# CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

 To view this video please enable JavaScript, and consider upgrading to a web browser that supports HTML5 video
Save this PDF as:

Size: px
Start display at page:

## Transcription

1 CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of \$0 per unit and sets a price to maximize profit. If marginal cost should increase by 5 percent, would the price charged also rise by 5 percent? Yes. The monopolist s pricing rule as a function of the elasticity of demand for its product is: (P - MC) P = - 1 E d or alternatively, P = 1 + MC 1 E d In this example E d = -.0, so 1/E d = -1/; price should then be set so that: P = MC 1 = MC Therefore, if MC rises by 5 percent price, then price will also rise by 5 percent. When MC = \$0, P = \$40. When MC rises to \$0(1.5) = \$5, the price rises to \$50, a 5% increase. 4. A firm faces the following average revenue (demand) curve: P = Q where Q is weekly production and P is price, measured in cents per unit. The firm s cost function is given by C = 50Q + 30,000. Assuming the firm maximizes profits, a. What is the level of production, price, and total profit per week? The profit-maximizing output is found by setting marginal revenue equal to marginal cost. Given a linear demand curve in inverse form, P = Q, we know that the marginal revenue curve will have twice the slope of the demand curve. Thus, the marginal revenue curve for the firm is MR = Q. Marginal cost is simply the slope of the total cost curve. The slope of TC = 30, Q is 50. So MC equals 50. Setting MR = MC to determine the profit-maximizing quantity: Q = 50, or Q =,500. Substituting the profit-maximizing quantity into the inverse demand function to determine the price: P = (0.01)(,500) = 75 cents. Profit equals total revenue minus total cost: π = (75)(,500) - (30,000 + (50)(,500)), or π = \$35 per week. b. If the government decides to levy a tax of 10 cents per unit on this product, what will be the new level of production, price, and profit? 10

2 Suppose initially that the consumers must pay the tax to the government. Since the total price (including the tax) consumers would be willing to pay remains unchanged, we know that the demand function is P* + T = Q, or P* = Q - T, where P* is the price received by the suppliers. Because the tax increases the price of each unit, total revenue for the monopolist decreases by TQ, and marginal revenue, the revenue on each additional unit, decreases by T: MR = Q - T where T = 10 cents. To determine the profit-maximizing level of output with the tax, equate marginal revenue with marginal cost: Q - 10 = 50, or Q =,000 units. Substituting Q into the demand function to determine price: Profit is total revenue minus total cost: π = ( 70 ),000 P* = (0.01)(,000) - 10 = 70 cents. ( ) 50 ( )(, 000 )+ 30,000 ) = 10, 000 cents, or \$100 per week. Note: The price facing the consumer after the imposition of the tax is 80 cents. The monopolist receives 70 cents. Therefore, the consumer and the monopolist each pay 5 cents of the tax. If the monopolist had to pay the tax instead of the consumer, we would arrive at the same result. The monopolist s cost function would then be TC = 50Q + 30,000 + TQ = (50 + T)Q + 30,000. The slope of the cost function is (50 + T), so MC = 50 + T. We set this MC to the marginal revenue function from part (a): Q = , or Q =,000. Thus, it does not matter who sends the tax payment to the government. The burden of the tax is reflected in the price of the good. 5. The following table shows the demand curve facing a monopolist who produces at a constant marginal cost of \$10. Price Quantity

3 a. Calculate the firm s marginal revenue curve. To find the marginal revenue curve, we first derive the inverse demand curve. The intercept of the inverse demand curve on the price axis is 7. The slope of the inverse demand curve is the change in price divided by the change in quantity. For example, a decrease in price from 7 to 4 yields an increase in quantity from 0 to. Therefore, the slope is 3 and the demand curve is P = Q. The marginal revenue curve corresponding to a linear demand curve is a line with the same intercept as the inverse demand curve and a slope that is twice as steep. Therefore, the marginal revenue curve is MR = 7-3Q. b. What are the firm s profit-maximizing output and price? What is its profit? The monopolist s maximizing output occurs where marginal revenue equals marginal cost. Marginal cost is a constant \$10. Setting MR equal to MC to determine the profitmaximizing quantity: 7-3Q = 10, or Q = To find the profit-maximizing price, substitute this quantity into the demand equation: Total revenue is price times quantity: P = 7 ( 1.5) ( 5.67) = \$18.5. TR = ( 18.5)( 5.67) = \$ The profit of the firm is total revenue minus total cost, and total cost is equal to average cost times the level of output produced. Since marginal cost is constant, average variable cost is equal to marginal cost. Ignoring any fixed costs, total cost is 10Q or 56.67, and profit is = \$ c. What would the equilibrium price and quantity be in a competitive industry? For a competitive industry, price would equal marginal cost at equilibrium. Setting the expression for price equal to a marginal cost of 10: 7 1.5Q =10 Q = 11.3 P = 10. Note the increase in the equilibrium quantity compared to the monopoly solution. d. What would the social gain be if this monopolist were forced to produce and price at the competitive equilibrium? Who would gain and lose as a result? The social gain arises from the elimination of deadweight loss. Deadweight loss in this case is equal to the triangle above the constant marginal cost curve, below the demand curve, and between the quantities 5.67 and 11.3, or numerically ( )( )(.5)=\$4.10. Consumers gain this deadweight loss plus the monopolist s profit of \$ The monopolist s profits are reduced to zero, and the consumer surplus increases by \$ A firm has two factories for which costs are given by: The firm faces the following demand curve: Factory # 1: C 1 ( Q 1 ) = 10Q 1 Factory # : C ( Q ) = 0Q 1

