CHAPTER 14
MONOPOLY
The problems in this chapter deal primarily with marginal revenuemarginal cost
calculations in different contexts.
For such problems, students' primary difficulty is to
remember that the marginal revenue concept requires differentiation with respect to
quantity
.
Often students choose to differentiate total revenue with respect to price and
then get very confused on how to set this equal to marginal cost.
Of course, it is possible
to phrase the monopolist's problem as one of choosing a profitmaximizing price, but
then the inverse demand function must be used to derive a marginal cost expression.
The
analytical problems in this chapter take alternative approaches to some of the topics
explored earlier.
Varian’s approach to the welfare effects of third degree price
discrimination (Problem 14.12) is especially recommended.
Comments on Problems
14.1
A simple marginal revenuemarginal cost and consumer surplus computation.
14.2
An example of the
MR = MC
calculation with three different types of cost curves.
14.3
An example of the
MR = MC
calculation with three different demand and
marginal revenue curves.
Illustrates the "inverse elasticity" rule.
14.4
Examines graphically the various possible ways in which shift in demand may
affect the market equilibrium in a monopoly.
14.5
Introduces advertising expenditures as a choice variable for a monopoly.
The
problem also asks the student to view market price as the decision variable for the
monopoly.
14.6
A price discrimination example in which markets are separated by transport costs.
The problem shows how the price differential is constrained by the extent of those
costs.
Part d asks students to consider a simple twopart tariff.
14.7
This problem shows how the welfare cost of monopoly may be larger than in the
traditional case if the monopoly has higher costs.
14.8
This problem examines some issues in the design of subsidies for a monopoly.
14.9
A problem involving quality choice.
The result shows that, in this case,
monopolist's and competitive choices are the same (though output levels differ).
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Chapter 14: Monopoly
Analytical Problems
14.10
Taxation of a monopoly good.
This problem focuses mainly on
ad valorem
taxes on a monopoly good.
The final part of the problem compares
ad valorem
and specific taxes.
Solutions
14.1
a.
P
= 53 
Q
PQ
= 53
Q

Q
2
MR = 53  2
Q
= MC = 5
Q
= 24,
P
= 29,
π
= (
P

AC)
⋅
Q
= 576
b. MC =
P
= 5
P
= 5,
Q
= 48
c.
Competitive Consumers' Surplus =
2
(48)
2
= 1152.
Under monopoly:
Notice that the sum of consumer surplus, profits, and Deadweight loss under
monopoly equals competitive consumer surplus.
14.2
Market demand
Q
= 70 
P
,
MR = 70  2
Q
.
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 Winter '10
 Anam,Mahmudul
 Monopoly, Supply And Demand, prior consent, U.S. Edition

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