AP Micro · Unit 4 · Imperfect Competition

The market for bottled spring water in Kirevost is perfectly competitive, with an equilibrium price of $4.00 per bottle and a quantity of 120,000 bottles per week. AquaKir Holdings then buys every firm and runs the industry as a single profit-maximizing monopoly with the same demand and costs.

(a) Draw a correctly labeled graph of the perfectly competitive market for bottled water in Kirevost before the buyout, showing:

• (i) a downward-sloping demand curve $D$ and an upward-sloping supply curve $S$

• (ii) the competitive equilibrium, labeled $E_1$, at price $P_1 = {\char36}4.00$ and quantity $Q_1 = 120{,}000$ bottles per week

• (iii) the area of consumer surplus at the competitive equilibrium, shaded completely

• (iv) the area of producer surplus at the competitive equilibrium, shaded completely.
  (b) Compared with the competitive outcome in part (a), will the quantity of bottled water sold increase, decrease, or remain the same after AquaKir becomes a monopoly? Explain.
  (c) Suppose instead that AquaKir can charge each customer the maximum price that customer is willing to pay. Will the quantity AquaKir sells be greater than, less than, or equal to 120,000 bottles per week? Explain.
  (d) Draw a correctly labeled graph of AquaKir as a single-price monopoly, showing:

• (i) the downward-sloping demand curve $D$, the marginal revenue curve $MR$, an upward-sloping marginal cost curve $MC$, and a U-shaped average total cost curve $ATC$

• (ii) the profit-maximizing quantity and price, labeled $Q_M$ and $P_M$, where $MR = MC$

• (iii) the allocatively efficient quantity, labeled $Q_E$, where $D$ intersects $MC$

• (iv) the area of deadweight loss created by AquaKir's pricing, shaded completely.