Chapters 12 & 15 Workbook - Perfect Competition & Monopoly - ECON 1011 Prof Foster CHAPTERS 12 15 WORKBOOK PERFECT COMPETITION MONOPOLY PERFECT

Chapters 12 & 15 Workbook - Perfect Competition & Monopoly...

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Unformatted text preview: ECON 1011 Prof. Foster CHAPTERS 12 & 15 WORKBOOK PERFECT COMPETITION & MONOPOLY PERFECT COMPETITION 1) If the market price is $40 in a perfectly competitive market, the average revenue of selling five units is $______________. 2) If the market price is $40 in a perfectly competitive market, the marginal revenue from selling the fifth unit is $________________. 3) The revenue information below is for a perfectly competitive firm: Output Quantity Total Revenue Marginal Revenue 0 200 500 $3 $3,000 a) What is Total Revenue when Q = 100? b) What is Q when Total Revenue = $3,000? 4) A perfectly competitive apple farm produces 1,000 bushels of apples at a total cost of $36,000. The price of each bushel is $50. Calculate the firm's short-­‐run profit or loss. 5) Refer to the figure below. a) If the firm is producing 500 units, it should maintain its output to maximize profit. True or False? b) If the firm is charges a price of $12 per unit, it will not selling any output. True or False? ©I. R. Foster 1 ECON 1011 Prof. Foster 6) The table below lists the various pounds (lbs.) of apples that Margie can sell. Assume that Margie operates in a perfectly competitive market. What is Margie's total revenue if she sells 250 pounds of apples? Total Average Marginal Apples Market Price Revenue Revenue Revenue (pounds) per Pound (TR) (AR) (MR) 0 $3 $0 -­‐-­‐-­‐-­‐-­‐ -­‐-­‐-­‐-­‐-­‐ 100 150 200 250 300 350 400 7) Complete the following table to determine the profit-­‐maximizing level of output. Quantity Total Total Cost Profit Marginal Marginal Revenue (TC) Revenue Cost (MC) (TR) (MR) 0 0 3 1 5 5 2 10 6 3 15 8 4 20 11 5 25 15 6 30 21 7 35 30 8 40 42 9 45 60 10 50 85 8) The table below shows the short-­‐run cost data of a perfectly competitive firm. Assume that output can only be increased in batches of 20 units. Average Fixed Average Quantity Marginal Cost Cost Variable Cost 20 $40 $18 $18 40 20 14 10 60 13.1 16 20 80 10 22 40 100 8 30 62 120 6.61 40 90 a) If the market price is $45 the firm will produce ___________ units. b) If the market price is $45, the firm will earn a profit/loss of $_______________. ©I. R. Foster 2 ECON 1011 Prof. Foster 9) Refer to the figure below that illustrates the cost curves of a perfectly competitive firm. a) If the market price is P1, will the firm experience a profit or a loss? b) If the market price is P3, will the firm experience a profit or a loss? c) If the market price is P2 , will the firm experience a profit or a loss? 10) Refer to the figure below. a) Suppose the firm produces 4,000 units. What does the shaded area labeled A represent? b) Suppose the market price is $120, the firm earns a profit equal to the area A + B. True or False? c) Suppose the firm produces 4,000 units. What does the shaded area labeled B represent? ©I. R. Foster 3 ECON 1011 Prof. Foster 11) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per day and her costs are as follows: Output per Day Total Cost 0 $20 1 32 2 37 3 48 4 61 5 75 6 92 7 113 8 136 Suppose the current equilibrium price in the teapot market is $10. To maximize profit, how many teapots will Veronica produce, what price will she charge, and how much profit (or loss) will she make? 12) Refer to the figure below. a) The firm's short-­‐run supply curve is its marginal cost curve from b and above. True or False? b) Total revenue at the profit-­‐maximizing level of output is ___________. c) The total cost at the profit-­‐maximizing output level equals ___________. d) At the profit-­‐maximizing output level, the firm earns a profit of ___________. ©I. R. Foster 4 ECON 1011 Prof. Foster 13) A perfectly competitive firm has the following short-­‐run costs. There are 100 firms in this industry that all have costs identical to those of this firm. a) Complete the table below: Quantity Total Cost Marginal Cost Average Variable Average Total ($) ($) Cost ($) Cost ($) 0 $5 1 10 2 13 3 18 4 25 5 34 6 45 b) Market demand for the firm’s product is given by is given by the following market demand schedule: Price ($) Quantity Demanded $12 300 10 500 8 800 6 1200 4 1800 i) What is the market price facing firms in this industry? ii) What is the firm’s profit/loss? iii) The firm will break even when price equals $______. iv) The firm will shut down when market price is lower than $________. v) In the long run, if price is lower than $6, firms will: a. Continue to operate b. Shutdown c. Exit the industry d. Enter the industry ©I. R. Foster 5 ECON 1011 Prof. Foster 14) The graphs in this figure above represent the perfectly competitive market demand and supply curves for the apple industry and demand and cost curves for a typical firm in the industry. The current market price is $3 but the price will fall in the long-­‐run as new firms enter the market. True or False? 