Price-Searching Monopolist Instructions

Instructions

Steps - Part I

Your first step to this project is to estimate the demand for your product.   You are offered 5 free tries - you can produce and try to sell to figure out how many units will sell at different prices, in order to estimate the demand equation. 

So you send a bid to me, telling me what price you are charging and how many units you are offering and I will respond to you with the market's reaction, i.e. how many units sold at the price you specified 

Price-Searching Monopolist Instructions

This week, you will be playing the role of a monopolist. Your job in this experiment is to determine what quantity to supply (1 to 25) and what price to charge ($0 to $20, smallest division 25¢) that will maximize your profits or minimize your losses.

You will know your costs for each level of output, but this is a new product so you do not know the demand in advance. A venture-capital angel is giving you funds for 5 periods, so you can determine the quantity demanded at various prices. Demand curves in this experiment are all straight lines, but some are steeper than others.

For each round, you choose a price and quantity to offer for sale. Submit this price and quantity to me. I will tell you how many you sell at that price. You have 5 practice rounds (those covered by the venture capitalist) to figure out the demand curve. Note that you should offer all 25 units for sale in the first several periods, or you risk getting no information. For example, if you offered 4 units at a price of $10 and I told you that you sold all of them, you would not know that you really could have sold 6 units. Profit matters only for the final round, so don’t worry about producing too much in the first 5 rounds. Your good expires every round, so you cannot use production in more than one round.

Your performance will depend on two things:

1. how much profit you earn relative to the total profit potential (some demand/cost conditions mean that the best you can do is a loss), and

1. your approach to economic analysis and decision making.

First: Profit you earn. Your profit is calculated by Total Revenue – Total Cost, where Total Revenue is the price times the quantity sold, and Total Cost is the cost of production, including any unsold units. Profits only count for periods 6-10—losses in periods 1-5 are covered by your venture capitalist “angel”.

Second: Systematic price searching will be rewarded, rather than luck. To demonstrate this, keep a written record of your calculations of demand, marginal revenue, and the profit maximizing price and quantity, and a graph showing the results of your calculations. Excel spreadsheets work well for this.

Post your price and quantity offered in the wiki ‘Price Searching Monopolists’. I will visit it several times a day to respond to new postings. You will sometimes need more than one price check per day to complete the trial rounds by the due date. Be sure to plan in advance, because I may not be able to respond immediately.

Advice: Select prices that are even dollars and relatively far from the extremes for the first few offers. Get 2 points on the demand curve, and you can estimate the slope. Then you can use the following test rounds to check the accuracy of the demand schedule. The best solution for the last 5 rounds is to submit the profit-maximizing price and quantity for all 5 rounds, which may be submitted at the end with your analysis.

Steps - Part II

After you have completed the problem, answer the follow-up questions in your blog.

1. Graph the marginal cost, marginal revenue, and demand schedules for your product, and submit the graph along with your record of prices.

· Explain your reasoning in the trial rounds.  Looking back, would you have done anything differently?

· Show why producing and selling one unit beyond the optimal quantity would decrease profit in your market.

2. Answer true or false and explain your answer: Monopolists must choose both price and quantity but competitive firms only choose quantity.

3. Describe to your grandmother (or to mine, if yours happens to be an economist) why marginal revenue must be equal to marginal cost at the profit-maximizing level of output.

4. Calculate the elasticity of demand at your profit-maximizing level of output.  Use the point elasticity formula.  Is demand elastic or inelastic at the optimal price?  Why?

5. Suppose the government imposes a new fixed tax of $10 per round as an operating fee, regardless of the amount produced. Consider the following questions:

· How would this influence the optimal price and quantity choice of your firm in the short run?

· How would this influence the optimal price and quantity choice of your firm in the long run?

Rachel's cost

QuantityTotal Cost

043

148

251

353

454

555

657

760

865

972

1082

1195

12111

13131

14156

15186

16222

17264

18314

19374

20454

21554

22684

23849

241049

251299