price is PC, consumer surplus is
area A, producer surplus is zero, and total surplus is area A.
Figure 3 Figure 4
246 ❖ Chapter 15/Monopoly
b. Figure 4 illustrates the new situation when the supermarkets merge. Quantity declines
from QC to QM and price rises to PM. Consumer surplus falls by areas D + E + F to areas
B + C. Producer surplus becomes areas D + E, and total surplus is areas B + C + D + E.
Consumers transfer the amount of areas D + E to producers and the deadweight loss is
area F.
3. a. The following table shows total revenue and marginal revenue for each price and
quantity sold:
Price Quantity Total Marginal Total Profit

Revenue Revenue Cost
24 10,000 $240,000 ---- $50,000 $190,000
22 20,000 440,000 $20 100,000 340,000
20 30,000 600,000 16 150,000 450,000
18 40,000 720,000 12 200,000 520,000
16 50,000 800,000 8 250,000 550,000
14 60,000 840,000 4 300,000 540,000
b. Profits are maximized at a quantity where MR=MC. The quantity at which MC is closest
to MR without exceeding it is 50,000 CDs at a price of $16. At that point, profit is
$550,000.
c. As Ariana's agent, you should recommend that she demand $550,000 from them, so she
receives all of the profit (rather than the record company). The firm would still choose to
produce 50,000 CDs because their marginal cost would not change.
4. a. The table below shows total revenue and marginal revenue for the bridge. The profit-
maximizing price will occur at the quantity at which marginal revenue equals marginal
cost. In this case, marginal cost equals zero, so the profit-maximizing quantity occurs
where marginal revenue equals 0. This occurs at a price of $4 and quantity of 400,000
crossings. The efficient level of output is 800,000 crossings, because that is where price
is equal to marginal cost. The profit-maximizing quantity is lower than the efficient
quantity because the firm is a monopolist.
Price Quantity Total Revenue Marginal

(in Thousands) (in Thousands) Revenue
$8 0 $0 ----
7 100 700 $7
6 200 1,200 5
5 300 1,500 3
4 400 1,600 1
3 500 1,500 -1
2 600 1,200 -3
1 700 700 -5
0 800 0 -7
b. The company should not build the bridge because its profits are negative. The most
revenue it can earn is $1,600,000 and the cost is $2,000,000, so it would lose $400,000.
c. If the government were to build the bridge, it should set price equal to marginal cost to
be efficient. Since marginal cost is zero, the government should not charge people to use
the bridge.
Price
$8
Area
= 1/2 x 8 x 800,000
= $3,200,000 Demand
800,000
Quantity of Crossings
Figure 5
d. Yes, the government should build the bridge, because it would increase society's total
surplus. As shown in Figure 5, total surplus has area ½ × 8 × 800,000 = $3,200,000,
which exceeds the cost of building the bridge.
5. a. A monopolist always produces a quantity at which demand is elastic. If the firm produced
a quantity for which demand was inelastic and the firm raised its price, quantity would
fall by a smaller percentage than the rise in price, so revenue would increase. Because
costs would decrease at a lower quantity, the firm would have higher revenue and lower
costs, so profit would be higher. Thus the firm should keep raising its price until profits
are maximized, which must happen on an elastic portion of the demand curve.
b. As Figure 6 shows, another way to see this is to note that on an inelastic portion of the
demand curve, marginal revenue is negative. Increasing quantity requires a greater
percentage reduction in price, so revenue declines. Because a firm maximizes profit
where marginal cost equals marginal revenue, and marginal cost is never negative, the
profit-maximizing quantity can never occur where marginal revenue is negative. Thus, it
can never be on the inelastic portion of the demand curve. Total revenue is maximized
where marginal revenue is equal to zero (QTR on Figure 6).
Figure 6
6. a. The profit-maximizing outcome is the same as maximizing total revenue in this case
because there are no variable costs. The total revenue from selling to each type of
consumer is shown in the following tables:
Price Quantity of Adult Total Revenue from Sale

Tickets of Adult Tickets
10 0 0
9 100 900
8 200 1,600
7 300 2,100
6 300 1,800
5 300 1,500
4 300 1,200
3 300 900
2 300 600
1 300 300
0 300 0
Price Quantity of Child Total Revenue from Sale