15) The figure below shows the cost curves of a perfectly competitive firm in the coffee market. Use the graph to answer the following questions. Assume the market price is $3 per pound. a) What is the lowest price at which the coffee grower will supply output in the short run? b) In the diagram draw the firm's demand curve (label this "MR" for marginal revenue). c) What is the firm's profit-­‐maximizing output? d) Is the firm earning a profit or a loss? Identify the area in the graph that represents the firm's profit or loss. e) Explain how entry or exit will occur in the market to ensure that firms will break even in the long run. ©I. R. Foster 6 ECON 1011 Prof. Foster 16) Werner & Sons is a manufacturer of three-­‐ring binders operating in a perfectly competitive industry. The table below shows the firm's cost schedule. Average Quantity Variable Marginal Average Total Cost Variable (cases) Cost Cost Total Cost Cost 0 $0 $76 1 30 106 2 50 3 134 4 140 5 160 6 114 7 150 8 190 9 316 a) Complete the table by filling in the blank cells. b) Werner is selling in a perfectly competitive market at a price of $40. What is the profit maximizing or loss-­‐ minimizing output? c) Calculate the firm's profit or loss. d) Should the firm continue to produce in the short run? Explain. e) If the firm's fixed costs were $30 higher what would be the profit-­‐maximizing output level in the short run? Indicate whether the output level will increase, decrease or remain unchanged compared to your answer in b). f) Suppose fixed cost remains at $76. If the price of three-­‐ring binders falls to $20 what is the profit-­‐ maximizing or loss-­‐minimizing output? g) Calculate the profit or loss. Should the firm continue to produce in the short run? Explain your answer. h) Suppose the fixed cost remains at $76. What price corresponds to the shut-­‐down point? i) Suppose the fixed cost remains at $76. What price corresponds to the break-­‐even point? ©I. R. Foster 7 ECON 1011 Prof. Foster 17) Bob produces DVD movies for sale, which requires an office space and a machine that copies the original movie onto a DVD. Bob rents an office space for $30,000 per month and rents a machine for $20,000 per month. Those are his fixed costs. His variable cost per month is given in the following table: a) Complete the table below: Quantity of DVDs Variable Cost Total Cost Average Variable Average Total Marginal ($) ($) Cost ($) Cost ($) Cost ($) 0 $0 50,000 -­‐ -­‐ 1,000 5,000 55,000 5 55 2,000 8,000 58,000 4 29 3,000 9,000 59,000 3 19.67 4,000 14,000 64,000 3.5 16 5,000 20,000 70,000 4 14 6,000 33,000 83,000 5.5 13.83 7,000 49,000 99,000 7 14.14 8,000 72,000 122,000 9 15.25 9,000 99,000 149,000 11 16.56 10,000 150,000 200,000 15 20 b) There is free entry into the industry, and anyone who enters will face the same costs as Bob. Suppose that currently the price of a DVD is $23: i) What will Bob’s profit be? ii) Is this a long-­‐run equilibrium? iii) If not, what will the price of DVD movies be in the long run? c) Assume that DVD production is a perfectly competitive industry: i) Draw Bob’s demand curve at the market price of $23. Be sure to label your axes and the curve. ©I. R. Foster 8 ECON 1011 Prof. Foster ii) What is Bob’s breakeven price in the short-­‐run? iii) What is Bob’s shut-­‐down price? iv) Suppose the price of a DVD is $2. What should Bob do in the short run? v) Suppose the price of a DVD is $7. What is the profit-­‐maximizing quantity of DVDs that Bob should produce? What will his total profit be? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run? v) Suppose the price of a DVD is $20. What is the profit-­‐maximizing quantity of DVDs that Bob should produce? What will his total profit be? Will he produce or shut down in the short run? Will he stay in the industry or exit in the long run? d) Draw Bob’s marginal cost curve. Label your axes and your curve. i) Over what range of prices will Bob produce no DVDs in the short run? ii) Depict Bob’s individual short run supply curve in your graph. iii) Depict Bob’s individual long run supply curve in your graph. ©I. R. Foster 9 ECON 1011 Prof. Foster MONOPOLY 1) Refer to the figure below. The fact that this firm is a natural monopoly is shown by the continually declining long-­‐run average total cost as output rises. True or False? 2) Refer to the figure below. If the monopolist charges price P* for output Q*, should the firm shut down or continue to operate? 3) If a monopolist's price is $50 at 63 units of output and marginal revenue equals marginal cost and average total cost equals $43, then the firm's total profit is $_______________. 4) Some economists argue that Microsoft become a monopoly in the market for computer software by developing MS-­‐DOS, an operating system used for the first IBM personal computers. The more people who used MS-­‐DOS-­‐based programs, the greater the usefulness of a using a computer with an MS-­‐DOS operating system. The explanation for Microsoft's monopoly is ____________________________________. ©I. R. Foster 10 ECON 1011 Prof. Foster 5) Wendell can sell five motor homes per week at a price of $22,000. If he lowers the price of motor homes to $20,000 per week he will sell six motor homes. What is the marginal revenue of the sixth motor home? 6) The government of a small developing country has granted exclusive rights to Linden Enterprises for the production of plastic syringes. The table below shows the cost and demand data for this government protected monopolist. Quantity per Price per Case Total Cost Day (cases) 1 $16 $7.00 2 15 9.50 3 14 11.00 4 13 12.00 5 12 14.50 6 11 17.50 7 10 21.00 8 9 25.00 9 8 30.00 10 7 35.50 a) What is the profit-­‐maximizing quantity and price for the monopolist? b) What is the amount of profit that the firm earns? 