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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? |
Suppose that a monopolistic seller of flux capacitors faces the
Consider the market for Pop Rocks depicted in the diagram
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| a. If the Pop Rock industry were competitive, what would the competitive price and quantity be? b. If the Pop Rock industry were competitive, what would be the consumer and producer surpluses, respectively? c. Suppose that gangland figure Tommy Vercetti monopolizes the Pop Rock market. What price and quantity will he choose to maximize profit? d. Calculate the consumer and producer surplus of this Pop Rock monopoly. e. Compare your answers to (d) and (b). How big is the deadweight loss of monopoly? |
A monopolistic seller of fairy dust faces the following inverse
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| A monopolistic seller of fairy dust faces the following inverse demand curve: P = 100 – Q, where Q is smidgens of fairy dust per week. Fairy dust can be produced at a constant marginal cost of $20 per smidgen. a. Graph this demand curve. Then, calculate the profit-maximizing price and quantity of fairy dust. Finally, calculate the seller’s profit. b. A midsummer’s druid festival greatly increases the demand for fairy dust, so that the price any particular consumer is willing to pay doubles. The inverse demand curve is now given by P = 200 – 2Q. Verify graphically that demand has increased and calculate the new profit-maximizing price and quantity. c. A tour bus full of druids took a wrong left turn at Albuquerque and showed up in town by accident. Now there are twice as many buyers at any price as there were before, and the inverse demand the seller faces is given by P = 100 – 0.5Q. Verify graphically that demand has increased and calculate the new profit-maximizing price and quantity. d. Suppose that the demand shift the seller faces is a parallel shift of the inverse demand curve such as P = 150 – Q. Verify graphically that demand has increased and calculate the new profit-maximizing price and quantity. e. What do your answers to (b), (c), and (d) indicate about how monopolistic suppliers respond to increases in demand? |
Suppose that econometricians at Hallmark Cards determine that the price
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| Suppose that econometricians at Hallmark Cards determine that the price elasticity of demand for greeting cards is – 2. a. If Hallmark’s marginal cost of producing cards is constant and equal to $1.00, use the Lerner index to determine what price Hallmark should charge to maximize profit. b. Suppose that Hallmark Cards wishes to know the price elasticity of demand faced by its archrival, American Greetings. Hallmark hires you to estimate it. Hallmark provides you with an educated guess concerning the marginal cost of producing a greeting card, which they estimate to be constant and equal to $1.22. A quick trip to the store tells you that American Greetings is selling its cards for an average of $3.25. Using these numbers and assuming that American Greetings is maximizing its profit, calculate the price elasticity of demand faced by American Greetings. |
Suppose that the demand for bentonite is given by Q
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| Suppose that the demand for bentonite is given by Q = 40 – 0.5P, where Q is in tons of bentonite per day and P is the price per ton. Bentonite is produced by a monopolist at a constant marginal and average total cost of $10 per ton. a. Derive the inverse demand and marginal revenue curves faced by the monopolist. b. Equate marginal cost and marginal revenue to determine the profit-maximizing level of output. c. Find the profit-maximizing price by plugging the ideal quantity back into the demand curve. d. How would your answer change if marginal cost were instead given by MC = 20 + Q? |
People are always complaining about Facebook: It changed the way
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| People are always complaining about Facebook: It changed the way its news feed works, the privacy settings are awful, there are too many game notifications, and so on. Recognizing dissatisfaction with Facebook, Google tried three times to enter the social networking market, first with Buzz, then with Wave, and now with Google Plus. Users say that the Google Plus platform is far superior to Facebook’s, yet Google Plus appears to be failing. Explain why consumers might reject a superior product for an inferior one in a market like this. |
Suppose that the potential customers for hair braiding in a
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| Suppose that the potential customers for hair braiding in a city consider hair braiding to be identical and that the market is perfectly competitive. Hair braiding requires special skills so the supply of workers in this industry is upward-sloping, and the wages earned by hair braiders increase as the industry output increases. Firms in this market face the following total cost: TC = Q3 – 8Q2 + 20Q + W where Q is the number of hair braidings and W is the daily wage paid to workers. The wage, which depends on total industry output, equals W = 0.1NQ, where N is the number of firms. Market demand is QD = 500 – 20P. a. How does average total cost for the firm change as industry output increases? What does this relationship imply for industry’s long-run supply curve? b. Find the long-run equilibrium output for each firm. c. How does the long-run equilibrium price change as the number of firms increases? d. Find the long-run equilibrium number of firms and total industry output. e. Find the long-run equilibrium price. f. Suppose that demand increases to QD = 1,000 – 10P. Find the new long-run competitive equilibrium. Does this match your prediction about the long-run supply curve from part (a)? |
Suppose that the identical firms in a perfectly competitive market
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| Suppose that the identical firms in a perfectly competitive market for cakes have long-run total cost functions given by TC(Q) = 10Q3 – 60Q2 + 100Q. Total cost is independent of the number of firms and total output in the market. a. Describe the long-run supply curve for this industry. b. Suppose market demand is QD = 1,000 – 40P. Solve for the long-run competitive equilibrium price, output per firm, and number of firms in the market. c. Suppose demand decreases to QD = 800 – 40P. Solve for the long-run competitive equilibrium price, output per firm, and number of firms in the market. |
Suppose that the market for auto detailing in a city
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| Suppose that the market for auto detailing in a city is perfectly competitive. The auto detailing firms are identical and have long-run cost functions given by TC(Q) = 10Q3 – 100Q2 + 300Q. Market demand is QD = 5,000 – 90P. a. Derive the marginal and average cost curves for a firm in this industry. b. Find the quantity at which average total cost is minimized for each firm. c. Find the long-run equilibrium price in this industry. d. Use market demand to find the equilibrium total industry output. e. Find the equilibrium number of firms. |
Minnie is one producer in the perfectly competitive pearl industry.
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| a. Find the area on the graph that illustrates the total revenue from selling 1,000 units at $100 each. b. Find the area on the graph that indicates the variable cost of producing those 1,000 units. c. Find the area on the graph that indicates the fixed cost of producing those 1,000 units. d. Add together the two areas you found in (b) and (c) to show the total cost of producing those 1,000 units. e. Subtract the total cost of producing those 1,000 units from the total revenue from selling those units to determine the firm’s profit. Show the profit as an area on the graph. |
