Question

Suppose that many similar price-taking consumers (such as Denise in Chapter 10) have a single good (candy bars). Jane has a monopoly in wood, so she can set prices. Assume that no production is possible. Using an Edgeworth box, illustrate the monopoly optimum and show that it does not lie on the contract curve

Answer 1

The monopoly optimum does not lie on the contract curve in a scenario where a monopoly is present.

Step-by-step explanation:

In the scenario described, Jane has a monopoly on the production of wood and can set prices. The monopoly optimum occurs when Jane maximizes her profits by producing at the quantity where marginal revenue equals marginal cost. This quantity will determine the monopoly price, which is determined by the demand curve.

However, in this scenario, the monopoly optimum does not lie on the contract curve in an Edgeworth box. The contract curve represents the set of allocations that both consumers and producers prefer. Since the monopoly has market power, it can charge a higher price and reduce the consumer surplus, which means it does not align with the preferences of all consumers.