Economics ch 6 Monopoly and Monopolistic Competition
A monopolist's profit-maximizing price is $10, and its profit-maximizing output is 300 units. If the average cost of production is $7.50 per unit, the firm's economic profit will be $__. If the firm's managers change its price and output, the economic profit will___
(10*300)-(7.5*300)=750 Fall
You are the manager of a monopoly. If the marginal cost of your product is $100 and the price elasticity of demand for your product is 3, then the markup of price over marginal cost you should set is equal to ______ If the price elasticity of demand is 6 rather than 3, the markup you should set is equal to_____ Use your knowledge of the factors that affect the magnitude of the price elasticity of demand to explain the difference in the markups in your answers to the last two parts. A. A smaller price elasticity of demand suggests that there are few substitutes for a good, which allows you to set a higher markup. B. A smaller price elasticity of demand suggests that your good is an inferior good, which allows you to set a higher markup. C. A smaller price elasticity of demand suggests that your good is a normal good, which allows you to set a higher markup. D. A smaller price elasticity of demand suggests that there are many substitutes for your good, which allows you to set a higher markup.
1.5 1.2 A. A smaller price elasticity of demand suggests that there are few substitutes for a good, which allows you to set a higher markup.
You are a manager of a pharmaceutical firm that has a monopoly for a particular drug. Your staff has estimated the price elasticity of demand for the drug. When the price of the drug is$1,000 per dose, the price elasticity of demand is 3.0 and when the price is $300 per dose, the price elasticity of demand is 2.0. The marginal revenue of the drug when the price is $1,000 per dose is $___ The marginal revenue of the drug when the price is $400 per dose is $____
666.67 Marginal revenue of the drug can be found by using the expression: MR=P×(ε−1/ε). Substituting P=$1,000 and ε=3.0 into the above expression, we get: MR=$1,000×(3.0−1/3.0)=$666.67. 200 Substituting P=$400 and ε=2.0 into the expression for MR, we get: MR=$400×(2.0−1/2.0)=$200
The price elasticity of demand for your product is 2.0, and your marginal cost is $40. Your profit-maximizing price is $____ Suppose that you can run a new advertising campaign and differentiate your product by emphasizing its unique features, thereby decreasing the price elasticity of demand to 1.5. Your new profit-maximizing price will be $_____
80 120
Suppose that the demand for a monopoly firm's product is given by: Q=80−P. If the firm's marginal cost is constant at $30, then the profit-maximizing price is $55 and the profit-maximizing output is 25 units. Suppose that the demand changes to: Q=100−P. After this change, the new profit-maximizing price is $65 and quantity is 35 units. If the demand changes to: Q=160−2P. The new profit-maximizing price is $55 and quantity is 50 units.
80-2Q=30 => 2Q=50 => Q=25 P=80-25=55 the price is $55 and quantity 25 units P=100-Q => MR=100-2Q 100-2Q=30 => 2Q=70 => Q=35 P=100-35=65 the price is $65 and the quantity is 35 units Q=160-2P => 2P=160-Q => P=80-0.5Q MR=80-Q 80-Q=30 => Q=50 P=80-50*0.5=55 the price is $55 and quantity is 50 units
The first two columns of the table show a monopoly's marginal revenue, and the last two columns show its marginal cost. The firm's profit maximizing quantity is _____ units. The demand equation for this monopoly firm, expressed in the form P=mQ+b, is:_____. d) The firm's profit-maximizing price is$_______
= 14 units = P = -1/2Q+21 = 14 21-1/2*14=14
If the marginal revenue for a monopoly is given by MR = $400 −2×Q and the marginal revenue is MC = 2×Q, then the profit-maximizing quantity is A. 100. B. 200. C. 400. D. None of the above are correct.
A. 100. MR = MC 400 - 2Q = 2Q 400 = 2Q + 2Q = 4Q Q = 400/4 = 100
Compared to the market demand, a dominant firm's residual demand is ____ elastic so the price set by a dominant firm is ____ than the price set by a monopoly. A. more; lower B. less; lower C. less; higher D. more; higher
A. more; lower
In the long run, a monopolistically competitive firm can i. make an economic profit. ii. make zero economic profit. iii. incur an economic loss. A. Only i is correct. B. Only ii is correct. C. Only i and ii are correct. D. i, ii, and iii are correct.
B. Only ii is correct.
In a market with a dominant firm, at the price of $50 per unit, the market demand is 4,000 units and the competitive fringe's supply is 500 units. The dominant firm's demand at this price is A. 4,000 units. B. 3,500 units. C. 4,500 units. D. None of the above answers are correct because the dominant firm's demand cannot be determined with the information given.
B. 3,500 units.
The figure shows the demand, marginal revenue, and some cost curves of a monopolistically competitive firm. To maximize profit, this firm produces ____ smartphones and sets a price of _____ per smartphone. A. 250 million; $400 B. 150 million; $300 C. 150 million; $600 D. None of the above answers are correct.
