P|10| 9| 8| 7| 6| 5| 4| 3| 2| 1| Qd| 0| 1| 2| 3| 4| 5| 6| 7| 8| 9| The table abo
ID: 1185226 • Letter: P
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P|10| 9| 8| 7| 6| 5| 4| 3| 2| 1| Qd| 0| 1| 2| 3| 4| 5| 6| 7| 8| 9| The table above is consumer demand for widgets as a function of price. Suppose widgets have a fixed cost of 0, and MC=ATC=2. Answer the following questions without calculating profits. (You are not allowed to use profit to make calculations on this question). a. What is the profit maximizing price and quantity in competitive markets? b. (0.5)What is the profit maximizing price and quantity in a monopoly market? For the following 3 questions, suppose that everyone can provide an ID that shows their age, and the company can age discriminate. What price would they charge the different age groups, and what quantity would they sell to each age group? c. Suppose that the Q=1,...,Q=4 are all bought by people under the age of 30, and Q=5,...Q=9 are bought by people over the 30. d. Suppose that the Q=1,...,Q=2 are all bought by people under the age of 30, and Q=3,...Q=9 are bought by people over the 30. e. Suppose that the Q=1,...,Q=5 are all bought by people under the age of 30, and Q=6,...Q=9 are bought by people over the 30.Explanation / Answer
Perfect competition requires firms to sell as many of their products as they can profitably do so at the minimum market price that will allow the firms to stay in business (marginal cost pricing). They will, as you say, sell more of the products at a lower price than a monopoly, which will sell a lower quantity at a higher price (price is always above marginal cost).
But that only tells part of the story, the "all other things being equal" part. It is true mostly in theory. In reality, with the government prohibiting predatory pricing, monopolies actually tend to sell more at a lower price than perfect competition would allow. This is because most monopolies are actually natural monopolies, which enjoy economies of scale. That makes them more efficient. They can sell more at a lower cost to them than would be available to consumers under perfect competition (it's important to distinguish natural monopolies from monopolies in general; however, other types of monopolies mostly only exist in very small markets). But the large monopolies, which is what usually comes to mind when people think of monopolies, are usually natural monopolies and are much more efficient than perfect competition due to economies of scale.
Of course, efficiency alone will not help the consumer; the monopoly can still maximize profit by selling at a price much higher than marginal cost. This problem is counteracted by the fact that these companies tend to be highly regulated. For example, the local electric company is a natural monopoly, since one company can service all of the local demand much more efficiently than if more than one company competed for the service. But these companies have to have approval for the prices they charge. The agencies which approve price increases are supposed to take into consideration the theoretical "competitive price"; they won't allow these companies to charge whatever price will maximize profits.
Since anti-competitive practices are prohibited, the real world example of competitive markets providing social benefits better than monopoly would be the unregulated small monopoly. For example, and I have seen a lot of this through personal experience, some towns are small enough that they can support only one grocery store, or even only one restaurant.
Grocery stores and restaurants aren't really categorized as perfect competition (they are usually monopolistic competition or oligopoly, depending on the size of the market), but it can be a problem if it becomes a monopoly. That store or restaurant will charge a higher price than similar stores in an area with more competition. Where I currently live, the same grocery chains supply both large and small towns, and they charge different prices for the same products depending on the size of the market. Their highest prices are in towns with no competition. And the consumers in small towns always have a smaller variety of consumer products to choose from (fewer brands, fewer different sized packages).
Also, monopolies in small towns not only have a monopoly in the market they sell their products in; they also have a monopoly in the labor market, which allows them to exploit workers. For example, I grew up in a town that had only one restaurant; restaurant servers had to either work there, commute long distances (for low pay, in bad weather, which would not be profitable), or work in another industry. Jobs in other industries basically were non-existent; almost everybody was a self-employed farmer. Many people had no effective options. They could work in that restaurant or not at all. But the restaurant exploited the workers; they made the servers sign a form stating that they made enough in tips, to go along with a salary of maybe $1 per hour, so that they qualified as earning minimum wage when the tips were considered. But they had to sign this BEFORE they were hired - and before they knew how much they would really make in tips - it was a condition of employment. In reality, these servers rarely if ever made enough in tips to match what their signed agreement said they made. Not only were these workers underpaid, but the IRS has, at least in the past, had a field day going after such workers for more taxes. They were audited at a very high rate, and the IRS made them pay taxes based on the tip earnings their signed paper said they made, not on the actual tips they earned. There was a way around this overtaxing for these workers, but it required: knowledge of tax laws specific to that industry, meticilous record keeping, and informing on the employer. Many were afraid of losing their jobs by putting the employer out of business, and just went ahead and paid taxes on money that they didn't really earn.
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