Monopoly

True/ False

1.A profit maximizing monopolist facing no entry threat will operate on the elastic portion of the market demand curve.

2. Even if an industry has IRTS over the entire range of output, the sum of the producer's and the consumer's surplus will be maximized by pricing at marginal costs.

3.Since a monopoly is a "bad" thing for consumers but a "good" thing for producers, on balance, we cannot be sure that the monopoly is responsible for any loss in economic efficiency.

4. The quantity sold by a monopolist that maximizes its sales can never be equal to the quantity that would be sold under profit maximization if marginal costs are positive.

5. The marginal revenue of a good that costs $5 and has an own-price elasticity (in absolute value) equal to 0.2 is -20.

Answers: 1.T     2.T    3.F    4. T    5.T

3. Short Questions

1. Calculate the marginal revenue curves associated with the following inverse demand or demand functions

a). p = 130 - y
b). y = 100 - p
c). p = 1/y

Answers: a) 130-2y b) 100-2y c) 0.

4. Long Questions

1. The (inverse) market demand for snowshovels in Spuzzum is given by p = 50 - .5y

a). Snowgone Inc. is the only supplier of showshovels in Spuzzum.
Its total cost function is given by TC = 10y

Calculate:
i). the profit maximizing level of output
ii). the profit maximizing price
iii). the consumers surplus
iv). the monopoly profits
v). the burden of monopoly (deadweight loss)

b). Snowgone Inc. loses a legal battle and as a result has to pay licensing fee of $700 per year to MasterShovels Ltd. Its total costs therefore increase to TC = 10y + 700

With this new cost function, once again calculate

i). the profit maximizing level of output
ii). the profit maximizing price
iii). the consumers surplus
iv). the monopoly profits
v). the burden of monopoly (deadweight loss)

Are your answers the same as in part (a) or different? Explain why.
 

c). If all potential showshovel suppliers have cost functions as shown in part (a), is Snowgone Inc. a natural monopoly? Explain (Hint: Calculate the residual demand function. Would another firm, facing this demand function, be able to make positive profits?).

d). If all potential showshovel suppliers have cost functions as shown in part (b), is Snowgone Inc. a natural monopoly? Explain.

Answers: a) y=40, p=30, CS=400, Profit=800, DWL=400; b)  y=40, p=30, CS=400, Profit=100, DWL=400; c) NO the residual demand is y=60-2p.The profit for the potential entrant is 200. d) YES Because of the fixed cost the market cannot support the second firm. The potential entrant makes negative profits if enters, therefore will stay out.