Download Economics - Bekemeyer`s World

Economics
Mr. Bekemeyer
Monopoly
(Unit VI.ii Problem Set)
Please type your responses and include the question.
1.
A publisher faces the following demand schedule for the next novel of one of its popular
authors:
Price Quantity Demanded (novels)
$100
0
$90
100,000
$80
200,000
$70
300,000
$60
400,000
$50
500,000
$40
600,000
$30
700,000
$20
800,000
$10
900,000
$0
1,000,000
The author is paid $2 million to write the book, and the marginal cost of publishing the book is a
constant $10 per book.
a.
Compute total revenue, total cost, and profit at each quantity. What quantity would a profitmaximizing publisher choose? What price would it charge?
b.
Compute marginal revenue. (Recall that MR=∆TR/∆Q.) How does marginal revenue compare
to the price? Explain.
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?
d.
In your graph, shade in the deadweight loss. Explain in words what this means.
e.
Supposed the publisher was not profit-maximizing but was concerned with maximizing
economic efficiency. What price would it charge for the book? How much profit would it make
at this price?
2.
Skyscraper City has a subway system, for which a one-way fare is $1.50. There is pressure on the mayor
to reduce the fare by one-third, to $1.00. The mayor is dismayed, thinking that this will mean
Skyscraper City is losing one-third of its revenue from sales of subway tickets. The mayor’s economic
adviser reminds her that she is focusing only on the price effect and ignoring the quantity effect. Explain
why the mayor’s estimate of a one-third loss of revenue is likely to be an overestimate. Illustrate with a
diagram.
3.
Suppose the Clean Springs Water Company has a monopoly on bottled water sales in California. If the
price of tap water increases, what is the change in Clean Springs’ profit-maximizing levels of output,
price, and profit? Explain in words and with a graph.
4.
5.
A small town is served by many competing supermarkets, which have constant marginal cost.
a.
Using a diagram of the market for groceries, show the consumer surplus, producer surplus and
total surplus.
b.
Now, suppose that the independent supermarkets 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 consumers to producers? What is the deadweight
loss?
Johnny Rockabilly has just finished compiling a greatest hits set of songs for iTunes. His recording
company’s marketing department determines that the demand for his entire hit collection on iTunes is as
follows:
Price Number of downloads
$24
10,000
$22
20,000
$20
30,000
$18
40,000
$16
50,000
$14
60,000
The company can produce the music downloads with no fixed cost and a variable cost of $5 per
download.
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 downloads would maximize profit? What would the price be? What would
the profit be?
c.
If you were Johnny’s agent, what recording fee would you advise Johnny to demand from the
record company? Why?
6.
Bob, Bill, Ben, and Brad Baxter have just made a documentary movie about their basketball team. They
are thinking about making the movie available for download on the Internet, and they can act as a
single-price monopolist if they choose to. Each time the movie 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 schedule for their film.
Price of download
$10
$8
$6
$4
$2
$0
7.
Quantity of downloads
demanded
0
1
3
6
10
15
a.
Calculate the total revenue and the marginal revenue per download.
b.
Bob is proud of the film and wants as many people as possible to download it. Which price
would he choose? How many downloads would be sold?
c.
Bill wants as much total revenue as possible. Which price would he choose? How many
downloads would be sold?
d.
Ben wants to maximize 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?
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:
Price per Crossing Number of Crossings, in Thousands
$8
0
$7
100
$6
200
$5
300
$4
400
$3
500
$2
600
$1
700
$0
800
a.
If the company were to build the bridge, what would its profit-maximizing price be? 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? What would be its
profit or loss?
c.
If the government were to build the bridge, what price should it charge?
d.
Should the government build the bridge? Explain.
8.
9.
The Placebo Drug Company holds a patent on one of its discoveries.
a.
Assuming that the production of the drug involves rising marginal cost, draw a diagram to
illustrate Placebo’s profit-maximizing price and quantity. Also show Placebo’s profits.
b.
Now suppose that the government imposes a tax on each bottle of the drug produced. On a new
diagram, illustrate Placebo’s new price and quantity. How does each compare to your answer in
Part a?
c.
Although it is not easy to see in your diagrams, the tax reduces Placebo’s profit. Explain why
this must be true.
d.
