1. Assume that Fred has a monopoly on the production

1. Assume that Fred has a monopoly on the production of widgets in Smallville. He finds that he faces a down sloping demand for widgets—that is, he can sell more by lowering the price. In the chart of the demand schedule below, fill in the blanks for total and marginal revenue.

2. Notice what happens to Fred’s total revenue as he produces and sells more—it graphs like a haystack, first going up, and then going down. A perfect competitor has a linear up sloping total revenue curve. Why? Why is the monopolist total revenue curve different from that of a pure competitor?

3. Notice marginal revenue. It is less than price at all levels of output except the first. To a pure competitor, P=MR. Once again, why? Why is MR less than price to a monopolist, while MR equals price to a pure competitor?

4. In what price range is the demand for Fred’s Widgets elastic? (You do not have to use the elasticity formula—just use the total revenue test.) In what price range is the demand for Fred’s Widgets inelastic?

5. Why would Fred never choose to produce in the inelastic portion of his demand curve? (What could he do to his costs of production and to his total revenue by producing less and charging more?)