+
HW:
Read/notes Mod. 63 (Price
Discrimination)
Micro Packet Work
Able to complete 3.10-3.15
Monopoly FRQ Jigsaw
Students will graphically identify implications of monopoly markets on CS,
DWL, profit, losses, TR, in the face of multiple forms of regulation. Students will
complete the day by drafting their set of rules to govern their monopoly
analysis.
Natural
Monopoly
Illustrated
+
Allocative Efficiency
occurs where cost of
last unit equals price
paid MC = P
Fair Return
P/Q:
ATC = P
Socially
Optimal:
MC = P
Profit Maximizing/
Unregulated MR =
MC
+
Accounting vs. Economic Profit
 What
is the state of a firm’s accounting
profit if their economic profit is equal to $0?
They’re making an accounting profit! Remember,
economic profit considers opportunity cost, while
accounting does not. Therefore a firm can have a normal
economic profit while having a positive accounting
profit.
+
Taxes and Subsidies
What happens when our firm is subject to a tax or subsidy?
Subsidy:
Tax:
Payments to
the firm
Lump Sum
Subsidies:
Per Unit
Subsidies:
Lowers ATC
(Shifts
downward)
One time
payments to.
FC. ATC.
MC no
change.
Payments to on
every unit.
VC. ATC.
MC.
Firm pays
government
Lump Sum Tax:
Per Unit Tax:
One time
payment. One
time cost. FC.
ATC.
MC no change!
Payment on
every unit sold.
VC. ATC.
MC.
Increases
costs of
operation.
Specific
types!
+ Why we should NEVER tax a
monopoly.

Let’s assume the government imposes a per unit tax on the
local (and only) gas station in town.
+ Why we should NEVER tax a
monopoly.

Let’s assume the government imposes a per unit tax on the
local (and only) gas station in town.
MC2
The per unit
tax increases
costs per
unit. Thus
increasing
MC….
Price will
increase and
quantity will
fall!
Leave the
monopoly
alone!
PM2
QM2
+
Closure

Draft a set of rules for your interpretation of monopolies on
the test:

Consider:

Order of procedure

Identification of key points

Types of monopolies

Regulation techniques