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Monopoly Quiz Recap
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a) Assume that this profit-maximizing monopolist is unregulated. Identify each of the following:
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i) The monopolist’s quantity of output
10
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ii) The monopolist’s price
$30
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iii) The profit earned by the monopolist
$150
6
iv) The deadweight loss
$75
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b) Can the profit-maximizing monopolist continue to earn profit in the long run? Yes!
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c) Now assume that the monopolist can perfectly price discriminate. Identify each of the following:
= MR
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i) The quantity produced
= MR
20
10
ii) The profit earned by the monopolist
= MR
$250
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iii) The consumer surplus
= MR
None!
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d) Now, assume instead that the monopolist cannot price discriminate and is regulated to produce the socially optimal (allocatively efficient) quantity. Identify each of the following:
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i) The socially optimal quantity
20
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ii) The consumer surplus
$250
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e) Is the monopolist facing the regulation in part (d) earning a positive economic profit, earning zero economic profit, or incurring a loss?
Earning zero economic profit
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f) Now, assume instead that the monopolist cannot price discriminate and is regulated to produce the break-even (zero economic profit) quantity. Identify each of the following:
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i) The monopolist’s quantity of output
20
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ii) The monopolist’s price
$15
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g) Is the dot marked by the delicious slice of pecan pie on the elastic, inelastic, or unit elastic portion of the demand curve?
elastic
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h) What is the meaning of life?
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h) What is the meaning of life? ____________ pie
Monopolistic CompetitionMonopolistic Competition
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Examples:
Everything
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Differentiated Products
Characteristics of Monopolistic Competition:
•Relatively Large Number of Sellers•Differentiated Products•Some control over price •Easy Entry and Exit (Low Barriers)•A lot of non-price competition (Advertising)
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PerfectCompetition
PureMonopoly
MonopolisticCompetition Oligopoly
PureMonopoly
MonopolisticCompetition Oligopoly
Monopolistic Qualities• Control over price of own good
due to differentiated product• D greater than MR • Plenty of Advertising• Not efficient
“Monopoly” + ”Competition”
Perfect Competition Qualities• Large number of smaller firms• Relatively easy entry and exit• Zero Economic Profit in Long-
Run since firms can enter26
• Goods are NOT identical.• Firms seek to capture a piece of the market by making unique goods.
• Since these products have substitutes, firms use NON-PRICE Competition.
Examples of NON-PRICE Competition• Branding• Unique Product Attributes • Advertising (Two Goals)
1. Increase Demand 2. Make demand more INELASTIC
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Differentiated Products
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Warm Up1. What are the differences between
monopolistic competition and perfect competition?
2. What are the differences between monopolistic competition and monopoly?
3. What are the differences between Donald Trump and this dog?
Graphing Monopolistic Competition
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D
MR
MCATC
30Q
Monopolistic Competition is made up of price makers so MR is less than Demand
In the short-run, it is the same graph as a monopoly making profit
In the long-run, new firms will enter, driving down the DEMAND for firms
already in the market.
P
Q1
P1
D
MR
MC
31Q
P
New firms enter => demand for firm’s product falls until there is no economic
profit
ATC
Q1
P1
D
MR
MC
32Q
P
New firms enter => demand for firm’s product falls until there is no economic profit
ATC
QLR
PLR
Price and quantity falls and TR=TC
D
MR
MC
33Q
P
LONG-RUN EQUILIBRIUM
ATC
QLR
PLR
Quantity where MR =MC up to Price = ATC
Why does DEMAND shift?When short-run profits are made…
–New firms enter.–New firms mean more close
substitutes and less market share for each existing firm.
–Demand for each firm’s product falls.
When short-run losses are made…–Firms exit. –Result is fewer substitutes and larger
market share for remaining firms.–Demand for each firm’s product rises.
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D
MR
MC
ATC
35Q
What happens when there is a loss?
In the long-run, firms will leave, driving up the DEMAND for firms
already in the market.
P
Q1
P1
In the short-run, the graph is the same as a monopoly making a loss
D
MR
MC
ATC
36Q
Firms leave so demand increases until there is no economic profit
P
Q1
P1
D
MR
MC
ATC
37Q
Firms leave so demand increases until there is no economic profit
P
QLR
PLR
Price and quantity increase and TR=TC
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Side NoteThe elasticity of demand for a monopolistically competitive firm’s product varies with the number of competitors:
If there are many competitors (and therefore many substitutes), demand for the firm’s product will tend to be more elastic
If there are fewer competitors and substitutes, demand will tend to be less elastic
Are Monopolistically Competitive Firms
Efficient?
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D
MR
MC
40Q
P
LONG-RUN EQUILIBRIUM
ATC
QLR
PLR
Not Allocatively Efficient because P MC Not Productively Efficient because not
producing at Minimum ATC
QSocially Optimal
D
MR
MC
41Q
P
LONG-RUN EQUILIBRIUM
ATC
QLR
PLR
This firm also has EXCESS CAPACITY
QSocially Optimal
• The firm can produce at the lowest per unit cost (minimum ATC) but it chooses not to.
• Excess capacity = the gap between the minimum ATC output and the profit maximizing output.
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Excess Capacity
D
MR
MC
43Q
P
LONG-RUN EQUILIBRIUM
ATC
QLR
PLR
The firm can produce at a lower cost but it holds back production to
maximize profit
QProd Efficient
Excess Capacity
• Large number of firms and product variation meets society’s needs.
• Nonprice Competition (product differentiation and advertising) may result in sustained profits for some firms.
Ex: Nike might continue to make above normal profit because they are a well-known brand.
Advantages ofMONOPOLISTIC COMPETITION
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