Tickets of Child Tickets
10 0 0
9 0 0
8 0 0
7 0 0
6 0 0
5 100 500
4 200 800
3 200 600
2 200 400
1 200 200
0 200 0
To maximize profit, you should charge adults $7 and sell 300 tickets. You should charge
children $4 and sell 200 tickets. Total revenue will be $2,100 + $800 = $2,900. Because
total cost is $2,000, profit will be $900.
b. If price discrimination were not allowed, you would want to set a price of $7 for the
tickets. You would sell 300 tickets and profit would be $100.
c. The children who were willing to pay $4 but will not see the show now that the price is
$7 will be worse off. The producer is worse off because profit is lower. Total surplus is
lower. There is no one that is better off.
d. In (a) total profit would be $400. In (b), there would be a $400 loss. There would be no
change in (c).
7. a. The museum’s average-total-cost curve and marginal-cost curve are shown in Figure 7
below. Because all of the cost is fixed, the average-total-cost curve is downward-sloping
like an average-fixed-cost curve and the marginal cost is zero. The museum is a natural
monopoly.
Price
ATC
MC=0
Quantity
Figure 7
b. With a lump sum tax of $24, the price of admission is $0 so each person would visit the
museum (𝑄! = 10 − 0) 10 times. The benefit each person would get from the museum
"
would be consumer surplus of '# × 10 × 10) $50 less the $24 tax, or $26.
c. If the museum finances itself by charging an admission fee, the lowest price the museum
can charge without incurring a loss is $4, as shown in the following table.
Price Number of Visits Museum Profit

per Person 𝜋 = (𝑃 × 𝑄) − 𝑇𝐶
$2 8 ($2 x 800,000) – $2,400,000 = -$800,000
$3 7 ($3 x 700,000) - $2,400,000 = -$300,000
$4 6 ($4 x 600,000) - $2,400,000 = $0
$5 5 ($5 x 500,000) - $2,400,000 = $100,000
d. When the price is $4 and each person visits the museum 6 times, each person’s
"
consumer surplus is '# × (10 − 4) × 6) $18, which is $8 less than each person’s benefit
under the tax plan. Because each person has the same demand curve, all are better off
under the mayor’s plan.
e. The real world considerations that might favor an admission fee include the
administrative cost to collect the lump sum tax from all 100,000 residents compared to
the relatively simple collection of an admission fee and the unpopular nature of taxes.
8 a. Figure 8 below illustrates the demand, marginal revenue, and marginal cost curves.
Price
$70 MC
$50
$10
MR D
Quantity
20 35 70
Figure 8
Assuming Mr. Potter profit-maximizes, he sets MR=MC and solves for the profit
maximizing quantity. Then he substitutes the profit-maximizing quantity into the demand
curve:
70 – 2Q = 10 + Q
60 = 3Q
Q = 20
P = 70 – Q = $50
b. If the mayor sets a price ceiling 10% lower than the profit-maximizing price, the price
would be $45 and the quantity demanded would be ($45 = 70 − 𝑄) 25 units of water.
The marginal cost of producing 25 units of water is (10 +25) $35. While Mr. Potter would
prefer to sell 20 units at a price of $50 per unit, he is willing to sell 25 units at the ceiling
price of $45 because the price still exceeds his marginal cost of production.
c. Uncle Billy is incorrect. Price ceilings cause shortages when the ceiling price is lower than
the competitive price, at which price equals marginal cost. Because the ceiling still
exceeds the competitive price and marginal cost, there is no shortage in this case.
d. If the ceiling is set 50% below the profit-maximizing price, at $25, the quantity
demanded would be ($25 = 70 − 𝑄) 45 units of water and Mr. Potter would produce
($25 = 10 + 𝑄) 15 units of water, where the price equals his marginal cost. In this case,
Uncle Billy is correct. The price ceiling creates a shortage of 30 units of water.
9. a. The monopolist would set marginal revenue equal to marginal cost and then substitute
the profit-maximizing quantity into the demand curve to find the price:
10 – 2Q = 1 + Q
9 = 3Q
Q=3
P = 10 – Q = $7
Total revenue = P ´ Q = ($7)(3) = $21

Total cost = 3 + 3 + 0.5(9) = $10.5
Profit = $21 – $10.5 = $10.5
b. The firm becomes a price taker at a price of $6 and no longer has monopoly power. In a
competitive equilibrium, the price equals marginal cost so,
10 - Q = 1 + Q
10 = 1 + 2Q
9 = 2Q
Q = 4.5
P = 5.5
The firm will export soccer balls because the world price is greater than the domestic
price (in the absence of monopoly power). As Figure 9 shows, domestic production will
rise to 5 soccer balls, domestic consumption will rise to 4, and exports will be 1.
Figure 9
c. The price actually falls even though Wiknam will now export soccer balls. Once trade
begins, the firm no longer has monopoly power and must become a price taker.
However, the world price of $6 is greater than the competitive equilibrium price ($5.50)
so the country exports soccer balls.
d. Yes. The country would still export balls at a world price of $7. The firm is a price taker
and no longer is facing a downward-sloping demand curve. Thus, it is now possible to
sell more without reducing price.
10. a. Figure 10 shows the firm’s demand, marginal revenue, and marginal cost curves. The
firm’s profit is maximized at the output where marginal revenue is equal to marginal cost.
Therefore, setting the two equations equal, we get:
1,000 – 20Q = 100 + 10Q

