Download The profit-maximizing decisions on price and output The decision on

Economics: Key Notes and Exambuilder Elective Part 1
3
Fill in the following table.
Quantity (units)
0
1
TC ($)
30
60
2
AC ($)
3
4
50
5
52.5
MC ($)
50
70
(For answers, see the bottom of this page.)
The profit-maximizing decisions on price and
D
output
• If MR > MC, raising the production level brings a positive marginal profit
to the firm.
• If MR < MC, reducing the production level avoids a negative marginal
profit to the firm.
• If MR = MC, all positive marginal profit is earned, and all negative
marginal profit can be avoided.
• Hence, similar to a price-taking firm in a perfectly competitive market, a
monopolist also maximizes profit by equating MR with MC.
• Once the monopolist has determined the profit-maximizing output level, it
charges a price according to the consumers’ maximum willingness to pay at
the margin, i.e., price = marginal benefit (MB).
The decision on whether to produce
E
(a) AR < AC ⇒ TR < TC ⇒ Discontinue to produce
• If total revenue is not sufficient to cover total cost, the monopolist
suffers a loss and will discontinue production.
TR
TC
<
, implying AR < AC. Hence, a monopolist
Q
Q
suffers a loss whenever AR < AC.
• If TR < TC,
Suggested Answers (Check Your Progress 3)
Quantity (units)
0
1
2
3
4
5
TC ($)
30
60
100
150
210
280
AC ($)
–
60
50
50
52.5
56
MC ($)
–
30
40
50
60
70
14
Monopoly Pricing
2. (a) Explain whether each of the following is an example of third degree
price discrimination.
(i) A financial institution charges civil servants lower interest rates
on personal loans than other borrowers.
(3 marks)
(ii) The per-gigabyte price of a larger hard disk is lower than that of a
smaller one.
(3 marks)
(iii) An insurance company charges higher premiums on younger
drivers and lower promiums on older drivers
(3 marks)
(iv) A hotel with vacant rooms charges different customers different
rates for the same room without fully informing all customers of
the different pricing information.
(3 marks)
(b) What are the necessary conditions to practise price discrimination?
Explain THREE of them.
(6 marks)
Consider the criteria to
determine whether a
case is third degree price
discrimination or not.
HKEP
Ans. (a) (i) It is not third degree price discrimination.
1
1
(ii) It is not third degree price discrimination.
(iv) It is third degree price discrimination.
(iii) It is not third degree price discrimination.
(b) The three necessary conditions are :
1
1
• The seller is a price searcher.
1
• The seller must have perfect information.
0
• Resale is to be prevented.
0
Although whether each
case is third degree price
discrimination is correctly
identified, no supporting
reason is given.
The necessary conditions
are only stated but not
explained.
(a)Do not just state whether each case is third degree price
discrimination or not without giving a supporting reason. The
reason given should be specific to each case.
(b)State and explain the necessary conditions. If a condition is
specific to a type of price discrimination, state that it is required
for that type of price discrimination.
33
Monopoly Pricing
Paper 2 Short Questions and Structured / Essay-type Questions
1. Why is a monopolist adopting simple monopoly pricing an inefficient producer? Explain with the aid
(9 marks)
of a diagram. Hint 1 2. (a) The following table shows the demand, revenue and cost schedules faced by a monopolist
adopting simple monopoly pricing:
Quantity (units)
0
1
2
3
4
5
6
Unit price ($)
11
10
9
8
7
6
5
Total revenue ($)
Average revenue ($)
–
Marginal revenue ($)
–
Total cost ($)
3
Average cost ($)
–
Marginal cost ($)
–
9
4
24
3.25
2
(i) Fill in the missing values in the table. 5
Hint 2
(1 mark for each row of data)
(ii) What is the amount of fixed cost? (iii)(I) What quantity is the profit-maximizing output level? Explain. (b) Explain whether each of the following is an example of third degree price discrimination. (i) Electrical appliance stores in Mongkok charge tourists higher prices than local consumers for
the same digital cameras.
(3 marks)
(ii) Reputable stores with big names (i.e., anchor stores) are often charged considerably lower rent
per square foot than other ordinary stores in a shopping centre.
(3 marks)
(iii)Children / the elderly are charged lower admission fees than adults for entering the Hong Kong
Disneyland.
(3 marks)
Hint 3
(II) Calculate the total profit at the profit-maximizing output level.
Show your working. Hint 5 (1 mark)
Hint 4
(2 marks)
(2 marks)
Hint 6
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