Answer to Question #113277 in Microeconomics for Erol

Question

1. Given that a monopoly’s marginal revenue curve is strictly downward sloping, use math and a graph to show why a monopoly’s revenue curve reaches its maximum at a larger quantity than does its profit curve
2. Suppose a firm has market power and faces a downward sloping demand curve for its product, and its marginal cost curve is upward sloping.
If the firm reduces its price, then consumer surplus increases, producer surplus may increase or decrease.Explain this statement with a graph.
3. A firm is a natural monopoly. Its marginal cost curve is flat, and its average cost curve is downward sloping (because it has a fixed cost). The firm can perfectly price discriminate.
a) Use a graph to show how much the monopoly produces, Q*.
b) Show graphically and mathematically that a monopoly might shut down if it can only set a single price butoperate if it can perfectly price discriminate.

Answer 1

1. In a monopoly, the marginal revenue is lower than the price because the demand curve is downward sloping. When prices go down, more units of the product are bought. Because of this, marginal revenue will not equal price. That's why a monopoly’s revenue curve reaches its maximum at a larger quantity than does its profit curve.

2. If the firm reduces its price, then the quantity produced increases, and consumer surplus increases, but producer surplus may decrease or increase depending on the steepness of the marginal cost curve.

3. a) The monopoly produces Q* at MC = D.

b) A monopoly might shut down if it can only set a single price and its profit-maximizing price is lower than its average variable cost. But it will operate if it can perfectly price discriminate, because it can set different prices for different consumers depending on their willingness to pay.