# Monopoly

Business I · Microeconomics · https://tryals.app/learn/business-i/monopoly

## The Price Maker

A **monopoly** is a single seller facing the entire market demand curve, making it a **price maker** that chooses price or quantity.

**Marginal revenue**: **MR** is less than price because selling one more unit requires lowering the price on all units. For linear demand $P = a - bQ$, total revenue is $TR = aQ - bQ^2$, yielding:

$$MR = a - 2bQ$$

**MR** has **twice the slope** of demand, falling faster and hitting zero at half the intercept.

**Profit maximisation**: Set $MR = MC$ to find $Q^*$, then read the price directly from the demand curve above.

> **Common pitfall:** Never read the monopoly price off the **MR** curve. Always climb up to the demand curve to find what customers pay.

$$\pi = (P - AC) \times Q$$

## Welfare and Pricing

**Deadweight loss**: Monopolists restrict output ($Q_m < Q_c$) and charge higher prices ($P_m > P_c$). Unproduced units between $Q_m$ and $Q_c$ create a **deadweight loss** triangle.

**Price discrimination** types:
- **First degree**: Perfect, charges max willingness to pay.
- **Second degree**: Packages, self-selection.
- **Third degree**: Groups with different elasticities.

**Sources of monopoly power**: Patents, economies of scale, essential resources, network effects.

| | Perfect competition | Monopoly |
|---|---|---|
| Price | $P = MC$ | $P > MR = MC$ |
| Output | Higher | Restricted |
| Surplus | Maximised | Deadweight loss |
| Profit | Zero | Persists behind barriers |

## Practice questions

6 of this lesson's 13 practice questions, with answers. The full set is in the app.

### 1. A perfectly price-discriminating monopolist produces the competitive quantity yet the outcome is not the competitive one. What is the difference between them?

A. The deadweight loss is larger than under uniform monopoly pricing
B. Nothing: the two outcomes are identical in every respect
C. The distribution: the firm captures the whole surplus
D. The quantity is higher than the competitive one, creating overproduction

**Answer:** C. The distribution: the firm captures the whole surplus

**Why:** Efficiency and equity come apart here. The firm sells to everyone willing to pay above marginal cost, so no gains are lost, but each buyer pays exactly their maximum and keeps nothing.

Page: https://tryals.app/practice/business-i/monopoly/a-perfectly-price-discriminating-monopolist-produces-the-competitive

### 2. Which are sources of monopoly power?

A. Control of an essential resource
B. Patents and legal barriers
C. Economies of scale (natural monopoly)
D. Many small firms in the market

**Answer:** A. Control of an essential resource; B. Patents and legal barriers; C. Economies of scale (natural monopoly)

**Why:** Many small firms is the hallmark of competition, not monopoly. Patents, scale economies, and resource control create market power.

Page: https://tryals.app/practice/business-i/monopoly/which-are-sources-of-monopoly-power

### 3. Monopoly deadweight loss is the triangle between demand and marginal cost over the units not produced. Why is that area a LOSS rather than a transfer?

A. Because the monopolist wastes resources on maintaining its position
B. Because consumers pay a higher price on the units that are produced
C. Because the firm earns less than it would under competition
D. Because those units are simply not produced by anyone

**Answer:** D. Because those units are simply not produced by anyone

**Why:** The rectangle changes hands; the triangle evaporates. Gains from trade that would have existed simply do not occur, which is why the loss is called dead.

Page: https://tryals.app/practice/business-i/monopoly/monopoly-deadweight-loss-is-the-triangle-between-demand-and-marginal

### 4. Match each price discrimination type to its mechanism.

**Answer:**

- First degree → Charge each consumer their willingness to pay
- Second degree → Offer different packages; consumers self-select
- Third degree → Charge different prices to identifiable groups
- Natural monopoly → Economies of scale make one firm most efficient

**Why:** Three degrees of price discrimination, plus the structural reason a monopoly might be socially efficient.

Page: https://tryals.app/practice/business-i/monopoly/match-each-price-discrimination-type-to-its-mechanism

### 5. A monopolist's marginal revenue is below its price. What does the gap represent in business terms?

A. The deadweight loss imposed on consumers
B. The cost of producing the additional unit
C. The markup the monopolist charges above competitive price
D. The revenue lost on every unit already selling higher

**Answer:** D. The revenue lost on every unit already selling higher

**Why:** Cutting the price to move one extra unit cuts it on every unit, and that inframarginal loss is exactly the wedge between price and marginal revenue. A competitive firm faces no such wedge because it can sell more at the going price, which is why MR = P there and MR < P here.

Page: https://tryals.app/practice/business-i/monopoly/a-monopolists-marginal-revenue-is-below-its-price-what-does-the-gap

### 6. Sort into monopoly vs perfect competition characteristics.

**Answer:**

- Monopoly: $MR < P$, Deadweight loss, Price maker
- Perfect competition: $MR = P$, Zero economic profit in long run, Price taker

**Why:** Monopoly: price maker, MR < P, DWL. Competition: price taker, MR = P, zero profit, no DWL.

Page: https://tryals.app/practice/business-i/monopoly/sort-into-monopoly-vs-perfect-competition-characteristics