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Monoply Tayyab Ismat

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

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

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

A publisher faces the following demand schedule for the next novel of one of its popular authors:

QUESTION 2 p Q 100090100,00080200,00070300,00060400,00050500,00040600,00030700,00020800,00010900,00001000,000

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.

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 publishers decision regarding the price to charge? Explain.

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?

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. solutionp QTrMrTcProfit1000002-2901000009936802000001674127030000021551660400000243618505000002517184060000024-18163070000021-39122080000016-5106109000009-711-2010000000-912-12

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.

Part c

Part dThe area of deadweight loss is marked DWL in the gure. 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 ecient level of output.Part eIf the author were paid $3 million instead of $2 million, the publisher wouldnt change the price, since there would be no change in marginal cost or marginal revenue. The only thing that would be aected would be the rms prot, which would fall.

Part fTo maximise economic eciency, the publisher would set the price at $10 per book, since thats the marginal cost of the book. At that price, the publisher would have negative prots equal to the amount paid to the author.

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?PQ$8071006200530044003500260017000800

Part b If the company is interested in maximising profit, should it build the bridge? what would be its profit or loss?Part cIf the government were to build the bridge, what price should it charge?Part dShould the government build the bridge? Explain.

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.

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 cIf 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.PQTRMR$80$0_7100700$762001,200553001,500344001,600135001,500-126001,200-31700700-508000-7

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.

part d

Johnny Rockabilly has just finished recording his latest CD. His record company's marketing department that the demand for the CD is as follow:pQ2410,0002220,0002030,0001840,0001650,0001460,000

The company can produce the CD with no xed cost and a variable cost of $5 per CD.Question 4

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?

SolutionPart 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 $550,000Part 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.

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 saloons demand curve and its cost curves ,show the price and quantity combinations favoured by each of the three partners?QUESTION 6:

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

Explain why a monopolist will always produce a quantity at which the demand curve is elastic. (Hint: If demand is inelastic and the rm raises its price, what happens to total revenue and total costs?)Question no 7

A monopolist always produces a quantity at which the demand curve is elastic. If the rm produced at a quantity for which the demand curve were inelastic, then if the rm 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 rm would have higher revenue and lower costs, so prot would be higher. Thus the rm should keep raising its price until prots 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 rm maximises prot where marginal cost equals marginal revenue, and marginal cost is never negative, the prot maximising quantity can never occur where marginal revenue is negative, so can never be on an inelastic portion of the demand curve.

solution

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 BOver the past two decades many companies have launched communication satellites change the cost structure of long distance phone service?Question 8

Part c why might it be efficient to have competition in long distance phone service and regulated monopolies in local phone service?

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

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.

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

price adults children100091000820007300063000530010043002003300200230020013002000300200

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?

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:

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.

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).

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

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 QsQ MPB: marginal private benefit MSB: marginal social benefit

. 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 thingssimple, 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.

b)Inyourdiagram,marktheareaequaltothemonopolist'sprotandcallitX.MarktheareaequaltoconsumersurplusandcallitY.MarktheareaequaltothedeadweightlossandcallitZ.

c) Now suppose that the monopolist can perfectly price discriminate. What is the monopolist's prot? answer :X + Y + Z

d) What is the change in the monopolist's prot from price discrimination? What is the change in total surplus from price discrimination? Which change is larger? Explain. The change in prot is Y + Z, while the change in total surplus is Z. The change in monopolists prot is larger because both consumer surplus and deadweight Loss are added to monopolist's prots, while only deadweight loss is added to total surplus.

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 xed cost C in order to price discriminate. How would a monopolist make the decision whether to pay thisxed 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.

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 monopolists demand and total cost.Demand: P = 10 QTotal Cost: TC = 3 + Q + 0.5Q2Where Q is quantity and P is price measured in Wiknamian dollarsQuestion 12

A :Derive the firms marginal revenue and marginal cost curves. (You should be able to show that they areMarginal Revenue: MR = 10 2QMarginal Cost: MC = 1 + QTo get marginal revenue, take the derivative of total revenue with respect to Q. Total revenue isTR = P*Q = (10-Q)Q = 10Q Q2MR = dTR/dQ = 10 2QYou 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

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.

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.

Question 13Based 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 10QTotal Revenue: TR = 1,000Q 10Q2Marginal Revenue: MR = 1,000 20QMarginal Cost: MC = 100 + 10Qwhere Q indicates the number of copies sold and P is the price in Ectenian dollars.

A: Find the price and quantity that maximize the companys profit.Figure 12 shows the firms demand, marginal revenue, and marginal cost curves. The firms 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 + 10Q900 = 30QQ = 30The monopoly price is P = 1,000 10Q = 700 Ectenian dollars.

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 + 10Q900 = 20QQ = 45At 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.

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 monopolists maximization problem would be affected, if it is affected at all.

1 A flat fee of 2000 Ectenian dollars would not alter the profit-maximizing price or quantity. The deadweight loss would be unaffected.

2A 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 + 10Q750 = 20QQ = 37.5As 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.

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.