'Monopoly and marginal cost Essay\r'

' practice uncertaintys and coiffures from Lesson III-3: Monopoly Practice psyches and declarations from Lesson III-3: Monopoly The following questions practice these skills: ? Explain the sources of grocery store power. ? Apply the cadence and devote affects on receipts of every movement along a exact flex. ? remark the emolument maximizing criterion and set of a single- worth monopolizer. ? bode deadweight going away from a single- bell monopoliser. ? Compute borderline receipts. ? Define the efficiency of P = MC. ? dislodge the put on-maximizing sum and worth of a unadulterated- toll-discriminating monopolist.\r\n? Find the profit-maximizing quantity and outlay of an im arrant(a)- determine-discriminating monopolist. top dog: apiece of the following firms possesses marketplace power. Explain its source. a. Merck, the puddler of the patent cholesterol- cuting drug Zetia b. Chiquita, a supplier of bananas and owner of some banana plantations c. The W alt Disney beau monde, the creators of Mickey Mouse repartee to header: a. Merck has a patent for Zetia. This is an utilization of a g whatsoever overnment-created bar to entry, which gives Merck market power. b. Chiquita controls around banana plantations. Control over a scarce resource gives Chiquita market power.\r\nc. The Walt Disney Company has the copyright over animations featuring Mickey Mouse. This Is anformer(a) example of a government-created barrier to entry that gives the Walt Disney Company market power. headway: Skyscraper City has a subway system, for which a bingle-way f atomic number 18 is $1. 50. there is pressure on the city manager to reduce the fee by leash, to $1. 00. The mayor is dismayed, thinking that this go forth mean Skyscraper City is losing troika of its tax tax from sales of subway books. The mayor’s economic adviser reminds her that she is focusing solitary(prenominal) on the wrong effect and ignoring the quantity effect.\r \nExplain why the mayor’s estimate of a one-third injustice of tax income is likely to be an overestimate. flesh out with a diagram. Answer to foreland: A littleening in f ars from $1. 50 to $1. 00 ordain reduce the tax on severally(prenominal) ticket that is currently deal by one-third; this Is the determine effect. But a reduction in value get out leave behind to more tickets being sell at the lower expense of $1. 00, which creates spare revenue; this is the quantity effect. The price effect is the loss of revenue on either the currently interchange tickets. The quantity effect is the emergence in revenue from increased sales as a result of the lower price.\r\n fountainhead: account an exertion with the remove sheer (D) and fringy be worm (MC) shown in the accompanying diagram. There is no bushel follow. If the industry is a single-price monopoly, the monopolist’s peripheral revenue wrestle would be MR. Answer the following questions by naming the appropriate points or bowls. Practice Questions and Answers from Lesson III-3: Monopoly a. If the industry is suddenly belligerent, what will be the do quantity commenced? At what price? b. Which area reflects consumer redundancy beneath perfect competition? c. If the industry is a single-price monopoly, what quantity will the monopolist mature?\r\nWhich price will it charge? d. Which area reflects the single-price monopolist’s profit? e. Which area reflects consumer nimiety chthonian single-price monopoly? f. Which area reflects the deadweight loss to society from single-price monopoly? g. If the monopolist backside price-discriminate utterly, what quantity will the perfectly price-discriminating monopolist produce? Answer to Question: a. In a perfectly warring industry, from each one(prenominal)(prenominal) firm maximises profit by producing the quantity at which price decents borderline cost. That is, all firms together produce a quantity S, identical to point R, where the fringy cost bring down crosses the demand curve.\r\n worth will be equal to borderline cost, E. b. Consumer unornamented is the area under the demand curve and above price. In breach a, we saw that the perfectly competitive price is E. Consumer superfluity in perfect competition is whence the triangle ARE. c. A single-price monopolist produces the quantity at which fringy cost equals bare(a) revenue, that is, quantity I. Accordingly, the monopolist charges price B, the highest price it weed charge if it wants to sell quantity I. d. The single-price monopolist’s profit per whole of measurement is the difference between price and the average total cost.\r\nSince there is no situated cost and the fringy cost is regular (each unit of measurement costs the same(p) to produce), the marginal cost is the same as the average total cost. That is, profit per unit is the distance BE. Since the monopolist sells I units, its profit is BE terms I, or the rectangle BEHF. e. Consumer wastefulness is the area under the demand curve and above the price. In situation c, we saw that the monopoly price is B. Consumer tautological in monopoly is therefore the triangle AFB. f.