How is the demand curve perceived by a perfectly competitive firm different from the demand curve perceived by a monopolist?
How does the demand curve perceived by a monopolist compare with the market demand curve?
Is a monopolist a price taker? Explain briefly.
What is the usual shape of a total revenue curve for a monopolist? Why?
What is the usual shape of a marginal revenue curve for a monopolist? Why?
How can a monopolist identify the profit-maximizing level of output if it knows its total revenue and total cost curves?
How can a monopolist identify the profit-maximizing level of output if it knows its marginal revenue and marginal costs?
When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge?
Is a monopolist allocatively efficient? Why or why not?
How does the quantity produced and price charged by a monopolist compare to that of a perfectly competitive firm?
Critical Thinking Questions
Imagine that you are managing a small firm and thinking about entering the market of a monopolist. The monopolist is currently charging a high price, and you have calculated that you can make a nice profit charging 10% less than the monopolist. Before you go ahead and challenge the monopolist, what possibility should you consider for how the monopolist might react?
If a monopoly firm is earning profits, how much would you expect these profits to be diminished by entry in the long run?
Draw the demand curve, marginal revenue, and marginal cost curves from Figure 9.2.4, and identify the quantity of output the monopoly wishes to supply and the price it will charge. Suppose demand for the monopoly’s product increases dramatically. Draw the new demand curve. What happens to the marginal revenue as a result of the increase in demand? What happens to the marginal cost curve? Identify the new profit-maximizing quantity and price. Does the answer make sense to you?
Draw a monopolist’s demand curve, marginal revenue, and marginal cost curves. Identify the monopolist’s profit-maximizing output level. Now, think about a slightly higher level of output (say \(Q_0 + 1\)). According to the graph, is there any consumer willing to pay more than the marginal cost of that new level of output? If so, what does this mean?
If price falls below \(AVC\), the firm will not be able to earn enough revenues even to cover its variable costs. In such a case, it will suffer a smaller loss if it shuts down and produces no output. By contrast, if it stayed in operation and produced the level of output where \(MR = MC\), it would lose all of its fixed costs plus some variable costs. If it shuts down, it only loses its fixed costs.
This scenario is called “perfect price discrimination.” The result would be that the monopolist would produce more output, the same amount in fact as would be produced by a perfectly competitive industry. However, there would be no consumer surplus since each buyer is paying exactly what they think the product is worth. Therefore, the monopolist would be earning the maximum possible profits.