2.
A small town is served by many competing supermarkets
which have the same constant marginal cost.
part a
Using a diagram of the market for groceries show the
consumer surplus, producer surplus, and total surplus.
Part b
Now suppose that the independent super markets combine
into one chain. Using a new diagram show the new consumer
surplus producer surplus and total surplus .relative to the
competitive market, what is the transfer from consumer to
producers? What is the dead weight loss
Question 1
3.
A :Figure 3 illustrates the market for
groceries when there are many competing
supermarkets with constant marginal cost.
Output is QC, price is PC, consumer surplus
is area A, producer surplus is zero, and total
surplus is area A.
solution
5.
If the supermarkets merge, Figure 4
illustrates the new situation. Quantity
declines from QC to QM and price rises to
PM. Consumer surplus falls by areas D + E
+ F to areas B + C. Producer surplus
becomes areas D + E, and total surplus is
areas B + C + D + E. Consumers transfer the
amount of areas D + E to producers and the
deadweight loss is area F.
Part b
7.
A publisher faces the following demand schedule for the
next novel of one of its popular authors:
QUESTION 2
p Q
100 0
90 100,000
80 200,000
70 300,000
60 400,000
50 500,000
40 600,000
30 700,000
20 800,000
10 900,000
0 1000,000
8.
The author is paid $2 million to write the book, and
the marginal cost of producing the book as a constant
$10 per book.
Part a Compute total revenue, total cost, and profit at
each quantity. What quantity would a profit maximising
publisher choose? What price would it charge?
Part b Compute marginal revenue. (Recall that MR
= ∆TR/ ∆Q .) How does marginal revenue compare to the
price? Explain.
9.
Part c: Graph the marginal revenue, marginal cost,
and demand curves. At what quantity do the marginal
revenue and marginal cost curves cross? What does this
signify?
Part d: In your graph, shade in the deadweight loss.
Explain in words what this means.
Part e: If the author were paid $3 million instead of $2
million to write the book, how would this affect the
publisher’s decision regarding the price to charge? Explain.
10. Part f: Suppose the publisher was not profit
maximising but was concerned with maximising
economic efficiency. What price would it charge for
the book? How much profit would it make at this
price?
11.
The following table shows revenue, costs and profits, where quantities are in
thousands, and total revenue, total cost, and profit are in millions of dollars.
solution
p Q Tr Mr Tc Profit
100 0 0 0 2 -2
90 100000 9 9 3 6
80 200000 16 7 4 12
70 300000 21 5 5 16
60 400000 24 3 6 18
50 500000 25 1 7 18
40 600000 24 -1 8 16
30 700000 21 -3 9 12
20 800000 16 -5 10 6
10 900000 9 -7 11 -2
0 1000000 0 -9 12 -12
12.
Part a A profit-maximising publisher would choose a
quantity of 400,000 at a price of $60 or a quantity of 500,000
at a price of $50; both combinations would lead to profits of
$18 million. Part
b Marginal revenue is always less than price. Price falls
when quantity rises because the demand curve slopes
downward, but marginal revenue falls even more than
price because the firm loses revenue on all the units of the
good sold when it lowers the price.
14.
Part d
The area of deadweight loss is marked DWL in the
figure. Deadweight loss means that the total surplus in
the economy is less than it would be if the market were
competitive, since the monopolist produces less than
the socially efficient level of output.
Part e
If the author were paid $3 million instead of $2
million, the publisher wouldn’t change the price, since
there would be no change in marginal cost or marginal
revenue. The only thing that would be affected would
be the firm’s profit, which would fall.
15.
Part f
To maximise economic efficiency, the publisher would
set the price at $10 per book, since that’s the marginal
cost of the book. At that price, the publisher would
have negative profits equal to the amount paid to the
author.
16. question 3
A company is considering
building a bridge across a
river. The bridge would cost $2
million to build and nothing to
maintain. The following table
shows the company's
anticipated demand over the
lifetime of the bridge:
Part a
If the company were to build
bridge, what would be its
profit maximising price? would
that be the efficient level of
output? why or why not?
P Q
$8 0
7 100
6 200
5 300
4 400
3 500
2 600
1 700
0 800
17. Part b
If the company is interested in maximising profit, should
it build the bridge? what would be its profit or loss?
Part c
If the government were to build the bridge, what price
should it charge?
Part d
Should the government build the bridge? Explain.
18.
Solution
Part a
The table below shows total revenue and
marginal revenue for the bridge. The profit
maximising price would be where revenue is
maximised, which will occur where marginal
revenue equals zero, since marginal cost equals
zero. This occurs at a price of $4 and quantity of
400. The efficient level of output is 800, since
that's where price equals marginal cost equals
zero. The profit maximising quantity is lower
than the efficient quantity because the firm is a
monopolist.
