Download Chapter 9 Part 1

Chapter 9
Questions
& Solutions
1
Plot the marginal revenue curve associated with the following
demand curve faced by a monopolistic competitor.
P
D
80
Q
1
P
MR
40
D
80
Q
2
Use the graph on the next slide to answer the following
questions.
A. What price is charged by the monopolistic in order to
maximize profits?
B. Calculate the total revenue accruing to the monopolist at
the profit maximizing output.
C. Calculate the total cost to the monopolist at the profitmaximizing output.
D. Calculate the profit for the monopolist.
E. Calculate the total variable and fixed costs of the
monopolist at the profit-maximizing output.
F. Now assume the MC curve represents market supply for
a perfectly competitive market. What would the equilibrium
price and quantity be for perfect competition? Are
consumers better off or worse off with perfect competition or
monopoly?
2
P
MC
Cont.
20
ATC
AVC
16
15
13
12
MR
20
25 28
D
50
Q
2
(a) MR = MC
Q = 20; P = $20
(b) TR = PQ = $400
(c) ATC when Q = 20
ATC = $15
TC = (ATC)(Q) = ($25)(20) = $300
(d) Profit = TR - TC = $400 - $300 = $100
(e) AVC when Q = 20
AVC = $12
TVC = (AVC)(Q) = ($12)(20) = $240
TFC = TC - TVC = $300 - $240 = $60
(f) P = $16 Q = 28
Consumer better off with Perfect Competition
Lower Price, more quantity
3
List differences and similarities among monopolies,
oligopolies, and monopolistic competition. Be prepared to
give examples of each form of imperfect competition on the
selling side.
3
See Notes
4
Units of
Variable Input
Price/Unit
1
2
3
4
5
2
2.5
3
4.5
6
Total Cost of
Input
Marginal Input
Cost
A. Calculate the total input cost and the marginal input cost.
B. If the marginal value or marginal revenue products were 4,
what would be the profit maximizing level of input?
4
Units of
Variable Input
1
2
3
5
8
Price/Unit
Total Cost of
Input
2
2.5
3
4.5
6
Marginal Input
Cost
$2
$5
$9
$22.5
$48
Rule MVP (or MRP) = MIC
4 = MIC
Profit maximizing level of input is 3 units
--$3
$4
$6.75
$8.5
B. Find the equilibrium price and quantity under perfect
competition in the graph below.
C. What is the magnitude of monopsonistic exploitation?
MIC
$/unit
5
A. Find the equilibrium price and quantity for a monopsonist
in the graph below.
Supply of
Input
8
5
3
MVP or MRP
10
15
Quantity per unit of time
5
(a) MIC = MVP Under monopsony
10 units of input @ $3/unit
(b) Under perfect competition
15 units of input @ $5/unit
(c) Magnitude of monopsonistic exploitation
Difference in price of input under perfect
competition versus monopoly
$5 - $3 = $2
6
Explain the significance of the following acts:
A. Clayton Act
B. Capper-Volstead Act
C. Packers and Stockyards Act
6
See Notes
7
List and explain the various measures that may be employed
to counteract possible adverse effects of imperfect competition
in the marketplace.
7
See Notes
8
On the following graph, show the effect of a lump-sum tax on
a monopolist.
MC
ATC
MR
Quantity per unit of time
D
8
Upward shift of ATC Curve
No effect on price charged by the monopolist
No effect on quantity produced by the monopolist
But a reduction in profit occurs
9
Using the graph below, answer questions a through d.
P
MC
ATC
50
40
38
35
D
25 MR 34
Q
A. What are the profit-maximizing price and quantity levels for
the monopolist?
B. Calculate profit.
C. Suppose the government imposes a price ceiling of $40.
Now what is the optimal price and quantity combination?
D. Calculate the new level of profit.
9
(a) MR = MC
P = $50 Q = 25
(b) TR = PQ = ($50)(25) = $1250
ATC when Q = 25
TC = ATC)(Q) = ($38)(25) = $950
Profit = TR - TC = $300
(c ) MR = MC
P = $40 Q = 34
(d) TR = PQ = ($40)(34) = $1360
ATC when Q = 34
ATC still $38
TC = (ATC)(Q) = ($38)(34) = $1292
Profit = TR - TC = $1360-$1292=$68