Exam 14: Monopoly

Using the diagram below compare the monopoly price and quantity (label them P_M and Q_M, respectively) to the perfectly competitive price and quantity (label them P_C and Q_C, respectively).

What are two possible benefits from advertising from a consumer's perspective? What are two possible drawbacks?

Demonstrate graphically and explain verbally the long-run equilibrium for a monopolistically competitive firm. How does this differ from the long run equilibrium of a monopoly firm?

As the owner/operator of One-of-a-Kind Gifts (the only gift shop in town), you want to make as much profit as you can. Suppose that at your current level of production, you determine that your MR > MC. What should you do? Explain. What would you do if you had discovered that MR < MC at your current production level? (Assume marginal cost rises as output rises.) Explain.

As manager of a mutual fund, your job is to buy stocks in companies whose stock price will rise. You decide to only buy stocks of monopoly companies rather than perfectly competitive companies. Your rationale: the monopoly company stocks are a "sure-thing" since customers have no alternative suppliers, which means monopolies earn much more profit than perfectly competitive firms (which you expect to result in higher stock prices for the monopoly companies). What is wrong with assuming that monopolies must be profitable? Explain, using a diagram to illustrate your explanation.

How would we show graphically the welfare loss resulting from converting a perfectly competitive industry into a monopoly?

Using the diagram below, add the curve(s) that are needed to illustrate the profit-maximizing output level and price for this monopolist. Mark the profit-maximizing quantity and price.