Question Detail:

  1. ControlSoft, Inc. is a supplier of inventory management and control software that is popular with companies in the US. The company has retained a consulting firm to provide advice concerning demand and supply conditions in the industry. Using government data, the consultant estimates market supply and demand conditions as follows: Qs = 4000P and Qd = 1,500,000 – 2000P.

a) Assuming the industry is perfectly competitive, calculate the domestic equilibrium price and output combination.

b) Now assume that ControlSoft lobbies for and obtains import restrictions which eliminate their leading competitors, giving them a monopoly in the domestic market. Based on the same demand and supply conditions above, calculate the new equilibrium price and output combination. For this problem assume that TR = 750Q – 0.0005Q2 and MR = 750 – 0.001Q, while the industry supply curve now represents their marginal cost curve since the firm is now a monopoly. Hint: You will need to rewrite the supply equation in terms of price to get their marginal cost curve.

c) Is the outcome in part B desirable from society's viewpoint? Explain.

  1. (20 points) Use the information in the table below to answer the following questions.

Q

AVC

ATC

MC

MR1

P1

MR2

P2

0

130.00

80.00

1

55.70

155.70

55.70

120.00

120.00

70.00

70.00

2

52.80

102.80

49.90

100.00

110.00

50.00

60.00

3

51.30

84.63

48.30

80.00

100.00

30.00

50.00

4

51.20

76.20

50.90

60.00

90.00

10.00

40.00

5

52.50

72.50

57.70

40.00

80.00

-10.00

30.00

6

55.20

71.87

68.70

20.00

70.00

-30.00

20.00

7

59.30

73.59

83.90

0.00

60.00

-50.00

10.00

8

54.80

77.30

103.30

-20.00

50.00

-70.00

0.00

9

71.70

82.81

126.90

-40.00

40.00

-90.00

10

80.00

90.00

154.70

-60.00

30.00

-110.00

11

89.70

98.79

186.70

-80.00

20.00

-130.00

12

100.80

109.13

222.90

-100.00

10.00

-150.00

  1. Suppose the monopolistically competitive firm above is facing the following price and marginal revenues found in the MR1 and P1 columns. How much should this firm produce, and what price should they charge? Explain, calculating total profit or loss earned at this quantity.
  2. Now suppose there is a decrease in demand, and a corresponding decrease in the price and marginal revenue to the numbers shown in the MR2 and P2 columns. How much should this firm produce now, and what price should they charge? Explain, calculating total profit or loss earned at this quantity.
  1. (20 points) Indicate whether each of the following statements is true or false, and explain why. Do not simply give a corrected statement -- you must provide a full explanation as to why that statement is correct or not.

a) Profit maximization in perfectly competitive and monopoly markets requires setting MR = MC.

b) In monopoly markets, firm and market demand curves always have identical slope.

c) Excess profits in long-run equilibrium are typical of both monopolistically competitive and oligopoly markets.

d) An efficiently functioning cartel achieves the monopoly price/output combination.

e) A high ratio of distribution cost to total cost tends to increase competition by widening the geographic area over which any individual producer can compete.

  1. (15 points) Indicate whether or not each of the following examples of business behavior are legal or illegal under current antitrust law, and mention whether violations under the Sherman Act, Clayton Act, and/or Federal Trade Commissions Act are involved. Explain each answer.

a. Charging higher markups for younger versus older customers.

b. False and misleading advertising.

c. Mergers for monopoly.

d. Charging different markups to various business customers.

e. A business strategy of using patents to limit competition.

  1. (20 points) Suppose a monopolist has the demand schedules. Marginal costs are constant at $13 per unit and MC = ATC at all output levels.

Market 1

Market 2

Price

Qd

Price

Qd

$71

0

$115

0

63

1

100

1

55

2

83

2

48

3

71

3

42

4

63

4

37

5

55

5

33

6

48

6

29

7

42

7

25

8

37

8

18

9

33

9

11

10

29

10

Note: Part d on perfect price discrimination comes fromCh. 15 material. Read theCh. 15 slides (#11-17) and the price discrimination example posted in the Week 8 course materials folder first before attempting to this.

This will give you a chance to work together to understand these problems since you don't have a problem set next week and this topic tends to be challenging for students. As further incentive, you will likely see some price discrimination problems on the Week 8 quiz or final exam.

a) Assume the monopolist produces in market 1 only. If the monopolist charges a single price for output, how much will he produce, what price will he charge, and what profit will he earn?

b) Assume now that the monopolist has identified a second group of buyers which has a different demand schedule shown in market 2 above. Costs are the same as in market 1. What price should the monopolist charge in the second market, how much output will he produce, and how much profit will he make? Assume the monopolist can keep customers in both markets separate.

c) Based solely on the two prices, what can you conclude about the relative elasticities of demand in each market? Explain.

d) (Extra Credit) Assume that the monopolist can perfectly price discriminate in the first market rather than charging a single price. How much will he produce, what price will he charge, and what profit will he earn in this case? What accounts for the difference in your answers between part b and part d?

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