Answered: Monopoly versus perfect competition…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter14: Monopoly

Section: Chapter Questions

Problem 14.7P

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5. Monopoly versus perfect competition

Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium, with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power.

The following graph shows the demand (D�) and supply (S=MC�=MC) curves in the market for hot dogs.

Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from perfect competition.

Perfect CompetitionPC Outcome045901351802252703153604054505.04.54.03.53.02.52.01.51.00.50PRICE (Dollars per hot dog)QUANTITY (Hot dogs)DS=MC

Assume that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't affect demand and that the new monopoly's marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm.

Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist.

MonopolyMonopoly Outcome045901351802252703153604054505.04.54.03.53.02.52.01.51.00.50PRICE (Dollars per hot dog)QUANTITY (Hot dogs)DMRMC

In the following table, enter the price and quantity that would arise in a perfectly competitive market; then enter the profit-maximizing price and quantity that would be chosen if a monopolist controlled this market.

Market Structure	Price	Quantity
(Dollars)	(Hot dogs)
Perfect Competition
Monopoly

Given the summary table of the two different market structures, you can infer that, in general, the price is lower under a , and the quantity is lower under a .

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