Handout 13 (Monopoly – Market Structure, and Applications) with Solutions

Handout 13 Monopoly – Market Structure, and Applications This handout contains exercises of - Monopoly Things you should know - What are the characteristics of monopoly market? - How does a monopolist maximize its profit? Can it shutdown or exit? - Why is there no supply curve for monopoly market? Exercises Question 1 (Market Structure) 1. If a firm producing goods in a perfectly competitive industry raises its price by 1% above the market price, its quantity sold will ________________. 2. The demand curve for goods produced by a firm in perfectly competitive industry is _______________, while the demand curve for a firm in monopoly market is _______________. 3. Which of the following descriptions would be close to the definition of firms/market in imperfect competition? i) Apple iPhone ii) Shell gasoline pump in large Interstate stops with 10 other brand pumps iii) Madison Gas and Electric, provider of electricity in Madison iv) Corn in the United States 4. Which of the following statements is true when the market structure is monopoly? a. There are many buyers and sellers in this market. b. There are barriers to entry in this market. c. The products sold in this market by different firms are indistinguishable. d. Each firm in the market always earns positive economic profit. 5. Explain economically why each of us does not own personal nuclear power generator. 10 12 Question 2 (Numerical Questions – Graph Format) 6 ATC 2 4 Price 8 MC D 0 MR 0 2 4 6 8 10 12 Quantity 1. In the graph above, suppose the average total cost is $3 when quantity is 4 units. This monopolist should produce the profit-maximizing quantity of ____________ units and set the price at ___________. This monopolist earns a profit of ____________ in the short-run and in the long-run it should ______________. 2. A profit-maximizing monopolist produces a positive quantity Q* > 0. At Q* the monopolist also finds that ATC > P > AVC > MR = MC. Given this information, this monopolist should 1 _________________ in the short-run and earns ________________. Assuming that there is no change to the demand or cost structure of this good, this monopolist should _______________. 3. Suppose a monopolist currently produces a positive quantity to maximize its profit and it is earning positive profit. Suppose it faces a fine of $50,000 for environmental violation so it earns negative economic profit, then in the short-run, it should [ keep operating at the same quantity / operate at lower quantity / shut down ] Question 3 (Numerical Questions – Table Format) The table below shows the quantity demanded at each price for a good, and the total cost to produce at each quantity for a monopolist. Q P TC 0 90 100 10 80 800 20 70 1200 30 60 1500 40 50 1700 50 40 2000 1. What is the profit-maximizing quantity? What price should this monopolist set for this good? What is the profit this monopolist earns? 2. Suppose this monopolist must now bribe the government to maintain the status as the sole producer. The government offers two ways to do so: Option 1: Pay a license fee of $10 per unit produced Option 2: Pay a flat license fee of $300 i) In each of the options offered by the government, evaluate the profit-maximizing behavior of this monopolist. ii) Which option would you, as a monopolist, choose? iii) What is the government revenue if you choose Option 1? Question 4 (Numerical Questions – Equation Format) Suppose the market demand of a good produced by monopolist is given by: P = 40 – Q. For this monopolist, the total cost is: TC = Q2 + 100, the marginal cost is: MC = 2Q. 1. What is the profit-maximizing quantity? What price should this monopolist set for this good? What is the profit this monopolist earns? 2. Suppose the fixed cost is now $350. In the short-run, what is the profit-maximizing quantity? What price should this monopolist set for this good? What is the profit this monopolist earns? Should this monopolist operate in the long-run? 2