Assignment:
Principles of Economics Monopoly and Competition Assignment Worksheet Directions This assignment focuses on the comparison of perfect competition and monopoly in terms of efficiency and fairness. To complete this assignment you must complete all of the following questions. Microeconomic Problem Assume that Fred has a monopoly on the production of widgets in Smallville. He finds that he faces a downsloping demand for widgets-that is, he can sell more by lowering the price. In the chart of the demand schedule below, fill in the blanks for total and marginal revenue. ECO1050 - Principles of Economics Monopoly and Competition Assignment Worksheet
Directions
This assignment focuses on the comparison of perfect competition and monopoly in terms of efficiency and fairness. To complete this assignment you must complete all of the following questions.
Microeconomic Problem
1. Assume that Fred has a monopoly on the production of widgets in Smallville. He finds that he faces a downsloping demand for widgets-that is, he can sell more by lowering the price. In the chart of the demand schedule below, fill in the blanks for total and marginal revenue.
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Price
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Quantity Demanded
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Total Revenue
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Marginal Revenue
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$10
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0
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-
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$9
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1
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|
|
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$8
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2
|
|
|
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$7
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3
|
|
|
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$6
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4
|
|
|
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$5
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5
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|
|
|
$4
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6
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|
|
|
$3
|
7
|
|
|
|
$2
|
8
|
|
|
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$1
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9
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|
|
2. Notice what happens to Fred's total revenue as he produces and sells more-it graphs like a haystack, first going up, and then going down. A perfect competitor has a linear upsloping total revenue curve. Why? Why is the monopolist total revenue curve different from that of a pure competitor?
3. Notice marginal revenue. It is less than price at all levels of output except the first. To a pure competitor, P=MR. Once again, why? Why is MR less than price to a monopolist, while MR equals price to a pure competitor?
4. In what price range is the demand for Fred's Widgets elastic? (You do not have to use the elasticity formula-just use the total revenue test.) In what price range is the demand for Fred's Widgets inelastic?
5. Why would Fred neverchoose to produce in the inelastic portion of his demand curve? (What could he do to his costs of production and to his total revenue by producing less and charging more?)
6. Notice the relationship between marginalrevenue and totalrevenue. What is the value of marginal revenue when total revenue is maximized? Do not be fooled on any exam or on question 10 below-revenue maximization is different from profit maximization. Always use the MR=MC rule to determine profit maximization, but always use the rule you just developed to determine revenue maximization.
7. The graph above shows the demand (=AR=P) curve faced by a monopolist. What is the profit-maximizing output? What price will be charged at that output?
8. What is the cost per unit at that output? How much profit per unit will be made at that output? How much total profit will the monopolist make at that output?
9. Since this is a monopolist and, presumably, entry by rivals is blocked, the firm can make these economic profits in the long run. If this were, instead, a purely competitive firm, where would the price settle? Compare the output that would be produced by a pure competitor with the output of the monopolist. Would more or less be produced with competition? Would the price be higher or lower with competition?
10. What would be the revenue-maximizing output of this monopolist?
11. At equilibrium, is the price charged by the monopolist higher or lower than the MC? Is the price charged higher or lower than the minimum ATC? What do these facts tell you about the productive and allocative efficiency of monopoly versus pure competition?