Monopoly

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Monopoly Powered By Docstoc
					Graph of the equilibrium
     with a tariff.




   Tariff level (use the
   spinner to control).




 Equilibrium prices and
quantities with the tariff
        in place.



 Welfare measures with
the tariff (select boxes to
     show on graph).




                                             Parameters of the   Parameters of the
                  World market price (use
                                              inverse demand     monopolist's cost
                  the spinner to control).
                                                 function.           function.
                                                                 Graph of the equilibrium
                                                                      with a quota.




                                                                   Quota level (use the
                                                                   spinner to control).




                                                                  Equilibrium prices and
                                                                   quantities with the
                                                                     quota in place.



                                                                 Welfare measures with
                                                                 the quota (select boxes
                                                                   to show on graph).




       of the   Equilibrium prices and
                                         Welfare measures with
polist's cost    quantities with free
                                              free trade.
                         trade.
      equilibrium
th a quota.




a level (use the
 er to control).




rium prices and
      with the
ota in place.



 measures with
ta (select boxes
ow on graph).
                             Domestic Demand          Marginal Revenue          Marginal Cost
        180.0


        160.0


        140.0


        120.0


        100.0




                                                                                                                  Price
Price




         80.0


         60.0


         40.0


         20.0


          0.0
                0.0   10.0      20.0      30.0        40.0     50.0      60.0         70.0      80.0       90.0
                                                        Quantity


                                        Tariff Ridden Equilibrium

Tariff (%)                                      0.0          (Check the boxes to see the surplus graphs)


Domestic Price                                 50.0          Consumer Surplus                          3025.0
Quantity Demanded                              55.0          Monopoly Profit                            375.0
Quantity Supplied                              20.0          Government Revenue                           0.0
Imports                                        35.0          Total Surplus                             3400.0


                                       Parameters of the Economy

Inverse Demand                                               Marginal Cost
Intercept                                  160.0             Intercept                                   10.0
Slope                                       -2.0             Slope                                        2.0
World Price                  500.0          50.0             Fixed Cost                                  25.0
                             Marginal Cost                               Domestic Demand
        180.0
                             Residual Demand                             Residual Marginal Revenue

        160.0


        140.0


        120.0


        100.0
Price




         80.0


         60.0


         40.0


         20.0


          0.0
                0.0   10.0    20.0       30.0        40.0     50.0      60.0      70.0       80.0         90.0
                                                       Quantity


                                     Quota Ridden Equilibrium

Quota Volume                                   0.0          (Check the boxes to see the surplus graphs)


Domestic Price                               110.0          Consumer Surplus                          625.0
Quantity Demanded                             25.0          Monopoly Profits                         1850.0
Quantity Supplied                             25.0          Quota Rents                                 0.0
Imports                                        0.0          Total Surplus                            2475.0


                                       Free Trade Equilibrium

Domestic Price                                50.0          Consumer Surplus                         3025.0
Quantity Demanded                             55.0          Monopoly Profits                          375.0
Quantity Supplied                               20          Total Surplus                            3400.0
Imports                                       35.0
Exercises

1. Pro-competitive Effects of Trade
In this sheet we assume a single price domestic monopolist. In the initial equilibrium depicted on the left the
monopolist faces a fixed world price (the economy is open and small). In this context, the monopolist cannot
charge any price higher than the world price, because all buyers are free to purchase from the world, which is
willing to supply the whole market. In effect, the industry is forced to act as if it were competitive rather than a
monopoly. This is socially desirable because monopoly introduces a deadweight loss. To see the extent of the
loss, consider the equilibrium on the right. This is a zero quota equilibrium (autarky). The monopolist makes

2. Effect of Small Tariffs

Now consider the effect of a tariff (increase the value in cell E31). As the price of importing rises, the monopolist
is able to charge a higher price, just as with competition. If the tariff is small, however, it is still unable to exploit

3. Non-Equivalence of Tariffs and Quotas
Suppose the tariff you set in the previous exercise was 50 percent, then imports (cell E36) should be 10. Under
perfect competition, a quota of 10 should be equivalent to a tariff of 50 percent. To see whether this holds with
monopoly, increase the quota in cell O31 to 10. The results are quite different. With the tariff, the price is 75.
With the quota, the price is 97. Why? The quota allows imports of 10 units, but leaves residual demand to the
monopolist. The monopolist exploits the residual demand in the usual way, by restricting output and pushing up
the price. Consumers cannot respond to the move by purchasing more from the world market, because the

4. Prohibitive Tariffs and Monopoly
What if the tariff imposed is large rather than small? If the tariff was large enough to push the price of importing
above price at which domestic demand equals the monopolist's marginal cost, then the tariff will diverge from
the competitive tariff also. Under competition, a tariff that raises the cost of importing above the autarky price is
said to be prohibitive. The extent to which the cost of importing exceeds the autarky price is called water, the
domestic price cannot be forced above the autarky price by a tariff. Under monopoly things are different. The
just prohibitive tariff is 70. When you have 70 in cell E31, the value in cell E36 is zero. As we keep increasing the
tariff though, the domestic price rises with it. Why? The monopolist can, and prefers to, restrict its output meet
the higher price (it cannot go higher for the same reasons outlined above). If the tariff rises above 120, the

5. Effect of Falling World Prices

Consider the implications of advances in technology in foreign markets that lead to a fall in the world price. Take
as our starting point a tariff of 120 percent in cell E31 and a zero quota in cell O31, since in both cases the
monopolist is unconstrained. Now, decrease the world price in cell E44 to represent the technological progress.
The tariff and quota are no longer equivalent in their effect. The quota fully insulates the monopolist from
external competition, no matter what happens. The monopolist protected by a tariff however, must still contend

				
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posted:11/20/2011
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