Now, assume that one of the hot dog stands successfully lobbies the city council

Question

Now, assume that one of the hot dog stands 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 stands 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 red point (cross symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. Use the green triangle (triangle symbols) to shade the area that represents consumer surplus, and use the purple quadrilateral (diamond symbols) to shade the area that represents producer surplus. Consider the welfare effects when the industry operates under a perfectly competitive market versus a monopoly. On the previous graph, use the tan triangle (rectangle symbols) to shade the area that represents the loss of welfare from a monopoly, or deadweight loss (DWL). That is, show the area that was formerly producer surplus or consumer surplus and now does not accrue to anybody. In the following table, enter the price and quantity that would arise in a perfectly competitive market; then enter the profit-maximizing price and quantity that would be chosen if a monopolist controlled this market.

Explanation / Answer

Equilibrium is achieved where MR = MC

In case of Perfect competition, P = MR while in Monopoly P = Average Revenue determined by Demand curve.

In Perfect Competition, P = 3 and Q = 200

In monopoly, P = 4 and Q = 200

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