Exam 23: Monopoly

If a monopolist were allowed (and able)to first degree price discrimination,there would be no efficiency/equity tradeoff so long as the government can tax the profits of the firm and redistribute the tax revenues in a lump sum way.

Low demand consumers are indifferent between second degree and first degree price discrimination.

One way to deal with the efficiency problem of monopolies is to tax the profits of monopolists.

Suppose a single firm has constant marginal cost and faced the demand curve a.Illustrate in this graph how a monopolist who cannot price discriminate would price this good.What is the monopoly price and quantity? b.Assuming no recurring fixed costs,how much profit does the monopolist make? How much consumer surplus is generated? c.If the monopolist were able to first-degree price discriminate instead,how much would he produce? How much profit would he make? How much consumer surplus is generated? d.Which outcome is more efficient and why?

Unlike perfectly competitive firms,monopolists produce where marginal revenue intersects marginal cost.

A monopolist will not produce at all if the intersection of marginal revenue and marginal cost occurs at a quantity at which average cost lies above the demand curve.

In the absence of recurring fixed costs,a monopolist will always produce a positive output quantity.

The more consumer surplus is generated in a market dominated by a single monopoly,the more efficient the outcome.

Suppose a monopolist has zero marginal cost but positive recurring fixed costs.Then,if it is efficient to produce,the efficient quantity to produce occurs where demand crosses the horizontal (quantity)axis.

Explain why the deadweight loss from monopoly power may be exacerbated if the barrier to entry that creates monopoly power is created through exclusive government granting of a monopoly.For what types of government grants of monopoly power might this not be the case?

For any constant-elasticity market demand curve,a monopolist is profit maximizing regardless of what quantity he produces so long as marginal costs are zero.

A (non-price discriminating)monopolist with zero marginal cost but recurring fixed costs may end up not producing even if it would be efficient for him to produce.

Under second degree price discrimination,the average price per unit paid by high demand consumers is not equal to marginal willingness to pay for one additional unit.

First degree price discrimination is efficient and therefore preferred by everyone to no price discrimination on the part of a monopolist.

How would a regulator of a monopoly think differently about regulating price discrimination depending on whether the regulator's objective is to maximize efficiency or to maximize consumer surplus?

Consider a commonly owned fishery in a market with no other fisheries.Given the Tragedy of the Commons,it is more efficient to let a single firm take over the fishery even if that gives the firm monopoly power.

Suppose a monopolist has zero marginal cost.If he faces a market demand curve with constant price elasticity of -2,the profit maximizing output level approaches infinity.

Since revenue increases with increases in price when demand is relatively inelastic,monopolists produce on the inelastic part of demand.

The more profit a monopolist makes,the more inefficient is the monopoly outcome.

If a monopolist faced a downward sloping average cost curve that lies fully above market demand,he will not produce if he can only charge a single per-unit price,but it would also be inefficient for him to produce.