Economics (7th Edition) (What's New in Economics)
7th Edition
ISBN: 9780134738321
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Question
Chapter 15, Problem 15.4.4PA
To determine
True deadweight loss caused by monopoly .
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According to an article in China Daily, China recently accelerated its plan to privatize tens of thousands of state-owned firms. Imagine that you are an aide to a senator on the Foreign Relations Committee of the U.S. Senate, and you have been asked to help the committee determine the price and quantity that will prevail when competitive forces are allowed to equilibrate the market. The best estimates of the market demand and supply for the good (in U.S. dollar equivalent prices) are given by: Qd=12 -2P and Qs=-4 + 2P, respectively.
a. Determine the competitive equilibrium price and quantity
b. Based on your answer to the Senate Foreign Relations Committee in question (2a), one of the senators raises a concern that the free market price might be too high for the typical Chinese citizen to pay. Accordingly, she asks you to explain what would happen if the Chinese government privatized the market, but then set a price at the Chinese equivalent of $3.00. How do you answer? What…
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.
PRICE (Dollars per hot dog)
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
0
45
Monopoly
MC
MR
90 135 180 225 270 315
QUANTITY (Hot dogs)
D
360
405 450
Monopoly Outcome
Deadweight Loss
?
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 a market is controlled by a monopoly because the resulting equilibrium is different from the (efficient) competitive
outcome.
In the following table, enter the price and quantity that would arise in a competitive market; then enter the profit-maximizing price and quantity t
would be chosen if a monopolist controlled this market.
Market Structure
Price
(Dollars)
Quantity
(Gyros)
Competitive
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
Chapter 15 Solutions
Economics (7th Edition) (What's New in Economics)
Ch. 15 - Prob. 15.1.1RQCh. 15 - Prob. 15.1.2RQCh. 15 - Prob. 15.1.3PACh. 15 - Prob. 15.1.4PACh. 15 - Prob. 15.1.5PACh. 15 - Prob. 15.1.6PACh. 15 - Prob. 15.2.1RQCh. 15 - Prob. 15.2.2RQCh. 15 - Prob. 15.2.3RQCh. 15 - Prob. 15.2.4RQ
Ch. 15 - Prob. 15.2.5PACh. 15 - Prob. 15.2.6PACh. 15 - Prob. 15.2.7PACh. 15 - Prob. 15.2.8PACh. 15 - Prob. 15.2.9PACh. 15 - (Related to the Apply the Concept an page 512) Why...Ch. 15 - Prob. 15.2.11PACh. 15 - Prob. 15.2.12PACh. 15 - Prob. 15.2.13PACh. 15 - Prob. 15.3.1RQCh. 15 - Prob. 15.3.2RQCh. 15 - Prob. 15.3.3RQCh. 15 - Prob. 15.3.4PACh. 15 - Prob. 15.3.5PACh. 15 - Prob. 15.3.6PACh. 15 - Prob. 15.3.7PACh. 15 - Prob. 15.3.8PACh. 15 - Prob. 15.3.9PACh. 15 - Prob. 15.3.10PACh. 15 - Prob. 15.4.1RQCh. 15 - Prob. 15.4.2RQCh. 15 - Prob. 15.4.3PACh. 15 - Prob. 15.4.4PACh. 15 - Prob. 15.4.5PACh. 15 - Prob. 15.4.6PACh. 15 - Prob. 15.4.7PACh. 15 - Prob. 15.5.1RQCh. 15 - Prob. 15.5.2RQCh. 15 - Prob. 15.5.3RQCh. 15 - Prob. 15.5.4PACh. 15 - Prob. 15.5.5PACh. 15 - Prob. 15.5.6PACh. 15 - Prob. 15.5.7PACh. 15 - Prob. 15.5.8PACh. 15 - Prob. 15.5.9PACh. 15 - Prob. 15.5.10PACh. 15 - Prob. 15.5.11PACh. 15 - Prob. 15.5.12PACh. 15 - Prob. 15.5.13PACh. 15 - Prob. 15.1CTECh. 15 - Prob. 15.2CTECh. 15 - Prob. 15.3CTE
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- Consider the welfare effects when the industry operates under 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 a monopoly controls a market because the resulting equilibrium is different from the competitive outcome, which is efficient. In the following table, enter the price and quantity that would arise in a 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) Competitive Monopoly Given the summary table of the two different market structures, you can infer that, in general, the price is higher under a_______________, and the…arrow_forwardOn 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 a market is controlled by a monopoly because the resulting equilibrium is different from the (efficient) competitive outcome. In the following table, enter the price and quantity that would arise in a competitive market; then enter the profit-maximizing price and quantity that would be chosen if a monopolist controlled this market. Market Structure Price (Dollars) Quantity (Gyros) Competitive Monopoly Given the summary table of the two different market structures, you can infer that, in general, the price is higher under a and the quantity is lower under aarrow_forwardEvaluate the following: “Since a rival’s profit-maximizing price and output depend on its marginal cost and not its fixed costs, a firm cannot profitably lessen competition by implementing a strategy that raises its rival’s fixed costs.”arrow_forward
