Suppose that a certain manufacturer has a monopoly on the sorority and fraternity ring business (a constant-cost industry) because he has persuaded the “Greeks” to give it exclusive rights to their insignia.
a. Using demand and cost curves, draw a diagram depicting the firm’s profit-maximizing price and output level.
b. Why is marginal revenue less than price for this firm?
c. On your diagram, show the deadweight loss that occurs because the output level is determined by a monopoly rather than by a competitive market.
d. What would happen if the Greeks decided to charge the manufacturer a royalty fee of $3 per ring?