Question

For the Pure Monopoly Market Structure 2 a. For the monopolist, please explain in detail the steps required to determine: Creative Commons Attribution 4.0 License, CC BY Charles Hackner Houston Community College unless otherwise noted. i. The firm’s optimal level of output. ii. The firm’s product price that would correspond to that optimal level of output. iii. If the firm has achieved maximum profit iv. If the firm has achieved minimum profit Use the MR MC approach along with the appropriate cost curves to create your answer. b. For each of the 2 cases (profit maximization, loss minimization, and shut down) explain what would happen to economic profit if your federal government imposed a tariff on the importing of several of your key inputs, and why you would expect that result. c. You are employed by a firm with monopoly power. The boss wants to increase profits. i. Explain the power of price discrimination to your boss. ii. Explain the requirements and assumptions for successfully implementing this approach. iii. Explain 2 things that would prevent this approach from being successful. d. You work for the government in the department that is responsible for dealing with Monopoly issues (the Antitrust Division of the Justice Dept.). Please read through the slides, listen to the audio lectures, then: i. Explain the dilemma of regulation. ii. Explain which of the 3 options you would use, and iii. Explain why you picked that particular option

Answer 1

Answer to Q. No. A (I)

According to MR-MC Approach, a firm achieves its equilibrium at a point where below mentioned two conditions are fulfilled:

1. MR=MC; and

2. MC cuts MR from below i.e. MC is upward sloping.

In the above graph, it can be analysed that both the conditions are fulfilled at point E. At this point MR=MC and MC is cutting from below i.e. MC is upwards sloping.

Therefore, the firms optimal level of output will the output at equilibrium point i.e. at point Q. OQ is the firms optimal level of output.

Answer to Q. No. A (II)

Firms product price that would correspond to the firms optimal level of output is OP as shown in the above diagram.

Answer to Q. No. A (III)

In the above diagram it can be analysed that according to MR-MC approach, firm is at equilibrium point at point E. At point E equilibrium price of the product of the firm is OP/AR and Equilibrium quantity is OQ. ATC is the Average total cost curve of the firm.

At quantity OQ, firm is earning average revenue of OP/AR and the average cost of the product of the firm is represented by OC.

Difference between AR and AC is the profit earned by the firm.

Difference of AR and AC i.e. profit is represented by AR-AC (Shaded portion) which is the maximum profit of the firm.

Answer to Q. No. A (IV)

In the above diagram it can be analysed that Average cost is exceeding Average revenue of the firm. In other words, the firm is incurring loss. Any firm can sustain in the event of incurring loss till the point where it can recover its average variable cost as it impacts the operational capacity of the firm in the long term. Therefore, it is important for any firm to recover average variable cost. At a point where average revenue of the firm is equal to its average variable cost the firm has to shut its business as beyond this point the firm can not bear the losses. therefore it is known as shut down point. It can also be understood that a firms minimum profit should above average variable cost so as to not to get into any situation where it has to shut down its business.