Question

1. In a figure, illustrate the case of a monopoly that is incurring an economic loss. Label the price the monopoly charges as P and the quantity the monopoly produces as Q.
2. A perfectly competitive industry becomes a single-price monopoly and the industry’s costs do not change. Are consumers better or worse off with this change? Is society better or worse off with the change? Support your answers by drawing one figure that compares the price and quantity produced when the industry is perfectly competitive and when it is a single-price monopoly.
3. When a monopoly price discriminates, what does it do? Why does a monopoly want to price discriminate?
4. Using a figure, compare and contrast the output and price of a natural monopoly that is regulated according to a marginal cost pricing rule and one that is regulated according to an average total cost pricing rule.
5. A single-price monopoly produces ____ output than does a perfectly competitive market with the same costs and the monopoly sets a ____ price than the price in the perfectly competitive market.

1. more; higher
2. more; lower
3. less; higher
4. less; lower

Answer the following multiple choice questions.

7. The unregulated, single-price monopoly shown in Figure 2, produces ____ units per year and its price is ____ per unit.
   1. 4; $6
   2. 4; $4
   3. 6; $4
   4. None of the above answers is correct.

8. 8. The unregulated, single-price monopoly shown in Figure 2, is
   1. earning an economic profit.
   2. earning a normal profit.
   3. incurring an economic loss.
   4. None of the above answers is correct because more information is needed to determine the amount of the firm’s profit or loss.

9. If a monopoly is maximizing profits, then it must be that it is producing an amount of output so that
   1. MR = ATC.
   2. MC = AVC.
   3. MR = P.
   4. MR = MC.
   10. Price discrimination by a monopoly
       1. increases consumer surplus.
       2. decreases consumer surplus.
       3. increases the firm’s profit.
       4. Both answers b and c are correct.
       11. In order for a monopoly to price discriminate, the monopoly must
           1. face consumers with identical willingness-to-pay.
           2. produce a good or service that can be resold.
           3. produce a good that cannot be resold.
           4. charge the highest price possible.
       12. 12. A natural monopoly that is regulated to set its price equal to its marginal cost
           1. incurs an economic loss.
           2. makes a normal profit.
           3. makes an economic profit.
           4. creates the maximum deadweight loss.

Answer 1

1)

The above diagram shows a Monopoly that is incurring an economic loss. The Monopoly is in equilibrium at point E where MC=MR. The profit maximising output is Q. The price charged is determined by the corresponding point on the demand curve. The price charged is P. In the above diagram we can see that at the profit maximising output, the demand curve lies above the average variable cost( AVC) curve but below the average total cost( ATC) curve indicating that the price charged is sufficient to cover all the variable costs but not all costs. Hence the firm is incurring losses. The average total cost is S. The firm is incurring losses equal to the shaded area i.e., the portion PRMS.