Economics Tutorial 7

1.Compare any FOUR (4) differences between the

characteristics of a monopolist market structure with that of a
perfect competition market structure.
 Perfect Competition Market Monopolist Market

Number of seller • many sellers • one seller

• none of which is large in relation to
total sales

Control of Price • Price Taker • price searcher

• does not have the ability to control the • has the ability to control to some degree
price of the product it sells the price of the product it sells

Types of product • Sells homogeneous product • Sells a product

• with a lot of substitutes • no close substitutes exist

Barrier to entry • no barrier to entry and exist • extremely high barriers to entry
(a) Legal barriers to entry
(b) Economic of scale
(c) Exclusive ownership of a necessary
2. Compare and contrast the characteristics
of firms in a perfect competitive industry
with those in a monopolistic competitive
industry.
 Perfect Competitive Industry Monopolistic Competitive
Industry
Number of seller and many sellers and many buyers
buyers

Types of Product sells homogeneous product slightly differentiated product

Barrier of entrance easy to entry into and exit from the industry

Control of Price • price taker • price searcher

• does not have the ability to control • has the ability to control to
the price of the product some degree the price of the
• Price is determined in the market product
3) Briefly compare the demand curves in
perfect competition and monopolistic
competition.
    
Perfect Competition Monopolistic Competition
 The demand curve for perfectly competitive  The demand curve for monopoly
market varies significantly from that of the competition is a downward-sloping, in
entire market. The market demand curve contrast to perfect competition where the
slopes downward, while the perfectly firm’s individual demand curve is perfectly
competitive firm’s demand curve is a elastic.
horizontal line equal to the equilibrium price
of the entire market. The horizontal demand
curve indicates that the elasticity of demand
for the good is perfectly elastic.

 This means that if any individual firm  The monopolist can raise its price and still
charged a price slightly above market price, it sell its product (though not as much). They
would not sell any products. can raise prices without losing all of their
customers.
4.Describe any THREE (3) types of
barriers to entry that create the
conditions for monopoly.
A. Legal barriers to entry
Public franchises A right granted to a firm by government that permits
the firm to provide a particular good or service and
excludes all others from doing the same.
For example: public utilities, like electricity, water and
gas.
Patents granted to inventors of a product or process for a period of
20 years.

Government required to carry on a business or occupation

licenses For example: radio and TV licence
B. Economic of scale
If economies of scale exist only when a firm produces a large quantity
of output and one firm is already producing this output, then new firms
(that initially produce less output) will have higher unit costs than those
of the established firm.
This will make the new firms uncompetitive when compared to the
established firm.
Economies of scale act as a barrier to entry, effectively preventing firms
from entering the industry and competing with the established firm.
C. Exclusive ownership of a necessary resource
Existing firms may be protected from entry of new firms by the
exclusive or near-exclusive ownership of a resource needed to enter
the industry.
5. The table below shows the quantity sold and total costs incurred by a
monopolist .
Price (RM) Quantity sold Total cost
(units) (RM)
10 10 50
9 15 75
8 20 100
7 25 125
6 30 150

i) From the above table, how do you know that the monopolist is a price searcher rather than a price taker?
ii) Calculate the marginal revenue (MR) and marginal cost (MC) for each level of output.
iii) What is the criterion used by the monopolist to determine its profit-maximising output level?
iv) Determine the profit-maximising output, price and profit earned by the monopolist.
 Price (RM) Quantity sold (units) Total cost
(RM)
10 10 50
9 15 75
8 20 100
7 25 125
6 30 150

i. From the above table, how do you know that the monopolist is a price searcher
rather than a price taker

- The monopolist is a price searcher because a price searcher has the ability to control to some degree
the price of the product it sells. A downward-sloping demand curve posits an inverse relationship
between price and quantity demanded, which means that more is sold at lower prices than at higher
prices, ceteris paribus. From the above table, although price increases, the product can still be sold but
the quantity sold decreases, so the monopolist is a price searcher.
ii. Calculate the marginal revenue (MR) and marginal cost (MC) for each level of output.

(1) (2) (3) (4) (5) (6)

Price Quantity Total Revenue Marginal Total Marginal Cost
(RM) sold (units) (RM) Revenue cost (MC)
(1) × (2) (MR) (RM)
= =
= =
   
 
10 10 10×10=100 = 10 50 =5

9 15 9×15=135 =7 75 =5

8 20 8×20=160 =5 100 =5

7 25 7×25=175 =3 125 =5

6 30 6×30=180 =1 150 =5
iii. What is the criterion used by the monopolist to determine its profit-
maximising output level?

-The criterion used by the monopolist to determine its profit-maximising output level
is marginal revenue equals to marginal cost (MR=MC), and charges the higher price
per unit at which this quantity of output can be sold.
iv. Determine the profit-maximising output, price and profit earned by the monopolist.

(1) (2) (3) (4) (5) (6)

Price Quantity Total Marginal Total Marginal
(RM) sold Revenue Revenue cost Cost
(units) (1) × (2) (MR) (RM) (MC)
= =
= =
   
 
10 10 100 10 50 5
9 15 135 7 75 5
8 20 160 5 100 5
7 25 175 3 125 5
6 30 180 1 150 5

Profit-maximising: MR = MC
Output= 20 units, Price= RM8, Total revenue= RM160, Total cost= RM100
 
Profit = Total revenue – Total Cost
= Rm160- Rm100
= Rm60
 6. The table below shows the cost information for a perfectly competitive firm.

