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Unformatted text preview: 4. meIt maxlmlzatlon and loss mlnlmizatlun BYOB is a pure mehoponst In beer productlon and dlstrlbutlon in a small counth Suppose that BYOB cannot price dlscrln‘ﬂnate. It sells Its beer at the same prlce per can to all custen‘lersl The
Fellewlhg graph EHDWS the I'har'glnal cht (MC), marglhal revenue {MR}, average total cast (ATE), and demand {D} In
the market for been Place the grey pcﬂht (star symbol) on the graph to ind1cate the profIt—maxlmlzlhg prlce and quahtlty for BYOB. Drop
lines wlll extend to both axes automatlcally. Ir BYOB Is makan an economlc proﬁt. use the purple rectangle [dlamend symbols} to shade In the area representan
Its emmmk profit. On the other hand, If BYOB 15 sufferlng an emnomlc less. use the red rectangle [cross symbols]
to shade In the area representlng its ecehemlc less. PRICE AND CDSTS IDollars per can] SJ] MonepoLy Outcome
MC _
.55 T
in
Less
3.5 h
1]
2.5 ‘Prum
O O 2.]
1.5
‘l.] 0.5
MR
Ill] I] It 3 12 15 2] 215 23 32 35 IN
UUﬁNTITVHDUS nfcans Der munth] CleanALL Suppose that BYOB charges $2.?5 per can. Your Friend Dmltrl says that slnce BYOB Is a pure monopoly wlth market
power, it should charge a hlgher prlce of $3.00 per can. Dmitrl clalms that BYOB would break even If it dId thls. FIII In
the followan table to determine whether Dmitri Is oorrect. Price Quantity Demanded Total Revenue Total Cost Economic Proﬁt (P) (Cans per month} (TR) (11:) {+) or Loss {—11 2.?5 2.000 5.500 5,000 —500 3m 4.2m v a v
Given the above information, Dmltrl Is correct In hIs assertlon that BYOB should charge $3.00 per can. Suppose that a technologlcal Innovation causes BYOB to now face the following marglnal cost (MC), marginal revenue
(MR), average total cost (ATE). and demand {0) In the market for beer. Speciﬁcally, the temnologlcal Innovation
caUses a decrease In average ﬁxed costsr thereby lowerlng the ATE curve to its posltlon on the graph below. Place the grey.' polnt (star symbol) on the graph belowI to indlcate the profItmaxlmlzlng prlce and quantlty for BYOB.
Drop IInes wIII extend to both axes automatically. If BYOB I5 makan an economlc proﬁt, use the purple rectangle [diamond symbols) to shade In the area that
represems echomlc proﬁt. However. if BYOB is suﬁeﬁng an economlc loss. USE the red rectangle (cross symbols} to
Shade “1 the area that relateSENS economlc IDES. PRICE AND 005TS IDoLlars per can]
5'” Monopoly Outcome
MC _
as ‘f‘
in
Less
3.5 h
in f
;/ MC 0mm
2.5
O 0
2D N
1.5
1.n
0.5
MR
n.n
nae a1215202e233235sn
QUANTITY I1 005 of cans per month] 5. Monopoly outoome vs. perfect competition outcome To deterrnlne the degree of effit:lenc~,,l in a partlcular type of market structure or prlcing scheme. economlsts often
measure welfare effects In the form of consumer and producer surplus. This problem compares consumer and
prodUcer surpIUs In a purely cdmpetltlue market wlth consumer and prddUcer surplus In a market domlnated by a
single seller) Conslder the market for hot dogs in a small city. Suppose that this market Is In long—run competitive equlllorlum wlth
many hot dog stands in the city, each one sellan the same klnd of hot dog. Therefore. each vendor Is a prlce taker
and possesses no market power. The graph below shows the demand (D) and supply cUWes (s = MC) In the market for hot dogs. Determlne the slze of consumer surpIUs and producer surplu5 in this purely competitive market. Place the red point
(cross symbol] on the graph to Indicate the market prlce and qUantlty that wlll result from pure competition. Dashed
drop Ilnes wlll autornatlcally extend to both axes. On the graph below. use the green triangle (trlangle symbols] to
shade the area that represents consumer surplus. and use the purple triangle {dlamond symbols) to shade the area
that represents prodUcer sUrplus. Nolne: If you declde that consumer surpIUs or producer sUrplus equals zero, you should not place the shape
correspondan to that area on the graph. PRICE llilollars oer hot dog]
El]
5 I NC PC Outcome
ta ‘1'
I
All]
CSunderPC
35 A A
Ill]
25 PSunderPC
Q 9
El]
1.5
1.]
I15
D
Ill]
III 20 to 6] BI] IEID 12!] MD 150 130 200
uunmlrvluutoogsperdayl Thls lndUstry will produce a total of hot dogs per Idayr at the purely competitive price of each. NOW, assume that one of the hot dog stands suecessfull'y‘ Iobhles the city councll to obtth the eKCIUSltfe tlght to sell
hot dogs wlthln the clty Ilmlts. This ﬁrm buys up all the rest of the hot dog stands In the clty and operates as a pure
menopoly. Assume that thls change EIOESh't affect demand, and that the new pure monopoly's margll'lal cast curve
correspOnds exactly to the supplyI EUWE on the diagram above. Under this assUmptien, the graph below shows the
demand (D), marglnal revenue (MR), and marginal cost (MC) curves for the pure monopoly firm. Place the red point (cross symbol] on the graph to Indicate the proﬁt—maxlmlzing prioe and qUantlty of a pure
monopollst. On the graph below, Use the green triangle [trlangle symbols) to shade the area that represents
conswher sUrplus, and Use the pUrple quadrllateral (dlamond sythIs) to shade the area that represems pmdumr
surDIUS. PRICE AND COSTS IDollars per hol dag] 5.0 MI: Monopoly Outcome
45.5 I ‘
I
M]
CS under Monopoly
3.5 A A
in
PS under Monopoly
2.5 ,1"
O O
2.0
15 Elficienty L055
l: El
‘l.lJ
I15
MR D
flu [J 20 M] Ell] El] 1m] 12!] 1&0 15!] mo 2m] DUANIITY IHut dogs perday] Based on the graph you just plotted aheve, as a pUre monopollst. the hot dog vendor mailmlzes econprnlc proﬁt by
produdng hot dogs per day at a prlce of each Consider the welfare effects when the Industry operates under a purely competltlve market versus a pure monopoly.
0n the graph above. use the dark green triangle {rectangle symbols) to shade the area that represents the loss of
welfare from a pure monopoly, or efﬂclency loss {or“deadweight loss"). That Is, show the area that was formerly
producer surplus or oonsumer surplus and now dms not aocrue to anybody. ...
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 Spring '11
 Makambira

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