19. Part b
The company should not build the
bridge because its profits are
negative. The most revenue it
can earn is $1,600,000 and the
cost is $2,000,000 so it would lose
$400,000.
Part c
If the government were to build the
bridge, it should set price equal
to marginal cost to be efficient.
But marginal cost is zero, so the
government should not charge
people to use the bridge.
P Q TR MR
$8 0 $0 _
7 100 700 $7
6 200 1,200 5
5 300 1,500 3
4 400 1,600 1
3 500 1,500 -1
2 600 1,200 -3
1 700 700 -5
0 800 0 -7
20.
Part d
Yes, the government should build the bridge,
because it would increase society's total surplus,
total surplus has area 1/2*8*800,000=$3,200,000,
which exceeds the cost of building the bridge.
22. Johnny Rockabilly has
just finished recording
his latest CD. His record
company's marketing
department that the
demand for the CD is as
follow:
p Q
24 10,000
22 20,000
20 30,000
18 40,000
16 50,000
14 60,000The company can produce the CD with
no fixed cost and a variable cost of $5 per
CD.
Question 4
23. Part a
Find total revenue for quantity equal to 10,000,
20,000 and so on. What is the marginal revenue
for each 10,000 in the quantity sold?
Part b
What quantity of CD's would maximse profit?
What would the price be? What would the
profit be?
Part c
If you were Johnny's agent, what recording fee
would you advise Johnny to demand form the
record company? Why?
24. Solution
Part a
The following table shows total
revenue and marginal revenue for
each price and quantity sold:
Part b
Profits are the maximized at a price of
$16 and quantity of 50,000. At that
point profit is $550,000
Part c
As Johnny's agent, you should
recommend that he demand $550,000
from them, so he instead of the
record company receives all of the
profit.
25.
larry,Curly,and Moe run the only saloon in
townLarry wants to sell as many drinks as possible
without losing money .Curly wants the saloon to
bring in as much revenue as possible.Moe wants to
make the largest possible profits, using a single
diagram of the saloon’s demand curve and it’s cost
curves ,show the price and quantity combinations
favoured by each of the three partners?
QUESTION 6:
26.
Larry wants to sell as many drinks as possible
without losing money ,so he wants to set quantity
where price (demand) equals average cost ,which
occurs at quantity QL and price pl figure10.Curly
wants to bring in as much revenue as possible, which
occurs where marginal revenue equals Zero, at
quantity Qc and price Pc.Moe wants to maximum
profits, which occurs where marginal cost equals
marginal revenue, at quantity Qm and price Pm.
QUESTION 6
:SOLUTION
28.
Explain why a monopolist will always produce a
quantity at which the demand curve is elastic. (Hint:
If demand is inelastic and the firm raises its price,
what happens to total revenue and total costs?)
Question no 7
29.
A monopolist always produces a quantity at which the demand
curve is elastic. If the firm produced at a quantity for which the
demand curve were inelastic, then if the firm raised its price,
quantity would fall by a smaller percentage than the rise in price, so
revenue would increase. Since costs would decrease at a lower
quantity, the firm would have higher revenue and lower costs, so
profit would be higher. Thus the firm should keep raising its price
until profits are maximised, which must happen on an elastic portion
of the demand curve.
Another way to see this is to note that on an elastic portion of the
demand curve, marginal revenue is negative. Increasing quantity
requires a greater percentage reduction in price, so revenue declines.
Since a firm maximises profit where marginal cost equals marginal
revenue, and marginal cost is never negative, the profit maximising
quantity can never occur where marginal revenue is negative, so can
solution
30.
For many year AT ant T revenue was regulate
monopoly , providing both local and long distance
telephone service.
part A
Explain why long distance phone service was
originally a natural monopoly?
part B
Over the past two decades many companies have
launched communication satellites change the cost
structure of long distance phone service?
Question 8
31.
Part c
why might it be efficient to have competition in
long distance phone service and regulated
monopolies in local phone service?
32.
A : it is much less expensive overall for one firm to
create one system of long distance phones lines and
services for everyone to use rather than multiple
firms each creating separate line systems that all
run to the same places.
B : as the number of satellites increased it turned
the naturally monoplies long distance market into
more of a competative/equilibrium pricing
stracture.
explanation
33.
c: because other companies
are launching satellites for
their long distance usage.it
is most efficient to society if
all companies compete in the
market because their
customers would otherwise
be.
34.
You live in a town with 300 adults and 200 children
and you are thinking about putting on a play to
entertain your neighbors and make some money. A
play has affixed cost of 2000 butt selling and extra
ticket has zero marginal cost. Here are the demand
schedules for your two type of customers:
Question 9
36.
