# ECON1001 Study Guide - Final Guide: Price Discrimination, Demand Curve, Marginal Revenue

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2. Do you agree with the following statement? “Monopolists always earn excessive

profits and are always inefficient.” Explain your answer.

The statement is incorrect. Monopolists often earn excessive profits and are inefficient

but not always. [2 points]

Regulation or more sophisticated pricing can address these problems. [3 points].

Monopolist can be efficient when no consumers pay more then the MC of the product-

can be achieved through regulation or price discrimination.

And monopolists can make losses if fixed costs are high relative to demand for the

product. [3 points]

1. When is monopoly efficient?

A monopoly is efficient when there are no consumers willing to pay more for the good or

service than the marginal cost of production. This can be achieved by either certain forms of

price discrimination or regulation.

2. Explain how economic forces drive economic profits to zero in the long run in

perfect competition.

If there are economic profits in an industry firms will enter the industry. This shifts the

supply curve to the right and as long as demand is downward sloping prices fall. This reduces

the gap between ATC and price and therefore, economic profit. Firms will continue entering

until P=ATC and so there is no economic profit. If P<ATC then economic profit is negative

and firms will exit, shifting the supply curve left and prices up until P=ATC.

9. Imagine you own and operate a business selling t-shirts with pictures of local

scenery on them on a small resort island where there is no competition (your

business is a monopoly). Your demand curve is given by P = 40 - 0.1Q, where Q is

the number of t-shirts you sell per week and P is the price consumers are willing to

pay. Your marginal cost is a constant $10 per t-shirt (it does not depend on the

number of shirts you sell). Your weekly fixed costs are $500.- question is similar to

2017 Jamaica question -working out at bottom of page.

a. Draw a graph of your demand and marginal cost curves.

b. Write down the formula for your marginal revenue curve and add the curve to the

graph.

c. Calculate the profit maximizing price and quantity and show them on your graph

as well as showing in writing how you found them.

d. Calculate your economic profit. Hint: Note that marginal cost is equal to average

variable cost in this case.

e. Calculate the deadweight loss due to the monopoly.

[3 points for each correct answer]

a.

b.

MR =40 -0.2Q

c. For the profit maximizing quantity, MR = MC:

10 =40 -0.2Q

-30

-.2 =Q

Q=150

If Q is 150 then from the formula for the demand curve:

P=40 -0.1*150

P=25

d. Economic profit is revenue – total costs. With 150 shirts at $25 each, revenue is $3,750.

TC =MC *Q+FC

TC =10 *150 +500 =2000

Therefore profit is $1,750.

e. The deadweight loss is the triangle under the demand curve to the right of the level of

sales under monopoly, which is $1,125.

DL =25 -10

( )

*(300 -150) /2 =1125