PROBLEMS
Question 13.13
Each of the following firms possesses market power. Explain its source.
Merck, the producer of the patented cholesterol-
lowering drug Zetia Waterworks, a provider of piped water
Chiquita, a supplier of bananas and owner of most banana plantations
The Walt Disney Company, the creators of Mickey Mouse
Question 13.14
Skyscraper City has a subway system, for which a oneway fare is $1.50. There is pressure on the mayor to reduce the fare by one-
third, to $1.00. The mayor is dismayed, thinking that this will mean Skyscraper City is losing one- third of its revenue from sales of subway tickets. The mayor’s economic adviser reminds her that she is focusing only on the price effect and ignoring the quantity effect. Explain why the mayor’s estimate of a one- third loss of revenue is likely to be an overestimate. Illustrate with a diagram. Question 13.15
Bob, Bill, Ben, and Brad Baxter have just made a documentary movie about their basketball team. They are thinking about making the movie available for download on the internet, and they can act as a single-
price monopolist if they choose to. Each time the movie is downloaded, their internet service provider charges them a fee of $4. The Baxter brothers are arguing about which price to charge customers per download. The accompanying table shows the demand schedule for their film. Price of download
Quantity of downloads demanded
$10
0
8
1
6
3
4
6
2
10
0
15
Calculate the total revenue and the marginal revenue per download.
Bob is proud of the film and wants as many people as possible to down load it. Which price would he choose? How many downloads would be sold?
Bill wants as much total revenue as possible. Which price would he choose? How many downloads would be sold?
Ben wants to maximize profit. Which price would he choose? How many downloads would be sold?
Brad wants to charge the efficient price. Which price would he choose? How many downloads would be sold?
Question 13.16
Jimmy’s room overlooks a major league baseball stadium. He decides to rent a telescope for $50.00 a week and charge his friends to use it to peep at the games for 30 seconds. He can act as a single-
price monopolist for renting out “peeps.” For each person who takes a 30- sec- ond peep, it costs Jimmy $0.20 to clean the eyepiece. This table shows the information Jimmy has gathered about the weekly demand for the service. Price of peep
Quantity of peeps demanded
$1.20
0
1.00
100
0.90
150
0.80
200
0.70
250
0.60
300
0.50
350
0.40
400
0.30
450
0.20
500
0.10
550
For each price in the table, calculate the total revenue from selling peeps and the marginal revenue per peep.
At what quantity will Jimmy’s profit be maximized? What price will he charge? What will his total profit be?
Jimmy’s landlady complains about all visitors and tells him to stop selling peeps. But, if he pays her $0.20 for every peep he sells, she won’t complain. What effect does the $0.20-
per- peep bribe have on Jimmy’s marginal cost per peep? What is the new profit- maximizing quantity of peeps? What effect does the $0.20- per- peep bribe have on Jimmy’s total profit?
Question 13.17
Suppose that De Beers is a single-
price monopolist in the diamond market. De Beers has five potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most one diamond— and only if the price is just equal to, or lower than, her willingness to pay. Raquel’s willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s, $100; and Sophia’s, $0. De Beers’s marginal cost per diamond is $100. The result is a demand schedule for diamonds as follows: Price of diamond
Quantity of diamonds demanded
$500
0
400
1
300
2
200
3
100
4
0
5
Calculate De Beers’s total revenue and its marginal revenue. From your calculation, draw the demand curve and the marginal revenue curve.
Explain why De Beers faces a downward-
sloping demand curve and why the marginal revenue from an additional diamond sale is less than the price of the diamond. Suppose De Beers currently charges $200 for its diamonds. If it lowers the price to $100, how large is the price effect? How large is the quantity effect?
Add the marginal cost curve to your diagram from part a and determine which quantity maximizes
De Beers’s profit and which price De Beers will charge.
Question 13.18
Use the demand schedule for diamonds given in Problem 5. The marginal cost of producing diamonds is constant at $100. There is no fixed cost.
If De Beers charges the monopoly price, how large is the individual consumer surplus that each buyer experiences? Calculate total consumer surplus by summing the individual consumer surpluses. How large is producer surplus?
Suppose that upstart Russian and Asian producers enter the market and it becomes perfectly competitive.
What is the perfectly competitive price? What quantity will be sold in this perfectly competitive market?
At the competitive price and quantity, how large is the consumer surplus that each buyer experiences? How large is total consumer surplus? How large is producer surplus?
Compare your answer to part c to your answer to part a. How large is the deadweight loss associated with monopoly in this case?
Question 13.19
Use the demand schedule for diamonds given in Problem 5. De Beers is a monopolist, but it can now price-
discriminate perfectly among all five of its potential customers. De Beers’s marginal cost is constant at $100. There is no fixed cost. If De Beers can price-
discriminate perfectly, to which customers will it sell diamonds and at what prices? How large is each individual consumer surplus? How large is total consumer surplus? Calculate producer surplus by summing the producer surplus generated by each sale.
Question 13.20
Download Records decides to release an album by the group Mary and the Little Lamb. It produces the album with no fixed cost, but the total cost of creating a digital album and paying Mary her royalty is $6 per album. Download Records can act as a single-
price monopolist. Its marketing division finds that the demand schedule for the album is as shown in the accompanying table. Price of album
Quantity of albums demanded
$22
0
20
1,000
18
2,000
16
3,000
14
4,000
12
5,000
10
6,000
8
7,000
Calculate the total revenue and the marginal revenue per album.
The marginal cost of producing each album is constant at $6. To maximize profit, what level of output should Download Records choose, and which price should it charge for each album?
Mary renegotiates her contract and will be paid a higher royalty per album. So the marginal cost rises to be constant at $14. To maximize profit, what level of output should Download Records now choose, and which price should it charge for each album?
