Unit 15: Monopoly
The one seller with no competitors, the price it actually chooses instead of the highest one imaginable, and the profit it squeezes out by price discrimination.
6 topics · 20 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Why Monopolies Arise
- How it worksHow do owning a key resource, government-granted patents, and natural cost advantages each create a barrier that keeps out competitors?
- Common mistakeWhy isn't every large, dominant company automatically a monopoly in the economic sense?
- Going furtherWhat happens to a monopoly's barrier to entry once a patent on its product expires?
Your turn1 of 2
Only one company is legally allowed to run the water pipes under a city's streets, since duplicating that pipe network would be extraordinarily wasteful. What kind of barrier to entry does this represent?A Monopolist's Demand Curve and Marginal Revenue
- How it worksHow does selling one more unit at a lower price make a monopolist's marginal revenue fall below its price, unlike a competitive firm?
- Worked exampleFind the marginal revenue of the 6th unit for a monopolist whose price must drop from 12 dollars to 11 dollars to sell it.
- Common mistakeWhy isn't a monopolist's marginal revenue curve the same thing as its demand curve?
Your turn1 of 2
A monopolist selling 12 units at 15 dollars must drop the price to 13 dollars on every unit to sell one more. What is the marginal revenue of that additional unit?Monopoly Profit Maximization
- How it worksHow does a monopolist find its profit-maximizing quantity where marginal revenue equals marginal cost, then read the price off the demand curve above it?
- Worked exampleFind a monopolist's profit-maximizing price and quantity given marginal cost of 4 dollars and a demand curve of price equals 20 minus quantity.
- Common mistakeWhy doesn't a monopolist charge the highest price it can possibly get away with?
Your turn1 of 2
Find a monopolist's profit-maximizing price given marginal cost of 6 dollars and a demand curve of price equals 25 minus quantity, using marginal revenue equals 25 minus 2 times quantity.Deadweight Loss from Monopoly
- How it worksHow does producing below the competitive quantity create a deadweight-loss triangle between the monopoly price and the marginal cost curve?
- Common mistakeWhy isn't the monopolist's extra profit itself the social cost of monopoly?
- Ties togetherHow does monopoly's deadweight loss compare to the deadweight loss a tax creates by the same kind of quantity restriction?
Your turn1 of 2
A monopolist restricts output below the 71 unit efficient quantity, producing only 38 units, with a 10 dollar gap between price and marginal cost at that output. What is the resulting deadweight loss?Price Discrimination
- How it worksHow does charging each customer close to their own willingness to pay let a monopolist capture more consumer surplus as profit?
- Worked exampleWalk me through a movie theater charging 15 dollars to adults and 8 dollars to students for the identical seat.
- Common mistakeWhy doesn't price discrimination always make consumers worse off compared with a single uniform price?
- Going furtherWhat happens to the deadweight loss from monopoly if a monopolist could perfectly price discriminate against every single customer?
- Ties togetherHow does perfect price discrimination turn every unit of consumer surplus back into monopoly profit instead?
Your turn1 of 2
A movie theater charges 18 dollars to adults and 10 dollars to students for the identical seat. If 145 adults and 54 students buy tickets, what is total revenue?Public Policy Toward Monopolies
- How it worksHow do antitrust laws, price regulation, and public ownership each try to push a monopoly's outcome back toward the competitive one?
- Common mistakeWhy isn't breaking up every natural monopoly into competing firms actually the efficient answer?
- Ties togetherHow does regulating a natural monopoly's price down toward its marginal cost trade off against covering its high fixed costs?
Your turn1 of 2
A natural monopoly's total cost is 23928 dollars fixed plus 6 dollars per unit. What is average cost per unit at 1898 units, if a regulator requires price to equal average cost to keep the firm solvent?