5. Monopoly outcome versus competition outcome Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium, with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power. The following graph shows the demand (D) and supply curves (S = MC) in the market for hot dogs. Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from competition. Use the green point (triangle symbol) to shade the area that represents consumer surplus, and use the purple point (diamond symbol) to shade the area that represents producer surplus. PRICE (Dollars per hot dog) 5.0 4.5 PRICE (Dollars per hot dog) 4.0 3.5 3.0 2.5 1.0 0.5 0 5.0 Show Transcribed Text 4.5 4.0 3.5 0 20 3.0 40 1.0 Competitive Market 0.5 Assume that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't affect demand and that the new monopoly's marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm. Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. Use the green points (triangle symbol) to shade the area that represents consumer surplus, and use the purple points (diamond symbol) to shade the area that represents producer surplus. S=MC 60 80 100 120 140 160 180 200 QUANTITY (Hot dogs) D Monopoly PC Outcome MC Consumer Surplus Producer Surplus + Monopoly Outcome A Consumer Surplus (?) Producer Surplus Deadweight Loss ?
5. Monopoly outcome versus competition outcome Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium, with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power. The following graph shows the demand (D) and supply curves (S = MC) in the market for hot dogs. Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from competition. Use the green point (triangle symbol) to shade the area that represents consumer surplus, and use the purple point (diamond symbol) to shade the area that represents producer surplus. PRICE (Dollars per hot dog) 5.0 4.5 PRICE (Dollars per hot dog) 4.0 3.5 3.0 2.5 1.0 0.5 0 5.0 Show Transcribed Text 4.5 4.0 3.5 0 20 3.0 40 1.0 Competitive Market 0.5 Assume that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't affect demand and that the new monopoly's marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm. Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. Use the green points (triangle symbol) to shade the area that represents consumer surplus, and use the purple points (diamond symbol) to shade the area that represents producer surplus. S=MC 60 80 100 120 140 160 180 200 QUANTITY (Hot dogs) D Monopoly PC Outcome MC Consumer Surplus Producer Surplus + Monopoly Outcome A Consumer Surplus (?) Producer Surplus Deadweight Loss ?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:5. Monopoly outcome versus competition outcome
Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium, with many hot dog stands in the
city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power.
The following graph shows the demand (D) and supply curves (S = MC) in the market for hot dogs.
Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from competition. Use the green point
(triangle symbol) to shade the area that represents consumer surplus, and use the purple point (diamond symbol) to shade the area that represents
producer surplus.
PRICE (Dollars per hot dog)
5.0
4.5
PRICE (Dollars per hot dog)
4.0
3.5
3.0
2.5
1.0
0.5
0
5.0
Show Transcribed Text
4.5
4.0
3.5
3.0
0 20
1.0
0.5
40
Assume that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This
firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't affect demand and that the
new monopoly's marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows
the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm.
0
Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. Use the green points
(triangle symbol) to shade the area that represents consumer surplus, and use the purple points (diamond symbol) to shade the area that represents
producer surplus.
Competitive Market
0
20 40
S=MC
60 80 100 120 140 160 180 200
QUANTITY (Hot dogs)
D
Monopoly
MC
PC Outcome
D
Consumer Surplus
MR
60 80 100 120 140 160 180 200
QUANTITY (Hot dogs)
Producer Surplus
+
Monopoly Outcome
A
Consumer Surplus
(?)
Producer Surplus
Deadweight Loss
(?
Consider the welfare effects when the industry operates under a competitive market versus a monopoly.
On the monopoly graph, use the black points (plus symbol) to shade the area that represents the loss of welfare from a monopoly, or deadweight loss.
That is, show the area that was formerly producer surplus or consumer surplus and now does not accrue to anybody.
Deadweight loss occurs when a monopoly controls a market because the resulting equilibrium is different from the competitive outcome, which is
efficient.
Transcribed Image Text:In the following table, enter the price and quantity that would arise in a competitive market; then enter the profit-maximizing price and quantity that
would be chosen if a monopolist controlled this market.
Price
Market Structure (Dollars)
Competitive
Monopoly
Quantity
(Hot dogs)
Given the summary table of the two different market structures, you can infer that, in general, the price is higher under a
and the quantity is lower under a
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