Mountain of Monopoly Name _____________________

Sample 1: Perfect Competition

Five friends go to an auction and see an Elvis bobble head doll. The auctioneer has
hundreds of the dolls and they all are exactly alike. Alice is willing to pay $5, Betty is
willing to pay $4, Cathy is willing to pay $3, Dolly is willing to pay $2, and Edna is
willing to pay $1 for the dolls. At a marginal cost of $2, how many will be sold, what
will be the total profit, total cost, total revenue, consumer’s surplus, producer’s surplus,
and price of each doll?

Four dolls will be sold at the price of $2

because that’s the resource allocative
efficient price (P = MC). Total revenue will
be $8 and total cost will be $8 for zero profit.
Consumer’s surplus is $8 and producer’s
surplus is $8.

Sample 2: Pure Monopoly

If the same five friends go to an action in which the seller has a monopoly, What will be
the price the dolls sell at, profit, total cost, total revenue, consumer’s and producer’s
surplus?

Two dolls will be sold at $4 dollars. Total

revenue will be $8 and total cost $4 for a $4
profit. Consumer’s surplus will be $2 and
producer’s surplus will be $8.

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Sample 3 Price Discriminating Monopoly

A price discriminating monopolist can sell

the same product at different prices. In this
case, Alice pays $5, Betty pays $4, Cathy
Pays $3, and Dolly pays $2. Total revenue
equals $14, total cost equals $8, profit equals
$6, consumer’s surplus equals $0, and
producer’s surplus equals $14.50. When a
monopolist is able to discriminate, profits are
maximized and all surplus is captured by the
producer.

Problem MONO1 (0)

a. This is a single-price monopoly.

What is another name for this type of
monopoly? __________________
b. What price would this monopoly
sell all of her output?________
c. What quantity would the
monopolist sell? ___________
d. How much is total revenue at the
monopoly price?____________
e. How much is total cost at the
monopoly price?____________
f. How much profit does the
monopolist earn?___________
g. What price ranges are
inelastic?______________
h. At what price is the price elasticity
of demand = 1?__________
i. At the monopoly price, how much is
consumer’s surplus?__________
j. Shade the dead weight loss.
k. What price would a perfect competitor charge?___________
l. What price would allow the firm to break even?__________
m. Why does the marginal revenue curve lie below the demand curve? _________
______________________________________________________.

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Problem MONO2 (0)

A monopoly might own all of the resources used to make a good or have exclusive
ownership of the resources. A monopoly might have a license, patent, copyright or legal
right to be the sole producer of the good. A monopoly might be large enough that it is the
only business capable of producing and selling the good at an affordable price. Some
monopolies have cozy relationships tacitly act like a monopoly. In each case below,
identify the source of the monopoly power.

a. A liquor store that requires a license. ___________________

b. A railroad that owns all of the tracks for 500 miles around a hub. ______________
c. Larry Litiagator, the only licensed lawyer in a town of 500 people. _____________
d. The U. S. Postal Service. _____________________
e. Terri’s Tropical Fish, the largest outlet for tropical fish in the Midwest. _________

Problem MONO3 (3)

Hornbuckle Carnival Rides has one ride, the Matterhorn. They have the patent on the
ride. The ride which simulates a rollercoaster ride through the Himalayas is popular in
rural towns in Iowa. Complete the table and graph the demand, marginal revenue, and
marginal cost curves. Assume that marginal cost is a constant $9. After you graph the
data, What is the profit maximizing output? a. _________ What is the profit maximizing
price? b. _________ If this were a perfectly competitive firm, what output would be
produced? c. ____________ How much profit would be made by a price discriminating
monopolist? d. _____________

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Problem MONO4 (0)

Each of the following brothers are willing to pay the maximum price shown in the table
for an iPod Shuffle.

