Chapter 9: Monopoly

LEARNING OBJECTIVES

#1 - Graphically express the monopolist’s demand curve and marginal revenue curve. And you will understand how a monopolist maximizes profit by setting MR = MC.

Step 1 Read the sections in your textbook titled “The Monopoly Market Structure” and “Price and Output Decisions for a Monopolist.”

*Step 2 Watch the Graphing Workshop “See It!” tutorial titled “Monopoly: Demand and Marginal Revenue.” Study graphs showing how a firm maximizes profit.

*Step 3 Watch the Graphing Workshop “See It!” tutorial titled “Output Determination in Monopoly.” Study graphs showing how monopoly maximizes profit.

Step 4 Read the Graphing Workshop “Grasp It! exercise titled “Monopoly, Demand and Marginal Revenue.” This exercise uses a slider bar to demonstrate the relationship between the demand curve, marginal revenue curve, and total revenue.

Step 5 Read the Graphing Workshop “Grasp It!” exercise titled “Output Determination in Monopoly.” This exercise uses a slider bar to compute different profits for a monopolist that charges different prices.

Step 6 Create a new graph at the Graphing Workshop “Try It!” exercise titled “Monopoly: Demanded and Marginal Revenue.” This exercise uses the market for gasoline to show that total revenue is maximum were marginal revenue equals zero.

Step 7 Create a new graph at the Graphing Workshop “Try It!” exercise titled “Output Determination in Monopoly.” This exercise shows the demand (D) and marginal revenue (MR) curves facing a monopolist, as well as the firm’s average total cost (ATC), average variable cost (AVC), and marginal cost (MC) curves to determine the profit- maximizing price and rate of output for a monopolist.

Step 8 Play the “Causation Chains Game” titled “Profit Maximization and Loss Minimization.”

The Result By following these steps, you have learned that a monopolist does not operate where total revenue equals its maximum and marginal revenue equals zero. Instead, the monopolist sets its price and quantity where MR = MC to maximize profits.

#2 - Explain why a monopolist may practice price discrimination.

Step 1 Read the section in your textbook titled “Price Discrimination.”

Step 2 Watch the Graphing Workshop “See It!” exercise titled “Price Discrimination.” Study price discrimination in the market for airline tickets.

Step 3 Read the Graphing Workshop “Grasp It!” exercise titled “Price Discrimination.” This exercise uses a slider bar to demonstrate a monopolist can maximize profit by charging a lower price to more price sensitive customers.

Step 4 Work the Graphing Workshop “Try It!” exercise titled “Price Discrimination.” This exercise illustrates the situation facing a monopoly supplier of a new method of cosmetic surgery.

Ch9-1 Step 5 Read the EconNews article titled “Drug Discrimination.” This article describes how conditions exist that allow companies to charge different prices for the same drug in Canada and the United States.

The Result Following these steps, you have learned that, under certain conditions, a monopolist may be able to maximize profits by changing different prices for the same product to different groups of customers.

#3 - Distinguish between monopoly and perfect competition.

Step 1 Read the sections in your textbook titled “Comparing Monopoly and Perfect Competition,” “The Case against and for Monopoly,” and the You’re the Economist titled “New York Taxicabs: Where Have all the Flags Gone?”

Step 2 Read the EconNews article titled “European Airlines: Too Many For Their Own Good?” This article describes a European airline monopoly for comparison to the perfectly competitive model.

Step 3 Read the EconNews article titled “Not Only Can’t You Find a Taxi in New York: Now You’ll Have to Pay Even More to Not Find One.” This article describes the history of the tax monopoly in New York City.

The Result By following these steps, you have learned that both a monopolist and a perfectly competitive firm produce an output where MR = MC. If the market demand curve and costs were the same, the monopolist would charge a higher price and produce a lower output, which would be inefficient.