Part a:
to maximize profit what price would you charge for an
adult ticket? For a children's ticket?
How many profit do you make?
part b
The city council passes a law prohibiting you from charging
different prices to different customers. What price do you set
for a ticket now? How much profit do you make?
Part c
Who is worse off because of the law prohibiting price
discrimination? Who is better off ?
Part d if the fixed cost of the play were 2500 rather than 2000
how would your answer to part(a) part(b) part (c) change?
37.
Solution
The profit-maximizing outcome is the same as
maximizing total revenue in this case because there
are no variable costs. The total revenue from selling
to each type of consumer is shown in the following
tables:
39.
To maximize profit, you should charge adults $7 and sell 300 tickets. You
should charge children $4 and sell 200 tickets. Total revenue will be $2,100
+ $800 = $2,900. Because total cost is $2,000, profit will be $900.
40.
b. The city council passes a law prohibiting you from charging
different prices to different customers. What price do you set for a
ticket now? How much profit do you make?
If price discrimination were not allowed, you would want to set a
price of $7 for the tickets. You would sell 300 tickets and profit would
be $100.
c. Who is worse off because of the law prohibiting price
discrimination? Who is better off?
The children who were willing to pay $4 but will not see the show
now that the price is $7 will be worse off. The producer is worse off
because profit is lower. Total surplus is lower. There is no one that is
better off.
d.If the fixed cost of the play were $2500 rather than $2000, how
would your answers to parts (a), (b), and (c) change?
In (a) total profit would be $400. In (b), there would be a $400 loss.
There would be no change in (c).
41.
If the government wanted to encourage a monopoly
to produce the socially efficient quantity should it
use a per unit tax or per unit subsidy? Explain how
this tax or subsidy would achieve the socially
efficient level of output. Among the various
interested parties the monopoly firm the
monopoly's consumers and other taxpayers who
would support the policy and who would oppose
it?
Question 10
42.
Computation of the following When we want a
socially efficient quantity we need to give a per unit
subsidy to the monopolist. This is because the firm
produces at Qm, which is less than Qs-socially
efficient level. To encourage higher output the firm
has to be compensated for the losses from the higher
output. The subsidy lowers costs of production to
MC1. Now when the firm equates MC1 with its MPB
we arrive at Qs as the optimal level of output. The only
loser is tax payer, who may not even use this good, yet
he pays for it. The monopolist is happy as he continues
to maximize its profits in both situations by equating
MC with MPB benefits / cost MC MC1 MSB MPB Qm
Qs Q MPB: marginal private benefit MSB: marginal
social benefit
43.
.
Question 11
Many schemes for price discriminating involve some cost. For
example, discount coupons take up time and resources from
both the buyer and the seller. This question considers the
implications of costly price discrimination. To keep things
simple, let's assume that our monopolist's production costs are
simply proportionalto output, so that average total cost and
marginal cost are equal to each other.
a)Draw the cost, demand, and marginal revenue curves for the
monopolist. Showthe price the monopolist would charge
without price discrimination.
44.
b) In your diagram, mark the area equal to the
monopolist's profit and call it X.
Mark the area equal to consumer surplus and call it Y
. Mark the area equal to
the deadweight loss and call it Z.
45.
c) Now suppose that the monopolist can perfectly
price discriminate. What is the monopolist's profit?
answer :X + Y + Z
d) What is the change in the monopolist's profit
from price discrimination? What is the change in
total surplus from price discrimination? Which
change is larger?
Explain. The change in profit is Y + Z, while the
change in total surplus is Z. The change in
monopolists profit is larger because both consumer
surplus and deadweight Loss are added to
monopolist's profits, while only deadweight loss is
added to total surplus.
46.
e) Now suppose that there is some cost of price
discrimination. To model this cost,let's assume
that the monopolist has to pay a fixed cost C in
order to price discriminate. How would a
monopolist make the decision whether to pay this
fixed cost?
A monopolist would price discriminate if Y + Z >
C
f) How would a benevolent social planner, who
cares about total surplus, decide whether the
monopolist should price discriminate?
The benevolent social planner would decide to
price discriminate if Z > C.
47.
Only one firm produces and sells soccer balls on the
country of Wiknam, and as the story begins, international
trade in soccer balls is prohibited. The following
equations describe the monopolist’s demand and total
cost.
Demand: P = 10 – Q
Total Cost: TC = 3 + Q + 0.5Q2
Where Q is quantity and P is price measured in
Wiknamian dollars
Question 12
48.
A :Derive the firm’s marginal revenue and marginal cost curves.