Question 13.21
This diagram illustrates your local electricity company’s natural monopoly. It shows the demand curve for kilowatt-
hours (kWh) of electricity, the company’s marginal revenue (MR) curve, its marginal cost (MC) curve, and its average total cost (ATC) curve. The government wants to regulate the monopolist by imposing a price ceiling. 
If the government does not regulate this monopolist, which price will it charge? Illustrate the inefficiency this creates by shading the deadweight loss from monopoly.
If the government imposes a price ceiling equal to the marginal cost, $0.30, will the monopolist make profits or lose money? Shade the area of profit (or loss) for the monopolist. If the government does impose this price ceiling, do you think the firm will continue to produce in the long run?
If the government imposes a price ceiling of $0.50, will the monopolist make a profit, lose money, or break even?
Question 13.22
The Collegetown movie theater serves 900 students and 100 professors in town. Each student’s willingness to pay for a movie ticket is $5. Each professor’s willingness to pay is $10. Each will buy only one ticket. The movie theater’s marginal cost per ticket is constant at $3, and there is no fixed cost.
Suppose the movie theater cannot price-
discriminate and charges both students and professors the same price per ticket. If the movie theater charges $5, who will buy tickets and what will the movie theater’s profit be? How large is consumer surplus? If the movie theater charges $10, who will buy movie tickets and what will the movie theater’s profit be? How large is consumer surplus?
Assume the movie theater can price-
discriminate between students and professors by requiring students to show their student ID, charging students $5 and professors $10, how much profit will the movie theater make? How large is consumer surplus?
Question 13.23
A monopolist knows that in order to expand the quantity of output it produces from 8 to 9 units it must lower the price of its output from $2 to $1. Calculate the quantity effect and the price effect. Use these results to calculate the monopolist’s marginal revenue of producing the 9th unit. The marginal cost of producing the 9th unit is positive. Is it a good idea for the monopolist to produce the 9th unit?
Question 13.24
In the United States, the Federal Trade Commission (FTC) is charged with promoting competition and challenging mergers that would likely lead to higher prices. Several years ago, Staples and Office Depot, two of the largest office supply superstores, announced their agreement to merge.
Some critics of the merger argued that, in many parts of the country, a merger between the two companies would create a monopoly in the office supply superstore market. Based on the FTC’s argument and its mission to challenge mergers that would likely lead to higher prices, do you think it allowed the merger?
Staples and Office Depot argued that, while in some parts of the country they might create a monopoly in the office supply superstore market, the FTC should consider the larger market for all office supplies, which includes many smaller stores that sell office supplies (such as grocery stores and other retailers). In that market, Staples and Office Depot would face competition from many other, smaller stores. If the market for all office supplies is the relevant market that the FTC should consider, would it make the FTC more or less likely to allow the merger?
Question 13.25
Prior to the late 1990s, the same company that generated your electricity also distributed it to you over high-
voltage lines. Since then, 16 states and the District of Columbia have begun separating the generation from the distribution of electricity, allowing competition between electricity generators and between electricity distributors. Assume that the market for electricity distribution was and remains a natural monopoly. Use a graph to illustrate the market for electricity distribution if the government sets price equal to average total cost.
Assume that deregulation of electricity generation creates a perfectly competitive market. Also assume that electricity generation does not exhibit the characteristics of a natural monopoly. Use a graph to illustrate the cost curves in the long-
run equilibrium for an individual firm in this industry.
Question 13.26
Explain the following situations.
In Europe, many cell phone service providers give away for free what would otherwise be very expensive cell phones when a service contract is purchased. Why might a company want to do that?
In the United Kingdom, the country’s antitrust authority prohibited the cell phone service provider Vodaphone from offering a plan that gave customers free calls to other Vodaphone customers. Why might Vodaphone have wanted to offer these calls for free? Why might a government want to step in and ban this practice? Why might it not be a good idea for a government to interfere in this way?
Question 13.27
The 2014 announcement that Time Warner Cable and Comcast intended to merge prompted questions of monopoly because the combined company would supply cable access to an overwhelming majority of Americans. It also raised questions of monopsony since the combined company would be virtually the only purchaser of programming for broadcast shows. Assume the merger occurs: in each of the following, determine whether it is evidence of monopoly, monopsony, or neither.
The monthly cable fee for consumers increases significantly more than the increase in the cost of producing and delivering programs over cable.
Companies that advertise on cable TV find that they must pay higher rates for advertising.
Companies that produce broadcast shows find they must produce more shows for the same amount they were paid before.
Consumers find that there are more shows available for the same monthly cable fee.
Question 13.28
Walmart is the world’s largest retailer. As a consequence, it has sufficient bargaining power to push its suppliers to lower their prices so it can honor its slogan of “Always Low Prices” for its customers.
Is Walmart acting like a monopolist or monopsonist when purchasing goods from suppliers? Explain.
How does Walmart affect the consumer surplus of its customers? The producer surplus of its suppliers?
Over time, what is likely to happen to the quality of products produced by Walmart suppliers?
WORK IT OUT
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Question 13.29
17. Consider an industry with the demand curve (D) and marginal cost curve (MC) shown in the accompanying diagram. There is no fixed cost. If the industry is a single-
If the industry is perfectly competitive, what will be the total quantity produced? At what price?
Which area reflects consumer surplus under perfect competition?
If the industry is a single-
price monopoly, what quantity will the monopolist produce? Which price will it charge? Which area reflects the single-
price monopolist’s profit? Which area reflects consumer surplus under single-
price monopoly? Which area reflects the deadweight loss to society from single-
price monopoly? If the monopolist can price-
discriminate perfectly, what quantity will the perfectly price- discriminating monopolist produce?