ONLINECO 

Chapter 15. Monopoly. Principles of Economics. Exercises 7-11.

 

7. Consider the relationship between monopoly pricing and price elasticity of demand.

A) Explain why a monopolist will never produce a quantity at which the demand curve is inelastic. (Hint: If demand is inelastic and the firm raises its price, what happens to total revenue and total costs?)

b. Draw a diagram for a monopolist, precisely labeling the portion of the demand curve that is inelastic. (Hint: The answer is related to the marginal- revenue curve.)

c. On your diagram, show the quantity and price that maximize total revenue.

 

8. You live in a town with 300 adults and 200 children, and you are thinking about putting on a play to entertain your neighbors and make some money. A play has a fixed cost of $2,000, but selling an extra ticket has zero marginal cost. Here are the demand schedules for your two types of customers:

a. To maximize profit, what price would you charge for an adult ticket? For a child’s ticket? How much profit do you make?

b. The city council passes a law prohibiting you from charging different prices to different customers. What price do you set for a ticket now? How much profit do you make? c. Who is worse off because of the law prohibiting price discrimination? Who is better off? (If you can, quantify the changes in welfare.) d. If the fixed cost of the play were $2,500 rather than $2,000, how would your answers to parts (a), (b), and (c) change?

 

9. Only one firm produces and sells soccer balls in the country of Wiknam, and as the story begins, international trade in soccer balls is prohibited. The following equations describe the monopolist’s demand,marginal revenue, total cost, and marginalcost:

a. How many soccer balls does the monopolist produce? At what price are they sold? What is the monopolist’s profit? b. One day, the King of Wiknam decrees that henceforth there will be free trade—either imports or exports— of soccer balls at the world price of $6. The firm is now a price taker in a competitive market. What happens to domestic production of soccer balls? To domestic consumption? Does Wiknam export or import soccer balls?

c. In our analysis of international trade in Chapter 9, a country becomes an exporter when the price without trade is below the world price and an importer when the price without trade is above the world price. Does that conclusion hold in your answers to parts (a) and (b)? Explain.

d. Suppose that the world price was not $6 but, instead, happened to be exactly the same as the domestic price without trade as determined in part (a).Would allowing trade have changed anything in the Wiknamian economy? Explain. How does the result here compare with the analysis in Chapter 9?

 

10. Based on market research, a film production company in Ectenia obtains the following information about the demand and production costs of its new DVD:

a. Find the price and quantity that maximize the company’s profit.

b. Find the price and quantity that would maximize social welfare.

c. Calculate the deadweight loss from monopoly.

d. Suppose, in addition to the costs above, the director of the film has to be paid. The company is considering four options:

i. a flat fee of 2,000 Ectenian dollars.

ii. 50 percent of the profits.

iii. 150 Ectenian dollars per unit sold.

iv. 50 percent of the revenue.For each option, calculate the profit-maximizing price and quantity. Which, if any, of these compensation schemes would alter the deadweight loss from monopoly?Explain.

 

11. Many schemes for price discriminating involve some cost. For example, discount coupons take up the time and resources of both the buyer and the seller. This question considers the implications of costly price discrimination. To keep things simple, let’s assumethat our monopolist’s production costs are simply proportional to output so that average total cost and marginal cost are constant and equal to each other.a. Draw the cost, demand, and marginal-revenue curves for the monopolist. Show the price the monopolist would charge without pricediscrimination. b. In your diagram, mark the area equal to the monopolist’s profit and call it X. Mark the area equal to consumer surplus and call it Y. Mark the area equal to the deadweight loss and call it Z. c. Now suppose that the monopolist can perfectly price discriminate. What is the monopolist’s profit?(Give your answer in terms of X, Y, and Z.) d. What is the change in the monopolist’s profit from price discrimination? What is the change in total surplus from price discrimination? Which change is larger? Explain. (Give your answer in terms of X, Y, and Z.)