4 where Q is total output, i.e. Q = Q 1 + Q. Chapter 10: Market Power: Monopoly and Monopsony P = 700-5Q a. On a diagram, draw the marginal cost curves for the two factories, the average and marginal revenue curves, and the total marginal cost curve (i.e., the marginal cost of producing Q = Q 1 + Q ). Indicate the profit-maximizing output for each factory, total output, and price. The average revenue curve is the demand curve, P = 700-5Q. For a linear demand curve, the marginal revenue curve has the same intercept as the demand curve and a slope that is twice as steep: MR = Q. Next, determine the marginal cost of producing Q. To find the marginal cost of production in Factory 1, take the first derivative of the cost function with respect to Q: ( ) dc 1 Q 1 dq Similarly, the marginal cost in Factory is ( ) dc Q dq = 0 Q 1. = 40 Q. Rearranging the marginal cost equations in inverse form and horizontally summing them, we obtain total marginal cost, MC T : MC MC 3MC Q = Q + Q = 1 + = T, or Q MCT = Profit maximization occurs where MC T = MR. See Figure 10.6.a for the profitmaximizing output for each factory, total output, and price. 13

5 800 Price 700 MC MC 1 MC T 600 P M MR D Q Q 1 Q T Quantity Figure 10.6.a b. Calculate the values of Q 1, Q, Q, and P that maximize profit. Calculate the total output that maximizes profit, i.e., Q such that MC T = MR: 40Q = Q, or Q = Next, observe the relationship between MC and MR for multiplant monopolies: MR = MC T = MC 1 = MC. We know that at Q = 30, MR = (10)(30) = 400. Therefore, MC 1 = 400 = 0Q 1, or Q 1 = 0 and MC = 400 = 40Q, or Q = 10. To find the monopoly price, P M, substitute for Q in the demand equation: P M = (5)(30), or P M = 550. c. Suppose labor costs increase in Factory 1 but not in Factory. How should the firm adjust the following(i.e., raise, lower, or leave unchanged): Output in Factory 1? Output in Factory? Total output? Price? An increase in labor costs will lead to a horizontal shift to the left in MC 1, causing MC T to shift to the left as well (since it is the horizontal sum of MC 1 and MC ). The new MC T curve intersects the MR curve at a lower quantity and higher marginal revenue. At a higher level of marginal revenue, Q is greater than at the original level for MR. Since Q T falls and Q rises, Q 1 must fall. Since Q T falls, price must rise. 14

6 7. A drug company has a monopoly on a new patented medicine. The product can be made in either of two plants. The costs of production for the two plants are MC 1 = 0 + Q 1, and MC = Q. The firm s estimate of the demand for the product is P = 0-3(Q 1 + Q ). How much should the firm plan to produce in each plant, and at what price should it plan to sell the product? First, notice that only MC is relevant because the marginal cost curve of the first plant lies above the demand curve. 30 Price MC = Q MC 1 = 0 +Q MR D Figure 10.7 Q This means that the demand curve becomes P = 0-3Q. With an inverse linear demand curve, we know that the marginal revenue curve has the same vertical intercept but twice the slope, or MR = 0-6Q. To determine the profit-maximizing level of output, equate MR and MC : 0-6Q = Q, or Q = Q = Price is determined by substituting the profit-maximizing quantity into the demand equation: P = ( ) = A monopolist faces the demand curve P = 11 - Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of \$6 per unit. a. Draw the average and marginal revenue curves and the average and marginal cost curves. What are the monopolist s profit-maximizing price and quantity? What is the resulting profit? Calculate the firm s degree of monopoly power using the Lerner index. Because demand (average revenue) may be described as P = 11 - Q, we know that the marginal revenue function is MR = 11 - Q. We also know that if average cost is constant, then marginal cost is constant and equal to average cost: MC = 6. To find the profit-maximizing level of output, set marginal revenue equal to marginal cost: 11 - Q = 6, or Q =.5. 15

7 That is, the profit-maximizing quantity equals,500 units. Substitute the profitmaximizing quantity into the demand equation to determine the price: P = = \$8.50. Profits are equal to total revenue minus total cost, π = TR - TC = (AR)(Q) - (AC)(Q), or π = (8.5)(.5) - (6)(.5) = 6.5, or \$6,50. The degree of monopoly power is given by the Lerner Index: Price 1 P MC P = = Profits 6 AC = MC 4 MR D = AR Figure 10.9.a b. A government regulatory agency sets a price ceiling of \$7 per unit. What quantity will be produced, and what will the firm s profit be? What happens to the degree of monopoly power? To determine the effect of the price ceiling on the quantity produced, substitute the ceiling price into the demand equation. 7 = 11 - Q, or Q = 4,000. The monopolist will pick the price of \$7 because it is the highest price that it can charge, and this price is still greater than the constant marginal cost of \$6, resulting in positive monopoly profit. Profits are equal to total revenue minus total cost: The degree of monopoly power is: π = (7)(4,000) - (6)(4,000) = \$4,000. P MC 7 6 = = P c. What price ceiling yields the largest level of output? What is that level of output? What is the firm s degree of monopoly power at this price? If the regulatory authority sets a price below \$6, the monopolist would prefer to go out of business instead of produce because it cannot cover its average costs. At any price above \$6, the monopolist would produce less than the 5,000 units that would be produced in a 16 Q