Output Total Cost (TC) Marginal Cost (MC)

(units) (RM) (RM)

0 100 -
1 160  
2 200 40
3 236  
4 276  
5 326  
6 386  
7 456  
8 576  
9 726  

i). What is the fixed cost for this firm?

ii). Compute marginal cost (MC) for each level of output.
iii). If the firm is able to sell all of its output at a fixed price of RM120 per unit, how many units should
it sell in order to maximise its profit
iv). Based on your answer in part (iii), calculate the firm’s profit.
i). What is the fixed cost for this firm?
- Fixed cost = RM100
ii). Compute marginal cost (MC) for each level of output.
(1) (2) Marginal Cost (MC)
Output Total Cost (RM)
(units) (TC) =
(RM) =

0 100 -
1 160 60
2 200 40
3 236 36
4 276 40
5 326 50
6 386 60
7 456 70
8 576 120
9 726 150
iii). If the firm is able to sell all of its output at a fixed price of RM120 per unit, how many units should it sell in order to
maximise its profit?
Output Total Cost (TC) Marginal Cost
(units) (RM) (MC)
Profit-maximizing : MR=MC (RM)
0 100 -
Total Revenue= Price × Quantity 1 160 60
2 200 40
RM120 × 1= RM120, RM120 × 2= RM240 3 236 36
4 276 40
Marginal Revenue = 5 326 50
6 386 60
= 7 456 70
8 576 120
= RM120 9 726 150

→ When MR=MC= RM120, the firm should sell 8 units of output in order to maximise its profit.

iv). Based on your answer in part (iii), calculate the firm’s profit.
Profit = Total revenue – Total Cost
= (RM120 × 8 units) –RM576
=RM960 –RM576
=RM384
7. May 2016/2017
The following table shows the total revenue and total cost of a firm at the various quantities of output:
i. Calculate the marginal cost and marginal revenue of the firm for each level of output.
(6 marks)

Total Total Marginal Marginal

Quantity Cost Revenue Cost Revenue
(RM) (RM) (RM) (RM)
0 20 0 - -
1 60 120 40 120
2 120 220 60 110
3 200 300 80 100
4 300 360 100 90
5 380 400 80 80
6 440 420 60 70
(ii.)What is the profit maximisation quantity of output that the
firm should produce? Explain.
Profit-maximizing: MR=MC
When quantity=5, MR=MC=80
5 is the profit maximization quantity of output that the firm should produce.
8.(i)Define ‘allocative efficiency’ and ‘productive efficiency’.(4 marks)
allocative efficiency - A firm that produces the quantity of output at which Price = Marginal Cost.
Resources are allocated in the most efficient way to produce the mix of product and services
that is most wanted by society.
productive efficiency - A firm that produces its output at the lowest possible per unit cost. To
charge a price that is just consistent with the cost P= minimum ATC.
(ii)Use the concepts of allocative efficiency and productive efficiency to
analyse the impact of a monopolist on the welfare of society.(5 marks)
A firm is resource allocative efficient if it charges a price that is equal to marginal cost; that is, if
P = MC. Because the monopolistic competitive firm charges a price that is greater than marginal
cost (P > MC), it is not resource allocative efficient.
A firm is productive efficient if it charges a price that is equal to its lowest ATC. Because the
monopolistic competitor operates at excess capacity, it is not productive efficient.
9. Given the following information for Company X:
Total revenue = RM300 Total costs = RM650
Total fixed costs = RM400 Total variable costs = RM250
Price per unit = RM6 Quantity sold = 50 units
(i) Based on the information above, determine whether this company is making profits or
losses.
Profits= Total Revenue – Total Cost
= (Price* Quantity sold) – (Fixed cost + Variable cost)
= (6*50)- (400+250)
=300-650
=-350
Based on the information, this company is making losses of RM350.
 Total revenue = RM300 Total costs = RM650
Total fixed costs = RM400 Total variable costs = RM250
Price per unit = RM6 Quantity sold = 50 units
ii) Based on (i), propose to the owners whether this company should continue business or
shutdown.
ATC =Total cost / quantity sold
=650/50
=13
AVC =Total variable cost / quantity sold
=150/50
=3
Price = MC = MR
MC =Total Revenue / Quantity
=300/50
=6
In this case, Price > AVC it continues to produce in the short run.
10. Describe the THREE (3) types of
price discrimination practised by a
monopolist.
When the seller charges different prices for the product it sells and the price differences do
not reflect cost differences.
There are 3 types of price discrimination:

1) Perfect Price Discrimination

2) Second Degree Discrimination

3) Third Degree Discrimination

1) Perfect Price Discrimination:

This is also called as discrimination among units.

If seller charges the highest price each consumer would be willing to
pay for the product rathe than go without it.
2) Second Degree Discrimination
Also called discrimination among quantity.
seller charges a uniform price per unit for one specific quantity, a
lower price for an additional quantity, and so on.
For example : Bakery – buy 3rd get 20% discount
3) Third Degree Discrimination
Called discrimination among buyers.
seller charges a different price in different markets or charges a
different price to different segments of the buying population.
For example : buffet – kids30%
11) Distinguish between a “price taker” and
a “price maker”.
   
Price Taker Price Maker
 A seller does not have the  Price makers are able to
ability to control the price of the influence the market price and
product it sells; it takes the price enjoy pricing power.
determined in the market.  Price makers are found in
 Price takers are found in imperfectly competitive markets
perfectly competitive markets. such as a monopoly or oligopoly
market.