Sid is the CEO of a local power plant operating in monopoly market structure.
a. Explain why the demand curve (P) here is larger than the MR, and why Sid won’t
produce on the inelastic portion of demand curve.
b. Draw a graph comparing Sid’s market structure with a market in perfect competition
(on the same graph). Be sure to label the components of deadweight loss.
c. On a separate graph, show the case where the monopoly is making a positive profit
and label the profit area.
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 always equal price.
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