Download The Whatsa Widget Company has a monopoly in the sale of widgets

1. The Whatsa Widget Company has a monopoly in the sale of widgets and faces the following
demand schedule:
Price
Quantity
$40
0
35
10,000
30
20,000
25
30,000
20
40,000
15
50,000
10
60,000
5
70,000
0
80,000
The firm has fixed costs of $60,000. The marginal cost of each widget is a constant $15 per
widget.
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. (Recall that MR = ΔTR/ΔQ.) 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 intersect? What does this signify?
d. In your graph, shade in the deadweight loss. Explain in words what this means.
e. If fixed costs rise to $70,000, how would this affect the firm’s decision about what price
to charge? Explain.
2. Suppose that a natural monopolist was required by law to charge average total cost. On a
diagram, label the price charged and the deadweight loss to society relative to marginal-cost
pricing.
3. A small town is served by many competitive supermarkets, which have constant marginal cost.
a. Using a diagram of the market for groceries, show the consumer surplus, producer
surplus, and total surplus.
b. Now suppose that the independent supermarkets combine into one chain. Using a new
diagram, show the new consumer surplus, producer surplus, and total surplus. Relative
to the competitive market, what is the transfer from consumers to producers? What is
the deadweight loss?
4. Johnny Rockabilly has just finished recording his latest CD. His record company’s marketing
department determines that the demand for the CD is as follows:
Price
24
22
20
18
16
14
Quantity 10,000
20,000
30,000
40,000
50,000
60,000
The company can produce the CD with no fixed cost and a variable cost of 5$ per CD.
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?
c. If you were Johnny’s agent, what recording fee would you advise Johnny to demand
from the record company? Why?
1. The following table shows revenue, costs, and profits, where quantities are in thousands, and
total revenue, total cost, and profit are in millions of dollars:
Total
Marginal
Total
Marginal
Price
Quantity(,000)
Profit
revenue revenue
cost
cost
40
35
30
25
20
15
10
5
0
0
10
20
30
40
50
60
70
80
0 --350
600
750
800
750
600
350
0
35
25
15
5
-5
-15
-25
-35
60 --210
360
510
660
810
960
1110
1260
15
15
15
15
15
15
15
15
-60
140
240
240
140
-60
-360
-760
-1260
a. A profit-maximizing manufacturer would choose a quantity of 20,000 at a price of $30 or
a quantity of 30,000 at a price of $25; both combinations would lead to profits of
$240,000.
b. Marginal revenue is always less than price. Price falls when quantity rises because the
demand curve slopes downward, but marginal revenue falls even more than price
because the firm loses revenue on all the units of the good sold when it lowers the price.
c. Figure 1 shows the marginal-revenue, marginal-cost, and demand curves. The marginal
revenue and marginal-cost curves cross at quantities of 20,000 and 30,000. This signifies
that the firm maximizes profits in that region.
d. The area of deadweight loss is marked “DWL” in the figure. Deadweight loss means that
the total surplus in the economy is less than it would be if the market were competitive,
because the monopolist produces less than the socially efficient level of output.
e. If fixed costs rise to $70,000, the manufacturer would not change the price, because there
would be no change in marginal cost or marginal revenue. The only thing that would be
affected would be the firm’s profit, which would fall.
Figure 1.
2. Figure 2 illustrates a natural monopolist setting price, PATC, equal to average total cost. The
quantity produced is QATC. Marginal cost pricing would yield the price PMC and quantity QMC. For
quantities between QATC and QMC, the benefit to consumers (measured by the height of the
demand curve) exceeds the cost of production (measured by the height of the marginal-cost
curve). This means that the deadweight loss from setting price equal to average total cost is the
triangular area shown in the figure.
Figure 2.
3.
a. Figure 3 illustrates the market for groceries when there are many competing supermarkets
with constant marginal cost. Output is QC, price is PC, consumer surplus is area A, producer
surplus is zero, and total surplus is area A.
Figure 3.
b. If the supermarkets merge, Figure 4 illustrates the new situation. Quantity declines from QC to
QM and price rises to PM. Consumer surplus falls by areas D + E + F to areas B + C. Producer
surplus becomes areas D + E, and total surplus is areas B + C + D + E. Consumers transfer
the amount of areas D + E to producers and the deadweight loss is area F.
Figure 4.
4.
a. The following table shows total revenue and marginal revenue for each price and
quantity sold:
Price
Quantity
24
22
20
18
16
14
10,000
20,000
30,000
40,000
50,000
60,000
Total
Revenue
240,000
440,000
600,000
720,000
800,000
840,000
Marginal
Revenue
--20
16
12
8
4
Total Cost
Profit
50,000
100,000
150,000
200,000
250,000
300,000
190,000
340,000
450,000
520,000
550,000
540,000
b. Profits are maximized at a price of $16 and quantity of 50,000. At that point, profit is
c.
$550,000.
As Johnny's agent, you should recommend that he demand $550,000 from them, so
he receives all of the profit (rather than the record company).