Chapter 9: Q 19. (page 233)
What is the usual shape of a marginal revenue curve for a monopolist? Why?
The usual shape of a marginal revenue curve for a monopolist is downward sloping as the addition of each additional unit will increase the output which will decrease the price of the output.
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Draw the demand curve, marginal revenue, and marginal cost curves from Figure 9.6, and identify the quantity of output the monopoly wishes to supply and the price it will charge. Suppose the demand for the monopoly’s product increases dramatically. Draw the new demand curve. What happens to the marginal revenue as a result of the increase in demand? What happens to the marginal cost curve? Identify the new profit-maximizing quantity and price. Does the answer make sense to you?
Return to Figure . Suppose is and is . Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling units of output. Estimate from the graph what the new firm’s average cost of producing output would be. If the incumbent continues to produce units, how much output would the two firms supply to the market? Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant. Approximately how much profit would each firm earn?
For many years, the Justice Department has tried to break up large firms like IBM, Microsoft, and most recently Google, on the grounds that their large market share made them essentially monopolies. In a global
market, where U.S. firms compete with firms from other countries, would this policy make the same sense as it might in a purely domestic context?
How can a monopolist identify the profit-maximizing level of output if it knows its total revenue and total cost curves?
How does the demand curve perceived by a monopolist compare with the market demand curve?
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