MCD2020 Microeconomics
Tutorial 9: Monopoly
Chapter 15
Learning objectives
1. Explain what monopoly is and why some markets have only one seller
2. Explain how a monopoly determines the quantity to produce and the price to charge
3. Analyse how the monopoly’s decisions affect economic surplus
4. Compare monopoly outcomes with those of perfect competition
Exercises marked with ★ are core content, and should be prioritised during class time
pg. 1
Learning Objective 1
Question 1 – Why do some markets have only one seller
In the table below,
• the first column gives the reasons why some markets have only one supplier
• the second column gives a real-life example of such a monopoly
In the last column, explain how and why the identified reason is applicable to the given example.
• You can use AI tools to find information.
• Write your answer in your own words, not copied
Reason for being a monopoly Example Explanation
High start-up costs and economies of AusNet Services (Victoria,
scale (Natural monopoly) Australia)
China and rare earth metals
Control over key resources
Government regulation/licensing
Pfizer Inc.
(Patents or copyrights):
You can use the space below to answer Question 1, as needed
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pg. 2
Learning Objective 2
★Question 2 - Demand curve and the marginal revenue curve of the monopoly
Calculate the Marginal Revenue in the table below and draw an approximate (sketch diagram) the
diagram showing the marginal revenue curve and the demand curve.
Q P ($) TR MR
0 11
1 10
2 9
3 8
4 7
5 6
6 5
7 4
8 3
a) The monopolist faces no ………………, and therefore can choose the …………… it wants to charge,
although the price is limited by the ………….. …… ……… (demand curve).
b) Price effect - When the monopolist lowers the price, since the price ………… on all units sold,
total revenue tends to …………. due to earning less money per unit.
c) Output effect - Lowering the price …………. the number of units sold at the lower price. This tends
to increase ………… ………….. by increasing the sales quantity
d) Assume that the monopolist decreased the price from $7 to $6 in order to increase sales from 4 to
5 units:
• the output effect on total revenue due to an increase in output by one ( the fifth)
unit is equal to $ .
• the price effect on total revenue due to a decrease in price of $1 for the previous
four units is equal to $ .
• As such, the net impact of the output effect and the price effect on the Marginal
Revenue is equal to $ , and the firm increases total revenue
by the price.
• The monopolist can decrease the and increase total revenue only if the
…………….. effect is stronger than the ……….. effect. Understanding this
balance helps the monopolist decide the optimal price to maximize revenue and
profits
pg. 3
e) Why are these two effects less important for firms that face competition? Explain your answer
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★Question 3 - Monopoly price includes a mark-up
Joseph owns the only ice cream shop in a small town outside Melbourne, in regional Victoria. The
following table shows prices and costs of Joseph’s ice cream shop.
Fixed Variable Total Marginal Total Marginal
Price
Quantity Cost Cost Revenue Revenue Cost Cost
$
$ $ $ $ $ $
9 0 3 0
8 1 3 2
7 2 3 3
6 3 3 6
5 4 3 12
4 5 3 21
3 6 3 33
i. Fill in the blank columns to complete the information
pg. 4
ii. Assuming that Joseph is operating at its profit-maximising output level, what is the
current output and price of the firm?
…………………………………………………………………………………………………
………………………………………………………………………………………
Note that profit maximising monopoly price is higher than its marginal cost. Difference
between the price and the marginal cost is the mark-up
iii. How much profit is made at the current output level
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iv. Complete the table below to find more information about Joseph’s ice cream
business.
Total Price Output Net effect
Price
Quantity Revenue Effect Effect on TR
$
$ $ $ $
9 0 0
8 1
7 2
6 3
5 4
4 5
3 6
v. Assume that Joseph wanted to maximise total revenue, and not total profit. Fill in the
information below to understand the firm’s strategy.
If the firm was maximising total revenue and not total profit, it would produce ………
units, and sell at ……….. At this output level the price effect and the output effect are
………….. and the marginal revenue is equal to …………... Reducing price any
further will …………. total revenue. This is a short-term strategy that firms would
sometimes adopt, for example, to ………….. market share
pg. 5
Learning Objective 3
★Question 4 - Monopoly, consumer surplus and producer surplus
a. What area(s) of the graph represent(s) total revenue for this firm if it was profit
maximizing?
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b. What area(s) of the graph represent(s) total cost for this firm if it was profit maximizing?
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c. What area(s) of the graph represent(s) profits for this firm if it was profit maximizing?
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d. What area(s) of the graph represent(s) deadweight loss if the firm was profit maximizing?
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e. Compared to an allocatively efficient market, which area represent the consumer surplus
that was transferred to the monopolist?
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pg. 6
★Question 5 – Monopoly profits and loss of welfare
Use the Graph below to answer the questions given below
a) The profit-maximizing price and quantity are found by locating where
………………….. equals ………….………. and moving up to the ……………. curve to
find individuals’ willingness to pay. Thus, the profit-maximizing price and quantity are
…….and ………., respectively.
b) The total revenue at this output level is It is calculated by multiplying the ……….. by
the ……………………., and is $..............
c) The total cost at this output level is found by moving up from the profit maximising
quantity to the …………………. curve to find the ……………. ………… …………….
at this output level
d) The total cost at this output level is It is calculated by multiplying the ……..……..
…………. by the ……………………., and is $..............
e) Total profit equals total revenue ……………. total cost and is $.........
f) price and quantity combination that creates the greatest economic welfare for society
is located where the ………….. curve and the …………………. curve intersects. Thus,
the price and quantity combination that creates the greatest economic welfare for
society is $…………. and ……….. units, respectively.
g) Therefore, the firm operating at the profit maximising output level causes a
deadweight loss of $....................................
pg. 7
Learning Objective 4
★Question 6 - Compare monopoly market outcomes with competitive market outcomes
Assume that the market for raw honey in a small sub-urban Melbourne town consists of a large number of
small farmers who sell their produce in small shops and markets. The product is undifferentiated and price
of each shop is very similar to the price of other shops.
Assume also that following the increased publicity and profits of the honey market, a large firm from
Melbourne decides to take-over all small firms and operate the business as the sole supplier of raw honey
in Melbourne.
a) Draw a graph to illustrate the price and output of the honey market after the takeover
b) Use your graph to compare the price, output and efficiency of competitive market and a
monopoly
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pg. 8
Question 7 - Natural monopoly
The graph below illustrates a natural monopoly
A natural monopoly is different from a normal monopoly because of the large …………….. ..
………….. the natural monopoly experiences. Natural monopolies usually have high initial
…………. ………….. and low and stable …………….. …………….. Therefore, it is difficult for a
new firm to ………………. the market, which makes the existing firm to experience these large
economies of scale. For natural monopolies, …………… ………… is decreasing over all relevant
quantities
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pg. 9
Independent learning
Assume that we have only one firm producing tennis balls. See the diagram below showing the
market for tennis balls and find the:
Use the Graph above to answer the questions given below
i. the quantity of output maximizing the profit, and the price monopolist is charging,
…………………………………………………………
ii. value of the average revenue at the profit maximising level of production,
…………………………………………………………………………………………………
iii. value of the marginal cost at the profit maximising level of production,
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iv. value of marginal revenue at the profit maximising level of production,
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v. value of the average total cost
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vi. What is the value of total revenue, total cost and total profit at the profit
maximizing quantity?
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vii. What would be the efficient level of output and price if the market was perfectly
competitive?
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pg. 10