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# Answers_Ch14 - CHAPTER 14 MONOPOLY The problems in this...

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CHAPTER 14 MONOPOLY The problems in this chapter deal primarily with marginal revenue-marginal cost calculations in different contexts. For such problems, students' primary difficulty is to remember that the marginal revenue concept requires differentiation with respect to quantity . Often students choose to differentiate total revenue with respect to price and then get very confused on how to set this equal to marginal cost. Of course, it is possible to phrase the monopolist's problem as one of choosing a profit-maximizing price, but then the inverse demand function must be used to derive a marginal cost expression. The analytical problems in this chapter take alternative approaches to some of the topics explored earlier. Varian’s approach to the welfare effects of third degree price discrimination (Problem 14.12) is especially recommended. Comments on Problems 14.1 A simple marginal revenue-marginal cost and consumer surplus computation. 14.2 An example of the MR = MC calculation with three different types of cost curves. 14.3 An example of the MR = MC calculation with three different demand and marginal revenue curves. Illustrates the "inverse elasticity" rule. 14.4 Examines graphically the various possible ways in which shift in demand may affect the market equilibrium in a monopoly. 14.5 Introduces advertising expenditures as a choice variable for a monopoly. The problem also asks the student to view market price as the decision variable for the monopoly. 14.6 A price discrimination example in which markets are separated by transport costs. The problem shows how the price differential is constrained by the extent of those costs. Part d asks students to consider a simple two-part tariff. 14.7 This problem shows how the welfare cost of monopoly may be larger than in the traditional case if the monopoly has higher costs. 14.8 This problem examines some issues in the design of subsidies for a monopoly. 14.9 A problem involving quality choice. The result shows that, in this case, monopolist's and competitive choices are the same (though output levels differ). This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. 115

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116 Chapter 14: Monopoly Analytical Problems 14.10 Taxation of a monopoly good. This problem focuses mainly on ad valorem taxes on a monopoly good. The final part of the problem compares ad valorem and specific taxes. Solutions 14.1 a. P = 53 - Q PQ = 53 Q - Q 2 MR = 53 - 2 Q = MC = 5 Q = 24, P = 29, π = ( P - AC) Q = 576 b. MC = P = 5 P = 5, Q = 48 c. Competitive Consumers' Surplus = 2 (48) 2 = 1152. Under monopoly: Notice that the sum of consumer surplus, profits, and Deadweight loss under monopoly equals competitive consumer surplus. 14.2 Market demand Q = 70 - P , MR = 70 - 2 Q .
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Answers_Ch14 - CHAPTER 14 MONOPOLY The problems in this...

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