2024-2025 Fall Semester

ECON 211
Instructor: Seven Ağır
Teaching Assistants: Rüveyda Yıldız, Esra Altın

PROBLEM SET 6 SOLUTIONS

PROBLEMS

1. From the monopoly graph below, identify the following:

a) The profit maximizing price P3

b) The profit maximizing quantity Q1

c) The area representing deadweight loss C+D

d) The area representing the transfer of consumer surplus to the monopoly A

 2. You are a self-employed consultant specialized in monopolies. Three firms are
currently seeking your advice. Select one of the following recommendations for each
firm in the short run.

Firm P MR TR Q TC MC ATC AVC

A 3.90 3.00 7800 2000 7400 2.90 3.70 3.24
B 5.90 59000 10000 47400 5.90 4.74 4.24
C 11 9.00 44.000 4000 47600 9.00 11.90 10.74

a) Fill the table.

b) Recommend each firm one of the options stated below.

 Remain at the current output level. Firm C, since MR=MC

 Increase output. Firm A, since MR>MC
 Decrease output.

 Shut down. Firm B, since firm is monopolist, price is always higher tham MR. So
the situation of the firm is MR<MC
3. Let figure represent the situation faced by a firm that is a monopoly. The monopoly's marginal cost
curve and average total cost curve are represented with MC and ATC below. The monopoly's demand
curve is denoted with a D.

a) What is the profit maximizing price and quantity for this monopoly?
Where MC=MR, Q* = 13 and P* = 70
b) Calculate this monopoly's economic profits in the short run.
Profits equal (P-ATC)Q, which gives (70-60)13 = 130, which are positive economic profits.
c) What will happen to these economic profits in the long run?
These profits will persist in the long run because there is no entry of new firms to compete away
profits.

d) A regulator who wished to ensure that this monopoly earns zero economic profits should regulate
what price?
Find where ATC=D. P=60 for zero economic profits of (60-60)23 = 0.
e) What would the profit maximizing level of output be if this market is perfectly competitive?

MC = P; thus Q* = 20
f) What are the possible reasons lead to such a market structure, monopoly?
1. Government blocks the entry of more than one firm into a market
2. One firm has control of a key raw material necessary to produce a good.
3. There are important network externalities (Microsoft example) in supplying the good or
service.
4. Economies of scale are so large that one firm has a natural monopoly.”

g) How monopoly affects consumer surplus, producer surplus and economic surplus compared to perfect
competition?
CS decreases, PS increases and TS decreases (deadweight loss because of monopoly)
4. The demand function in a market structure dominated by a single firm (i.e monopoly):

P = 120 – 2Q

It also knows that its fixed cost is 100. The AVC is represented as AVC = 60 + 2Q

a) Find the total revenue (TR) function.

Since AR = P, TR = P*Q = (120-2Q) * Q = 120Q – 2Q2

b) Find the MR and MC function.

TC = TFC + TVC = 100 + AVC*Q

TC = 100 + 60Q + 2Q2

MC = ∂ TC / ∂ Q = 60 + 4Q

MR = ∂ TR / ∂Q = 120-4Q

c) Find the quantity that gives the maximum TR.

Total revenue is maximized when its first derivative with respect to quantity (i.e. marginal revenue) is
equal to zero. Total revenue is also maximized when elasticity of demand is equal to one; i.e. midpoint of
the demand curve.

120-4Q = 0; QE = 30

d) Find the quantity that gives the minimum AC.

Average cost is minimized when its first derivative with respect to quantity is equal to zero. Alternatively,
average cost is minimized when AC = MC.

AC = TC/Q = (100/Q) + 60 + 2Q

∂ AC / ∂ Q = 2 – (100/Q2) = 0

Q=

e) Determine the profit maximizing level of output and find the profit.

Profit is maximized when marginal revenue and marginal cost is equal to each other.

60 + 4Q = 120 – 4Q

Qmonopoly = 7.5

TR = 120Q – 2Q2 = 1575/2; TC= 100 + 60Q + 2Q2 = 1325/2

Profit = TR – TC = 125
f) What would the profit maximizing level of output be if this market is perfectly competitive?

Under perfect competition, profit maximization implies P = MC. To obtain perfectly competitive
outcome, 120-2Q = 60+4Q

Q perfect competition = 10

g) What is the cost of monopoly to the society? Show this on a graph.

The triangle adb (cdb) is the cost of monopoly paid by consumers (producers) due to under-production.
The triangle abc is deadweight loss of the economy and it is equal to

DWL = = 18,75

h) What happens in the long run in case of monopoly?

Firm continues to profit as there are barriers to entry.

j) Can you explain why monopoly does not produce; i. allocatively efficient outcome; ii. Productively efficient
outcome?

i. Price is greater than marginal cost

ii. At optimum quantity, in the long run, the firm continues to produce at a cost that is higher than the
minimum average cost.
MULTIPLE CHOICE QUESTIONS:

1) The reason that the Fisherman's Friend restaurant in Stonington, Maine had a monopoly on selling
seafood dinners in that town is most likely due to
A) a government-imposed barrier.
B) occupational licensing.
C) no competitors apparently found the profit level attractive enough to enter the market.
D) the restaurant owned all the fresh seafood in the state.

