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# rev1(4) - Monopoly Types of problems Basic problem-firm...

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Monopoly Types of problems: Basic problem—firm produces at one firm and sells in one market at a common price Firm incentives—owner versus managers Price discrimination problems o Geographically separate markets with by transportation costs between markets o Consumer groups that have difficulty reselling product (may involve capacity constraint) o Two-part tariff to capture consumer surplus o Perfect price discrimination Monopoly producing at multiple plants 1. George owns the Soft Rock Café in Bellevue, Nebraska. The café caters to the over 50's crowd: if features records from the '70s and serves only steak dinners. The demand for meals at the Soft Rock is Q=270-12P, where Q is the number of customers (and meals) per day and P is the price of a meal. George's costs are TC=13Q. a) What price and output will George choose if he is maximizing profit? b) What is the "deadweight welfare loss" of monopoly in this problem? c) Now suppose that George sells his café to a national restaurant chain. The chain wants to maintain the same format for the café and retains George to manage the café. George believe that his employment prospects at other businesses will be enhanced if he maximizes revenue at the Soft Rock Café. What will be the price and output if George maximizes revenue? d) The chain is happy with increased sales from part c, but they are distressed that the restaurant is now losing money. The chain advises George that the Soft Rock must breakeven, or he will be replaced. Under these new conditions, what price and output will George choose? Answer: a) P=17.75 and Q=57 b) If Q was produced in a competitive industry then P=MC=13 and Q=114. Producer surplus is 270.75 in monopoly (firm profits). Consumer surplus with monopoly is (22.5-17.75)57(.5)=135.375. TS=270.75+135.375=406.125 with monopoly. Producer surplus is 0 with competition, and consumer surplus is (22.5-13)114(0.5)==541.5. TS=541.5 with competition. DWL=541.5-406.125=135.375. c) P=11.25 and Q=135 d) P=13 and Q=114 2. Rita is the owner/manager of a golf course in Panama City, Florida. This is the only golf course within 100 miles, so Rita has monopoly power in the local golf market. This city has two types of golfers: air force officers from the local base and local townsfolk. Air force officers have golf demand functions of q A =100-P, where q A is the number of times that an air force officer plays golf in a year and P is the green fee that the individual pays each time they play. Similarly, q T =80-P is the golf demand for the townsfolk. Assume that there are 100 golfers of each type in the local area. Rita's cost function for operating the course is TC=10q, and costs are identical for each type of golfer. Rita is considering a policy of charging an annual membership fee (T) that allows members to play on the course during the year and then a usage fee (P) for each time that the member plays.

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a) Initially, suppose that Rita ignores townsfolk, and she sets membership and usage fees
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## This note was uploaded on 05/06/2010 for the course ECON econ 101 taught by Professor Buddin during the Spring '10 term at UCLA.

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rev1(4) - Monopoly Types of problems Basic problem-firm...

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