1001majorch10

# 1001majorch10 - ECON1001AB Dr.KafuWONG...

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ECON 1001 AB Introduction to Economics I Dr. Ka-fu WONG Ninth week  of tutorial sessions KKL 925, KKL 1010, K812, KKL 106 Clifford CHAN KKL 1109 [email protected]

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Covered and to be covered Covered the week before the break Dr. Wong finished up to slides of 24 of kf011.ppt You should have at least read up to Chapter 10 Monopoly and Other Forms of Imperfect Competition Midterm 2 will be held on this Saturday; it covers everything up to Chapter 10. Focus on materials covered after the first midterm If not, please press hard on it. Start reading Chapter 11 Strategic Choice in Oligopoly, Monopolistic Competition, and Everyday Life To be covered in the tutorial sessions this week Problems in chapter 10: #1, #3, #5, #7, #8 and #9 You are advised to work on the even ones as well
Problem #1, Chapter 10 Two car manufacturers, Saab and Volvo, have fixed costs of \$1 billion and marginal costs of \$10,000 per car. If Saab produces 50,000 cars per year and Volvo produces 200,000, calculate the average production cost for each company. On the basis of these costs, which company’s market share do you think will grow in relative terms?

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Solution to Problem #1 (1) Given in the question, both manufacturers have a fixed cost of \$1 billion and a marginal cost of \$10,000 per car Marginal cost = Variable cost Total variable cost (TVC)= Marginal cost * quantity Saab TVC Saab = 10,000 * 50,000 = \$500,000,000 Total cost (TC) = Total variable cost + Total fixed cost TC Saab = \$500,000,000 + \$1,000,000,000 = \$1.5 billion AC Saab = \$1.5 billion / 50,000 = \$30,000
Solution to Problem #1 (2) Volvo TVC Volvo = 10,000 * 200,000 = \$2,000,000,000 Total cost (TC) = Total variable cost + Total fixed cost TC Volvo = \$2,000,000,000 + \$1,000,000,000 = \$3 billion AC Volvo = \$3.0 billion / 200,000 = \$15,000 Why Volvo’s average cost is only half of Saab’s even if they actually face the same fixed and marginal costs? Volvo’s annual production is 4 times larger than Saab’s This reveals that Volvo has a much higher market share than Saab, and thus it has a higher potential for growth relative to Saab

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Problem #3, Chapter 10 Multiple-choice question A single-price, profit maximizing monopolist: Causes excess demand, or shortages, by selling too few units of a good or service Choose the output level at which marginal revenue begin to increase Always charge a price above the marginal cost of production Also maximizes marginal revenue None of the above statements is true
Solution to Problem #3, (1) A) False Even if a monopoly produces less than the perfectly competitive quantity, it will not produce any excess demand or shortage At the chosen output, demand and supply coincide B) False A monopoly maximizes the total profit instead Similar to a perfectly competitive firm, a monopoly produces at a level where marginal revenue is equal to marginal cost

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Solution to Problem #3 (2) C) True A monopoly determines an output level by equating marginal revenue and marginal cost, but it charges a price according to the demand Demand function is always higher than the marginal revenue function Thus, a monopoly always charges a price is greater than the marginal revenue (marginal cost)
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