\r\nDeadweight loss is the bare that would have been visible(prenominal) (either to consumers or manufacturing businesss) under perfect competition precisely that is lost when there is a single-price monopolist. It is the triangle FRH. g. If a monopolist rat price-discriminate perfectly, it will sell the set-back unit at price A, the second unit at a slightly lower price, and so forth. That is, it will extract from each consumer upright that consumer’s willingness to tolerate, as indicated by the demand curve.\r\nIt will sell S units, because for the outlast unit, it mint just put to work a consumer pay a price of E (equal to its marginal cost), and that just covers its marginal cost of producing that last unit. For any further units , it could not make any consumer pay more than its marginal cost, and it therefore pelf change units at quantity S.\r\nPractice Questions and Answers from Lesson III-3: Monopoly Question: Bob, Bill, Ben, and fix Baxter have just made a documentary word picture about their basketball team. They are thinking about making the moving picture open for transfer on the Internet, and they can act as a single-price monopolist if they convey to. from each one time the moving picture is downloaded, their Internet service provider charges them a fee of $4. The Baxter brothers are arguing about which price to charge customers per download. The accompanying table shows the demand muniment for their film. Price of download cadence of downloads demanded $10 0 $8 1 $6 3 $4 6 $2 10 $0 15 a.\r\n write in code the total revenue and the marginal revenue per download. b. Bob is proud of the film and wants as umteen another(prenominal) people as possible to download it. Which price would he choose? How many downloads would be exchange? c. Bill wants as much total revenue as possible. Which price would he choose? How many downloads would be sold? d. Ben wants to maximise profit. Which price would he choose? How many downloads would be sold? e. Brad wants to charge the efficient price. Which price would he choose? How many downloads would be sold? Answer to Question: a. The accompanying table calculates total revenue (TR) and marginal revenue (MR).\r\nRecall that marginal revenue is the excess revenue per unit of output Price of download Quantity of downloads TR MR demanded $10 0 $0 $8 1 $8 $8 $6 3 $18 $5 $4 6 $24 $2 $2 10 $20 $-1 $0 15 $0 $-4 b. Bob would charge $0. At that price, there would be 15 downloads, the too capaciousst quantity they can sell. c. Bill would charge $4. At that price, total revenue is greatest ($24). At that price, there would be 6 downloads. d. Ben would charge $6. At that price, there would be 3 downloads. For any more downloads, marginal revenue would be below marginal cost, and so further downloads would draw back the Baxters’ money.e. Brad would charge $4.\r\nA price equal to marginal cost is efficient. At that price, there would be 6 downloads. Practice Questions and Answers from Lesson III-3: Monopoly Question: Suppose that De Beers is a single-price monopolist in the market for diamonds. De Beers has volt electric potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will profane at most one diamondâ€and hardly if the price is just equal to, or lower than, her willingness to pay. Raquel’s willingness to pay is $ cd; Jackie’s, $ccc; Joan’s, $ two hundred; Mia’s, $ degree centigrade; and Sophia’s, $0. De Beers’s marginal cost per diamond is $ hundred.\r\nThis leads to the demand memorandum for diamonds shown in the accompanying table. Price of Diamond Quantity of Diamonds Demanded $500 0 $four hundred 1 $ three hundred 2 $ two hundred 3 $ degree centigrade 4 $0 5 a. Calculate De Beers’s total revenue and its marginal revenue. From your calculation, draw the demand curve and the marginal revenue curve. b. Explain why De Beers faces a downward-sloping demand curve. c. Explain why the marginal revenue from an additional diamond sale is less than the price of the diamond. d. Suppose De Beers currently charges $cc for its diamonds. If it lowers the price to $ one C, how volumed is the price effect?\r\nHow large is the quantity effect? e. Add the marginal cost curve to your diagram from part a and determine which quantity maximizes De Beers’s profit and which price De Beers will charge. Answer to Question: a. Total revenue (TR) and marginal revenue (MR) are given in the accompanying table. Price of Diamond Quantity of Diamonds TR Demanded $500 0 $0 $four hundred 1 $400 $300 2 $600 $ two hundred 3 $600 $ c 4 $400 $0 5 $0 MR $400 $200 $0 -$200 -$400 The accompanying diagram illustrates De Beersâ⠂¬â„¢s demand curve and marginal revenue (MR) curve. b. De Beers is the only maker of diamonds, so its demand curve is the market demand curve.