ECON 213 Problem Set 10 Understanding Monopoly Assignment solutions complete answers

ECON 213 Problem Set 10 Understanding Monopoly Assignment solutions complete answers 

 

The local community bus service, which is a monopoly, charges $2.00 for a one-way fare. The city council is thinking of raising the fare to $2.50 and expects it to generate 25% more revenue. The council has asked for your advice as a student of economics.

 

The council predicts that raising the price by 25% will raise revenues by 25%. Which of the following is true?

 

Therefore, the council has     increase in revenue.

 

01Question

If you’re like most college students, you are always worried about having enough money. Suppose that you decide to become an Uber driver and offer rides to students on weekends. For a fee, you will drive them to parties and pick them up at the end of the night. The table below depicts the demand schedule for rides. To keep things simple, assume that you are the only person providing this service; that is, you’re a monopolist. Let’s see how much money you can make.
 

Price
Quantity of Rides Demanded
$70
0
$60
10
$50
20
$40
30
$30
40
$20
50
$10
60
First, complete the table below.
 

Price
Quantity of Rides Demanded
Total Revenue
Marginal Revenue
(per 10 customers)
$70
0
$0
---
$60
10
$600
$600
$50
20
  $  
  $  
$40
30
  $  
  $  
$30
40
$1,200
$0
$20
50
  $  
  $  
$10
60
$600
-$400
 

Although you have no fixed costs, you do incur a marginal cost of $15 per ride. How much do you charge per ride to maximize profits?

 

How much profit do you earn? 

 

02Question
Below are eight descriptions of firms operating under various market conditions. For each item, determine whether the market is a monopoly or a market with perfect competition.

A firm in this market has significant market power

A firm in this market has no competitors

A firm in this market produces where P > MC

A firm in this market may earn long-run economic profits

A firm in this market is one of many small competitors

A firm in this market produces where P = MC

A firm in this market cannot earn long-run economic profits

A firm in this market has no market power

 

03Question
Suppose that the owner of a smartphone monopoly hires you to determine whether his firm has made the profit-maximizing number of smartphones. He provides you with the following production and sales information for the first six months of 2016. 
 

Month
Sales
MR of last unit
MC of last unit
January 2016
10,000
$250
$225
February 2016
10,500
$230
$230
March 2016
11,000
$220
$210
April 2016
10,500
$210
$220
May 2016
12,000
$200
$210
June 2016
11,000
$220
$220
In which months should the firm have produced fewer smartphones? 

 

In which months should the firm have produced more smartphones?

 

In which months was the firm maximizing profits?

 

04Question
A monopolist has the following fixed and variable costs:



Price
Quantity
Fixed Cost
Variable Cost
Total cost
Marginal Cost
Total Revenue
Marginal Revenue
$10
0
$8
$0
   
---
   
---
$9
1
$8
$5
   
   
   
   
$8
2
$8
$8
   
   
   
   
$7
3
$8
$10
   
   
   
   
$6
4
$8
$11
   
   
   
   
$5
5
$8
$13
   
   
   
   
$4
6
$8
$16
   
   
   
   
$3
7
$8
$20
   
   
   
   
$2
8
$8
$25
   
   
   
   

Complete the table.
The profit-maximizing monopolist produces a quantity of

 

05Question
The figure below depicts an unlabeled market diagram that includes both the monopoly and perfectly competitive solutions. Label the diagram with the items to the right of the diagram. Make sure you scroll down to see all the items that need labeling.

 

 

06Question
Use the figure below to answer the questions that follow.
 

(a) Which area represents consumer surplus under perfect competition?

 

(b) Which area represents producer surplus under perfect competition? 

 

(a) Which area represents consumer surplus under monopoly?

 

(b) Which area represents producer surplus under monopoly?

 

Which area represents the deadweight loss associated with a monopoly?

 

07Question
Suppose that after graduating from college with an economics degree, you get a job with your state’s public utilities commission. Your job is to determine the regulated price for an electric utility (a natural monopoly). The figure below shows the current situation in the market.
  

If the electric utility was unregulated, it would earn

 

If you set a regulated price to achieve economic efficiency, the electric utility would earn

 

If the electric utility is forced to charge a price that leads to economic losses, it would go out of business, and consumers would have no electricity. To avoid this, the government has several possible solutions at its disposal. Which of the following is NOT a possible solution?

