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# ps5 answers - Chapter 15 4 If the price of tap water rises...

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Chapter 15 4. If the price of tap water rises, the demand for bottled water increases. This is shown in Figure 4 as a shift to the right in the demand curve from D 1 to D 2 . The corresponding marginal-revenue curves are MR 1 and MR 2 . The profit-maximizing level of output is where marginal cost equals marginal revenue. Prior to the increase in the price of tap water, the profit-maximizing level of output is Q 1 ; after the price increase, it rises to Q 2 . The profit-maximizing price is shown on the demand curve: it is P 1 before the price of tap water rises, and it rises to P 2 after. Average cost is AC 1 before the price of tap water rises and AC 2 after. Profit increases from ( P 1 - AC 1 ) x Q 1 to ( P 2 - AC 2 ) x Q 2 . Figure 4 Figure 5 Figure 6 5. a. Figure 5 illustrates the market for groceries when there are many competing supermarkets with constant marginal cost. Output is Q C , price is P C , consumer surplus is area A, producer surplus is zero, and total surplus is area A. b. If the supermarkets merge, Figure 6 illustrates the new situation. Quantity declines from Q C to Q M and price rises to P M . Area A in Figure 5 is equal to area B + C + D + E + F in Figure 6. Consumer surplus is now area B + C, producer surplus is area D + E, and total surplus is area B + C + D + E. Consumers transfer the amount of area D + E to producers and the deadweight loss is area F. 6. a. The following table shows total revenue and marginal revenue for each price and quantity sold: Price Quantity Total Revenue Marginal Revenue Total Cost Profit 24 10,000 \$ 240,000 ---- \$ 50,000 \$ 190,000 22 20,000 440,000 \$ 20 100,000 340,000 20 30,000 600,000 16 150,000 450,000 18 40,000 720,000 12 200,000 520,000 16 50,000 800,000 8 250,000 550,000 14 60,000 840,000 4 300,000 540,000 b. Profits are maximized at a price of \$16 and quantity of 50,000. At that point, profit is \$550,000. c. As Johnny's agent, you should recommend that he demand \$550,000 from them, so he instead of the record company receives all of the profit. 8. a. The table below shows total revenue and marginal revenue for the bridge. The profit-maximizing price would be where revenue is maximized, which will occur where marginal revenue equals zero, since marginal cost equals zero. This occurs at a price of \$4 and quantity of 400. The efficient level of output is 800, since that's where price equals marginal cost equals zero. The profit-maximizing quantity is lower than the efficient quantity because the firm is a monopolist. Price Quantity Total Revenue Marginal Revenue \$ 8 0 \$ 0 ---- 7 100 700 \$ 7 6 200 1,200 5 5 300 1,500 3 4 400 1,600 1 3 500 1,500 -1 2 600 1,200 -3 1 700 700 -5 0 800 0 -7 b. The company should not build the bridge because its profits are negative. The most revenue it can earn is \$1,600,000 and the cost is \$2,000,000, so it would lose \$400,000.

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Figure 7 Figure 11 c. If the government were to build the bridge, it should set price equal to marginal cost to be efficient. But marginal cost is zero, so the government should not charge people to use the bridge.
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ps5 answers - Chapter 15 4 If the price of tap water rises...

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