Instead of the tax per bottle, suppose that the government imposes a tax on Placebo of $10,000
regardless of how many bottles are produced. How does this tax affect Placebo’s price,
quantity, and profits? Explain.
Suppose that De Beers is a single-price monopolist in the market for diamonds. De Beers has five
potential customers: Raquel, Jackie, Joan, Mia, and Sophia. Each of these customers will buy at most
one diamond -- and only if the price is just equal to, or lower than, her willingness to pay. Raquel’s
willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s, $100; and Sophia’s, $0. De Beers’s
marginal cost per diamond is $100. This leads to the demand schedule for diamonds shown in the
accompanying table.
Quantity of diamonds
Price of diamond
demanded
$500
0
$400
1
$300
2
$200
3
$100
4
$0
5
10.
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 $200 for its diamonds. If it lowers the price to $100, how
large is the price effect? How 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.
Use the demand schedule for diamonds given in Problem 9. 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
buyer experiences? Calculate total consumer surplus by summing the individual consumer
surpluses. How large is producer surplus? Suppose that upstart Russian and Asian producers
enter the market and the market becomes perfectly competitive.
b.
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?
11.
Use the demand schedule for diamonds given in Problem 9. De Beers is a monopolist, but 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?
b.
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.
12.
Larry, Curly, and Moe run the only saloon in town. Larry 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 saloon’s demand curve and its cost
curves, show the price and quantity combinations favored by each of the three partners. Explain.
13.
For many years, AT & T was a regulated monopoly, providing both local and long-distance telephone
service.
a.
Explain why long-distance phone service was originally a natural monopoly.
b.
Over the past two decades, many companies have launched communication satellites, each of
which can transmit a limited number of calls. How did the growing role of satellites change the
cost structure of long-distance phone service?
After a lengthy legal battle with the government, AT & T agreed to compete with other companies in
the long-distance market. It also agreed to spin off its local phone service into the “Baby Bells”, which
remain highly regulated.
c.
14.
15.
Why might it be efficient to have competition in long-distance phone service and regulated
monopolies in local phone services?
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 if the firm can perfectly price discriminate?
What is the change in deadweight loss? What transfers occur?
Singer Alanis Morissette has a monopoly over a scare resource: herself. She is the only person who can
produce an Alanis Morissette concert. Does this fact imply that the government should regulate the
prices of her concerts? Why or why not?
16.
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. Here are the demand schedules for your two types of customer:
Price Adults Children
$10
0
0
$9
100
0
$8
200
0
$7
300
0
$6
300
0
$5
300
100
$4
300
200
$3
300
200
$2
300
200
$1
300
200
$0
300
200
17.
18.
a.
To maximize profit, what price would you charge for an adult ticket? For a child’s ticket? How
much profit do you make?
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?
c.
Who is worse off because of the law prohibiting price discrimination? Who is better off? (If
you can, quantify the charges in welfare).
d.
If the fixed cost of the play were $2,500 rather than $2,000, how would your answers to parts
(a), (b), and (c) change?
The movie theater in Bloomington, Indiana serves two kinds of customers: students and professors.
There are 900 students and 100 professors in Bloomington. Each student’s willingness to pay for a
movie ticket is $5. Each professor’s willingness to pay for a movie ticket is $10. Each will buy at most
one ticket. The movie theater’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?
b.
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 much profit will the movie theater make? How large is
consumer surplus?
In the United States, the Federal Trade Commission (FTC) is charged with promoting competition and
challenging mergers that would likely lead to higher prices. In 1996, Staples and Office Depot, two of
the largest office supply superstores, announced their agreement to merge.
a.
Some critics of the merger argued that, in many parts of the country, a merger between the two
companies would create a monopoly in the office supply superstore market. Based on the FTC’s
argument and its mission to challenge mergers that would likely lead to higher prices, do you
think it allowed the merger?
b.
Staples and Office Depot argued that, while in some parts of the country they might create a
monopoly in the office supply superstore market, the FTC should consider the larger market for
all office supplies, which includes many smaller stores that sell office supplies (such as grocery
stores and other retailers). In that market, Staples and Office Depot would face competition
from many other, smaller stores. If the market for all office supplies is the relevant market that
the FTC should consider, would it make the FTC more or less likely to allow the merger?