Problems

20 . How can a monopolist identify the profit-maximizing level of output if it knows its total revenue and total cost curves? 21 . How can a monopolist identify the profit-maximizing level of output if it knows its marginal revenue and marginal costs? 22 . When a monopolist identifies its profit-maximizing quantity of output, how does it decide what price to charge? 23 . Is a monopolist allocatively efficient? Why or why not? 24 . How does the quantity produced and price charged by a monopolist compare to that of a perfectly competitive firm?

Critical Thinking Questions

25 . ALCOA does not have the monopoly power it once had. How do you suppose their barriers to entry were weakened? 26 . Why are generic pharmaceuticals significantly cheaper than name brand ones? 27 . For many years, the Justice Department has tried to break up large firms like IBM, Microsoft, and most recently Google, on the grounds that their large market share made them essentially monopolies. In a global market, where U.S. firms compete with firms from other countries, would this policy make the same sense as it might in a purely domestic context? 28 . Intellectual property laws are intended to promote innovation, but some economists, such as Michele Boldrin and David K. Levine, have argued that such laws are not desirable. In the United States, there is no intellectual property protection for food recipes or for fashion designs. Considering the state of these two industries, and bearing in mind the discussion of the inefficiency of monopolies, can you think of any reasons why intellectual property laws might hinder innovation in some cases? 29 . Imagine that you are managing a small firm and thinking about entering the market of a monopolist. The monopolist is currently charging a high price, and you have calculated that you can make a nice profit charging 10% less than the monopolist. Before you go ahead and challenge the monopolist, what possibility should you consider for how the monopolist might react? 30 . If a monopoly firm is earning profits, how much would you expect these profits to be diminished by entry in the long run?

Problems

31 . Return to Figure 9.2. Suppose P0 is $10 and P1 is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the graph what the new firm’s average cost of producing output would be. If the incumbent continues to produce 6,000 units, how much output would the two firms supply to the market? Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant. Approximately how much profit would each firm earn? 32 . Draw the demand curve, marginal revenue, and marginal cost curves from Figure 9.6, and identify the quantity of output the monopoly wishes to supply and the price it will charge. Suppose demand for the monopoly’s product increases dramatically. Draw the new demand curve. What happens to the marginal revenue as a result of the increase in demand? What happens to the marginal cost curve? Identify the new profit-maximizing quantity and price. Does the answer make sense to you? 33 . Draw a monopolist’s demand curve, marginal revenue, and marginal cost curves. Identify the monopolist’s profit-maximizing output level. Now, think about a slightly higher level of output (say Q0 + 1). According to the graph, is there any consumer willing to pay more than the marginal cost of that new level of output? If so, what does this mean?

FIGURE 10.1Competing Brands? The laundry detergent market is one that is characterized neither as perfect competition nor monopoly. (Credit: modification of “DSC_7174” by Pixel Drip/Flickr Creative Commons, CC BY 2.0)

In this chapter, you will learn about:

• Monopolistic Competition
• Oligopoly

BRING IT HOME The Temptation to Defy the Law Laundry detergent and bags of ice—products of industries that seem pretty mundane, maybe even boring. Hardly! Both have been the center of clandestine meetings and secret deals worthy of a spy novel. In France, between 1997 and 2004, the top four laundry detergent producers (Proctor & Gamble, Henkel, Unilever, and Colgate-Palmolive) controlled about 90 percent of the French soap market. Officials from the soap firms were meeting secretly, in out- of-the-way, small cafés around Paris. Their goals: Stamp out competition and set prices. Around the same time, the top five Midwest ice makers (Home City Ice, Lang Ice, Tinley Ice, Sisler’s Dairy, and Products of Ohio) had similar goals in mind when they secretly agreed to divide up the bagged ice market. If both groups could meet their goals, it would enable each to act as though they were a single firm—in essence, a