8 competitive industry. Therefore, the regulatory agency should set a price ceiling of \$6, thus making the monopolist face a horizontal effective demand curve up to Q = 5,000. To ensure a positive output (so that the monopolist is not indifferent between producing 5,000 units and shutting down), the price ceiling should be set at \$6 + δ, where δ is small. Thus, 5,000 is the maximum output that the regulatory agency can extract from the monopolist by using a price ceiling. The degree of monopoly power is P MC 6 + δ 6 δ = = 0 as δ 0. P Michelle s Monopoly Mutant Turtles (MMMT) has the exclusive right to sell Mutant Turtle t-shirts in the United States. The demand for these t-shirts is Q = 10,000/P. The firm s short-run cost is SRTC =, Q, and its long-run cost is LRTC = 6Q. a. What price should MMMT charge to maximize profit in the short run? What quantity does it sell, and how much profit does it make? Would it be better off shutting down in the short run? MMMT should offer enough t-shirts such that MR = MC. In the short run, marginal cost is the change in SRTC as the result of the production of another t-shirt, i.e., SRMC = 5, the slope of the SRTC curve. Demand is: 10, 000 Q =, P or, in inverse form, P = 100Q -1/. Total revenue (PQ) is 100Q 1/. Taking the derivative of TR with respect to Q, MR = 50Q -1/. Equating MR and MC to determine the profit-maximizing quantity: 5 = 50Q -1/, or Q = 100. Substituting Q = 100 into the demand function to determine price: P = (100)(100-1/ ) = 10. The profit at this price and quantity is equal to total revenue minus total cost: π = (10)(100) - (000 + (5)(100)) = -\$1,500. Although profit is negative, price is above the average variable cost of 5 and therefore, the firm should not shut down in the short run. Since most of the firm s costs are fixed, the firm loses \$,000 if nothing is produced. If the profit-maximizing quantity is produced, the firm loses only \$1,500. b. What price should MMMT charge in the long run? What quantity does it sell and how much profit does it make? Would it be better off shutting down in the long run? In the long run, marginal cost is equal to the slope of the LRTC curve, which is 6. Equating marginal revenue and long run marginal cost to determine the profitmaximizing quantity: 50Q -1/ = 6 or Q = Substituting Q = into the demand equation to determine price: P = (100)[(50/6) ] -1/ = (100)(6/50) = 1 Therefore, total revenue is \$ and total cost is \$ Profit is \$ The firm should remain in business. 17

9 c. Can we expect MMMT to have lower marginal cost in the short run than in the long run? Explain why. In the long run, MMMT must replace all fixed factors. Therefore, we can expect LRMC to be higher than SRMC. 1. The employment of teaching assistants (TAs) by major universities can be characterized as a monopsony. Suppose the demand for TAs is W = 30,000-15n, where W is the wage (as an annual salary), and n is the number of TAs hired. The supply of TAs is given by W = 1, n. a. If the university takes advantage of its monopsonist position, how many TAs will it hire? What wage will it pay? The supply curve is equivalent to the average expenditure curve. With a supply curve of W = 1, n, the total expenditure is Wn = 1,000n + 75n. Taking the derivative of the total expenditure function with respect to the number of TAs, the marginal expenditure curve is 1, n. As a monopsonist, the university would equate marginal value (demand) with marginal expenditure to determine the number of TAs to hire: 30,000-15n = 1, n, or n = Substituting n = into the supply curve to determine the wage: 1,000 + (75)(105.5) = \$8,909 annually. b. If, instead, the university faced an infinite supply of TAs at the annual wage level of \$10,000, how many TAs would it hire? With an infinite number of TAs at \$10,000, the supply curve is horizontal at \$10,000. Total expenditure is (10,000)(n), and marginal expenditure is 10,000. Equating marginal value and marginal expenditure: 30,000-15n = 10,000, or n = Dayna s Doorstops, Inc. (DD), is a monopolist in the doorstop industry. Its cost is C = 100-5Q + Q, and demand is P = 55 - Q. a. What price should DD set to maximize profit? What output does the firm produce? How much profit and consumer surplus does DD generate? To maximize profits, DD should equate marginal revenue and marginal cost. Given a demand of P = 55 - Q, we know that total revenue, PQ, is 55Q - Q. Marginal revenue is found by taking the first derivative of total revenue with respect to Q or: MR = dtr = 55 4 Q. dq Similarly, marginal cost is determined by taking the first derivative of the total cost function with respect to Q or: MC = dtc = Q 5. dq Equating MC and MR to determine the profit-maximizing quantity, 55-4Q = Q - 5, or Q =

