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PADP 6950 Lecture Notes - Lecture 10: Marginal Revenue, Demand Curve, Market Power

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peachkangaroo252
26 Mar 2019
School
University of Georgia
Department
Public Administration and Policy
Course
PADP 6950
Professor
Emily Lawler

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Document Summary

Barriers to entry: rm is a price-setter . If the rm charges a high price, they will only sell a small quantity (& vice versa) Demand curve facing monopoly: bc monopoly is only rm in the market, its demand curve is the market demand curve. Marginal revenue for a monopoly: marginal revenue (mr) > the change in total revenue from producing an additional unit. Mr = change in tr / change in q. Mr = p1 + q0 (p1 - p0) Change in tr = p1 + q0(p1 - p0: integration. Change in tr = p x (change in q) + q x (change in p) Mr = p + (change in p / change in q) x q: for a linear inverse demand curve, p = a - bq. (change in p) / (change in q) = - b. Mr = a - 2bq: marginal revenue curve for monopoly.

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Related Questions

Consider the following market demand schedule and total costs for a monopoly.

Q P TR TC MR MC Profit                                        
0 45   4                                              
1 40   9                                              
2 35   19                                              
3 30   39                                              
4 25   61                                              
5 20   91                                              
6 15   130                                              
7 10   172                                              

a) Fill in the blanks.

b) How is the relationship between price and MR different between monopolistic and perfectly competitive markets?

c) Would the demand curve facing a monopolistic competitive market be more or less elastic than the demand curve facing a monopolist, why? Do firms in a monopolistically competitive market make long-run economic profits, why or why not?

You are a very powerful lobbyist and have convinced your client that you can make them the only legal extractor of coal in the United States and simultaneously make coal imports illegal. In essence, your client can become the coal monopoly. Currently, before the policy change, the supply and demand curves for coal are as follows:

Demand Curve: Qd = 70 − 1/2P

Supply Curve: Qs = 3/4P

Where Q is in tens of thousands of short tons and P is in dollars. Show all steps used to obtain answers.

Q1: What is the equilibrium price and quantity in a free market?

Q2: Present the supply and demand curves in the form P = f(Q) instead of the form provided Q = f(P).

Q3: Solve for the monopoly’s marginal revenue curve.

Q4: Once the coal monopoly has been implemented, what is the new equilibrium price and quantity?

(Hint, set marginal revenue curve equal to the marginal cost curve (i.e. supply curve) and solve.)

Q5: Using the “P, Q” graph show the supply curve, demand curve, monopolist’s marginal revenue, and P and Q observed in the market for both a free market and monopoly

A. A competitive firm

  1. can consider only its location in setting the price.
  2. must base its competitive price on product differentiation.
  3. has the ability to set its own price.
  4. must accept the price determined by the intersection of the market supply and demand curves.
  5. has no supply curve.

B. If a firm is making an economic profit, then

  1. the factors of production are being paid their opportunity costs.
  2. there will be no change in the number of firms if the industry is perfectly competitive.
  3. the factors of production are being paid less than their opportunity costs.
  4. the factors of production are being paid more than their opportunity costs.
  5. the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

  1. marginal revenue is greater than price.
  2. the elasticity of demand is constant.
  3. marginal revenue decreases when the price decreases.
  4. marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

  1. shut down because economic profits are negative.
  2. continue to produce as long as P > AVC.
  3. continue to produce because accounting profits are positive.
  4. set a higher price for its output.
  5. set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

  1. the marginal revenue curve.
  2. perfectly inelastic.
  3. always equal to marginal cost.
  4. the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

  1. monopolistic
  2. oligopolistic
  3. monopolistically competitive
  4. perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

  1. total revenue will fall if the price increases.
  2. total revenue will be unchanged if the price increases.
  3. total revenue will rise if the price increases.
  4. the total supply will increase by an equal amount if demand increases.
  5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

  1. monopoly.
  2. perfect competition.
  3. theories of consumer behavior.
  4. imperfect competition.
  5. the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

  1. economic profits are zero.
  2. TR > TC.
  3. TR < TC.
  4. P = AVC.
  5. normal profits are zero.