(You should be able to show that they are
Marginal Revenue: MR = 10 – 2Q
Marginal Cost: MC = 1 + Q
To get marginal revenue, take the derivative of total revenue with
respect to Q. Total revenue is
TR = P*Q = (10-Q)Q = 10Q – Q2
MR = dTR/dQ = 10 – 2Q
You should also recognize that for a monopolist with a linear
demand curve, marginal revenue falls twice as fast (has twice the
slope) of the demand curve.
Marginal cost is the derivative of total cost with respect to Q.
Therefore,
MC = dTC/dQ = 1 + Q
49.
a. How many soccer balls does the monopolist produce? At what price are they
sold? What is the monopolist’s profit?
The monopolist would set marginal revenue equal to marginal cost and then
substitute the profit-maximizing quantity into the demand curve to get price:
10 – 2Q = 1 + Q
9 = 3Q
Q = 3
P = 10 – Q = $7
Total revenue = P Q = ($7)(3) = $21
Total cost = 3 + 3 + 0.5(9) = $10.5
Profit = $21 – $10.5 = $10.5
50.
a. One day, the King of Wiknam decrees that henceforth there will be free trade – either
imports or exports – of soccer balls at the world price of $6. The firm is now a price-
taker in a competitive market. What happens to domestic production of soccer balls?
To domestic consumption? Does Wiknam export or import soccer balls?
The firm will export soccer balls because the world price is greater than the
domestic price (in the absence of monopoly power). As Figure 11 shows,
domestic production will rise to 5 soccer balls, domestic consumption will rise
to 4, and exports will be 1.
52.
d. Suppose that the world price was not $6 but, instead, happened to be
exactly the same as the domestic price without trade as
determined in part (a). Would allowing trade have changed
anything in the Wiknamian economy? Explain.
Yes. The country would still export balls at a world price of $7.
The firm is a price taker and no longer is facing a downward-
sloping demand curve. Thus, it is now possible to sell more
without reducing price. The firm would produce 6 soccer balls
(because MR = MC at Q = 6 if MR = 7). The firm would
export three and sell three domestically.
53.
Question 13
Based on market research, a film production
company in Ectenia obtains the following information
about the demand and production costs of its new DVD:
Demand: P = 1,000 – 10Q
Total Revenue: TR = 1,000Q – 10Q2
Marginal Revenue: MR = 1,000 – 20Q
Marginal Cost: MC = 100 + 10Q
where Q indicates the number of copies sold and P is
the price in Ectenian dollars.
54.
A: Find the price and quantity that maximize the
company’s profit.
Figure 12 shows the firm’s demand,
marginal revenue, and marginal cost curves. The
firm’s profit is maximized at the output where
marginal revenue is equal to marginal cost.
Therefore, setting the two equations equal, we get:
1,000 – 20Q = 100 + 10Q
900 = 30Q
Q = 30
The monopoly price is P = 1,000 – 10Q =
700 Ectenian dollars.
56.
b. Find the price and quantity that would
maximize social welfare / total surplus / total net
benefit.
Social welfare is maximized where price is
equal to marginal cost:
1,000 – 10Q = 100 + 10Q
900 = 20Q
Q = 45
At an output level of 45, the price would
be 550 Estonian dollars.
c. Calculate the deadweight loss from monopoly.
The deadweight loss would be equal to
(0.5)(15)(300) = 2,250 Estonian dollars.
57.
Suppose, in addition to the costs above, the director of
the film has to be paid. The company is considering
four options:
A flat fee of 2,000 Ectenian dollars.
50 percent of the profits.
150 Ectenian dollars per unit sold.
50 percent of the revenue.
For each of the options, describe how the monopolist’s
maximization problem would be affected, if it is
affected at all.
58.
1 A flat fee of 2000 Ectenian dollars would not alter the profit-
maximizing price or quantity. The deadweight loss would be
unaffected.
2 A fee of 50 percent of the profits would not alter the
profit-maximizing price or quantity. The deadweight loss would
be unaffected.
3. The marginal cost of production would rise by 150
Ectenian dollars if the director was paid that amount for every
unit sold. The new marginal cost would be 100 + 10Q + 150. The
new profit-maximizing output would be 25, the marginal cost at
that level would be 500, and the price would rise to 750. The
deadweight loss would be smaller. With the new marginal cost
function, the quantity at which social welfare is maximized
changes. Now, price is equal to marginal cost when Q = 37.5:
1,000 - 10Q = 250 + 10Q
750 = 20Q
Q = 37.5
As a result, the deadweight loss would be equal
to (0.5)(37.5-25)(750-500) = 1,562.50 Ectenian dollars rather than
2,250 Ectenian dollars.
59.
4 . If the director is paid 50 percent of the
revenue, then total revenue is 500Q – 5Q2.
Marginal revenue becomes 500 – 10Q. The
profit-maximizing output level will be 20
and the price will be 800 Ectenian dollars.
The deadweight loss will be greater.