10 Substituting Q = 10 into the demand equation to determine the profit-maximizing price: P = 55 - ()(10) = \$35. Profits are equal to total revenue minus total cost: π = (35)(10) - (100 - (5)(10) + 10 ) = \$00. Consumer surplus is equal to one-half times the profit-maximizing quantity, 10, times the difference between the demand intercept (the maximum price anyone is willing to pay) and the monopoly price: CS = (0.5)(10)(55-35) = \$100. b. What would output be if DD acted like a perfect competitor and set MC = P? What profit and consumer surplus would then be generated? In competition, profits are maximized at the point where price equals marginal cost, where price is given by the demand curve: 55 - Q = -5 + Q, or Q = 15. Substituting Q = 15 into the demand equation to determine the price: P = 55 - ()(15) = \$5. Profits are total revenue minus total cost or: Consumer surplus is π = (5)(15) - (100 - (5)(15) + 15 ) = \$15. CS = (0.5)(55-5)(15) = \$5. c. What is the deadweight loss from monopoly power in part (a)? The deadweight loss is equal to the area below the demand curve, above the marginal cost curve, and between the quantities of 10 and 15, or numerically DWL = (0.5)(35-15)(15-10) = \$50. d. Suppose the government, concerned about the high price of doorstops, sets a maximum price at \$7. How does this affect price, quantity, consumer surplus, and DD s profit? What is the resulting deadweight loss? With the imposition of a price ceiling, the maximum price that DD may charge is \$7.00. Note that when a ceiling price is set above the competitive price the ceiling price is equal to marginal revenue for all levels of output sold up to the competitive level of output. Substitute the ceiling price of \$7.00 into the demand equation to determine the effect on the equilibrium quantity sold: 7 = 55 - Q, or Q = 14. Consumer surplus is CS = (0.5)(55-7)(14) = \$196. Profits are π = (7)(14) - (100 - (5)(14) + 14 ) = \$15. The deadweight loss is \$.00 This is equivalent to a triangle of (0.5)(15-14)(7-3) = \$ e. Now suppose the government sets the maximum price at \$3. How does this affect price, quantity, consumer surplus, DD s profit, and deadweight loss? 19

11 With a ceiling price set below the competitive price, DD will decrease its output. Equate marginal revenue and marginal cost to determine the profit-maximizing level of output: 3 = Q, or Q = 14. With the government-imposed maximum price of \$3, profits are π = (3)(14) - (100 - (5)(14) + 14 ) = \$96. Consumer surplus is realized on only 14 doorsteps. Therefore, it is equal to the consumer surplus in part d., i.e. \$196, plus the savings on each doorstep, i.e., CS = (7-3)(14) = \$56. Therefore, consumer surplus is \$5. Deadweight loss is the same as before, \$.00. f. Finally, consider a maximum price of \$1. What will this do to quantity, consumer surplus, profit, and deadweight loss? With a maximum price of only \$1, output decreases even further: Profits are 1 = -5 + Q, or Q = 8.5. π = (1)(8.5) - (100 - (5)(8.5) ) = -\$7.75. Consumer surplus is realized on only 8.5 units, which is equivalent to the consumer surplus associated with a price of \$38 (38 = 55 - (8.5)), i.e., plus the savings on each doorstep, i.e., (0.5)(55-38)(8.5) = \$7.5 (38-1)(8.5) = \$1. Therefore, consumer surplus is \$93.5. Total surplus is \$65.50, and deadweight loss is \$ A monopolist faces the following demand curve: Q = 144/P where Q is the quantity demanded and P is price. Its average variable cost is and its fixed cost is 5. AVC = Q 1/, a. What are its profit-maximizing price and quantity? What is the resulting profit? The monopolist wants to choose the level of output to maximize its profits, and it does this by setting marginal revenue equal to marginal cost. To find marginal revenue, first rewrite the demand function as a function of Q so that you can then express total revenue as a function of Q, and calculate marginal revenue: Q = 144 P = 144 P Q P = 144 Q = 1 Q R = P * Q = 1 Q * Q = 1 Q MR = R Q = 0.5 * 1 Q = 6 Q. To find marginal cost, first find total cost, which is equal to fixed cost plus variable cost. You are given fixed cost of 5. Variable cost is equal to average variable cost times Q so that total cost and marginal cost are: 130

12 TC = 5 + Q * Q = 5 + Q MC = TC Q = 3 Q. To find the profit-maximizing level of output, we set marginal revenue equal to marginal cost: 6Q = 3 Q Q = 4. You can now find price and profit: P = 1 Q = 1 4 = \$6 1 3 Π = PQ TC = 6 * 4 (5 + 4 ) = \$11. b. Suppose the government regulates the price to be no greater than \$4 per unit. How much will the monopolist produce? What will its profit be? The price ceiling truncates the demand curve that the monopolist faces at P=4 or 144 Q = = 9. Therefore, if the monopolist produces 9 units or less, the price must be 16 \$4. Because of the regulation, the demand curve now has two parts: P = 3 \$ 4, if Q 9 1 Q 1 /, if Q > 9. Thus, total revenue and marginal revenue also should be considered in two parts TR = 4Q, if Q 9 1 Q 1 /, if Q > 9 and MR = 131 \$4, if Q 9 6Q 1/, if Q > 9. To find the profit-maximizing level of output, set marginal revenue equal to marginal cost, so that for P = 4, 3 4 = Q, or Q = 8, or Q = If the monopolist produces an integer number of units, the profit-maximizing production level is 7 units, price is \$4, revenue is \$8, total cost is \$3.5, and profit is \$4.48. There is a shortage of two units, since the quantity demanded at the price of \$4 is 9 units. c. Suppose the government wants to set a ceiling price that induces the monopolist to produce the largest possible output. What price will do this? To maximize output, the regulated price should be set so that demand equals marginal cost, which implies; 1 Q = 3 Q Q = 8 and P = \$4.4.

