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| In the chapter, we noted that the marginal revenue a seller receives can be expressed as MR = P + (?P/?Q) × Q. a. Using this formula as a starting point, show that marginal revenue can be expressed as MR = P(1 + 1/ ED), where ED is the price elasticity of demand. b. Using your knowledge about the price elasticity of demand, explain why the marginal revenue a firm with market power receives must always be less than the price. c. Using your knowledge of the price elasticity of demand, explain why the marginal revenue a perfectly competitive firm receives must be equal to the price. |
In the chapter, we noted that the marginal revenue a
The demand for saffron is highly elastic. The demand for
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| The demand for saffron is highly elastic. The demand for cigarettes is highly inelastic. The demand for peanut butter is unit-elastic. a. If saffron producers reduce the price of saffron, what will happen to total revenue as a result? Will marginal revenue be positive, zero, or negative? b. If cigarette makers reduce the price of cigarettes, what will happen to total revenue as a result? Will marginal revenue be positive, zero, or negative? c. If peanut butter producers reduce the price of peanut butter, what will happen to total revenue as a result? Will marginal revenue be positive, zero, or negative? |
In Cleveland, Clive sells 15 cloves at a price of
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| In Cleveland, Clive sells 15 cloves at a price of $5 each. If Clive lowers his price by 10%, to $4.50 per clove, he will sell 16, or 6.66% more. In Dallas, Della sells 15 cloves for $5 each. If Della lowers her price by 2%, to $4.90, she will sell 16 cloves, or 6.66% more. a. Classify the demand curves that Clive and Della face as elastic or inelastic. b. Determine the marginal revenue of the 16th unit for Clive. Then, compute the marginal revenue of the 16th unit for Della. c. How does the marginal revenue received by a seller depend on the price elasticity of demand? Explain your answer. |
Consider the demand curve for otter food shown below: a. Indicate
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| a. Indicate the area representing the total revenue Oscar the otter food seller would receive if he chose a price of $6. b. On the same graph, indicate the area representing the total revenue Oscar the seller would receive if he chose a price of $5. c. You should now have added two rectangles to your graph; however, because of some overlap, it actually appears that you’ve added three. One of the three is common to both scenarios above. The other two (smaller) rectangles are specific to scenario (a) or scenario (b). Label each rectangle with “A,” “B,” or “both” to indicate which scenario each rectangle belongs to. d. Indicate what happens (gain or loss) to rectangle A as Oscar reduces his price from $6 to $5. Why? e. Indicate what happens (gain or loss) to rectangle B as Oscar reduces his price from $6 to $5. Why? f. Calculate the area of rectangle A and the area of rectangle B. Then, subtract the area of A from the area of B. g. Calculate the marginal revenue Oscar receives when he sells a 4th unit. Does your answer agree with the number you calculated in (f)? Explain. |
In the early days of navigation, sailors had a tough
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| In the early days of navigation, sailors had a tough time figuring out exactly where they were. Pinpointing latitude was easy enough with a sextant, but because the earth was constantly spinning, pinpointing longitude by using celestial bodies was impossible. Anxious for a solution to this problem, the British government sponsored a contest with a prize of £20,000 (about $5 million in today’s dollars) to the inventor who could devise a reliable method of calculating longitude. Once invented, the method would be made available to anybody who wanted to use it. Explain the advantages of such a system in maximizing social well-being relative to the traditional system of awarding patents. |
Sally sells seashells by the seashore. When Sally prices her
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| Sally sells seashells by the seashore. When Sally prices her shells at $7 each, she sells 5 shells every day. When she prices her shells at $6, she sells 6. a. What is Sally’s total revenue when she chooses to sell 5 shells (by pricing at $7)? b. What is Sally’s total revenue when she chooses to sell 6 shells (by pricing at $6)? c. What is the marginal revenue Sally receives from deciding to sell a 6th shell? d. The 6th shell sells for a price of $6. Why is the marginal revenue from selling a 6th shell so much lower than $6? |
Five networks are vying to receive the pay-per-view broadcast rights
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| Five networks are vying to receive the pay-per-view broadcast rights to the World Series of Yahtzee. Each estimates that the inverse demand for watching this nail-biter of an event is given by P = 100 – 0.01Q. Each can provide the broadcast at a constant marginal cost of $1 per viewer. a. Calculate the deadweight loss of monopoly in the market for the televised Yahtzee tournament. b. Suppose that tournament Yahtzee’s governing body plans to select one network at its discretion to air the tournament. How much will each network be willing to spend lobbying for the broadcast rights? c. Explain why, in this situation, the losses to society are much greater than just the deadweight losses of monopoly. |
Consider the firm depicted in the diagram below. a. Is the
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| a. Is the firm a natural monopoly? How do you know? b. Will this firm earn a profit if it is not subject to regulation? How do you know? c. If the government requires the firm to charge no more than its marginal cost of production, how many units will be sold? At what price? What is the problem with the government capping prices at marginal cost? d. Suppose the government allows firms to charge no more than their average total costs of production. How many units will this firm sell? At what price? What is the problem with capping prices at average total cost? e. Evaluate the deadweight loss under each of the three pricing regimes above. Show each regime’s deadweight loss as an area on the graph. |
Consider a small, isolated town in which a brewery faces
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| Consider a small, isolated town in which a brewery faces the following inverse demand: P = 15 – 0.33Q. The brewery can produce beer at a constant marginal and average total cost of $1 per bottle. a. Calculate the profit-maximizing price and quantity, as well as producer and consumer surplus and the deadweight loss from market power. b. If it were possible to organize the townsfolk, how much would they be willing to pay the brewery to sell beer at a price equal to its marginal cost? c. What is the minimum payment the brewery would be willing to accept to sell beer at a price equal to marginal cost? d. Is there potentially a bargain that can be struck between the townsfolk and brewery? What would the deadweight loss be if such a bargain were struck? |
Suppose that a monopolistic seller of flux capacitors faces the
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| Suppose that a monopolistic seller of flux capacitors faces the inverse demand curve P = 40 – 0.5Q, and that the monopolist can produce flux capacitors at a constant marginal cost of $5. a. How many units will an unregulated monopolist sell? b. Suppose that the government imposes a price ceiling of $6. What does this price ceiling do to the monopolist’s marginal revenue curve? Specifically, what is the marginal revenue of the 10th unit? The 68th? How about the 69th? c. How many units will a profit-maximizing monopolist sell when the price ceiling is in place? At what price? d. Compare the deadweight loss of unregulated monopoly to the deadweight losses with the price ceiling. Does the price ceiling improve social welfare? |
