and Natural Monopoly
PROBLEM 1
1. Calculate the marginal revenue at each output
level for a monopolistic firm from the
information given for the demand schedule below.
(1 point)
DEMAND SCHEDULE
Price Quantity
$ 120 2,000
110 3,000
100 4,000
90 5,000
80 6,000
70 7,000
60 8,000
50 9,000
40 10,000
30 11,000
20 12,000
2. At which of the 11 output levels given in #1,
above, will this firm maximize total revenue (TR)?
Explain exactly why marginal revenue is less than
the price for each of the output levels given
above beyond the first level (2,000 units).
(2 points)
3. List the four ways of how monopolies get started
that were discussed in Lecture-Session # 6 and
explain what is meant by each. (2 points)
PROBLEM 2
The model below is a graphical illustration of the case of a natural monopoly.
D = Market Demand
MR = Marginal Revenue for firm
MC = Marginal Cost for firm
ATC = Average Total Cost for firm
NATURAL MONOPOLY
P
a —————–|
| MC
b _________________|
|
c _________________|________ ATC
| |
| |
d _________________|________|_____
| | |
| | | D
| | |
| | |
0 x y z Q
1. On the model constructed above, determine the
following points on the price axis and the
quantity axis of the graph. Assume that the firm
will maximize total profit (TP) with no
interference. (3 points)
a. At which output level above will the firm
maximize total profit?
b. On the price axis above, at which price should
the firm charge customers to maximize total
profit?
c. On the price axis above, which point shows the
total cost per unit (ATC) this monopolist will
sustain if the firm produces at the profit
maximizing output level?
2. On the model constructed above, determine the
following points that result based upon the “fair
return principle” of monopoly regulation.
(2 points)
a. Which point represents the output level?
b. Which point represents the price and ATC
level.
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