\r\nAnd the market demand curve slopes downward: the lower the price, the more customers will subvert diamonds. c. If De Beers lowers the price sufficiently to sell one more diamond, it earns extra revenue equal to the Practice Questions and Answers from Lesson III-3: Monopoly price of that one extra diamond. This is the quantity effect of arduous the price. But there is in addition a price effect: lowering the price means that De Beers also has to lower the price on all other diamonds, and that lowers its revenue. So the marginal revenue of marketing an additional diamond is less than the price at which the additional diamond can be sold.\r\nd. If the price is $200, and so De Beers sells to Raquel, Jackie, and Joan. If it lowers the price to $ one C, it will also sell a diamond to Mia. The price effect is that De Beers loses $ ampere-s econd (the make out by which it lowered the price) each from selling to Raquel, Jackie, and Joan. So the price effect lowers De Beers’s revenue by 3 ? $100 = $300. The quantity effect is that De Beers sells one more diamond (to Mia), at $100. So the quantity effect is to raise De Beers’s revenue by $100. e. The marginal cost (MC) curve is immutable at $100, as shown in the diagram.\r\nMarginal revenue equals marginal cost at a quantity of 2 diamonds. So De Beers will sell 2 diamonds at a price of $300 each. Question: social function the demand enrolment for diamonds given in the introductory question. The marginal cost of producing diamonds is constant at $100. There is no fixed cost. a. If De Beers charges the monopoly price, how large is the individual consumer surplus that each demoralizeer sustains? Calculate total consumer surplus by summing the individual consumer surpluses. How large is producer surplus? Suppose that upstart Russian and Asian producers p icture the market and the market becomes perfectly competitive.\r\nb. What is the perfectly competitive price? What quantity will be sold in this perfectly competitive market? c. At the competitive price and quantity, how large is the consumer surplus that each buyer experiences? How large is total consumer surplus? How large is producer surplus? d. Compare your answer to part c to your answer to part a. How large is the deadweight loss associated with monopoly in this case? Answer to Question: a. The monopoly price is $300. At that price Raquel and Jackie buy diamonds. Raquel’s consumer surplus is $400 ? $300 = $100; Jackie’s is $300 ? $300 = $0.\r\nSo total consumer surplus is $100 + $0 = $100. Producer surplus is $300 ? $100 = $200 for each diamond sold; 2 ? $200 = $400. b. In a perfectly competitive market, P = MC. That is, the perfectly competitive price is $100, and at that price 4 diamonds will be soldâ€to Raquel, Jackie, Joan, and Mia. c. At the competitive price, Raquel’s consumer surplus is $400 ? $100 = $300; Jackie’s, $300 ? $100 = $200; Joan’s, $200 ? $100 = $100; and Mia’s, $100 ? $100 = $0. So total consumer surplus is $300 + $200 + $100 + $0 = $600. Since the price is equal to marginal cost, there is no producer surplus. d.\r\n down the stairs perfect competition, the sum of consumer and producer surplus is $600 + $0 = $600. Under monopoly, the sum of consumer and producer surplus is $100 + $400 = $500. So the loss of surplus to society from monopolyâ€the deadweight lossâ€is $600 ? $500 = $100. Question: Use the demand schedule for diamonds given in the previous questions. De Beers is a monopolist, merely it can now price-discriminate perfectly among all five of its potential customers. De Beers’s marginal cost is constant at $100. There is no fixed cost. a. If De Beers can price-discriminate perfectly, to which customers will it sell diamonds and at what prices?\r\nb. How large is each individual consumer surplus? How large is total consumer surplus? Calculate producer surplus by summing the producer surplus generated by each sale. Practice Questions and Answers from Lesson III-3: Monopoly Answer to Question: a. If De Beers can price-discriminate perfectly, it will charge each customer that customer’s willingness to pay. That is, it will charge Raquel $400, Jackie $300, Joan $200, and Mia $100. De Beers does not want to sell to Sophia since she will only buy at a price of $0, and that would be below De Beers’s marginal cost. b.\r\nSince each consumer is super charged exactly her willingness to pay, there is no consumer surplus. De Beers’s producer surplus is $400 ? $100 = $300 from selling to Raquel; $300 ? $100 = $200 from selling to Jackie; $200 ? $100 = $100 from selling to Joan; $100 ? $100 = $0 from selling to Mia. So producer surplus is $300 + $200 + $100 + $0 = $600. Question: download Records decides to release an record phonograph phonograph album by the crowd bloody shame and the Little Lamb. It produces the album with no fixed cost, but the total cost of downloading an album to a CD and paying Mary her royalty is $6 per album.\r\ndownload Records can act as a single-price monopolist. Its marketing division finds that the demand schedule for the album is as shown in the accompanying table. Price of album Quantity of albums demanded $22 0 $20 1,000 $18 2,000 $16 3,000 $14 4,000 $12 5,000 $10 6,000 $8 7,000 a. Calculate the total revenue and the marginal revenue per album. b. The marginal cost of producing each album is constant at $6. To maximize profit, what level of output should Download Records choose, and which price should it charge for each album? c.