Buyer Maximum Price

Alex $50
Barry 40
Cisero 30
Donovan 20
Edward 10

Apple’s cost of making the Shuffle includes $50 of fixed costs and a constant marginal
cost of $10. Graph the five brothers’ demand, marginal revenue, and marginal cost
curves. What is the profit maximizing output? a. __________ What is the profit
maximizing price? b. __________ How much profit is made? c. ____________ If Apple
can price discriminate, how many Shuffles will Apple sell? d. ________ How much
profit will be earned by the price discriminating monopolist? e. _______

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Problem MONO5 (3)

Punky’s Pies sells ice cream pies in a monopolized market. Data for her market is
contained in the table below: Complete the table and graph the Demand, MR, and MC
curves. Answer questions a, b, c, and d.

P Q TR MR TC MC ATC Profit
20 0 8
18 1 14
16 2 22
14 3 32
12 4 44
10 5 58
8 6 74
6 7 92
4 8 112
2 9 147

a. If Punky only cares about

the maximum revenue she can
earn, how many pies will
maximize her total revenue?
__________

b. How many pies are

produced at the profit-
maximizing output? _____

c. If Punky’s Pies were a

perfectly competitive market,
about how many pies would
she make?______

d. What would be the long-

run price if the market were
perfectly competitive?_____

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Problem MONO6(0)

The iMAX is the only theater in the tiny town of Maxwell, a mining town in Rural Iowa.
The demand for popcorn once inside the theater is given in the following demand
schedule:

Price per Drink $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00
Quantity 0 10 20 30 40 50 60 70

Graph the demand, marginal revenue, and marginal cost assuming that marginal cost is a
constant $1.00. What will be the price of a drink at the iMax a. ___________. If the
citizens of Maxwell force the theater to sell at the perfectly competitive price, how many
drinks will be sold? b. _________ How much is total revenue at the profit-maximizing
price? c. ________ How much is total cost at the profit-maximizing price? d.
__________

What is the price elasticity of demand between

$3.00 and $2.00? e. ___________
How much is the dead weight loss when the
iMax sells popcorn at the profit-maximizing
price? f. ____________
How much is consumer’s surplus at the profit-
maximizing price? g. __________

Sample 4 – Natural Monopoly

A natural monopoly is so big that it supplies the

entire market. This market structure is
characterized by high fixed costs that are spread
out over a large range of output. Because of the
high fixed costs, the firm is easily identified by
a broad sweeping ATC curve and low variable
costs. The low variable costs can be seen in the
marginal cost curve which over this range of
output is constant.

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Problem MONO7 (0)

In the problem below, answer the questions that follow:

The firm still maximizes profit where MR =

MC. What is the price at the profit
maximizing output? a. __________
If this firm were regulated at the socially
optimal output, that is, resource allocative
output, what would be the price and output?
b. Price ________ Output_______
At the socially optimal output how much
profit is the firm making? c. ________
d. Shade the area dead weight loss.
Should this municipality be subsidized or
taxed? e. _________

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Solutions:
MONO1 a. Pure Monopoly b. $7 c. 3 d. $21 e. $12 f. $9 G. Below $5 H.
$5 I. 4.5 J. Shade Triangle; 3,$7 – 3, $4 – 4.5, $5.5 k. $5.5 l. 5 m. The
monopolist has to lower the price to sell the next item.

MONO2 a. License b. Economies of Scale or Exclusive ownership of a resource c.

License d. Legal right e. Possibly all. Answers can vary.

MONO3 a. $14 b. 2.5 c. 5 d. $25 if you include the whole area of consumer’s
surplus; $20 if you assume a stairstep and discrete quantity.

MONO4 a. 3 b. $30 c. 60 in profit d. 5 e. $100

MONO5 a. 5 b. 2.5 c. About 4 d. 10.67
MONO6 a. $4 b. 30 c. 120 d. $30 e. .56 f. 45 g. 4.5

MONO7 a. 6 b. $1, about 5.5 c. -1 d. not shown. E. subsidized.

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