Econ
Tutorials-Ch15 1. Johnny Rockabilly has just finished recording his latest CD. His record company’s marketing
department determines that the demand for the CD is as given in the first two columns in the table below. The company can produce the CD with no fixed cost and a variable cost of $5 per CD.
Price Quantity Total
Revenue $
Addition to
Revenue of each
additional 10000 units
$
Marginal Revenue
$
Total Cost
$
Marginal Cost
$
Profit $
24 10 000 240 000 ---- 190 000
22 20 000
440 000
340 000
20 30 000
600 000
450 000
18 40 000
720 000
520 000
16 50 000
800 000
550 000
14 60 000
840 000
540 000
a. Fill in the columns that have been left blank. b. Assuming that they can only produce in units of 10 thousand; what quantity of CDs would
maximize profit? What would the profit maximum price be? What would is the maximum profit?
c. Graph the marginal-revenue, marginal-cost, and demand curves assuming that could produce in units of 1. At what quantity do the marginal-revenue and marginal-cost curves cross? What does this signify?
d. If you were Johnny’s agent, what recording fee would you advise Johnny to demand from the record company? Why?
2. Larry, Curly, and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Curly wants the saloon to bring in as much revenue as possible. Moe wants to make the largest possible profits. Using a single diagram of the saloon’s demand curve and its cost curves, show the price and quantity combinations favoured by each of the three partners. Explain.
3. For many years, both local and long-distance phone services had been provided by provincially owned or regulated monopolies. a. Explain why long-distance phone service was originally a natural monopoly.
b. Over the past two decades, technological developments have allowed companies to launch communications satellites that can transmit a limited number of calls. How did the growing role of satellites change the cost structure of long-distance phone service?
4. 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 assume that 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 price discrimination.
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 answers in terms of X, Y, and Z.) e. Now suppose that there is some cost of price discrimination. To model this cost, let’s assume that the monopolist has to pay a fixed cost C in order to price-discriminate. How would a monopolist make the decision whether to pay this fixed cost? (Give your answer in terms of X, Y, Z, and C.) f. How would a benevolent social planner, who cares about total surplus but not who gets the benefit, decide whether the monopolist should price-discriminate? (Give your answer in terms of X, Y, Z, and C.) g. Compare your answers to parts (e) and (f). How does the monopolist’s incentive to price- discriminate differ from the social planner’s? Is it possible that the monopolist will price- discriminate even though it is not socially desirable? 5. A company is considering building a bridge across a river and charging a toll to cross. The bridge
would cost $2 million to build and nothing to maintain. The company’s anticipated demand over the lifetime of the bridge is given in the first two columns in the table below.
Price/Toll Quantity
in thousands
Total Revenue
in thousands
of $
Addition to
Revenue of each
additional 1000 units
MR
Total Cost in
thousands of $
MC Profit in
thousands of $
$8 0 $0 ---- 7 100 700 $700 6 200 1200 500 5 300 1500 300 4 400 1600 100 3 500 1500 −100 2 600 1200 −300 1 700 700 −500 0 800 0 −700
a. Fill in the columns that have been left blank. b. If the company were to build the bridge, what would be its profit-maximizing price? Would
that be the efficient level of output? Why or why not? c. If the company is interested in maximizing profit, should it build the bridge? What would be its
profit or loss? d. If the government were to build the bridge, what price should it charge? e. Should the government build the bridge? Explain.