EC 102 Principles of Microeconomics

Workshop # 3

1. Draw all of the diagrams for the possible SR profits that a profit maximizing monopolist can earn. On your diagrams show Q* and profits in terms of P and ATC.

2. What kind of profits can a profit maximizing monopolist earn in the LR? Why?

3. If you were to draw all of the diagrams for the possible SR profits that a profit maximizing monopolistically competitive firm can earn, they would look almost identical to what other type of firm? What would the only difference be?

4. What kind pf profits can a profit maximizing monopolistically competitive firm earn in the LR? Why? Draw the diagram for the LR profits of a MC firm.

5. If firms in an oligopolistic market are organized into a cartel, how will any one firm try to cheat to increase its profits? Under what conditions is cheating most likely to occur?

6. Monopoly power is an example of a market failure. Use a diagram to compare a monopoly market with a perfectly competitive market. On your diagram show that the PC market leads to the efficient outcome (P=MC) and that the monopoly market does not (P>MC).

7. Draw a diagram of a natural monopoly. If the government tries to regulate the monopoly by forcing it to charge a price P=MC show what problem is created. What price could the government set that would allow the firm to earn a "normal" profit? Would this be preferable to the price P=MC?