# Why is the government response to Natural Monopoly generally different than other types of Monopolies?

### Econ 120

Problem Set 5

Name: ________________________
Monopoly
1. What are the five listed barriers to entry in the Monopoly lecture? (5 pts.)
2. Draw a graph of a monopoly making positive profits. Be sure to include labeled axes, MC & ATC, MR, Demand, their price and quantity, and the profit rectangle. (3 pts.)

3. Below you have the demand schedule and the total cost information for a Monopoly.
a. Complete the table. (5 pts.)

 Quantity Price (WTP) Total Cost MC MR ATC TR Profit 0 16 2 — — — — 1 14 3 2 12 5 3 10 8 4 8 12 5 6 17 6 4 23

b. What’s the profit maximizing price and quantity? What profit will they get? (3 pts.)
c. When lowering the price from \$10 to \$8, what’s the price effect and what’s the quantity effect? (2 pts.)
d. What’s the Marginal Revenue of the 4th unit? What’s the price of the 4th unit? (2 pts.)
e. Why is the Marginal Revenue of the 4th unit different than the price of the 4th unit? (Hint: This could be answered in two words.) (2 pts.)
f. Monopolies lead to inefficiency; there are missed opportunities for beneficial transactions. Why is that the case? Where do we see that on this table? (Hint: It deals with MC and WTP). (3 pts.)
g. What are the recommended government responses to Monopoly? Be sure to include at least two. (2 pts.)
h. Why is the government response to Natural Monopoly generally different than other types of Monopolies? (3 pts.)
4. Suppose the movie market has two different types of consumers: students and adults. The demand schedule for movies on a given night for both groups is below. Assume that the movie theatre has no fixed cost. They have a relatively small variable cost– \$1 per person going to the theatre, in order to keep the place clean.

 Price Qd by Adults Qd by Students 14 10 0 12 12 4 10 14 8 8 16 12 6 18 16 4 20 20

a. Based upon this information, complete the table below. (6 pts.) (Hint: Qd Market = Qd by Adults + Qd by Students & TC = FC + VC)

 Price Qd by Market TR MR TC MC Profit 14 12 10 8 6 4

b. Suppose the movie industry successfully separates the market for movies by students and adults– possibly offering discounts if you qualify as being a student for instance. By separating the markets, they have the capacity to charge different prices to different groups. To explore why this might be helpful for the firm, complete the next two tables. (10 pts)

 Price Qd by Adults TR MR TC MC Profit 14 10 12 12 10 14 8 16 6 18 4 20
 Price Qd by Students TR MR TC MC Profit 14 0 12 4 10 8 8 12 6 16 4 20

c. What price and quantity will they want to charge students to maximize profits within that group? (2 pts.)
d. What price and quantity will they want to charge adults to maximize profits within that group? (2 pts.)
e. What’s the total profit in the market when the firm price discriminates between the two groups? How does this compare to when they just charge one price? (2 pts.)
Oligopoly
1. Below we the market demand for a good, and the total cost of producing various levels of quantities by the industry. This problem is a theoretical example of Cournot Competition, where firms choose quantities to produce, and end up selling at whatever price the market is willing to pay for the total industry output. For simplification purposes, firms have no fixed costs, and a constant MC and ATC.
a. Complete the table. (5 pts.)

 Quantity Price TR MR TC MC ATC Profit 0 \$14 — 0 — — 10 \$11 10 20 \$8 20 30 \$5 30 40 \$2 40

b. Now assume that the industry is made up of two firms– selling at the profit maximizing price you just found, and evenly splitting the quantity. Both are selling 10 units at \$8. Both firms have the same Marginal Cost curves. Copy and paste the Marginal Cost values from the table above— they should all be less than \$3 if you did it right. After copying and pasting the MC values, complete the rest of the table. (6 pts.)

 Quantity Price TR MR TC MC ATC Profit 0 \$11 — 0 — — 10 \$8 20 \$5 30 \$2

c. Given that the other firm is selling 10 units, what’s the profit maximizing quantity? What will the market price be? What’s their profit? (3 pts.)
d. What’s the profit for the firm that is still selling 10 units? (Hint: You have their Quantity (i.e. 10), you just found the price, and they have the same constant ATC). (2 pts.)
e. What’s the total industry profit before and after the other firm decided to deviate? (2 pts.)
2. Below we have a Payoff Matrix for Camel and Marlboro for deciding whether or not to advertise.

a. If Marlboro advertises, what’s Camel’s Best Response? (2 pts.)
b. If Marlboro does not advertise, what’s Camel’s Best Response? (2 pts.)
c. Does Marlboro have a dominant strategy? What is it? (2 pts.)
d. Does Camel have a dominant strategy? What is it? (2 pts.)
e. Define a Nash Equilibrium. Does a Nash Equilibrium exist in this game? What is it? (3 pts.)
f. Are the two companies better off both advertising or both not advertising? (2 pts.)
g. Define a Prisoner’s Dilemma. Explain whether or not this is a Prisoner’s Dilemma. (3 pts.)
h. Suppose Congress developed a bill banning cigarette companies from advertising. Based upon this problem, why might a cigarette company benefit from a ban on advertising? (3 pts.)
Monopolistic Competition
1. What gives firms market power in an industry characterized by Monopolistic Competition? (2 pts.)
2. In Monopolistic Competition, firms differentiate their products from competitors. Provide an example of a firm differentiating their product by: (3 pts.)
a. Quality
b. Location
c. Style or Type
3. Draw a graph of a firm making positive profits in an industry of Monopolistic Competition.
a. Be sure to include labeled axes, MC, MR, Demand, ATC and the profit rectangle. (3 pts.)

4. Draw a graph of a firm in an industry of Monopolistic Competition in the long run. (3 pts.)