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

CHAP. 9] PRICE AND OUTPUT UNDER PURE MONOPOLY 221
The firm may own a patent which precludes other firms from producing the same commodity. For example,
when cellophane was first introduced, DuPont had monopoly power in its production based on patents.
A monopoly may be established by a government franchise. In this case, the firm is set up as the sole
producer and distributor of a good or service but is subjected to governmental control in certain aspects of its
operation.
In some industries, increasing returns to scale may operate over a sufficiently large range of outputs as to
leave only one firm to produce the equilibrium industry output. These are called “natural monopolies” and are
fairly common in the areas of public utilities and transportation. What the government usually does in these
cases is to allow the monopolist to operate but subjects the monopoly to government control. For example,
electricity rates in New York City are set so as to leave Con Edison with only a “normal rate of return”
(say, 10 to 15%) on its investment.
9.3 (a) Are cases of pure monopoly common in the U.S. today? (b) What forces limit the pure monopolist’s
market power?
(a)
(b)
Aside from regulated monopolies, cases of pure monopoly have been rare in the past and are forbidden today
by United States antitrust laws. Even so, the pure monopoly model is often useful in explaining observed
business behavior in cases approximating pure monopoly, and also gives us insights into the operation of
other types of imperfectly competitive markets.
A pure monopolist does not have unlimited market power. The monopolist faces indirect competition for the
consumer’s dollar from all other commodities. Although there are no close substitutes for the commodity sold
by the monopolist, substitutes may nevertheless exist. Fear of government prosecution and the threat of
potential competition also act as a check on the monopolist’s market power.
DEMAND, MARGINAL REVENUE, AND ELASTICITY
9.4 Given the D function QD ¼ 12 2 P,(a) find the D and MR schedules, (b) plot the D and MR schedules,
and (c) find MR when P ¼ $10, $6, and $2.
(a) Table 9.6
P ($) 12 11 10 9 8 7 6 5 4 3 2 1 0
Q 0 1 2 3 4 5 6 7 8 9 10 11 12
TR ($) 0 11 20 27 32 35 36 35 32 27 20 11 0
MR ($) . . 11 9 7 5 3 1 21 23 25 27 29 211
(b)
Fig. 9-9
Note that when the D curve is a straight line, the MR curve bisects the distance between the D curve and the
price axis.