Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 24, Problem 4CQ
To determine
Distinguish between the
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Explain fully why perfectly competitive firms and monopolies maximize profits by choosing the quantity where MR = MC. Explain why the profit maximizing price of the monopoly can be higher or lower than the profit maximizing price for perfect competition.
Compare the long-run equilibrium position of a perfectly competitive firm and a monopolist.Illustrate your answer with the aid of diagrams.
Draw a perfect competition (PC) two-diagram model showing the long-run equilibrium outcome. Now imagine that a monopolist buys
up all of the PC firms and runs all of the production facilities it has purchased as one company. Relabel the "PC Market" diagram as
"Monopoly Market" and the "Representative PC Firm" diagram as "Representative Monopoly Plant".
a)
In your plant diagram, illustrate the changes in Q*, Pe, ATCE, and total profits or losses that will happen when the
monopoly buys up the representative PC firm. Explain in detail all the changes you've made to the diagram.
b)
Illustrate the monopoly market outcomes in your market diagram. Explain how these outcomes differ from the
outcomes when this was a PC market, and why they differ.
Chapter 24 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- Select one or two examples of an industry characterized by monopoly and discuss how each example conforms to the definition of a monopoly?arrow_forward2. HOW Fantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique's demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve. Place the black point (plus symbol) on the graph to indicate the short-run profit-maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company's profit or loss. PRICE (Dollars per bike) 500 450 400 350 300 250 200 150 100 50 0 0 Mo 50 100 ATC MR 200 250 300 350 QUANTITY (Bikes) 150 Demand 400 450 500 Monopolistically Competitive Outcome Given the profit-maximizing choice of output and price, the shop is earning shops in the industry than in long-run equilibrium. Profit or Loss profit, which means there arearrow_forwardFantastique Bikes is a company that manufactures bikes in a monopolistically competitive market. The following graph shows Fantastique's demand curve, marginal revenue curve (MR), marginal cost curve (MC), and average total cost curve (ATC). Place the black point (plus symbol) on the graph to indicate the short-run profit-maximizing price and quantity for this monopolistically competitive company. Then, use the green rectangle (triangle symbols) to shade the area representing the company's profit or loss. 500 450 Monopolistically Competitive Outcome 400 350 300 Profit or Loss 250 ATC 200 150 100 50 MC MR Demand 50 200 250 300 350 QUANTITY (Bikes) 100 150 400 450 500 Given the profit-maximizing choice of output and price, the shop is making profit, which means there are shops in the industry relative to the long-run equilibrium. Now consider the long run in which bike manufacturers are free to enter and exit the market. PRICE (Dollars per bike)arrow_forward
- Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable?arrow_forwardHow does monopolistic competition differ from pure competition in its basic characteristics? How does it differ from pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor and how that, in turn, affects its economic profit.arrow_forward10. Competitive Supermarkets A small town is served by many competing supermarkets, which all have the same constant marginal cost. Use the black point (plus symbol) to show the competitive price and quantity in this market. Then use the green area (triangle symbol) to shade the area representing consumer surplus in the market for groceries, and use the purple area (diamond symbol) to shade the area representing producer surplus. Competitive Market Demand Competitive Outcome Consumer Surplus Marginal Cost Producer Surplus Quantity of Groceries Price, Cost, Rev enuearrow_forward
- A small town is served by many competing supermarkets, which all have the same constant marginal cost. Use the black point (plus symbol) to show the competitive price and quantity in this market. Then use the green area (triangle symbol) to shade the area representing consumer surplus in the market for groceries, and use the purple area (diamond symbol) to shade the area representing producer surplus. Competitive Market Demand Competitive Outcome Consumer Surplus Marginal Cost Producer Surplus Quantity of Groceries Price, Cost, Revenuearrow_forwardA perfectly competitive firm is expected to make a $0 economic profit in the long-run. What type(s) of profit would you expect a monopolist to earn in the long-run? Why the difference? Use the editor to format your answerarrow_forwardWhat are the “monopolistic” and the “competitive” elements of monopolistic competition?Instructions: In order to receive full credit, you must make a selection for each option. For correct answer(s), click the box once to place a check mark. For incorrect answer(s), click twice to empty the box.Similar to a monopoly, a monopolistic competitor: can restrict output to increase price (at least in the short run).checked can make profits or losses in the short run.unanswered faces a downward-sloping demand curve.unanswered faces high barriers to entry.unanswered makes economic profits in the long run.unanswered produces where P > MR = MC.unanswered has one seller.unanswered Instructions: In order to receive full credit, you must make a selection for each option. For correct answer(s), click the box once to place a check mark. For incorrect answer(s), click twice to empty the box.Similar to a perfect competitor, a monopolistic competitor: faces a perfectly elastic demand…arrow_forward
- How is the demand curve perceived by a perfectly competitive firm different from the demand curve perceived by a monopolist?arrow_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
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