Tutorial 8

Principles of Microeconomics (CIX1001) Pure Monopoly

Question 1.
The figure below shows demand, marginal revenue, and short-run cost curves for a monopoly:

a. How much should the firm produce? What price should it charge?
b. What is the firms profit (loss)?
c. Should this firm produce or shut down? Explain.
d. If the firm shuts down in the short run, how much will it lose?
Question 2.
A monopolist faces the following demand and cost schedules:

Price Quantity Total Cost

RM 50 20 RM 100
49 21 110
48 22 125
47 23 145
46 24 170
45 25 200

a. How much output should the monopolist produce?

b. What price should the firm charge?
c. What is the maximum amount of profit that this firm can earn?
Question 3.
Muin Coffee has a monopoly on Arabica Coffee in the local market. The demand is:
 
1
QD = 100 − 2P ⇔ P = 50 − Q
2

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 Tutorial 8
Principles of Microeconomics (CIX1001) Pure Monopoly

The resulting marginal revenue function is M R = 50 − Q. The marginal cost of producing

Arabica Coffee is  
1
MC = 5 + Q
2
a. Calculate Muin profit maximizing output.
b. At output level a., what is the price that Muin should charge?
c. Calculate the consumer surplus, producer surplus and the total surplus for the monopoly
firm.
d. If Muin did not have monopoly power, what is the price and output?
e. Calculate the consumer surplus, producer surplus and the total surplus based on d.
above.
f. How much is the deadweight loss due to the monopoly of Muin?
g. With a properly label diagram, show the area of consumer surplus, producer surplus
in c. together with the area of deadweight loss based on e.

Question 4.
Anastasia’s Gold Mines, a single price monopoly, faces the demand and cost shown in the
table below.

Price Quantity Demanded Total Cost

(RM per ounce) (ounces per day) (RM per day)
600 0 6,000
500 20 7,200
400 40 8,800
300 60 10,800
200 80 13,200
100 100 16,000

a. Calculate Anastasia’s total revenue, marginal revenue, marginal cost and average total
cost for each quantity sold.
b. From you answer in part a., determine the profit-maximizing output and price.
c. What is Anastasia’s maximum profit?
d. Does Anastasia’s Gold Mines use resources efficiently? Explain your answer.
e. Can Anastasia enjoy positive economic profit in the long-run? Explain your answer.

Question 5.
a. A monopolist is producing at a point at which marginal cost exceeds marginal revenue.
How should it adjust its output to increase profit?
b. If the government wants to set a price ceiling that maximizes the monopolists output,
what price should it set? Briefly explain.

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 Tutorial 8
Principles of Microeconomics (CIX1001) Pure Monopoly

c. A firm faces the following average revenue (demand) curve:

P = 120 − 0.02Q

where Q is weekly production and P is price, measured in cents per unit. The firms
cost function is given by
T C = 60Q + 25, 000
Assume that the firm maximizes profits.
i) Calculate the quantity where the firm maximizes profits.
ii) Calculate the price where the firm maximizes profits.
iii) Calculate the total profit per week.

Question 6.
a. Explain what is meant by a pure monopoly?
b. List four types of barriers to entry.
c. Explain why it is true that at every level of output except the first unit, a monopolist
firms marginal revenue (MR) is below the selling price?