Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

216 PRICE AND OUTPUT UNDER PURE MONOPOLY [CHAP. 9
EXAMPLE 5. In Fig. 9-4, D, MR, SMC 1 , and SAC 1 are those of Fig. 9-3. As we saw in Example 4, the best level of output
in the short run for this monopolist is 2.5 units per time period.
Fig. 9-4
In the long run, the best level of output is 3.5 units and is given by the point where the LMC curve intersects the MR curve from
below (i.e., at the point of intersection, the slope of the MR curve has a larger negative value than the slope of the LMC curve).
The most appropriate scale of plant is given by the SAC 2 curve (which is tangent to the LAC curve at 3.5 units of output). Thus at
long-run equilibrium, SMC 2 ¼ LMC ¼ MR, P ¼ $4.50, SAC 2 ¼ $2.50, and profit is $2 per unit and $7 in total.
9.6 REGULATION OF MONOPOLY: PRICE CONTROL
By setting a maximum price at the level where the SMC curve cuts the D curve, the government can induce
the monopolist to increase output to the level the industry would have produced if organized along perfectly
competitive lines. This also reduces the monopolist’s profits.
EXAMPLE 6. Starting with a figure identical to Fig. 9-3, if the government imposed a maximum price of $5 (i.e., at the
level where the SMC curve cuts the D curve), the new demand curve facing the monopolist becomes ABK (see Fig.9-5).
The corresponding MR curve becomes ABCL and is identical with the new D curve over the infinitely elastic range, AB.
Thus, the regulated monopolist will behave as a perfectly competitive firm and produce at point B, where P or MR =
SMC and the SMC curve is rising. The result is that price is lower ($5 rather than the $5.50 in the absence of price
control), output is greater (3 units rather than 2.5 units), profit per unit is less ($1 rather than $1.50), and total profits are
reduced (from $3.75 to $3).
Fig. 9-5
9.7 REGULATION OF MONOPOLY: LUMP-SUM TAX
By imposing a lump-sum tax (such as a license fee or a profit tax), the government can reduce or even
eliminate the monopolist’s profits without affecting either the commodity price or output.