EXERCISE 14: monopoly versus competition
J. Wahl – Micro Principles
1. Suppose you owned the land on which a natural bridge stood. The bridge is the
only connection between Northfield and the rest of the world. Suppose also that the
costs of operating the bridge are essentially nil. The daily demand for trips across
the bridge is expressed as follows: q=6-2p. What quantity (and therefore what
price) will you set in order to maximize your profits?
2. Show graphically how a single-price monopolist would operate differently
(choice of q, p that results) than a competitive industry, provided that cost curves were
the same regardless of industrial organization.
3. Please explain how the graph you derived in number 2 would change
a. if cost curves differed by organizational type (think particularly about
natural monopolies).
b. if monopolists could price discriminate
4. Are monopolies bad? As you ponder this question, consider the following cases
in which suppliers are sole providers or have some market power by virtue of restrictions
upon entry:
The regional water company
Doctors (who must be licensed by the state)
Hairdressers (also licensed, usually by the municipality)
Holders of patents on, for example, pharmaceutical products
Microsoft
5. A 1967 case involving Schwinn forbade manufacturers from forcing retailers to
maintain a certain retail price. This case was overturned in part by a 1977 case
involving Sylvania. You are economists. In your view, should the practice of
"resale price maintenance" be illegal? Why or why not?
