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Homework Problem Set #14
E303
Davis, Spring 2006
1. Monopoly Pricing. A Graphical Analysis. The two panel graph below illustrates
the relation between market forces and optimizing decisions for a firm in the
canned peaches market, a competitive industry.
a. In the rightmost panel illustrate the optimal output, price and profit levels
for the competitive firm.
P
MC
S
Pc
ATC
P*
c =0
Market
D
Q
Firm Q*
Q
b. Suppose that due to concerns regarding the paucity of domestic peach
producers the government gives to USAPeaches Inc. an exclusive right to
domestically produce and sell canned peaches. Circle the components in
the competitive chart that you would use to generate predictions for the
monopolist.
c. In the coordinate axis below, identify the optimal monopoly output,
monopoly price and monopoly profits. Compare these predictions to the
price and profit conditions for the firm as a competitor that you developed
in part a..
P
Monopoly Profit
MC
Pm
ATC
D
m
Q
MR
Firm
Q
Comparing Monopoly to Competitor. In each case, circle the one that is greater.
Output: Monopolist / Competitor _______________________________________
Price:__ Monopolist / Competitor _______________________________________
Profit: __ Monopolist / Competitor _______________________________________
2. Monopoly Pricing. An Analytical Example. Consider a firm with the demand
curve P = 500 – Q and a cost function TC = 2500 + 4Q2.
a. What is the marginal revenue function for this firm?
MR____500 – 2Q_________________________________________________
b. Intuitively, why is marginal revenue more steeply sloped than demand
(average revenue?)
Reason for Steeper MR Slope:_To sell more units the firm must reduce the price on unit
that would have sold at a higher price
c. Identify the optimal level of output, price and profits for this firm.
= 500 –Q
= 500 – 50
= 450

MR = MC
500 – 2Q = 8Q
10Q = 500
Q = 50
P
= TR - TC
= 450(50) – [2500 + 4(50)2]
= 10,000
Qm __50_________
Pm___450_________  m___10,000__________
d. Were this firm a member of a competitive industry, what would be the
quantity, price and profit level for the firm?
MC = ATC
P = MC = ATC
8Q =2500/Q +4 Q
Q2 = 625
= 8(25)
2
4Q = 2500
Q = 25
= 200
Qc _=25__________ Pc___200___________
 c__=0___________
3. Monopolistic Competition. Schliezal Hickendorfer operates a small restaurant in
the fan that specializes in German/Chinese Cuisine. The market is
monopolistically competitive. The below demand and cost conditions illustrate
current market conditions for Schliezal.
P
Profits
MC
ATC
Pmc
D
MR
Qm
Firm
Q
a. Identify short run output, price and profit conditions for Schiezal.
See above
b. Why doesn’t the outcome in a define a long run equilibrium? What will
alter these predictions?
Change: Entry will shift in residual demand.
c. Illustrate Schliezal’s long run competitive equilibrium.
P
Profit =0
MC
ATC
Pm
D
MR
m
Q
Firm
Q