1. Why do monopolies arise? Give a few examples of underlying structures that can generate a monopoly in a market.
2. A certain monopoly firm has a marginal cost that depends on the quantity produced. The marginal cost is MC = 2*Q. You are also given a few values regarding the firm's average total cost, ATC, at different quantities:
|
Q
|
ATC
|
|
2
|
20
|
|
5
|
12.5
|
|
7
|
12
|
|
10
|
13
|
|
12
|
15
|
|
15
|
18
|
|
20
|
23
|
|
25
|
27
|
As a direct consequence of the shape of the demand curve, the marginal revenue curve becomes MR = 30 2*Q.
a) Construct a graph with quantity on the X-axis and your currency of choice on the Y-axis. Draw the MC-, MR-, ATC- and demand curves in the graph.
b) Why is the MR curve steeper than the demand curve?
c) How large quantities will the firm produce if it maximizes its profit?
d) Which price will they charge?
e) Calculate the profit.
f) Indicate the producer- and consumer surpluses in the graph.
g) Indicate the deadweight loss in the graph. Can you calculate how large it is? (Calculate how large the area you have indicated is.)
h) If the firm had operated in a perfectly competitive market instead, what would the equilibrium price have been? How would producer- and consumer surplus have been different?
i) Is the monopoly Pareto efficient? Why or why not?