3.3, 4.4, 5.4, 5.5, 5.7, 5.12, 5.13
Ed Scahill has acquired a monopoly on the production of baseballs, (don’t ask how)
and faces the demand and cost situation shown in the following table.
Fill in the remaining values in the table
If Ed wants to maximize profits, what price should he charge, and how
many baseballs should he sell? How much profit will he make?
He should charge $16 and produce 35,000 baseballs per week; then his profits would be
Suppose the government imposes a tax of $50,000 per week on baseball
production. Now what price should Ed charge, how many baseballs should
he sell, and what will his profits be?
Tax does not really affect his marginal cost/revenue, therefore he should not alter what he
charges or produces. His profit on the other hand, will fall to $10,000.
Economist Harvey Leibenstein argued that the loss of economic efficiency in
industries that are not perfectly competitive has been understated. He argued that when
competition is weak, firms are under less pressure to adopt the best techniques or to hold
down their costs. He referred to this effect as “x-inefficiency”. If x-inefficiency causes a
firm’s marginal costs to rise, show that the deadweight loss in Figure 14-5 understates the
true deadweight loss caused by a monopoly.
The marginal cost is going to fall from MC
as shown in the picture. If the
monopoly has higher costs then the deadweight loss would increase. The dark area is the
original deadweight loss but then the lighter area is the addition to the original