13 The regulated price becomes the monopolist s marginal revenue curve, which is a horizontal line with an intercept at the regulated price. To maximize profit, the firm produces where marginal cost is equal to marginal revenue, which results in a quantity of 8 units. 13

### CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC.

1 I S L 8 0 5 U Y G U L A M A L I İ K T İ S A T _ U Y G U L A M A ( 4 ) _ 9 K a s ı m 2 0 1 2 CEVAPLAR 1. Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market

### 11 PERFECT COMPETITION. Chapter. Competition

Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat

### Economics II: Micro Fall 2009 Exercise session 5. Market with a sole supplier is Monopolistic.

Economics II: Micro Fall 009 Exercise session 5 VŠE 1 Review Optimal production: Independent of the level of market concentration, optimal level of production is where MR = MC. Monopoly: Market with a

### Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2

Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2 Economics of Competition and Regulation 2015 Maria Rosa Battaggion Perfect

### Marginal cost. Average cost. Marginal revenue 10 20 40

Economics 101 Fall 2011 Homework #6 Due: 12/13/2010 in lecture Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework

### Final Exam (Version 1) Answers

Final Exam Economics 101 Fall 2003 Wallace Final Exam (Version 1) Answers 1. The marginal revenue product equals A) total revenue divided by total product (output). B) marginal revenue divided by marginal

### Chapter 7: The Costs of Production QUESTIONS FOR REVIEW

HW #7: Solutions QUESTIONS FOR REVIEW 8. Assume the marginal cost of production is greater than the average variable cost. Can you determine whether the average variable cost is increasing or decreasing?

### Problem Set 9 (75 points)

Problem Set 9 (75 points) 1. A student argues, "If a monopolist finds a way of producing a good at lower cost, he will not lower his price. Because he is a monopolist, he will keep the price and the quantity

### Market for cream: P 1 P 2 D 1 D 2 Q 2 Q 1. Individual firm: W Market for labor: W, S MRP w 1 w 2 D 1 D 1 D 2 D 2

Factor Markets Problem 1 (APT 93, P2) Two goods, coffee and cream, are complements. Due to a natural disaster in Brazil that drastically reduces the supply of coffee in the world market the price of coffee

### Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Practice for Perfect Competition Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is a defining characteristic of a

### CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

CHAPTER 8 PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY TEACHING NOTES This chapter begins by explaining what we mean by a competitive market and why it makes sense to assume that firms try to maximize profit.

### Chapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS

Chapter 15: While a competitive firm is a taker, a monopoly firm is a maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The

### Practice Questions Week 6 Day 1

Practice Questions Week 6 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Economists assume that the goal of the firm is to a. maximize total revenue

### Economics 431 Fall 2003 1st midterm Answer Key

Economics 431 Fall 003 1st midterm Answer Key 1) (7 points) Consider an industry that consists of a large number of identical firms. In the long run competitive equilibrium, a firm s marginal cost must

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Economics 103 Spring 2012: Multiple choice review questions for final exam. Exam will cover chapters on perfect competition, monopoly, monopolistic competition and oligopoly up to the Nash equilibrium

### Oligopoly and Strategic Pricing

R.E.Marks 1998 Oligopoly 1 R.E.Marks 1998 Oligopoly Oligopoly and Strategic Pricing In this section we consider how firms compete when there are few sellers an oligopolistic market (from the Greek). Small

### QE1: Economics Notes 1

QE1: Economics Notes 1 Box 1: The Household and Consumer Welfare The final basket of goods that is chosen are determined by three factors: a. Income b. Price c. Preferences Substitution Effect: change

### Profit maximization in different market structures

Profit maximization in different market structures In the cappuccino problem as well in your team project, demand is clearly downward sloping if the store wants to sell more drink, it has to lower the

### Economics 201 Fall 2010 Introduction to Economic Analysis

Economics 201 Fall 2010 Introduction to Economic Analysis Jeffrey Parker Problem Set #5 Solutions Instructions: This problem set is due in class on Wednesday, October 13. If you get stuck, you are encouraged

### Microeconomic FRQ s. Scoring guidelines and answers

Microeconomic FRQ s 2005 1. Bestmilk, a typical profit-maximizing dairy firm, is operating in a constant-cost, perfectly competitive industry that is in long-run equilibrium. a. Draw correctly-labeled

### All these models were characterized by constant returns to scale technologies and perfectly competitive markets.

Economies of scale and international trade In the models discussed so far, differences in prices across countries (the source of gains from trade) were attributed to differences in resources/technology.

### 1) If the government sets a price ceiling below the monopoly price, will this reduce deadweight loss in a monopolized market?

Managerial Economics Study Questions With Solutions Monopoly and Price Disrcimination 1) If the government sets a price ceiling below the monopoly price, will this reduce deadweight loss in a monopolized

### Figure: Computing Monopoly Profit

Name: Date: 1. Most electric, gas, and water companies are examples of: A) unregulated monopolies. B) natural monopolies. C) restricted-input monopolies. D) sunk-cost monopolies. Use the following to answer

1 Monopoly Why Monopolies Arise? Monopoly is a rm that is the sole seller of a product without close substitutes. The fundamental cause of monopoly is barriers to entry: A monopoly remains the only seller

### Microeconomics Topic 7: Contrast market outcomes under monopoly and competition.

Microeconomics Topic 7: Contrast market outcomes under monopoly and competition. Reference: N. Gregory Mankiw s rinciples of Microeconomics, 2 nd edition, Chapter 14 (p. 291-314) and Chapter 15 (p. 315-347).

### EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs:

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: Economic Cost: the monetary value of all inputs used in a particular activity or enterprise over a given period.