C. 150 million; $600
If the demand for a product is elastic, then the marginal revenue is A. negative. B. might be positive, equal to zero, or negative. C. positive. D.equal to zero.
C. positive.
The first two columns of the table show a monopoly's marginal revenue, and the last two columns show its marginal cost. Using the line drawing tool, plot and label the firm's demand curve (D), the marginal revenue curve (MR) and the marginal cost curve (MC) on the adjacent graph. Extend all three curves to the vertical axis.
D 21 = 16, 13 MR 21 = 18, 3 MC 0 = 18, 9
Using the line drawing tool, plot and label the firm's demand curve (D), the marginal revenue curve (MR) and the marginal cost curve (MC) on the adjacent graph. Extend all three curves to the vertical axis. Carefully follow the instructions above and only draw the required objects. (Hint: Recall that the demand curve and the marginal revenue curve have the same vertical intercept and the slope of the marginal revenue curve is twice that of the demand curve.)
D = (24, 16) MC = (3, 18) MR = (24, 18)
The following table shows the market demand and competitive fringe supply for a market with a dominant firm. An equation for the price elasticity of demand is: ε=[b×(P/Q^d] where b is the change in the quantity demanded from a $1 change in price. (For any two points on the demand curve, b is equal to the change in quantity demanded divided by the change in price.) Use this formula to calculate the price elasticity of demand at the three different prices on the market demand curve and on the residual demand curve. Price Market demand Competitive Residual ($ per unit) (units) fringe supply demand 50 70 60 10 45 80 40 40 40 90 20 70
For market demand, b is equal to the change in market demand divided by the change in price, which equals: ΔQ^d/ΔP = −10/5 = −2. For residual demand, b is equal to the change in residual demand divided by the change in price, which equals: ΔQ^d/ΔP = −30/5 = −6. Price elasticity of demand for market demand= (-2* (50/70)) = 1.43 (-2* (45/80)) = 1.13 (-2* (40/90)) = 0.89 Price elesticity of demand for residual demand= (-6* (50/10)) = 30 (-6* (45/40)) = 6.75 (-6* (40/70)) =3.43
The table shows part of a monopoly's demand (D). Complete the table: Price, P Quantity, Q Marginal Revenue MR $30 12 $29 13 $28 14 $27 15 $26 16 $25 17 $24 18 $23 19 $22 20 $21 21 $20 22 $19 23 Using the line drawing tool, plot the demand curve and the marginal revenue curve on the adjacent figure and label each curve appropriately. Assuming that both curves are linear, extend the demand and marginal revenue curves to the vertical axis. Carefully follow the instructions above and only draw the required objects. 2) The slope of the demand curve is negative__ and the slope of the marginal revenue curve is negative __. 3) The vertical intercept of the demand curve is __ and that of the marginal revenue curve is __.
MR = 17 15 13 11 9 7 5 3 1 -1 -3 2) -1 , -2 3) 42 , 42
The table shows the market demand and competitive fringe supply for a market with a dominant firm. Complete the residual demand column of the table.
Market demand - Competitive fringe supply = residual demand 45-34= 15 55-25= 30 65-20= 45 75-15= 60 85-10= 75 95- 5= 90
The following table shows the market demand and competitive fringe supply for a market with a dominant firm. An equation for the price elasticity of demand is: ε=[b×(P/Q^d) where b is the change in the quantity demanded from a $1 change in price. (For any two points on the demand curve, b is equal to the change in quantity demanded divided by the change in price.) Use this formula to calculate the price elasticity of demand at the three different prices on the market demand curve and on the residual demand curve. Price Market demand Competitive Residual ($ per unit) (units) fringe supply demand 40 70 60 10 35 80 40 40 30 90 20 70
Price elasticity of demand for market demand= (-2* (40/70)) = 1.14 (-2* (35/80)) = 0.88 (-2* (30/90)) = 0.67 Price elasticity of demand for residual demand= (-6* (40/10)) = 24 (-6* (35/40)) = 5.25 (-6* (30/70)) = 2.57
You are a manager of a firm like J.P. Licks, a monopolistically competitive ice cream store in Boston. You are determining the price and quantity of your Cookies 'n' Cream Pie. Economists you have hired report that the marginal cost of an ice cream pie is constant and is equal to $15 per pie. They also report that the demand is given by: Q=300−10P, where Q is the quantity of ice cream pies demanded per day and P is their price. a) The profit-maximizing price of Cookies 'n' Cream Pies is $__. b) The profit-maximizing quantity of Cookies 'n' Cream Pies is ______ pies.
Q = 300−10P ⇒ 10P = 300−Q ⇒ P=30−(1/10)Q Because the demand curve is linear, we double the slope to get the marginal revenue equation: MR = 30−(1/5)Q b) Profit-maximizing quantity: 30−(1/5)Q = 15 ⇒ (1/5)Q = 15 ⇒ Q ⇒ 15×5=75 pies. a) Profit-maximizing price: 30−((1/10)×75) = $22.50.
The first two columns of the table show a monopoly's marginal revenue, and the last two columns show its marginal cost.