900 = 30Q
Q = 30
The monopoly price is P = 1,000 – 10Q = 700 Ectenian dollars.
Figure 10
b. Social welfare is maximized where price is equal to marginal cost:
1,000 – 10Q = 100 + 10Q

900 = 20Q
Q = 45
At an output level of 45, the price would be 550 Ectenian dollars.
c. The deadweight loss would be equal to (0.5)(15)(300) = 2,250 Ectenian dollars.
d. i. A flat fee of 2000 Ectenian dollars would not alter the profit-maximizing price or
quantity. The deadweight loss would be unaffected.
ii. A fee of 50 percent of the profits would not alter the profit-maximizing price or
quantity. The deadweight loss would be unaffected.
iii. The marginal cost of production would rise by 150 Ectenian dollars if the director
was paid that amount for every unit sold. The new marginal cost would be 100 +
10Q + 150. The new profit-maximizing output would be 25, the marginal cost at
that level would be 500, and the price would rise to 750. The deadweight loss
would be smaller. With the new marginal cost function, the quantity at which
social welfare is maximized changes. Now, price is equal to marginal cost when
Q = 37.5:
1,000 - 10Q = 250 + 10Q
750 = 20Q
Q = 37.5
As a result, the deadweight loss would be equal to (0.5)(37.5-25)(750-500) =
1,562.50 Ectenian dollars rather than 2,250 Ectenian dollars.
iv. If the director is paid 50 percent of the revenue, then total revenue is 500Q –
5Q2. Marginal revenue becomes 500 – 10Q. The profit-maximizing output level
will be 20 and the price will be 800 Ectenian dollars. The deadweight loss will be
greater.
11. Larry wants to sell as many drinks as possible without losing money, so he wants to set
quantity where price (demand) equals average total cost, which occurs at quantity QL and
price PL in Figure 11. Curly wants to bring in as much revenue as possible, which occurs
where marginal revenue equals zero, at quantity QC and price PC. Moe wants to maximize
profits, which occurs where marginal cost equals marginal revenue, at quantity QM and price
PM.
Figure 11
12. a. Figure 12 shows the cost, demand, and marginal-revenue curves for the monopolist.
Without price discrimination, the monopolist would charge price PM and produce quantity
QM.
Figure 12
b. The monopolist's profit consists of the two areas labeled X, consumer surplus is the two
areas labeled Y, and the deadweight loss is the area labeled Z.
c. If the monopolist can perfectly price discriminate, it produces quantity QC, and has profit
equal to X + Y + Z.
d. The monopolist's profit increases from X to X + Y + Z, an increase in the amount Y + Z.

The change in total surplus is area Z. The rise in the monopolist's profit is greater than
the change in total surplus, because the monopolist's profit increases both by the amount
of deadweight loss (Z) and by the transfer from consumers to the monopolist (Y).
e. A monopolist would pay the fixed cost that allows it to discriminate as long as Y + Z (the
increase in profits) exceeds C (the fixed cost).
f. A benevolent social planner who cared about maximizing total surplus would want the
monopolist to price discriminate only if Z (the deadweight loss from monopoly) exceeded
C (the fixed cost) because total surplus rises by Z – C.
g. The monopolist has a greater incentive to price discriminate (it will do so if Y + Z > C)
than the social planner (she would allow it only if Z > C). Thus if Z < C but
Y + Z > C, the monopolist will price discriminate even though it is not in society's best
interest.

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15 MONOPOLY

1. The following table shows revenue, costs, and profits:

Price Quantity Total Marginal Total Cost Profit

a. A profit-maximizing publisher would choose a quantity of 400,000 at a price of $60 or a

Price Quantity Total Marginal Total Profit

Price Quantity Total Revenue Marginal

Price Quantity of Adult Total Revenue from Sale

Price Quantity of Child Total Revenue from Sale

Price Number of Visits Museum Profit

Total revenue = P ´ Q = ($7)(3) = $21

1,000 – 20Q = 100 + 10Q

The monopoly price is P = 1,000 – 10Q = 700 Ectenian dollars.

b. Social welfare is maximized where price is equal to marginal cost:

1,000 – 10Q = 100 + 10Q

At an output level of 45, the price would be 550 Ectenian dollars.

c. The deadweight loss would be equal to (0.5)(15)(300) = 2,250 Ectenian dollars.

d. The monopolist's profit increases from X to X + Y + Z, an increase in the amount Y + Z.

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