Suggestions for problem set 7

 

This problem set focuses on how a monopolist sets price and output and how this differs from a group of competitive firms.

 

Problem 1 requires you to compute the monopoly price in each of three markets. Review pages 245-246 in the text regarding how a monopolist determines its profit-maximizing level of output and the corresponding price it charges. You should be able to apply this directly to problem 1.

 

Problem 2 develops the relationship between marginal revenue and the price elasticity of demand. Could it ever be profitable for a monopolist to produce an output where the revenue from the marginal unit (i.e., the marginal unit) is negative? Use your answer to this question to address part c of problem 2.

 

Problems 3 and 4 require you to compare the price and output that would be determined in a market under perfect competition versus monopoly. You should be able to analyze this graphically. Draw a supply and demand curve for a competitive industry. The price must be such that it equals the marginal cost of each producer, with the supply curve reflecting firm marginal cost curves. Assume that the price also equals the minimum average total cost, so that the industry is in long-run equilibrium. Now imagine all the competitors merge to form a monopoly. Represent graphically the marginal revenue curve of the monopolist on the same graph as the demand and supply curve for the competitive industry. What output will the monopolist produceówill it be greater than, less than, or the same as the group of competitors? How will the price charged compare with the price under perfect competition? How will the monopolistís profits compare with the group of competitors? The answers to these questions should enable you to answer problem 3. To answer problem 4, analyze graphically the effects of the demand shifts in parts a and b on the price and output of the monopolist and compare this to the effect of the same demand shifts on a group of competitors.

 

A revenue-maximizing monopolist is concerned only with its revenues, not with its costs or profits. If the monopolist produced an output where the revenue from the marginal unit was positive, what would happen to the total revenue of the monopolist if it increased its output? . If the monopolist produced an output where the revenue from the marginal unit was negative, what would happen to the total revenue of the monopolist if it increased its output? If the monopolist produced the output that maximized its revenues, what would the marginal revenue have to equal? Represent this graphically. What role would the monopolistís marginal cost curve play in the determination of its revenue-maximizing output?

 

Quiz 7 integrates themes from a number of the problems, focusing on how a cost shift affects the various curves pertinent to a monopolist and in turn the price and output supplied by the monopolist.