ECN212 Final

In markets characterized by oligopoly

An oligopoly will want to try and collude with the other firms so they know what each other are doing, and thus make a higher profit. But as you remember, firms have incentives to cheat. If firms in an oligopoly decide to cooperate, they can behave like a monopolist and "own" the whole market. They can now charge a monopolist price for the product, and collective profits will be the highest.

Which of the following statements is correct?

Firm's demand for labor is dependent on the value of the marginal product of each worker. In fact, a competitive firm will hire workers until the last worker's value is equal to the market wage. This made the value of marginal product curve the same as the firm's demand curve for labor

Again, suppose the fixed cost equals zero. What is the monopoly profit if the firm can perfectly price discriminate?

If the firm can perfectly price discriminate, this means that it can charge a different price to every consumer. The price that each consumer will have to pay equals the consumer's reservation price (which is given by the demand curve). Thus, the monopoly can now price according to the demand curve (for example, the monopolist can sell the second unit for $11, the fourth unit for $10, etc). Because they can price discriminate, they no longer need to charge the same price for every unit. In this case, their profit is the triangle above the cost and beneath the demand curve, as shown below. The base has a length of 12 and a height of 6, so the area of the triangle is $36.

Again, suppose the fixed cost equals zero. What is the monopoly profit if the firm can perfectly price discriminate?

If the firm can perfectly price discriminate, this means that it can charge a different price to every consumer. The price that each consumer will have to pay equals the consumer's reservation price (which is given by the demand curve). Thus, the monopoly can now price according to the demand curve (for example, the monopolist can sell the second unit for $9, the fourth unit for $8). Because they can price discriminate, they no longer need to charge the same price for every unit. In this case, their profit is the triangle above the cost and beneath the demand curve, as shown below. The base has a length of 16 and the height is 8, so the area of the triangle is $64.

How does a competitive market compare to a monopoly that engages in perfect price discrimination?

If you draw the graphs for both a perfectly competitive market and a monopoly that can perfectly discriminate, you will see that the total surplus areas are the same - although in the case of a perfectly competitive firm all the surplus goes to the consumer in the case of a monopoly that can perfectly discriminate, all the surplus is the monopolist profit.

This example illustrates that

Increasing patent length when the fixed cost is lower can lower total surplus. Picking a patent length to maximize consumer surplus is the same as maximizing total surplus.

A monopolist faces the demand cuve illustrated below. Draw the marginal revenue (MR) curve on the graph. Suppose the marginal cost (MC) and average variable cost (AVC) both equal 6 for all quantity levels, MC = AVC = 6. Draw the MC curve in the graph.

Marginal revenue is twice as steep and has the same y-intercept as the demand curve. MC = 6. Q = 12

Suppose the marginal prodcut of labor for a firm is given by th figure above. Suppose there is perfect competition in the output market and the labor market and that the output price is $3 and the wage is $15 per hour. In this case the demand for labor equals ___

Remember that to figure out labor demand, the key equation is that the firm sets labor so that the value of the marginal product equals wage. PP x MMPP = wage. In the problem you are given that wage = $15 and p = $3. MMPP = 5. Wage increase will cause total spending on labor to decrease

In the answer to your previous question, we have implicitly assumed there are no externalities. Suppose instead there is a negative externality. In particular, for every unit produced, assume there is an external cost of $4 per unit. In this case, the monopoly output is:

Remember that when there is a negative externality, the social marginal cost is higher than the private marginal cost. Since there is a monopolist in the industry, we treat the marginal cost curve for the monopoly as the supply curve for the entire industry, which then also makes it the private marginal cost curve. We can then draw the social marginal cost curve $4 above the private marginal cost curve, as shown below. Since there is no positive externality, the demand curve equals the private marginal benefit curve and equals the social marginal benefit curve. Finally, the socially efficient quantity is where social marginal benefit equals social marginal cost, which happens to be at a quantity of 8.

Marginal revenue equals zero at what quantity level?

Remember, for a monopolist with linear demand, we can use the rule that the marginal revenue (MR) is twice as steep and has the same y-intercept as the demand curve. Saying that it's twice as steep means the marginal revenue curve will hit the x-intercept twice as fast, so 10 is the x-intercept for the MR curve. We are also given that marginal cost (MC) is equal to 2, so we can draw that in as well. QQ = 10 is when MMMM = 0.

Assume the fixed cost equals zero. The profit-maximizing monopoly price equals.

Since the monopoly will produce at a quantity where MC=MR, we see that it will produce 6 units. To sell 6 units, the monopolist must charge $9. This can be seen from the demand curve, as 6 units are demanded when the price is $9.

