Question

In: Economics

1. a. Draw a horizontal average cost curve for the monopolist. Where is the marginal cost...

1.

a. Draw a horizontal average cost curve for the monopolist. Where is the marginal cost curve and how do you know?

b. Is the equilibrium in which there is one competitive industry and one monopolistic industry efficient? Explain.

c. Now suppose the monopolist above can perfectly price-discriminate. What is his marginal revenue curve? Explain.

Solutions

Expert Solution

1.

A.

The MC curve lies on the ATC curve and ATC = MC, because ATC curve is horizontal in nature. ATC is horizontal and it means that fixed cost is zero and VC is also fixed for each unit of output. It makes ATC = MC.

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B.

Equilibrium for perfectly competitive industry is efficient, because firms are producing output level where Price = ATC = MC. It makes market to achieve productive and allocative efficiency. Further, ATC is at is lowest level. But, it is not the case for a monopolistic industry. In this industry, there is an equilibrium, but it not at the minimum of ATC and Price is higher than MC. Further, there is an excess capacity left at the equilibrium in this industry. It means that monopolistic industry is not achieving efficiency at the equilibrium.

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C.

Perfect price discrimination means putting price to each customer at their maximum willingness to pay level. In this case, the demand curve is marginal revenue curve for the monopolist. So, MR curve overlaps demand curve and there is no deadweight loss. At the same time, all welfare goes to the monopolist.


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