### Chapter 12 Monopolistic Competition and Oligopoly

Chapter Monopolistic Competition and Oligopoly Review Questions. What are the characteristics of a monopolistically competitive market? What happens to the equilibrium price and quantity in such a market

### Market Structure: Duopoly and Oligopoly

WSG10 7/7/03 4:24 PM Page 145 10 Market Structure: Duopoly and Oligopoly OVERVIEW An oligopoly is an industry comprising a few firms. A duopoly, which is a special case of oligopoly, is an industry consisting

### Course: Economics I. Author: Ing. Martin Pop

Course: Economics I Author: Ing. Martin Pop Contents Introduction 1. Characteristics of imperfect competition. The main causes of imperfect competition 2. Equilibrium firms in imperfect competition 3.

### Chapter 11 Pricing With Market Power

Chapter 11 Pricing With Market Power Review Questions 1. Suppose a firm can practice perfect first-degree price discrimination. What is the lowest price it will charge, and what will its total output be?

### 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 15, 2007. Lecture 13. Cost Function

Short-Run Cost Function. Principles of Microeconomics, Fall Chia-Hui Chen October, ecture Cost Functions Outline. Chap : Short-Run Cost Function. Chap : ong-run Cost Function Cost Function et w be the

### Managerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models

Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings

### Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit 1) Accountants include costs as part of a firm's costs, while economists include costs. A) explicit; no explicit B) implicit;

### Jason Welker 2009 Zurich International School

1 AP Microeconomics: Exam Study Guide Format: 60 MC questions worth 66.67% of total. 70 minutes to answer 20 questions are definitional Example: The unemployment rate measures the percentage of (A) people

### -1- Worked Solutions 5. Lectures 9 and 10. Question Lecture 1. L9 2. L9 3. L9 4. L9 5. L9 6. L9 7. L9 8. L9 9. L9 10. L9 11. L9 12.

-1- Worked Solutions 5 Lectures 9 and 10. Question Lecture 1. L9 2. L9 3. L9 4. L9 5. L9 6. L9 7. L9 8. L9 9. L9 10. L9 11. L9 12. L10 Unit 5 solutions Exercise 1 There may be practical difficulties in

### Thus MR(Q) = P (Q) Q P (Q 1) (Q 1) < P (Q) Q P (Q) (Q 1) = P (Q), since P (Q 1) > P (Q).

A monopolist s marginal revenue is always less than or equal to the price of the good. Marginal revenue is the amount of revenue the firm receives for each additional unit of output. It is the difference

### Homework 3 Managerial Economics MBA, NCCU

Homework 3 Managerial Economics MBA, NCCU 1.Consider a company that manages a network of hospitals across several counties in one state. Household incomes and the cost of living are higher in urban than

### Chapter 11. T he economy that we. The World of Oligopoly: Preliminaries to Successful Entry. 11.1 Production in a Nonnatural Monopoly Situation

Chapter T he economy that we are studying in this book is still extremely primitive. At the present time, it has only a few productive enterprises, all of which are monopolies. This economy is certainly

### Econ Wizard User s Manual

1 Econ Wizard User s Manual Kevin Binns Matt Friedrichsen Purpose: This program is intended to be used by students enrolled in introductory economics classes. The program is meant to help these students

### chapter: Solution Solution Monopoly 1. Each of the following firms possesses market power. Explain its source.

S197-S28_Krugman2e_PS_Ch14.qxp 9/16/8 9:22 PM Page S-197 Monopoly chapter: 14 1. Each of the following firms possesses market power. Explain its source. a. Merck, the producer of the patented cholesterol-lowering

### Economics 203: Intermediate Microeconomics I Lab Exercise #11. Buy Building Lease F1 = 500 F1 = 750 Firm 2 F2 = 500 F2 = 400

Page 1 March 19, 2012 Section 1: Test Your Understanding Economics 203: Intermediate Microeconomics I Lab Exercise #11 The following payoff matrix represents the long-run payoffs for two duopolists faced

### AP Microeconomics 2002 Scoring Guidelines

AP Microeconomics 2002 Scoring Guidelines The materials included in these files are intended for use by AP teachers for course and exam preparation in the classroom; permission for any other use must be

### 4. Market Structures. Learning Objectives 4-63. Market Structures

1. Supply and Demand: Introduction 3 2. Supply and Demand: Consumer Demand 33 3. Supply and Demand: Company Analysis 43 4. Market Structures 63 5. Key Formulas 81 2014 Allen Resources, Inc. All rights

### Break-even Analysis. Thus, if we assume that price and AVC are constant, (1) can be rewritten as follows TFC AVC

Break-even Analysis An enterprise, whether or not a profit maximizer, often finds it useful to know what price (or output level) must be for total revenue just equal total cost. This can be done with a

### 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

### First degree price discrimination ECON 171

First degree price discrimination Introduction Annual subscriptions generally cost less in total than one-off purchases Buying in bulk usually offers a price discount these are price discrimination reflecting

### Chapter 05 Perfect Competition, Monopoly, and Economic

Chapter 05 Perfect Competition, Monopoly, and Economic Multiple Choice Questions Use Figure 5.1 to answer questions 1-2: Figure 5.1 1. In Figure 5.1 above, what output would a perfect competitor produce?

### 12 Monopolistic Competition and Oligopoly

12 Monopolistic Competition and Oligopoly Read Pindyck and Rubinfeld (2012), Chapter 12 09/04/2015 CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition

### Problem Set #3 Answer Key

Problem Set #3 Answer Key Economics 305: Macroeconomic Theory Spring 2007 1 Chapter 4, Problem #2 a) To specify an indifference curve, we hold utility constant at ū. Next, rearrange in the form: C = ū

### Economics I. Decision-making Firm in Imperfect Competition

Economics I Decision-making Firm in Imperfect Competition The aim of the first lecture is to explain and analyze the markets in imperfect competition and firm behavior in imperfectly competitive environment.

