Homework – November 6th Review pages 438 – 444.

1. Homework – November 6th Review pages 438 – 444. 1. Explain what it means to say that the monopolist is a “price maker.” 2. Explain the relationship between output and price for the monopolist. 3. Explain why the monopolist has no supply curve. 4. Draw a graph of a monopoly like the one on page 445. Include all the curves shown on figure 24.4. Use your graph to answer the following questions: a. Identify the monopolist’s profit-maximizing price and level of output on your graph. b. Shade in and label the area of economic profit (or loss) on your graph. c. If the monopolist’s marginal cost decreases, how will price and quantity be affected? Show this on your graph.

2. Chapter 24 – Pure Monopoly • What are the characteristics of Pure Monopoly? • Single seller • No close substitutes • Blocked entry

3. Chapter 24 – Pure Monopoly • What are the market conditions that create a Pure Monopoly? • Barriers to Entry: Economies of Scale Patents and licenses Others

4. A monopoly is a price maker. What does this mean? Because the firm is the entire industry, it decides output levels for the entire market. It then sets price based on market demand for the product at that level of output. Price • P1 • P2 • D The demand curve, for the monopoly is downward sloping. 0 • Q2 • Q1 • Quantity

5. Marginal Revenue and Price • In monopoly, price and marginal revenue are not the same. • This is because of the monopoly’s downward-sloping demand curve. • To increase output, the monopolist must lower price, not just for the next unit, but for all units. • Example: if the monopolist could sell 10 units at $100 each, but had to lower the price to $99 to sell 11 units, what is the marginal revenue of the eleventh unit?

6. Marginal Revenue and Price • Example: if the monopolist could sell 10 units at $100 each, but had to lower the price to $99 to sell 11 units, what is the marginal revenue of the eleventh unit? 10 x 100 = $1000 11 x 99 = $1089 • Total revenue goes up by $89, so marginal revenue is $89, not the $99 price.

7. For a monopoly, marginal revenue is always less than price. Price • Demand • Marginal Revenue 0 • Quantity

8. How does a monopolist maximize profit? Set output where MR = MC. Price • MC • D • MR 0 • QM • Quantity

9. What price does the monopolist charge? Follow the quantity where MR = MC up to the demand curve. Price • MC • PM • D • MR 0 • QM • Quantity

10. What is the area of profit or loss for the monopolist? Price • MC • ATC • PM Profit • D • MR 0 • QM • Quantity

11. Does the monopolist always make a profit? Price • MC • ATC • PM Loss • D • MR 0 • QM • Quantity

12. And finally, what happens to output when a monopoly’s costs change? • MC Price • ATC • PM • P2 • D • MR 0 • QM • Q2 • Quantity

13. End Part 1

14. Price Discrimination Price($) MC Consumer Surplus ATC • PM Producer Surplus Deadweight Loss Demand Marginal Revenue • 0 • QM • QUANTITY

15. Price Discrimination • Conditions: A. Monopoly power. B. Market segregation: separate your customers into groups based on how much they’re willing to pay. C. No resale (customers cannot re-sell their purchase to someone else at the lower price). II. Results: A. Firm can charge each customer as much as they are willing to pay. B. Increases profit and output. C. Decreases consumer surplus (perfect price discrimination completely eliminates consumer surplus).

16. Price Discrimination Examples? Price($) MC ATC • PM • PD Demand Marginal Revenue • 0 • QM • QD • QUANTITY

17. Perfect Price Discrimination Examples? Price($) MC ATC • PM Demand Marginal Revenue • 0 • QM • QUANTITY