Question

1. What is a monopoly? Name 2 differences between a monopoly and a perfectly competitive market. 2. What is the profit maximizing condition for a price-setting monopoly? 3. Show that MR follows the notion "same intercept, twice the slope" of demand. 4. Is a monopoly the most socially optimal market? How does a monopoly differ from a perfectly competitive market? Explain and show in a graph. What is the difference in welfare? 5. At what point would a monopoly decide to shut down in the short-run? In the long run? 6. A firm facing demand curve p= 24-Q and MC = 2 Q has a new demand curve of p=36-2 Q but same marginal cost curve. What happens to price and quantity? What is the change in equilibrium price and quantity? Show the change.graphically. If marginal cost is a positive constant above 0, what type of elasticity of demand does the firm face? What would be a value of elasticity we would not see for a profit- maximizing monopoly? Explain why a monopolist has no supply curve. 9. Clothing stores often set the retail price of clothing at twice the cost of production. For example, a pair of jeans costs S7 to make, the jeans will retail for $14. What must the price elasticity of demand be for this practice to be profit maximizing?

Answer 1

1. Monopoly is a market situation where there is only one firm selling products with no close substitutes.

Differences between Monopoly and perfectly competitive market:

A) in Monopoly there is only one firm that produces completely heterogeneous products. But in perfectly competitive market, there are many firms operating in this market and each firm produces homogeneous products.

B) in Monopoly, there is high barriers to entry but in perfect competition, firms can enter or exit the market easily.

2. A profit maximizing Monopoly produces at the point where Marginal revenue = marginal cost and sets it's profit maximizing price at the point where profit maximizing output lies on the demand curve.