ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Transcribed Image Text:Consider the weekly market for gyros in a popular neighborhood close to campus. Suppose this market is operating in long-run competitive
equilibrium with many gyro vendors in the neighborhood, each offering basically the same gyros. Due to the structure of the market, the vendors act
as price takers and each individual vendor has no market power.
The following graph displays the supply (S = MC) and demand (D) curves in the weekly market for gyros.
Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from competition.
PRICE (Dollars per gyro)
5.0
4.5
4.0
3.5
3.0
2.0
1.5
1.0
0.5
0
0
10 20
30
Competitive Market
40
60
QUANTITY (Gyros)
50
70
80
S=MC
D
90 100
PC Outcome
(?)
Now assume that one of the gyro vendors successfully petitions the neighborhood development board to obtain exclusive rights to sell gyros in the
neighborhood. This firm buys up all the rest of the gyro food trucks in the area and begins to operate as a monopoly. Assume that this change does
not affect demand and that the marginal cost curve of the new monopoly corresponds exactly to the supply curve from the previous graph The
Transcribed Image Text:Now assume that one of the gyro vendors successfully petitions the neighborhood development board to obtain exclusive rights to sell gyros in the
neighborhood. This firm buys up all the rest of the gyro food trucks in the area and begins to operate as a monopoly. Assume that this change does
not affect demand and that the marginal cost curve of the new monopoly corresponds exactly to the supply curve from the previous graph. The
following graph reflects this new set of assumptions, and shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the
monopoly vendor.
Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist.
PRICE (Dollars per gyro)
5.0
4.5
4.0
3.5
3.0
1.5
1.0
0.5
0
0
10
20
30
Monopoly
MR
40
50 60
QUANTITY (Gyros)
70
MC
D
80 90 100
++
Monopoly Outcome
Deadweight Loss
(?)
Consider the welfare effects that result from the industry operating as a competitive market versus a monopoly.
On the monopoly graph, use the black points (plus symbol) to shade the area that represents the loss of welfare, or deadweight loss, caused by a
monopoly. That is, show the area that was formerly part of total surplus and now does not accrue to anybody.
Deadweight loss occurs when market is controlled by a monopoly because the resulting equilibrium is different from the (efficient) competitive
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