 

08Question
The local community bus service, which is a monopoly, charges $2.00 for a one-way fare. The city council is thinking of raising the fare to $2.50 but expects it to generate less than 25% more revenue. The council has asked for your advice as a student of economics.
The council predicts that raising the price by 25% will raise revenues by less than 25%. Which of the following is true?

 

Therefore, the council has

 

09Question
Does each of the following government activities promote competition or limit monopoly power by regulating markets? Place each in the correct category. 

 

10Question
Each of the following firms benefits from barriers to entry in its industry. Indicate whether each of the barriers is natural or government created.

 

11Question
The demand curve for a monopolist's product is shown. The point UD is the point along the curve where price elasticity of demand is unitary. With this information, use the straight-line tool to draw the marginal revenue curve, stretching from one axis to the other. 

 

12Question
The graph below shows a monopolist's demand (D), marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves. Management wants to adjust the production output quantity to maximize the firm's profits. What quantity should the firm aim for?

Give your answer by dragging the Q line to a new position to mark the quantity at which profit is as large as possible. 

 

13Question
Assume a monopolist faces the demand schedule given below and a constant marginal cost of $2 for each unit of output. 


Fill in the total and marginal revenue amounts in the table.
 

Price
Quantity demanded
Total revenue
Marginal revenue
15 
0
   
   ---
12 
1
   
   
7 
2
   
   
4 
3
   
   
2 
4
   
   
 

To maximize profit, this monopolist would produce       units of output at a price of $      per unit.

 

14Question
The graph shows a monopolist's demand (D), marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves. Use the area tool to draw the area representing the maximum profit the firm could earn—that is, the profit the firm would earn if it produced the optimal quantity. Your answer should be a rectangle drawn with four corners.

 

15Question
The graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for a monopolist. Use the area tool to outline the region corresponding to the deadweight loss that is due to the market being monopolistic rather than competitive. Your answer should be a triangle drawn with three corners.

 

16Question
A city's gas and electric company operates as a monopolist with average total cost (ATC), marginal cost (MC), and marginal revenue (MR) curves as shown in the graph below. The market demand curve (D) is shown as well. If local regulations cap the price on gas and electricity to maximize social benefit, what profit or loss will the utility company experience? Give the graphical part of your answer by using the area tool to draw a rectangle with four corners.

 

Does the rectangle in Part 1 represent a profit or a loss? Why?

 

17Question
A book publisher has a monopoly on the hardcover edition of a particular book, for which the demand curve is as pictured. Wanting to boost sales, the publisher drops the price from $20 to $15. In the graph, this change appears as a movement from point P1 to point P2.

Use the area tool to draw the region representing the price effect. (The combined result of the price effect and the output effect will determine whether the publisher's move was a good idea.)

 

The price effect will cause the book publisher's revenue to go  by  $  . (However, remember that the overall change in revenue will also depend on the output effect.)

 

18Question
An art publisher has a monopoly on high-quality prints of a famous painting, for which the demand curve is as pictured. Wanting to boost sales, the publisher drops the price from $90 to $75. In the graph below, this change appears as a movement from point P1 to point P2.

Use the area tool to draw the region representing the output effect. (Together, the output effect and the price effect will determine whether the art publisher's move was a good idea.)

 

The output effect will cause the art publisher's revenue to go   by  $  . (However, remember that the overall change in revenue will also depend on the price effect.)

 

19Question
The graph shows a monopolist's demand (D), marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves. Despite having the market all to itself, the firm has struggled to make money. Suppose that the firm is sold, and the new owner is initially less intent on maximizing profits than on simply making a profit. What range of production quantities will allow the firm to operate while earning a profit?

Give your answer by dragging the Qmin to Qmax lines into their correct positions. The output will need to lie somewhere between those limits.

 

20Question
The graph below shows the demand (D), marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves for a supplier of bottled water to commercial buildings. The firm operates as a local monopoly. Use the area tool to draw the rectangle that represents the firm's profit if the market quantity is 7,000 bottles.

 

The profit is

 

This profit could be increased by lowering the price. For maximum profit, the price should be