The profit-maximizing quantity is found by setting marginal revenue equal to marginal cost, (MR=MC). This occurs when the firm produces 14 units. b) m = ((MR2−MR1)/(Q2−Q1)) = ((13.00−14.00)/(11−10)) = −1 14.00 = (−1 × 10)+ b ⇒ b = 24 the demand equation will be: P = 24 − 1/2Q or P=-1/2Q+24 c)graph (y,x) D = (24, 16) MC = (3, 18) MR = (24, 18) d) P=24−(1/2)×14 = $17
Suppose that the market demand curve for your product is given by: Q=$25−0.5P. Assume that the marginal cost and average total cost equal $34 for all levels of production. The marginal revenue curve would be given by the equation: MR=_____. (Carefully enter your response as an algebraic expression, using the proper notation in the proper format.) The adjacent figure shows the demand curve (D) and the marginal revenue curve (MR) for your product. Using the line drawing tool, plot the marginal cost (MC) and the average total cost (ATC) curves. Using the point drawing tool, show the profit-maximizing price and quantity for your firm. Carefully follow the instructions above and only draw the required objects. Economic profit earned by your firm will be equal to $_____.
We know that the marginal revenue curve has the same vertical intercept as the demand curve. Rewriting the demand equation to make price the subject, we get: 0.5P=25−Q ⇒ P=50−2Q. We can now compare the above equation to the general form of a line, y=mx+b, where m is the slope and b is the intercept. As the intercept of the demand equation is 50, we can say that the intercept of the marginal revenue curve will be 50 too. As the marginal revenue curve has a slope twice that of the demand curve, we can say that the slope of the marginal revenue curve will be 4. Therefore, the marginal revenue curve is given by: MR=50−4Q. As the marginal cost and average total cost equal $34 for all levels of production, MC and ATC curves will overlap and will be parallel to the quantity axis. The MR and MC curves intersect at 4 units, which will, therefore, be the profit-maximizing quantity. The associated price found on the demand curve is $42. According to the diagram, the profit-maximizing price is $42 and quantity is 4 units. Economic profit is given by (P−ATC)×Q. Therefore, the profit for your firm is: (P−ATC)×Q = ($42−$34)×4 = $32.
Suppose that the market demand curve for your product is given by: Q=$25−0.5P. Assume that the marginal cost and average total cost equal $18 for all levels of production. a) The marginal revenue curve would be given by the equation: MR=____________. b) (Carefully enter your response as an algebraic expression, using the proper notation in the proper format.) The adjacent figure shows the demand curve (D) and the marginal revenue curve (MR) for your product. Using the line drawing tool, plot the marginal cost (MC) and the average total cost (ATC) curves. Using the point drawing tool, show the profit-maximizing price and quantity for your firm. Carefully follow the instructions above and only draw the required objects. c) Economic profit earned by your firm will be equal to $ ______.
a) MR=50-4Q b) MC=ATC = (x,y) => 16, 18 (8, 34) MR=50-4Q => Q= 8 P=50-2Q = 50-2(8) = 34 c) (P−ATC)×Q=($34−$18)×8=$128.
Your marketing research department has estimated the demand for your firm's product to be: Q=10,000−100P and the marginal revenue to be: MR=100−0.02Q. Suppose marginal cost and average total cost are constant at $60. a) The quantity you should produce is __ units. b) The price you should charge is $__ c) The amount of economic profit earned by your firm would be $___
a) MR=MC to maximize profit 100−60=0.02Q ⇒ 40=0.02Q ⇒ Q=2,000 units b) 2,000=10,000−100P Solving for P, we get: 100P=10,000−2,000 ⇒ 100P=8,000 ⇒ P=$80 c) Your firm's economic profit is: (P−ATC)×Q=($80−$60)×2,000=$40,000.
You are the manager of a monopoly. If the marginal cost of your product is $100 and the price elasticity of demand for your product is 3, then the markup of price over marginal cost you should set is equal to ____________ If the price elasticity of demand is 9 rather than 3, the markup you should set is equal to __________. Use your knowledge of the factors that affect the magnitude of the price elasticity of demand to explain the difference in the markups in your answers to the last two parts. A. A smaller price elasticity of demand suggests that your good is an inferior good, which allows you to set a higher markup. B. A smaller price elasticity of demand suggests that there are few substitutes for a good, which allows you to set a higher markup. C. A smaller price elasticity of demand suggests that there are many substitutes for your good, which allows you to set a higher markup. D. A smaller price elasticity of demand suggests that your good is a normal good, which allows you to set a higher markup.
marginal cost = 1.5 markup equation P/MC = (ε/(ε−1))=(3/(3−1)) = 1.5 Substituting the new price elasticity of demand into the markup equation, we get: P/MC=(e/(e−1)) = (9/(9−1)= 1.1. The price is now marked up to be 1.1 times the marginal cost. B. A smaller price elasticity of demand suggests that there are few substitutes for a good, which allows you to set a higher markup.