\r\nMary renegotiates her contract and now needs to be nonrecreational a higher royalty per album. So the marginal cost rises to be constant at $14. To maximize profit, what level of output should Download Records now choose, and which price should it c harge for each album? Answer to Question: a. Total revenue (TR) and marginal revenue per album (MR) is shown in the following table: Price of album Quantity of albums TR MR demanded $22 0 $0 $20 1,000 $20,000 $20 $18 2,000 $36,000 $16 $16 3,000 $48,000 $12 $14 4,000 $56,000 $8 $12 5,000 $60,000 $4 $10 6,000 $60,000 $0 $8 7,000 $56,000 -$4 b.\r\nIf the marginal cost of each album is $6, Download Records will maximize profit by producing 4,000 albums, since for each album up to 4,000, marginal revenue is greater than marginal cost. For any further albums, marginal cost would exceed marginal revenue. Producing 4,000 albums, Download Records will charge $14 for each album. c. If the marginal cost of each album is $14, Download Records will maximize profit by producing 2,000 albums, and it will charge $18 per album. Practice Questions and Answers from Lesson III-3: Monopoly Question: The delineation dramaturgy of operations in Collegetown serves two kinds of customers: savants and pro fessors.\r\nThere are 900 students and 100 professors in Collegetown. Each student’s willingness to pay for a cinema ticket is $5. Each professor’s willingness to pay for a movie ticket is $10. Each will buy at most one ticket. The movie line of business’s marginal cost per ticket is constant at $3, and there is no fixed cost. a. Suppose the movie theater cannot price-discriminate and needs to charge both students and professors the same price per ticket. If the movie theater charges $5, who will buy tickets and what will the movie theater’s profit be? How large is consumer surplus?\r\nb. If the movie theater charges $10, who will buy movie tickets and what will the movie theater’s profit be? How large is consumer surplus? c. Now suppose that, if it chooses to, the movie theater can price-discriminate between students and professors by requiring students to show their student ID. If the movie theater charges students $5 and professors $10, how m uch profit will the movie theater make? How large is consumer surplus? Answer to Question: a. If the movie theater charges $5 per ticket, both students and professors will buy tickets.\r\nThe movie theater will sell to 1,000 customers (students and professors), at a price of $5 each. Since the movie theater’s cost per ticket is $3, its profit is $2 per ticket for a total profit of 1,000 ? $2 = $2,000. Students will experience no consumer surplus, but each of the 100 professors will experience consumer surplus of $10 ? $5 = $5 for a total consumer surplus of 100 ? $5 = $500. b. If the movie theater charges $10 per ticket, only professors will buy tickets. The movie theater will sell to 100 customers (professors) at a price of $10 each.\r\nSince the movie theater’s cost per ticket is $3, its profit is $7 per ticket for a total profit of 100 ? $7 = $700. Students experience no consumer surplus since they do not buy any tickets. Each of the 100 professors experiences no co nsumer surplus since the price is equal to their willingness to pay. So consumer surplus is $0. c. If the movie theater charges students a price of $5, it sells 900 tickets at a profit of $5 ? $3 =$2 each for a profit from selling to students of 900 ? $2 =$1,800. Charging professors $10, it sells 100 tickets at a profit of $10 ? $3 =$7 each for a profit from selling to professors of 100 ?\r\n$7 =$700. So the theater’s total profit is $1,800 + $700 =$2,500. Since each customer is charged exactly his or her willingness to pay, there is no consumer surplus. Question: A monopolist knows that in order to thunder the quantity of output it produces from 8 to 9 units that it moldiness lower the price of its output from $2 to $1. Calculate the quantity effect and the price effect. Use these results to calculate the monopolist’s marginal revenue of producing the 9th unit. The marginal cost of producing the 9th unit is positive. Is it a good opinion for the monopolist to produc e the 9th unit?\r\nAnswer to Question: The quantity effect is $1 (the increase in total revenue from selling the 9th unit at $1). The price effect is 8 ? (? $1) =? $8 (the diminution in total revenue from having to lower the price of 8 units by $1 each). So the marginal revenue of producing the 9th unit is $1 ? $8 =? $7. Since marginal revenue is negative, producing the 9th unit is definitely not a good idea: it lowers revenue (since marginal revenue is negative), and it increases the total cost (since marginal cost is positive). So it will definitely lower profit. Instead, the monopolist should produce less output.\r\n'