- Using a graph, explain why a firm might not want to spend A on advertising, even though it shifts the firm's demand curve to the right. In the figure to the right, let D¹ and MR¹ be demand and marginal revenue before advertising. Assume the monopoly has a constant marginal cost with no fixed cost such that MR¹ = AC¹. Then, suppose the monopoly advertises and that the advertising shifts demand and marginal revenue to D² and MR². Assume advertising is a marginal cost, such that the new marginal cost after advertising is still a constant and still equals a new average cost. Using the line drawing tool, graph the marginal cost curve, reflecting the cost of the advertising, such that the monopoly breaks even from advertising. Label this curve 'MC². Carefully follow the instructions above, and only draw the required objects. p, $ per unit 30- 28- 26- 24- 22- 20- 18- 16- 14- 12- 10- 8- 6- 4- 2- 0- FN 0 2 MC¹ = AC¹ MR1 MR² D¹ D² 6 8 10 12 14 16 18 20 22 24 26 28 30 Q, Quantityarrow_forwardUsing a graph, explain why a firm might not want to spend A on advertising, even though it shifts the firm's demand curve to the right. In the figure to the right, let D¹ and MR¹ be demand and marginal revenue before advertising. Assume the monopoly has a constant marginal cost with no fixed cost such that MR¹ = AC¹. Then, suppose the monopoly advertises and that the advertising shifts demand and marginal revenue to D² and MR². Assume advertising is a marginal cost, such that the new marginal cost after advertising is still a constant and still equals a new average cost. Using the line drawing tool, graph the marginal cost curve, reflecting the cost of the advertising, such that the monopoly breaks even from advertising. Label this curve 'MC².! Carefully follow the instructions above, and only draw the required objects. p, $ per unit 30- 28- 26- 24- 22- 20- 18- 16- 14- 12- 10- 8+ 6- 4- 2+ 0- 0 2 V MC = A ▬▬▬▬▬ AMR MR² D 4 6 8 10 12 14 16 18 20 22 24 26 28 Q, Quantity D²arrow_forwardConsider the welfare effects when the industry operates under 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 from a monopoly, or deadweight loss. That is, show the area that was formerly producer surplus or consumer surplus and now does not accrue to anybody. Deadweight loss occurs when a monopoly controls a market because the resulting equilibrium is different from the competitive outcome, which is efficient. In the following table, enter the price and quantity that would arise in a 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) Competitive Monopoly Given the summary table of the two different market structures, you can infer that, in general, the price is higher under a (competitive market or…arrow_forward
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- Q1 In many countries, the government chooses to "internalize" the monopoly by owning monopoly providers of goods and services. Monopoly is one of the market structures in Malaysia. It is characterized by the ability of one seller to gain high profits. In a place where a monopoly operates, it is hard for other firms to start. An example of monopolies Malaysia GLCS are Telekom Malaysia, TNB and etc. (In some cases, these firms are "nationalized," and the government actually buys or confiscates firms that operate in monopoly markets). (a) Explain TWO (2) advantages and disadvantages of such an approach above to ensure that the "best interest of society" is promoted in these monopoly markets. (b) Economists however would prefer a private ownership of monopoly rather than a public ownership of monopoly.arrow_forwardMonopoly outcome versus perfectly competitive outcome Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run perfectly 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 curves (S = MC) 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. Use the green point (triangle symbol) to shade the area that represents consumers’ surplus, and use the purple point (diamond symbol) to shade the area that represents producers’ surplus. (graph 1) 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…arrow_forwardThe figure shows the market demand curve for penicillin, an antibiotic medicine. Initially, the market was supplied by perfectly competitive firms Later, the government granted the exclusive right to produce and sell penicillin to one firm. The figure also shows the marginal revenue curve (MR) of the firm once it begins to operate as a monopoly. The marginal cost is constant at $3, irrespective of the market structure What is the surplus enjoyed by the firm when it is the sole supplier of the medicine? OA. 590 OB. $180 OC. $30 OD. $60 Price/Cost (5) 10 1 10 20 30 40 MR Demand 50 60 70 80 90 Quantity (units)arrow_forward
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