2) A monopoly is a seller of a product

A) with many substitutes.
B) without a close substitute.
C) with a perfectly inelastic demand.
D) without a well-defined demand curve.

3) Long-run economic profits would most likely exist in which market structure?
A) monopoly, monopolistic competition, and oligopoly
B) monopoly and oligopoly
C) monopoly and monopolistic competition
D) monopoly only

4) A monopolist faces
A) a perfectly elastic demand curve.
B) a perfectly inelastic demand curve.
C) a horizontal demand curve.
D) a downward-sloping demand curve.

5) Compared to a monopolistic competitor, a monopolist faces

A) a more elastic demand curve.
B) a more inelastic demand curve.
C) a more elastic demand curve at higher prices and a more inelastic demand curve at lower prices.
D) a demand curve that has a price elasticity coefficient of zero.

6) A monopoly differs from monopolistic competition in that

A) a monopoly has market power while a firm in monopolistic competition does not have any market
power.
B) a monopoly can never make a loss but a firm in monopolistic competition can.
C) in a monopoly there are significant entry barriers but there are low barriers to entry in a
monopolistically competitive market structure.
D) a monopoly faces a perfectly inelastic demand curve while a monopolistic competitor faces an elastic
demand curve.

7) Which of the characteristics in the list above is shared by an oligopolist and a monopolist?
A) a, b, c, and d
B) a, b, and d
C) a, c, and d
D) a and d
 8) Which one of the following about a monopoly is false?
A) A monopoly could make profits in the long run.
B) A monopoly could break even in the long run.
C) A monopoly must have some kind of government privilege or government imposed barrier to maintain
its monopoly.
D) A monopoly status could be temporary.

9) For a natural monopoly to exist

A) a firm must continually buy up its rivals.
B) a firm's long-run average cost curve must exhibit diseconomies of scale beyond the economically
efficient output level.
C) a firm's long-run average cost curve must exhibit economies of scale throughout the relevant range of
market demand.
D) a firm must have a government-imposed barrier.

10) In a natural monopoly, throughout the range of market demand

A) marginal cost is above average total cost and pulls average total cost upward.
B) average total cost is above marginal cost and pulls marginal cost upward.
C) marginal cost is below average total cost and pulls average total cost downward.
D) there are diseconomies of scale.

Figure 1

Figure 1 above shows the demand and cost curves facing a monopolist.
11) Refer to Figure 1. To maximize profit, the firm will produce at output level
A) Q1.
B) Q2.
C) Q3.
D) Q4.

12) Refer to Figure 1. The firm's profit-maximizing price is

A) P1.
B) P2.
C) P3.
D) P4.

13) Refer to Figure 1. If the firm's average total cost curve is ATC1, the firm will
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.

14) Refer to Figure 1. If the firm's average total cost curve is ATC2, the firm will
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.

15) Relative to a perfectly competitive market, a monopoly results in

A) a gain in producer surplus equal to the gain in consumer surplus.
B) a gain in producer surplus equal to the loss in consumer surplus.
C) a gain in producer surplus less than the loss in consumer surplus.
D) greater economic efficiency.
Figure 2

In 2011, Verizon was granted permission to enter the market for cable TV in Upstate New York, ending the
virtual monopoly that Time Warner Cable had in most local communities in the region. Figure 2 shows the
cable television market in Upstate New York.

16) Refer to Figure 2. Suppose the local government imposes a $2.50 per month tax on cable companies. What
happens to the price charged by the cable company following the imposition of this tax?
A) The price rises from PM to (PM + $2.50).
B) The price rises from PM but it increases by an amount less than $2.50.
C) The price rises from PM but it increases by an amount greater than $2.50 to reflect the monopoly's markup.
D) The price remains at PM.

17) Refer to Figure 2. Following the entry of Verizon, the subscription price falls from PM to PC. What is the
increase in consumer surplus as a result of this change?
A) the area A + B + C
B) the area B + C
C) the area D + F
D) the area B + C + D

18) Refer to Figure 2. What is the size of the deadweight loss prior to Verizon entering the market and what
happens to this deadweight loss after Verizon does enter the market?
A) The deadweight loss of area D is converted to consumer surplus.
B) The deadweight loss of area C+D is converted to consumer surplus
C) The deadweight loss of area D is converted to producer surplus.
D) The total deadweight loss is the area D+F; D is converted to consumer surplus and F to producer surplus.

19) Refer to Figure 2. If the firm's average total cost curve is ATC3, the firm will
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.
TRUE-FALSE QUESTIONS

1. Monopoly is a market structure where there is only one seller of a product, and there are no close
substitutes.
True

2. In monopolistic competition, all firms produce identical products and do not differentiate their
goods.
False (Products are differentiated in monopolistic competition.)

3. An oligopoly is characterized by a large number of small firms competing in the market.

False (An oligopoly has only a few dominant firms.)

4. In a monopoly, the firm has significant control over price because it is the only producer in the
market.
True

5. Oligopolies often engage in price wars to compete with one another due to the small number of
firms in the market.
True