Tutorial 5 – Week 6
(Based on Chapters 8 and 11)
Questions and Answers
From Chapter 8
Question 1
a) What is a monopoly? Assume that Peet's Coffee and Teas produces some flavourful varieties of
Peet's brand coffee. Is Peet's a monopoly?
Answer
A monopoly is the only seller of a good or service that does not have a close substitute.
No, although Peet's coffee is a unique product, there are many different brands of coffee that are
very close substitutes.
b) What gives rise to a natural monopoly? How do consumers benefit from a natural monopoly?
Answer:
A natural monopoly arises when the production function exhibits economies of scale over the
relevant range of market demand. The average cost of production is lower as the output produced
increases. Consumers benefit from having one supplier because the supplier will be able to pass
some of the cost savings to consumers
c) Use the following graph for a monopoly to answer the questions that follow.
i. What quantity will the monopoly produce, and what price will the monopoly charge?
ii. Calculate the profit (or loss). Show your workings
iii. Suppose the monopoly is regulated. If the regulatory agency wants to achieve economic
efficiency, what price should it require the monopoly to charge? How much output will the
monopoly produce at this price?
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, Answer
i. Output 62 units price = $24
ii. TR= 1488 TC= 1240 Profit: $248
iii. To achieve allocative efficiency, the regulatory agency should require the monopoly to charge
a price equal to marginal cost which, in this case, would be a price of $22. The regulated
monopoly will produce 83 units.
Question 2
a) What is the relationship between a monopolist’s demand curve and the market demand curve?
What is the relationship between a monopolist’s demand curve and its marginal revenue curve?
Answer:
The monopolist’s demand curve is the market demand curve. The marginal revenue curve is derived
from the demand curve. For a linear demand curve, the marginal revenue curve will be below the
demand curve (and it is also twice as steep as the demand curve, because in absolute value, the slope
of the marginal revenue curve will be twice the slope of the demand curve).
b) Discuss whether you agree or disagree with the following statement: ‘A monopolist maximises
profit by charging the highest price at which it can sell any of the good at all.’
Answer:
You should disagree. The monopolist charges the price that allows her or him to sell the level of
output where marginal revenue equals marginal cost. She or he is able to charge a higher price, but
would not be maximising profit if she or he did.
Question 3
Ted has acquired a monopoly in the production of cricket balls (don’t ask how) and faces the demand
and cost situation shown in the following table.
QUANTITY TOTAL MARGINAL MARGINAL
PRICE TOTAL COST
(PER WEEK) REVENUE REVENUE COST
$20 15 000 $330 000
19 20 000 365 000
18 25 000 405 000
17 30 000 450 000
16 35 000 500 000
15 40 000 555 000
a) Fill in the remaining values in the table.
b) If Ted wants to maximise profits what price should he charge and how many cricket balls should
he sell? How much profit will he make?
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(Based on Chapters 8 and 11)
Questions and Answers
From Chapter 8
Question 1
a) What is a monopoly? Assume that Peet's Coffee and Teas produces some flavourful varieties of
Peet's brand coffee. Is Peet's a monopoly?
Answer
A monopoly is the only seller of a good or service that does not have a close substitute.
No, although Peet's coffee is a unique product, there are many different brands of coffee that are
very close substitutes.
b) What gives rise to a natural monopoly? How do consumers benefit from a natural monopoly?
Answer:
A natural monopoly arises when the production function exhibits economies of scale over the
relevant range of market demand. The average cost of production is lower as the output produced
increases. Consumers benefit from having one supplier because the supplier will be able to pass
some of the cost savings to consumers
c) Use the following graph for a monopoly to answer the questions that follow.
i. What quantity will the monopoly produce, and what price will the monopoly charge?
ii. Calculate the profit (or loss). Show your workings
iii. Suppose the monopoly is regulated. If the regulatory agency wants to achieve economic
efficiency, what price should it require the monopoly to charge? How much output will the
monopoly produce at this price?
This study source was downloaded by 100000852681095 from CourseHero.com on 12-15-2022 19:57:30 GMT -06:00 1
https://www.coursehero.com/file/68116185/Tutorial-5-Week-6-Questions-and-Answers-revisedpdf/
, Answer
i. Output 62 units price = $24
ii. TR= 1488 TC= 1240 Profit: $248
iii. To achieve allocative efficiency, the regulatory agency should require the monopoly to charge
a price equal to marginal cost which, in this case, would be a price of $22. The regulated
monopoly will produce 83 units.
Question 2
a) What is the relationship between a monopolist’s demand curve and the market demand curve?
What is the relationship between a monopolist’s demand curve and its marginal revenue curve?
Answer:
The monopolist’s demand curve is the market demand curve. The marginal revenue curve is derived
from the demand curve. For a linear demand curve, the marginal revenue curve will be below the
demand curve (and it is also twice as steep as the demand curve, because in absolute value, the slope
of the marginal revenue curve will be twice the slope of the demand curve).
b) Discuss whether you agree or disagree with the following statement: ‘A monopolist maximises
profit by charging the highest price at which it can sell any of the good at all.’
Answer:
You should disagree. The monopolist charges the price that allows her or him to sell the level of
output where marginal revenue equals marginal cost. She or he is able to charge a higher price, but
would not be maximising profit if she or he did.
Question 3
Ted has acquired a monopoly in the production of cricket balls (don’t ask how) and faces the demand
and cost situation shown in the following table.
QUANTITY TOTAL MARGINAL MARGINAL
PRICE TOTAL COST
(PER WEEK) REVENUE REVENUE COST
$20 15 000 $330 000
19 20 000 365 000
18 25 000 405 000
17 30 000 450 000
16 35 000 500 000
15 40 000 555 000
a) Fill in the remaining values in the table.
b) If Ted wants to maximise profits what price should he charge and how many cricket balls should
he sell? How much profit will he make?
This study source was downloaded by 100000852681095 from CourseHero.com on 12-15-2022 19:57:30 GMT -06:00 2
https://www.coursehero.com/file/68116185/Tutorial-5-Week-6-Questions-and-Answers-revisedpdf/
