Question

1. At what MR does a monopolist maximize its revenue? How elastic is their demand at that MR?

2. A monopolist is considering increasing their revenue by changing price. They estimate that current MR<0. What kind of change should they bring in? To what extent?

3. When does a monopolist make a short-run economic profit? When does it make short-run economic loss, but continue production? When does it shut down?

4. (True/False. Explain) A monopolist can convert the entire customer surplus into profit.

5. Provide examples of monopoly in the US market. How do they keep the deadweight loss low?

Answer 1

A monopolist maximizes revenue where MR=0 and the demand is elastic. They make a short-run economic profit when total revenue exceeds total costs and continue production if they can cover average variable costs. True monopolies can convert much but not all consumer surplus into profits.

Step-by-step explanation:

A monopolist maximizes its revenue where the marginal revenue (MR) is equal to zero. At this point, the demand is elastic because a monopolist can only increase quantity by lowering the price, which means total revenue is increasing. If current MR is less than zero, the monopolist can increase revenue by reducing the quantity supplied, which will lead to a price increase. The extent of this change depends on the elasticity of demand and other market conditions.

A monopolist makes a short-run economic profit when its total revenue exceeds total costs, including both implicit and explicit costs. It makes a short-run economic loss but continues production as long as the price covers the average variable costs. If the price falls below the average variable cost, the monopolist shuts down production in the short run.

It is True: A monopolist can potentially convert a large portion of the consumer surplus into profit by setting a higher price than would be possible under perfect competition. However, it cannot convert the entire consumer surplus into profit because pricing at the maximum willingness to pay would lead to only one unit sold at a very high price, which would not maximize profits.

Examples of monopolies include public utility companies like electricity providers. They may keep the deadweight loss low through regulatory oversight, which can include limiting the prices they can charge.

Imagine a monopolist could practice perfect price discrimination, charging a different price to every customer based on willingness to pay; this would maximize monopoly profits as it would capture all consumer surplus. Barriers to entry like high initial costs and regulations create and preserve monopoly power. Natural monopolies occur in industries where the cost of production is lowest when a single firm supplies the market. Intellectual property laws protect intangible assets like patents and copyrights to stimulate innovation and grant temporary market power.