Chapter 9: MONOPOLY
1. Pure monopoly, barriers to entry
2. Perfect competiton v. Monopoly
3. Cartels
4. Natural monopoly
5. Monopolistic competition
Reading: All
Problems: 1,3-5,7-10,12
WHAT YOU SHOULD BE ABLE TO DO
1. Determine monopoly level of output and price.
2. Compare monopoly with the competitive price and quantity and determine the welfare (deadweight, efficiency) loss.
3. Compute a cartel's profit-maximizing quantity and price.
4. For a natural monopoly, determine the unregulated (profit-maximizing) price, regulated solutions via average-cost pricing and marginal cost pricing.
5. For monopolistic competition, determine the firm's profit-maximizing solution and the long-run equilibrium price and firm quantity.
EXAMPLES
1. A firm has a patent on a drug. It's demand (price) equation is: P = $500 -0.2Q, and its long-run total cost is: LTC = 0.6Q.
a. Determine the firm's LAC and LMC.
b. Determine the profit-maximizing price and quantity, and the firm's profits..
c. What would price and output be under perfect competition?
d. Determine the deadweight loss.
2. The demand equation for a monopolistically competitive firm is: P = 4.75 -0.2Q. The firm's LAC is: LAC = 5-0.3Q+0.01Q^2..
a. Determine the profit-maximizing price and quantity.
b. Explain whether the price you found in part a is also the long-run equilibrium price.
3. A market consists of two firms, A and B, that decide to form a cartel. Their long-run total costs are: LTCA = 6QA + QA^2 and LTCB = 19QB + 0.5QB^2.
a. If they decide to limit total output to 14, how much will each firm produce?
b. If market demand is P = 86-Q, determine the optimal output and price.
c. Determine the cartel's profits.
4. A firm has a natural monopoly with LTC = 80+2Q.
a. Verify that the firm has a natural monopoly.
b. If its price equation is P = 40-0.5Q, determine the unregulated price, output and profits.
c. What is the price and output under average-cost pricing?
d. What is the price and output under marginal-cost pricing? Determine profits.
Determine the per unit subsidy that will enable the firm to continue producing in the long-run.