### Figure 4-1 Price Quantity Quantity Per Pair Demanded Supplied \$ 2 18 3 \$ 4 14 4 \$ 6 10 5 \$ 8 6 6 \$10 2 8

Econ 101 Summer 2005 In-class Assignment 2 & HW3 MULTIPLE CHOICE 1. A government-imposed price ceiling set below the market's equilibrium price for a good will produce an excess supply of the good. a.

### Mikroekonomia B by Mikolaj Czajkowski. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Mikroekonomia B by Mikolaj Czajkowski Test 12 - Oligopoly Name Group MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The market structure in which

### Web Supplement to Chapter 2

Web upplement to Chapter 2 UPPLY AN EMAN: TAXE 21 Taxes upply and demand analysis is a very useful tool for analyzing the effects of various taxes In this Web supplement, we consider a constant tax per

### Chapter 7: Market Structure in Government and Nonprofit Industries. Soft Drinks. What is a Market? Do NFPs Compete? Some NFPs Compete Directly

Chapter 7: Market Structure in Government and Nonprofit Industries Soft Drinks HTTP:/www.economics.emory.edu/Working_Pa pers/wp/2008wp/frisvold_08_08_paper.pdf What is a Market? A market is a process in

### Solution to Homework Set 7

Solution to Homework Set 7 Managerial Economics Fall 011 1. An industry consists of five firms with sales of \$00 000, \$500 000, \$400 000, \$300 000, and \$100 000. a) points) Calculate the Herfindahl-Hirschman

### Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation. Jon Bakija

Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation Jon Bakija This example shows how to use a budget constraint and indifference curve diagram

### Lecture 28 Economics 181 International Trade

Lecture 28 Economics 181 International Trade I. Introduction to Strategic Trade Policy If much of world trade is in differentiated products (ie manufactures) characterized by increasing returns to scale,

### Chapter 4 Individual and Market Demand

Chapter 4 Individual and Market Demand Questions for Review 1. Explain the difference between each of the following terms: a. a price consumption curve and a demand curve The price consumption curve (PCC)

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Test 2 Review Econ 201, V. Tremblay MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Barbara left a \$25,000 job as an architect to run a catering

### MODULE 62: MONOPOLY & PUBLIC POLICY

MODULE 62: MONOPOLY & PUBLIC POLICY Schmidty School of Economics 1 LEARNING TARGETS I CAN Ø Compare & Contrast the effect that perfect competition and monopoly has upon society's welfare. Ø Explain how

### CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.)

CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.) Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates the

### Economics 101 Final Exam. May 12, 2008. Instructions

Economics 101 Spring 2008 Professor Wallace Economics 101 Final Exam May 12, 2008 Instructions Do not open the exam until you are instructed to begin. You will need a #2 lead pencil. If you do not have

### AP Microeconomics 2003 Scoring Guidelines

AP Microeconomics 2003 Scoring Guidelines The materials included in these files are intended for use by AP teachers for course and exam preparation; permission for any other use must be sought from the

### Economics 101 Fall 2011 Homework #3 Due 10/11/11

Economics 101 Fall 2011 Homework #3 Due 10/11/11 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework (legibly).

### Chapter 5 Uncertainty and Consumer Behavior

Chapter 5 Uncertainty and Consumer Behavior Questions for Review 1. What does it mean to say that a person is risk averse? Why are some people likely to be risk averse while others are risk lovers? A risk-averse

### Homework 3, Solutions Managerial Economics: Eco 685

Homework 3, Solutions Managerial Economics: Eco 685 Question 1 a. Second degree since we have a quantity discount. For 2 GB the cost is \$15 per GB, for 5 GB the cost is \$10 per GB, and for 10 GB the cost

### 9.1 Cournot and Bertrand Models with Homogeneous Products

1 Chapter 9 Quantity vs. Price Competition in Static Oligopoly Models We have seen how price and output are determined in perfectly competitive and monopoly markets. Most markets are oligopolistic, however,

### Figure 1, A Monopolistically Competitive Firm

The Digital Economist Lecture 9 Pricing Power and Price Discrimination Many firms have the ability to charge prices for their products consistent with their best interests even thought they may not be

### 5. Suppose demand is perfectly elastic, and the supply of the good in question

ECON 1620 Basic Economics Principles 2010 2011 2 nd Semester Mid term test (1) : 40 multiple choice questions Time allowed : 60 minutes 1. When demand is inelastic the price elasticity of demand is (A)

### Experiment 8: Entry and Equilibrium Dynamics

Experiment 8: Entry and Equilibrium Dynamics Everyone is a demander of a meal. There are approximately equal numbers of values at 24, 18, 12 and 8. These will change, due to a random development, after

### Variable Cost. Marginal Cost. Average Variable Cost 0 \$50 \$50 \$0 -- -- -- -- 1 \$150 A B C D E F 2 G H I \$120 J K L 3 M N O P Q \$120 R

Class: Date: ID: A Principles Fall 2013 Midterm 3 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Trevor s Tire Company produced and sold 500 tires. The

### Q D = 100 - (5)(5) = 75 Q S = 50 + (5)(5) = 75.

4. The rent control agency of New York City has found that aggregate demand is Q D = 100-5P. Quantity is measured in tens of thousands of apartments. Price, the average monthly rental rate, is measured

### Suppose you are a seller with cost 13 who must pay a sales tax of 15. What is the lowest price you can sell at and not lose money?

