… a core concept in Economic Analysis and Atlas102
Click for MRU video
Alex Tabarrok (reference below, video on right) examines how the relationship between the monopolist’s profit-maximising price and the elasticity of demand.
Using an example from the pharmaceutical industry, Tabarrok illustrates that the monopoly markup will be higher when the demand for its product is less elastic.
This can be demonstrated by comparing the monopoly markup for two different demand
Tabarrok notes that firms can acquire
Market Power by selling a unique good with Barriers to Entry, such as:
He then shows how the monopolist will set both price and output to maximize profit.
For a linear demand curve one can use a short cut for finding the marginal revenue: the MR begins at the same point on the vertical axis as the demand curve and has twice the slope, and splits the distance on the horizontal axis in half.
And, using the example of a pharmaceutical firm with the monopoly on an AIDS antiviral drug, Tabarrok shows how to add the average cost curve and calculate the monopolist’s profit. Practice questions
http://www.mruniversity.com/node/267321, accessed 7 May 2016.
In the textbook, The Applied Theory of Price, D. N. McCloskey refers to the equation MR= MC as the rule of rational life. Who follows this rule: monopolies, competitive firms, both or neither?
Rapido, the shoe company, is so popular that it has monopoly power. It’s selling 20 million shoes per year. The marginal cost of making extra shoes is quite low, and it doesn’t change much if they produce more shoes. Rapido’s marketing experts tell the CEO of Rapido that if it decreased prices by 20%, it would sell so many more shoes that profits would rise. If the expert is correct, at its current output, is MC=MR, is MC >MR, or is MC < MR?
MC greater than MR
MC less than MR
If the expert is correct and Rapido’s CEO follows the experts’ advice, will Rapido’s total revenue rise, fall, or be unchanged?
Total revenue will rise
Total revenue will fall
Total revenue will remain unchanged
Apollo, another highly profitable shoe company, also has market power. It’s selling 15 million shoes per year, and it faces marginal costs quite similar to Rapido. Apollo’s marketing experts conclude that if they increased prices by 20%, profits would rise. For Apollo, is MC=MR, is MC greater than MR, or is MC less than MR?
MC greater than MR
MC less than MR
When selling e-books, music on iTunes, and downloadable software, the marginal cost of producing and selling one more unit of output is essentially zero: MC = 0. Let’s think about a monopoly in this kind of market. If the monopolist is doing its best to maximize profits, what will marginal revenue equal at a firm like this?
Greater than 0
Less than 0
Indeterminate from the given information
All firms are trying to maximize their profits (profit = TR – TC). The rule from the previous question tells us that in the special case where marginal cost is zero, “profit maximization” is equivalent to which of the following statements?
“Maximize total revenue”
“Minimize total cost”
“Minimize average cost”
“Maximize average revenue”
Which of the following is true when a monopoly is producing the profit-maximizing quantity of output? More than one may be true.
Marginal revenue = Average cost
Total cost = Total revenue
Monopoly Price = Marginal cost
Marginal revenue = Marginal cost
A & C
C & D
For the following statements, decide whether it is true or false. When a monopoly is maximizing its profits, price is greater than marginal cost.
For a monopoly producing a certain amount of output, price is less than marginal revenue.
Atlas topic, subject, and course
Monopoly and Price Discrimination (core topic) in Economic Analysis and Atlas102 Economic Analysis. Source
Alex Tabarrok, Maximizing Profit under Monopoly (11-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at
http://www.mruniversity.com/courses/principles-economics-microeconomics/monopoly-profit-maximization-price-aids-medication, accessed 7 May 2016.
Page created by: Ian Clark, last modified 7 May 2016.
Image: Alex Tabarrok, minute 0.14 of Maximizing Profit under Monopoly (11-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/monopoly-profit-maximization-price-aids-medication, accessed 7 May 2016.