7) Assume that the table below gives the monthly demand and costs for subscriptions to basic cable for Comcast, a cable television monopoly in Philadelphia. Total Marginal Price Quantity Revenue Revenue Total Cost Marginal Cost $17 3 $51 -­‐-­‐-­‐-­‐-­‐ $56 -­‐-­‐-­‐-­‐-­‐ 16 4 64 $13 63 $7 15 5 75 11 71 8 14 6 84 9 80 9 13 7 91 7 90 10 12 8 96 5 101 11 a) If Comcast wants to maximize its profits, what price (P) should it charge and how many cable subscriptions per month (Q) should it sell? b) If Comcast maximizes its profits how much profit will it earn? ©I. R. Foster 11 ECON 1011 Prof. Foster 8) The figure below shows the cost and demand curves for a monopolist. a) What is the profit-­‐maximizing output and price for the monopolist? b) What is the monopolist's total revenue? c) What is the monopolist's total cost? d) What is the monopolist’s profit? e) Assume the firm maximizes its profits. What is the amount of consumer surplus? f) What is the amount of consumer surplus if, instead of monopoly, the industry was organized as a perfectly competitive industry? g) If this industry was organized as a perfectly competitive industry, then what would market output and market price be? h) If the firm maximizes its profits, the deadweight loss to society due to this monopoly is equal to the area EFG. True or False? 9) Consider an industry that is made up of six firms with the following market shares: Firm A -­‐ 50%, Firm B -­‐ 20%, Firms C and D -­‐ 10% each, and Firms E and F -­‐ 5% each. What is the value of the Herfindahl-­‐Hirschman Index and how will the industry be categorized? ©I. R. Foster 12 ECON 1011 Prof. Foster 10) The figure below reflects the cost and revenue structure for a monopoly that has been in business for a very long time. a) Identify the curves labeled A and B. Identify the curve which contains both point Y and point Z. Identify the curve which contains both point V and point W. b) What is the profit-­‐maximizing quantity and what price will the monopolist charge? c) What area represents total revenue at the profit-­‐maximizing output level? d) What area represents total cost at the profit-­‐maximizing output level? e) What area represents profit? f) What is the profit per unit (average profit) at the profit-­‐maximizing output level? g) If this industry was organized as a perfectly competitive industry, what would be the profit-­‐maximizing price and quantity? h) What area represents the deadweight loss as a result of a monopoly? 11) From the monopoly graph below, identify the area representing the deadweight loss. Would the deadweight loss be larger if the demand curve was more elastic or less elastic? ©I. R. Foster 13 ECON 1011 Prof. Foster 12) The figure below shows the market demand and cost curves facing a natural monopoly. a) Suppose the government regulates this industry in order to remove the inefficiency implied by the behavior of the profit maximizing owners. If regulators require that the firm produces the economically efficient output level, what is this level and what price will be charged? b) Which of the following would be true if government regulators require the natural monopoly to produce at the economically efficient output level? c) If the regulators of the natural monopoly allow the owners of the firm to break even on their investment the firm will produce an output of ________ and charge a price of ________. d) In the absence of any government regulation, the profit-­‐maximizing owners of this firm will produce ________ units and charge a price of ________. 13) Refer to the figure below to answer the following questions. a) What quantity will this monopoly produce and what price will it charge? b) Suppose the government decides to regulate this monopoly and imposes a price ceiling of $25. Now what quantity will the monopoly produce and what price will it charge? c) Will every consumer who is willing to pay the ceiling price of $25 be able to buy the product? Briefly explain. ©I. R. Foster 14 ECON 1011 Prof. Foster 14) Consider two industries, industry W and industry X. In industry W there are five companies, each with a market share of 20% of total sales. In industry X, there are six companies. One company has a 50% market share and each of the other five firms has a market share of 10%. a) Calculate the four-­‐firm concentration ratio for each industry. b) Calculate the Herfindahl-­‐Hirschman Index (HHI) for each industry. c) What do the values of the two concentration measures imply about the degree of market power in the two industries? ©I. R. Foster 15 ...
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