PROBLEMS AND APPLICATIONS
I. The Whatsa Widget Company has a monopoly in the sale of widgets and faces the following demand schedule.
a. Compute total revenue, total cost, and profit’ at each quantity. What quantity would a profit , maximizing manufacturer choose? What price would it charge?
b. Compute marginal revenue.How does marginal revenue compare to he price? Explain
2 Suppose that a natural monopolist was required by law to, charge average total cost. On a dill-gram, baler,.price charged and the deadweight loss to society relative to marginal-cost pricing .
. 3. Suppose.the Clean Sprinp Water Company has a monopoly on bottled water sales in California. If the price of tap water;What is, Clean Springs profits maximizing levels of output, price, and profit? Explain in a graph.
4. A small town is served by Cacti supermarkets, which have constant marginal cost.
a. Using a diagram of the consumer surplus, producer surplus, and total surplus.
b. Now suppose that the independent supermarkets combine into one chain.
5. Johnny Rockabilly has just finished recording his CD. His record company’s marketing department determines that the demand for the CD is as follows.
a. Find total revenue for quantity equal to 10,000, 20,000, and so on. What is the marginal revenue for each 10,000 increase in the quantity sold?
b. What quantity of CDs would maximize profit? What would the price be? What would the profit be?
6. 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:
A. I company were to build the bridge hat would be its profit-maximizing price? Would that be the, efficient level of output? Why or why not?
b, If the company is interested in maximizing profit, should it build the bridge?
7. i’f the Placebo Drug Company holds a patent on one of Its a. Assuming that ,the production of the drug involves rising marginal cost.Placebo’s profit maximizing price and quantity. Also show Placebo’s profits.
b:If suppose’ that the government imposes a tax on each bottle of the drug produced.
8.Run the only saloon in town. Larry wants to sell as many drinks as possible losing money. Curly wants the saloon to.bring in as much revenue as possible. Moe wants to
make the largest possibly profits. Using a single diagram of the saloon’s demand curve and its cost quantity combination favored by each of the three partners. Explain
9.For many years, a regulated monopoly, providing both local and long distance telephone phone ,service was,monopoly the past two, decades, many companies have launched communication satellites.
10. The Best Computer Company just developed a new computer chip, on which it immediately acquires a patent.
a. Draw a diagram that shows the consumer surplus, producer surplus, and total surplus in the market for this new chip.
b. What happens to these three measures of surplus.
11 Explain why a monopolist will never produce a quantity at which the demand curve is inelastic. (Hint: If demand is inelastic and the firm ‘raises its price, what happens to total, revenue and total costs?)
12′. Singer Avril Lavigne ‘has a monopoly over a scarce resource: herself. She is the only person who can produce an Avril Lavigne concert.Does this fact imply that the government should regulate the prices, of her concerts? Why or why not?
l3. 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 a fixed cost of $2,000, but selling an extra ticket has zero marginal cost.
14. Many schemes for price discriminating involve some cost. For example, discount coupons take up the, time and resources of 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 proportional to output so that average total cost and marginal cost are constant and, equal to each other.
a. Draw the cost, demand, and marginal-revenue curves for the monopolist. .Show the price the monopolist would charge without price discrimination.
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.
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