Chapter 10
How Monopolies Work
Supplemental Instruction
Iowa State University
Leader:
Course:
Instructor:
Date:
Veronica
Econ 101
Kreider
12-2-14
1. A Monopoly is either:
a. a market in which only one firm sells a product with no close
substitutes; or
b. the single firm that sells in that market.
2. Fill in the Table:
Reasons Monopolies Emerge
Definition
Picture or
Example
Economies
of Scale
economies of scale in
production causes a firm’s
long-run average cost curve
to slope downward. That is,
the more output the firm
produces, the lower will be
its cost per unit.
Legal
Barriers
Government Placed Barriers Patent:
allowing a monopoly by
Copyright.
creating barriers to entry
To Support Research and
Development
Network
Additional benefits enjoyed
Externalities by all users of a good or
service because others use
it as well.
Type of
Monopoly
Natural
Monopoly
Sometimes:
government
franchise
Type of Monopoly
Definition
A monopoly that arises
when, due to economies of
scale, a single firm can
produce for the entire
market at lower cost per
unit than could two or
more firms.
A government-granted
right to be the sole seller
of a product or service.
(anyone that enters will be
prosecuted)
often grant franchises
when they think the
market is a natural
monopoly
Facebook,
postal service,
Windows
3. Fill in the blank:
a. Monopoly, face a downward-sloping demand curve, marginal revenue is
less than the price of output. Therefore, the marginal revenue curve will
lie below the demand curve.
b. Monopolists are price-markers. There choose Q where MR=MC, but mark
price up above MC.
c. A monopoly makes a profit when P > ATC
d. A monopoly suffers a loss when P < ATC
e. Its total profit/loss at the best output level equals the area of a rectangle
with height equal to the distance between P and ATC and width equal to
the level of output.
f. monopolies may earn economic profit in the long run.
4. Looking at the Figure to the right:
a. What is the profit-maximizing
price the monopoly will
charge?
P = $8
b. What is the profit/loss the
monopoly will make/suffer?
0
2
4
6
8
10 12
14
16
18
Profit = ($8 - $6) * 4 million
Quantity (Millions units per year)
= $8million
c. How much would the monopoly be willing to spend to keep their patent?
Up to $8 million
20
5. Looking at the Figure to the right:
a. What is the profitmaximizing price the
monopoly will charge?
P = $3
b. What is the profit/loss the
monopoly will make/suffer?
0
2
4
6
8
10 12
14
16
18
20
Loss = ($3 – $3.5) * 8 million
Quantity (Millions units per year)
= $4 million
0
2
4
6
8
10 12
14
16
18
20
c. Would it be smart for them
Quantity (Millions units per year)
to produce less at a quantity
of 4 million? Why?
No.
Loss = ($4 –>$5) * 4 million
= > 4 million. They would make a greater loss by changing
quantity to 4 million
d. Should this monopoly produce or shutdown in the short run? In the long run?
Short Run you don’t know because you don’t know the AVC.
Long Run shut down because P < ATC
6. Looking at the Figure to the right:
a. What is the profit-maximizing
price the monopoly will
charge?
P= $3
b. What is the profit/loss the
monopoly will make/suffer?
Profi = ($3 - $2.5 ) * 8 million
=$4 millon
c. How much would the
0
2
4
6
8
10 12
14
16
18
20
0
2
4
6
8
10 12
14
16
18
20
monopoly be willing to
Quantity (Millions units per year)
Quantity (Millions units per year)
spend to keep their patent?
$4 million