AP Microeconomics Page 1 of 3 Assignment: Apply Concepts of Monopolies 1 Demand and marginal revenue for a hypothetical monopoly  A Draw and label a straight-line demand curve and a marginal revenue...

1 Demand and marginal revenue for a hypothetical monopoly
A
Draw and label a straight-line demand curve and a marginal revenue curve on a

graph for a hypothetical monopoly (3 points)
B
For any level of output, where does the marginal revenue curve lie in relation

to the demand curve? (1 point)
C
Where would you draw the industry demand curve on your graph? Why?

(1 point)
D
Since the monopolist’s demand curve slopes downward, the marginal revenue

is less than the price Explain why this statement is true (1 point)
E
Since the monopolist’s demand curve slopes downward, the monopolist is a

“price setter” Explain what this means (1 point)
F
Explain the relationship between the average revenue curve and the demand

curve for a monopolist (2 points)
G
Draw and label a straight-line demand curve and indicate its elastic and

inelastic portions Clearly indicate the point where the curve is unit elastic You

may need to draw the monopolist’s marginal revenue curve (2 points)
H
Why will the monopoly want to operate in the elastic portion of the demand

curve? Give two reasons (2 points)
I
Why can the monopoly operate in any portion of the demand curve it wants?

(1 point) 2 Determining profit-maximizing equilibrium for a hypothetical monopoly
A
What rule does the monopolist follow when choosing the level of output that

will maximize its profits? (2 points)
B
How does a monopolist determine the price for its product at its profitmaximizing

quantity of output? (1 point)
C
Construct a graph illustrating the monopolist’s profit-maximizing level of

output and price Use a straight-line demand curve, and show MR, MC, and ATC

(6 points)
D
On your graph from part C, shade in the area that represents the monopolist’s

profit Explain how to measure profit, and why this area shows profit (3 points) 3 Analyzing a monopoly’s cost and revenue figures Below are two different cases In each case, the monopolist wants to maximize

its profits or minimize its losses Analyze each case and give a recommendation

as to what the monopolist should do based on the possible recommendations

provided below Explain how you reached this recommendation and the

reasons for it You may have to fill in some figures before you decide what to

recommend Possible Recommendations:

a Increase production and reduce the price

b Decrease production and raise the price

c Shut down

d The monopoly is currently at the correct position
A
(3 points)

Price = 6 Marginal Revenue = 3

Quantity of Output = 1500 Total Revenue = _____

Total Cost = _____ Fixed Costs = 1500

Average Cost = 3 Marginal Cost = 2
B
(3 points)

Price = 3 Marginal Revenue = 2

Quantity of Output = 1500 Total Revenue = _____

Total Cost = 4500 Fixed Costs = _____

Average Cost = _____ Marginal Cost = 3

4 Price Discrimination
4
Price Discrimination A Why would a monopolist want to price discriminate? (2 points)  B Define consumer surplus and deadweight loss (2 points)  C Draw a graph illustrating the quantity the perfectly price discriminating

monopolist will produce Use a straight-line demand curve, and include MC and

ATC On the graph fill in the economic profit of monopolist engaging in perfect

price discrimination (4 points)  D Suppose a monopolist can only charge a single price On a new graph, illustrate

the monopolist’s profit, the consumer surplus, and the deadweight loss

(7 points)  E Why does the perfectly price discriminating monopoly have no deadweight loss?

(2 points)
5
Costs of a monopoly

People often complain about monopolies What aspect of monopoly behavior

does a normal consumer complain about? (2 points)
6
Natural monopolies  A Give two reasons natural monopolies arise (2 points)  B The government often regulates natural monopolies Explain the two ways

regulators tend to base rates Where is the price set? (3 points)  C What price and level of output results in zero allocative inefficiency? Natural

monopolies rarely operate at that price Why? (4 points)