CSUF ECON 315 - Chapter 13 Monopoly and Monopolistic Competition

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Chapter 13 Exercises 157Chapter 13 Monopoly and Monopolistic Competition13.1 Given a monopoly firm confronted with the following:Q$/Q4020 30 501021345678910MCACARMR(a) What is the profit-maximizing level of output, Q*, for this monopolist? ____________.(b) What is the profit-maximizing price, p*? ______________.(c) What is the unit cost AC* when this firm is maximizing profit? _____________________.(d) What is the maximum level of profit *? __________________________.13.2 All of the flags in a small, patriotic nation are produced by one firm — Tarzan Stripes, Inc. In effect, the company is a monopoly — the government has granted them exclusive rights to produce flags.(a) If the inverse demand curve for flags is given by p = 100 – 0.5Q, where Q = the number of flags (in thousands) and p = price of flags (in dollars), and the marginal cost (MC) of producing flags is always equal to $20, how many flags will Tarzan produce if their goal is158 Chapter 13 Exercisesto maximize profits? ___________. (Remember: MR for a linear demand is twice as steepas the demand curve.) Graph the AR, MR, and MC curves on the figure below.pQ(b) What price will the company charge? p = $______. Indicate the profit-maximizing p and Q on your graph.(c) If there are no fixed costs, what is profit? $_________. Show profits on your graph.(d) Monopolists are said to operate on the elastic portion of demand. Verify that this is true for this firm by calculating the point elasticity at the optimum p-Q point.  = ___________.(e) Verify that the rule of thumb for determining the profit-maximizing price holds in this case:p = MC/(1 – 1/).(f) Why wouldn’t a profit-maximizing monopolist ever produce where demand is inelastic?(g) How much consumer surplus is enjoyed by flag consumers? $_________. Show this area on your graph.13.3 Suppose that after a government coup, the flag-making monopoly of Tarzan Stripes is broken up, and replaced by many price-taking, flag-making firms.(a) Assuming that the MC of making flags remains constant at $20, what would happen to the price and quantity of flags sold? p = $________, Q = ________. Show this point on your graph from problem (2).(b) Compared to the competitive situation, Tarzan’s monopoly behavior resulted in a (higher, lower) price and a (higher, lower) quantity produced and sold.Chapter 13 Exercises 159(c) Under these competitive conditions, what is the consumer surplus? $_________. Show this consumer surplus on your graph.(d) The demand curve is often described as a marginal benefit (MB) curve, since it shows how much extra benefit some consumer receives from consuming the Qth unit of the good. How much MB would some consumer get from buying the 80,001st flag — one that Tarzanwould not have produced? $_________. How much extra cost would be involved in producing this flag? $________. Would the nation benefit from having the 80,001st flag produced? _____________. What about the 100,000th flag? _____________.(e) Calculate the welfare loss that had resulted from the (now-defunct) monopoly. Show this area on your graph. Verify that the loss in consumer surplus is exactly equal to the monopoly profits plus the deadweight loss.(f) In the monopoly case, total flag sales (revenues) were equal to $_________. The welfare loss, therefore, represents an amount equal to what percent of sales? ____________. If 10 percent of the industries in this country are monopolized (and the rest are competitive), the total welfare loss will be equal to what percent of total sales (GNP)? ________________.(g) Would it pay for Tarzan Stripes Inc. to engage in rent-seeking behavior (perhaps bribe the new government) to keep their monopoly position intact? ____________. How much would they conceivably pay to remain the flag-producing monopoly? ______________.13.4 Sam and Janet Evening run the only hotel on a beautiful South Sea island. Visitors come from all over the world to vacation on the island, but businesses also use the hotel for conventions. The price elasticities of demand for hotel rooms are believed to be V = 2 for the vacationers and B = 1.2 for business travelers.(a) What room rates should Sam and Janet charge these different groups if the marginal cost ofproviding a room is $30 per day? ___________________________________________.(b) The market segment with the less elastic demand is charged the (higher, lower) price; the segment with the more elastic demand is charged the (higher, lower) price.13.5 It is said that the monopolist has no supply curve! How is this possible? (Hint: First define exactly what is meant by the term supply curve.) ______________________________ __________________________________________________________________________.160 Chapter 13 Exercises13.6 A pharmaceutical company has developed and patented a new cure for forgetfulness that they are marketing under the name Milk of Amnesia. Demand for the product has been estimated by the marketing department to be as follows:p ($/bottle) Q (bottles) TR MR$55 750 —$50 1,000$45 1,250$40 1,500$35 1,750$30 2,000$25 2,250(a) Calculate the total revenue and marginal revenue associated with each price. Fill in the table above.(b) If MC = $15, what price should the company charge to maximize profits? $_______. Howmuch will they sell at this price? __________.(c) If the fixed costs associated with this product are $20,000, how much profit can they expectto realize? ___________. (Hint: Since MC is constant, MC = AVC.)(d) If the government imposes an annual lump-sum (licensing) fee of $10,000 on the company, should it modify this pricing strategy? ____________. Would your answer change if the annual licensing fee were raised to $20,000? ______________.(e) If instead the government imposes an excise tax of $10 per bottle on Milk of Amnesia, should the firm change its price? Explain. (f) In the short run, the (lump-sum fee, excise tax) has no effect on the profit-maximizing choice of the monopolist; the (lump-sum fee, excise tax) causes the monopolist to produce less and raise the price.13.7 Both pure competition and monopolistic competition result in zero economic profit in the long run. Why then, does competition result in production at lowest unit cost but monopolistic competition does not? Illustrate why using the graphs below where firm A is purely competitive and firm B is monopolistically competitive. Both firms face identical cost curves.


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CSUF ECON 315 - Chapter 13 Monopoly and Monopolistic Competition

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