ECN 104 Lecture Notes - Monopolistic Competition, Marginal Revenue, Price Discrimination

141 views4 pages
Answer Assignment Eight
1. Explain how monopoly causes an inefficient allocation of resources when the competitive firm
does not, even when both seek to maximize profits.
Both monopolies and competitive firms will maximize profits where marginal revenue equals
marginal cost. The difference is that in a competitive environment, marginal revenue is the same
as the price. Therefore, price is equal to marginal cost and in the long run this will be at the
minimum average cost level. This means that there are no economic profits, and there is
allocative efficiency because consumers are paying a price equal to the marginal cost of the last
product produced. Also, productive efficiency exists because P = minimum ATC.
However, the monopoly finds its marginal revenue is below the price it can obtain at each output
level. This occurs because the monopolist faces a downsloping market demand curve, and to sell
larger output, it must lower the price. Since the price is lowered on all units of output, the gain in
total revenue is less than the price for each additional unit produced. That is, the marginal
revenue is below the price. When a monopoly finds the output level where marginal revenue
equals marginal cost, it then finds that it can sell that level of output at a price that exceeds the
marginal revenue. Therefore, the consumer is paying a price that exceeds the marginal cost of
production. This means allocative efficiency is not achieved. If the price were allowed to fall to
the marginal cost, the consumer would purchase a greater quantity at a lower price. Therefore,
the monopoly situation is not efficient from the economic point of view. Specifically, there is an
underallocation of resources (P > MC). Also, production does not occur at minimum average
total cost so productive efficiency is not realized. There is also the possibility that a lack of
competitive pressure will cause the monopolist to be less efficient in its production methods (x-
inefficiency), so monopoly may not be as efficient in the production sense as is the competitive
firm.
2. Assume that a monopolist is able to engage in perfect price discrimination and sell each unit of
the product at a price equal to the maximum price the buyer of that unit of the product would be
willing to pay. Complete the table below by computing total revenue and marginal revenue for
the price discriminating monopolist.
Total Marginal Total Total Marginal
Quantity Price revenue revenue cost cost
0 $34 $______ $ 20
1 32 ______ $______ 36 $______
2 30 ______ ______ 46 ______
3 28 ______ ______ 50 ______
4 26 ______ ______ 54 ______
5 24 ______ ______ 56 ______
6 22 ______ ______ 64 ______
7 20 ______ ______ 80 ______
8 18 ______ ______ 100 ______
9 16 ______ ______ 128 ______
10 14 ______ ______ 160 ______
(a) What is the marginal revenue that the discriminating monopolist obtains from the sale of each
additional unit?
(b) How many units would be produced and what would be the total revenue for the perfectly
discriminating monopolist? What would economic profits be?
Unlock document

This preview shows page 1 of the document.
Unlock all 4 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Answer assignment eight: explain how monopoly causes an inefficient allocation of resources when the competitive firm does not, even when both seek to maximize profits. Both monopolies and competitive firms will maximize profits where marginal revenue equals marginal cost. The difference is that in a competitive environment, marginal revenue is the same as the price. Therefore, price is equal to marginal cost and in the long run this will be at the minimum average cost level. This means that there are no economic profits, and there is allocative efficiency because consumers are paying a price equal to the marginal cost of the last product produced. Also, productive efficiency exists because p = minimum atc. However, the monopoly finds its marginal revenue is below the price it can obtain at each output level. This occurs because the monopolist faces a downsloping market demand curve, and to sell larger output, it must lower the price.

Get access

Grade+
$10 USD/m
Billed $120 USD annually
Homework Help
Class Notes
Textbook Notes
40 Verified Answers
Study Guides
Booster Classes
Class+
$8 USD/m
Billed $96 USD annually
Homework Help
Class Notes
Textbook Notes
30 Verified Answers
Study Guides
Booster Classes