Experiment 3 Suppose that sellers pay a tax of 15. If a seller with cost 5 sells to a buyer with value 45 at a price of 25, the seller earns a profit of and the buyer earns a profit of. Suppose you are

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Multiple choice review questions for Midterm 2 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A consumption point inside the budget line A) is

### Pricing to Mass Markets. Simple Monopoly Pricing, Price Discrimination and the Losses from Monopoly

Pricing to Mass Markets Simple Monopoly Pricing, Price Discrimination and the Losses from Monopoly Many Buyers Costly to set individual prices to each consumer to extract their individual willingness-to-pay.

### Chapter 11 Pricing Strategies for Firms with Market Power

Managerial Economics & Business Strategy Chapter 11 Pricing Strategies for Firms with Market Power McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. Basic

### Chapter 13 Market Structure and Competition

Chapter 13 Market Structure and Competition Solutions to Review Questions 1. Explain why, at a Cournot equilibrium with two firms, neither firm would have any regret about its output choice after it observes

### CE2451 Engineering Economics & Cost Analysis. Objectives of this course

CE2451 Engineering Economics & Cost Analysis Dr. M. Selvakumar Associate Professor Department of Civil Engineering Sri Venkateswara College of Engineering Objectives of this course The main objective of

### Long Run Economic Growth Agenda. Long-run Economic Growth. Long-run Growth Model. Long-run Economic Growth. Determinants of Long-run Growth

Long Run Economic Growth Agenda Long-run economic growth. Determinants of long-run growth. Production functions. Long-run Economic Growth Output is measured by real GDP per capita. This measures our (material)

### Week 7 - Game Theory and Industrial Organisation

Week 7 - Game Theory and Industrial Organisation The Cournot and Bertrand models are the two basic templates for models of oligopoly; industry structures with a small number of firms. There are a number

### 13. If Y = AK 0.5 L 0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1,000.

Name: Date: 1. In the long run, the level of national income in an economy is determined by its: A) factors of production and production function. B) real and nominal interest rate. C) government budget

### Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions

Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services

### Economics 103h Fall l 2012: Review Questions for Midterm 2

Economics 103h Fall l 2012: Review Questions for Midterm 2 Essay/Graphing questions 1, Explain the shape of the budget line. 2. What shifts the budget line and why? Give an example in words and demonstrate

### INTRODUCTORY MICROECONOMICS

INTRODUCTORY MICROECONOMICS UNIT-I PRODUCTION POSSIBILITIES CURVE The production possibilities (PP) curve is a graphical medium of highlighting the central problem of 'what to produce'. To decide what

### Noah Williams Economics 312. University of Wisconsin Spring 2013. Midterm Examination Solutions

Noah Williams Economics 31 Department of Economics Macroeconomics University of Wisconsin Spring 013 Midterm Examination Solutions Instructions: This is a 75 minute examination worth 100 total points.

### Lecture 10 Monopoly Power and Pricing Strategies

Lecture 10 Monopoly Power and Pricing Strategies Business 5017 Managerial Economics Kam Yu Fall 2013 Outline 1 Origins of Monopoly 2 Monopolistic Behaviours 3 Limits of Monopoly Power 4 Price Discrimination

### Econ 201 Lecture 17. The marginal benefit of expanding output by one unit is the market price. Marginal cost of producing corn

Econ 201 Lecture 17 The Perfectly Competitive Firm Is a Taker (Recap) The perfectly competitive firm has no influence over the market price. It can sell as many units as it wishes at that price. Typically,

### Figure 1. D S (private) S' (social) Quantity (tons of medicine)

Price per ton Practice Homework Pollution & Environment Economics 101 The Economic Way of Thinking 1. Suppose that the production of pharmaceuticals generates pollution of the Columbia River, which is

### Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002).

Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002). Description of the model. This is a special case of a Mirrlees model.

### p, we suppress the wealth arguments in the aggregate demand function. We can thus state the monopolist s problem as follows: max pq (p) c (q (p)).

Chapter 9 Monopoly As you will recall from intermediate micro, monopoly is the situation where there is a single seller of a good. Because of this, it has the power to set both the price and quantity of

### Principle of Microeconomics Econ 202-506 chapter 13

Principle of Microeconomics Econ 202-506 chapter 13 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The WaveHouse on Mission Beach in San Diego

### Chapter 4 Consumption, Saving, and Investment

Chapter 4 Consumption, Saving, and Investment Multiple Choice Questions 1. Desired national saving equals (a) Y C d G. (b) C d + I d + G. (c) I d + G. (d) Y I d G. 2. With no inflation and a nominal interest

### Practice Problem Solutions PAI723 Professor David Popp Fall 2013

Practice Problem Solutions PAI723 Professor David Popp Fall 2013 1. Using supply and demand diagrams, illustrate the effect on the equilibrium price and quantity sold of cars when: a) the rates for auto

### Fall 2007 Economics 431 Mid-Term Exam Prof. Hamilton

Fall 2007 Economics 431 Mid-Term Exam Prof. Hamilton Name: KEY Question 1A. (15 points) Externalities and Monopoly Markets Demonstrate on a diagram that the deadweight loss from a negative production externality

### Chapter 5 Estimating Demand Functions

Chapter 5 Estimating Demand Functions 1 Why do you need statistics and regression analysis? Ability to read market research papers Analyze your own data in a simple way Assist you in pricing and marketing