Work It Out Chapter 13

Question 1 of 7

Work It Out

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You must read each slide, and complete any questions on the slide, in sequence.

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-price monopoly, the monopolist’s marginal revenue curve would be MR. Answer the following questions by naming the appropriate points or areas.

If the industry is perfectly competitive, what will be the total quantity produced? At what price?

Total quantity produced is .

Price is equal to .

Correct! For further review see the section “Welfare Effects of Monopoly.”

Incorrect, in a perfectly competitive industry, each firm maximizes profit by producing the quantity at which price equals marginal cost. That is, all firms together produce a quantity S, corresponding to point R, where the marginal cost curve crosses the demand curve. Price will be equal to marginal cost, E. For further review see the section “Welfare Effects of Monopoly.”

If the industry is perfectly competitive, what will be the total quantity produced? At what price?

Correct! For further review see the section “Welfare Effects of Monopoly.”

If the industry is perfectly competitive, what will be the total quantity produced? At what price?

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The horizontal axis is labeled ‘Quantity’, with points I, M, S, and T indicated from left to right. The vertical axis is labeled ‘Price’, with points A, B, C, and E indicated from top to bottom. The demand curve (D) starts from point A on the vertical axis and ends at point T on the horizontal axis. The marginal cost curve (MC) is a straight line extending from point E on the vertical axis. The marginal revenue curve (MR) starts from point A on the vertical axis and ends at point M on the horizontal axis. There are dotted lines drawn from points B and C on the vertical axis, as well as from points I, M and S on the horizontal axis. The points of intersection of all these points and the MR and D curves are labeled as follows: The dotted line extending from B has three points F, J, and N. The dotted line extending from C has three points G, K, and O directly below the points on the dotted line from B. The marginal cost curve MC, which extends from point E on the vertical axis, also has three points H, L, and R directly below the points on the previous two dotted lines.

Which area reflects consumer surplus under perfect competition?

Under perfect competition consumer surplus is equal to area ARE.

Under perfect competition consumer surplus is equal to area ABF.

Under perfect competition consumer surplus is equal to area ACK.

Under perfect competition consumer surplus is equal to area FHR.

Correct! For further review see the section “Welfare Effects of Monopoly.”

Incorrect. Consumer surplus is the area under the demand curve and above price. In part a,we saw that the perfectly competitive price is E. Consumer surplus in perfect competition is therefore the triangle ARE. For further review see the section “Welfare Effects of Monopoly.”

Correct! For further review see the section “Welfare Effects of Monopoly.”

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If the industry is a single-price monopoly, what quantity will the monopolist produce? Which price will it charge?

Total quantity produced is .

Price is equal to .

Correct! For further review see the section “Welfare Effects of Monopoly.”

Incorrect. A single-price monopolist produces the quantity at which marginal cost equals marginal revenue, that is, quantity I. Accordingly, the monopolist charges price B, the highest price it can charge if it wants to sell quantity I. For further review see the section “Welfare Effects of Monopoly.”

If the industry is a single-price monopoly, what quantity will the monopolist produce? Which price will it charge?

Correct! For further review see the section “Welfare Effects of Monopoly.”

If the industry is a single-price monopoly, what quantity will the monopolist produce? Which price will it charge?

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Which area reflects the single-price monopolist’s profit?

The profit for the single-price monopolist is equal to area CELK.

The profit for the single-price monopolist is equal to area HISR.

The profit for the single-price monopolist is equal to area CEGH.

The profit for the single-price monopolist is equal to area BEHF.

Correct! For further review see the section “Welfare Effects of Monopoly.”

Incorrect. The single-price monopolist’s profit per unit is the difference between price and the average total cost. Since there is no fixed cost and the marginal cost is constant (each unit costs the same to produce), the marginal cost is the same as the average total cost. That is, profit per unit is the distance BE. Since the monopolist sells I units, its profit is BE times I, or the rectangle BEHF. For further review see the section “Welfare Effects of Monopoly.”

Correct! For further review see the section “Welfare Effects of Monopoly.”

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Which area reflects consumer surplus under single-price monopoly?

Under single-price monopoly consumer surplus is equal to area AFB.

Under single-price monopoly consumer surplus is equal to area AKC.

Under single-price monopoly consumer surplus is equal to area FHR.

Under single-price monopoly consumer surplus is equal to area ARE.

Correct! For further review see the section “Welfare Effects of Monopoly.”

Incorrect, consumer surplus is the area under the demand curve and above the price. In part c, we saw that the monopoly price is B. Consumer surplus in monopoly is therefore the triangle AFB. For further review see the section “Welfare Effects of Monopoly.”

Correct! For further review see the section “Welfare Effects of Monopoly.”

WIO_Krugman_Chapter13_05

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Which area reflects the deadweight loss to society from single-price monopoly?

Under single-price monopoly the dead weight loss to society is equal to area RST.

Under single-price monopoly the deadweight loss to society is equal to area KLR.

Under single-price monopoly the dead weight loss to society is equal to area FIT.

Under single-price monopoly the deadweight loss to society is equal to area FHR.

Correct! For further review see the section “Welfare Effects of Monopoly.”

Incorrect, deadweight loss is the surplus that would have been available (either to consumers or producers) under perfect competition but that is lost when there is a single price monopolist. It is the triangle FRH. For further review see the section “Welfare Effects of Monopoly.”

Correct! For further review see the section “Welfare Effects of Monopoly.”

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If the monopolist can price-discriminate perfectly, what quantity will the perfectly price-discriminating monopolist produce?

Total quantity produced is .

Correct! For further review see the section “Perfect Price Discrimination.”

Incorrect, if a monopolist can price-discriminate perfectly, it will sell the first unit at price A, the second unit at a slightly lower price, and so forth. That is, it will extract from each consumer just that consumer’s willingness to pay, as indicated by the demand curve. It will sell S units, because for the last unit, it can just make a consumer pay a price of E (equal to its marginal cost), and that just covers its marginal cost of producing that last unit. For any further units, it could not make any consumer pay more than its marginal cost, and it therefore stops selling units at quantity S. For further review see the section “Perfect Price Discrimination.”

If the monopolist can price-discriminate perfectly, what quantity will the perfectly price-discriminating monopolist produce?

Correct! For further review see the section “Perfect Price Discrimination.”

If the monopolist can price-discriminate perfectly, what quantity will the perfectly price-discriminating monopolist produce?

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Work It OutChapter 13

Question 1 of 7

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