In Minnesota, the willingness to pay for a stadium is given. Suppose that a football stadium is nonrivalrous in consumption and non-excludable. It is socially efficient to build the football stadium if and only if the cost is no higher than

The stadium will be social efficient to build only if the value of everyone in the economy exceeds the cost of the project. We add up the reservation value of everyone in the economy and get as a whole the value is $6

Suppose the fixed cost can be avoided if the firm shuts down and produces zero. At what fixed cost is the firm indifferent between producing and shutting down

The firm is indifferent between producing and shutting down when its profit is 0. Here we have that the profit is $18 for the monopolist without a fixed cost. Therefore, if there was a fixed cost of $18, then the firm will have a profit of $0 and will be indifferent to either shutting down or producing.

Again, assuming the fixed cost equals zero, the monopoly profit equals

The monopolist profit is the difference between its revenue per unit ($6) and the cost per unit ($2) multiplied by how many units were produced and sold (8 units). This area is represented by the green box. The box has an area of 32, which means the profit for monopolists is $32.

Again assuming that fixed cost equals zero, the monopoly profit equals

The monopolist profit is the difference between its revenue per unit ($9) and the cost per unit ($3) multiplied by how many units were produced and sold (6 units). This area is represented by the green box in the graph. The box has an area of 18, which means the profit for this monopolist is $18.

At the quantity where marginal revenue equals zero.

The point at which revenue is maximized is where MMMM = 0. Marginal revenue means means the rate of change of revenue, so before MMMM = 0, revenue is increaing because marginal revenue is positive. After MMMM= 0, revenue is falling since marginal revenue is negative. In other words, revenue is going to keep getting higher and higher until the quantity of 10, and then after that, it'll start falling. Hence when MMMM = 0, revenue is at it's highest level.

Assume the fixed cost equals zero and MC = 2. The profit-maximizing monopoly price equals

The profit-maximizing monopoly price is the price at which they can sell the profit-maximizing quantity. The quantity at which marginal cost equals marginal revenue is, which means the firm will want to charge a price such that they can sell exactly 8 units. From the demand curve, we see that this price is $6

Suppose the fixed cost to develop the drug is 200, what patent length result in the maximum total surplus?

There is no deadweight loss when a monopolist can perfectly discriminate. If that's the case, then the total surplus is maximized as long as the drug is produced. This means the government needs to give enough incentive for the firm to produce the product, and it does not matter whether a monopoly remains in the market or if there is perfect competition. In this case, giving the firm a 1 or 2-year patent will give enough incentive for the firm to produce, since the fixed cost is $200, and the profit from a 1-year profit is $300.

At the quantity where Marginal revenue equals zero

This is a general rule that you should keep in mind. From the monopoly worksheet, the point at which revenue is maximized is where MR = 0. Marginal revenue means the rate of change of revenue, so before M = 0 (i.e. when quantity is less than 12), revenue is increasing because marginal revenue is positive. After MR = 0 (i.e. when quantity is greater than 12), revenue is falling since marginal revenue is negative. In other words, revenue is going to keep getting higher and higher until the quantity of 12 (when MR = 0), and then after that, it'll start falling. Hence, when MR = 0, revenue is at its highest level. So the answer is A.

The patent length (in years) that maximizes total surplus equals _ when the fixed cost to develop the drug is 250 and _ when the fixed cost is 750.

Total surplus is maximized when deadweight loss is minimized. This means that it is ideal if the product is produced and the number of years that the monopoly is in existence is minimized. To do so, the government must give the monopoly enough incentive to produce the product, which is where the patent comes in. If the fixed cost is low ($250), then the monopoly will develop the drug wheter it is given a one-year or two-year patent. This is because operating profit is higher than the fixed cost of $250 for both cases. Because of this, the government would want to give the firm a one-uear patent if the fixed cost was $250. However, if the fixed cost was $750, then notice that a one-year patent will not be enough of an incentive for the firm to produce this product.

Let's go back to the case where the monopolist sets a uniform price. Compared to the competitive allocation with free entry, the change in total surplus from monopoly equals

when the monopolist can only set one price for their product, the price is $6 and 8 units sold. In this case, there is less total surplus compared to the maximum total surplus that can be generated from that market. To find how much less surplus there is, you can simply find the deadweight loss that the uniform price monopolist creates. This area is shaded in black in the diagram at the beginning of this specific set of monopoly questions. The area of the triangle is 16. Therefore, the change in the total surplus from the monopoly is -16