Principles of economics: understanding monopoly Essay

| |Refer to the diagram below for a non-discriminating monopolist and answer the following questions 1 to 7: | | | |[pic] | | |1. |The profit-maximizing output for this firm is M. |T / F | |2. |At the profit-maximizing output the firm’s economic profit will be BAFG. |T / F | |3. |At output R economic profits will be zero. |T / F | |4. |At output Q production will be unprofitable. |T / F | |5. |The profit-maximizing price for this firm is J. |T / F | |6. |At output M total cost will be 0CHM. |T / F | |7. |If the government regulates the monopolist so that it charges the socially optimal price, the monopolist will |T / F | | |produce output Q. | | |8. |A monopoly is an industry with a single firm in which the entry of new firms is blocked. |T / F | |9. |If entry of new firms is prohibited in a pure monopoly industry the monopolist may be able to earn normal profit in|T / F | | |the long run. | | |10. |The pure monopolist’s demand curve is the industry demand curve. |T / F | |11. |A monopolist sets the price at which marginal revenue equals marginal cost. |T / F | |12. |When a monopolist incurs a loss it will produce as long as its total revenue covers its total variable costs. |T / F | |13. |Natural monopolies result from extensive economies of scale in production. |T / F | |SECTION B | |1. |[pic] | | |Refer to the diagram above. Determine the: | | | | | | |i. |Price equilibrium | | |ii. |Quantity equilibrium | | | | | | |At equilibrium, calculate the: | | | | | | |iii. |Total variable costs | | |iv. |Total costs | | |v. |Total fixed costs | | |vi. |Total revenue | | |vii. |Total profit/loss | |2. |The following diagram shows the costs and revenues for the producer of Company DeMassa. | | | | | | | |[pic] | | | | AR = average revenue | | | | MR = marginal revenue | | | | AC = average cost | | | | MC = marginal cost | | | | | | | | | | |a. |At what output and price will the producer maximize its profits? Explain | | | | | | |b. |How much profit/loss will be made? Should the firm continue production? | | | | | | |c. |Would you categorize Company DeMassa’s market structure as perfect competition or imperfect competition? | | | |Explain. | | | | | | |d. |List four characteristics of the market structure above. | | | | | | |e. |Based on part a, calculate the total fixed cost of the firm. | | | | | | SECTION C 1. Explain the various price discrimination practices. Price discrimination is bad for the public. Do you agree with this statement? 2. List four types of barriers to entry. 3. Explain the advantages and disadvantages of monopoly. MC AC AVC 9 10 11 12 AR Quantity (million, unit) MR Price, $ 7 6 5 4 Quantity (‘000) MR AR 22 20 17 16 14 Price (RM) MC AC AVC 160 185.