# hw aplia - 5.0 Monopoly.r Outcome 45.5 ‘1 0.0 4. Loss 3.5...

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Unformatted text preview: 5.0 Monopoly.r Outcome 45.5 ‘1 0.0 4. Loss 3.5 sl- ‘0 3.0 2.5 2.0 1.5 I 1.0 I 0.5 : _ I MR MR 0.0 Ill] I] :5 E12 15 2|] 215 2B 32 Eli-Iii] [J 45 31215202023323500 QUANTITY |1005 of ca hs per month] GUA NTITY I1 005 of cans per month] Explanation: Glass A The proﬁt-maximizing quantity occurs where marginal revenue equals marginal cost. Hence, the proﬁt-maximizing quantity for BYOB ls 2;000 cans of beer per month. BYOB wants to charge the highest price [P] possle at which It can sell all 2,000 cans. BYOB will charge a price on the demand curve that con‘esponds to the point at which the quantity {Q} demanded equals 2,000 cans. Therefore, BYOB will set Its price at \$235 per can, the maximum amount that consunErs are willing and able to pay. Economic proﬂt Is equal to total revenue mlnus total cost: Economic Profit Total Revenue {TR} - Total Cost {TC} {P it Q) - [ATC x Q} [P - ATE) it Q Therefore, you should have shaded In the area between \$2.15 and \$3.00 and over to 2;000 cans. Because the average total cost (\$3.00 per can} Is greater than the price [\$2.75 per can) at the proﬁt-maximizing tiuaritihu'r BYOB is suffering a loss. Suppose that BYOB chargEs \$2.35 per can. Your friend Dmltrl says that sInce BYOB Is a pure monopoh,I wltn market power, it should charge a hlgher prIce of \$3.00 per can. Dmltri clalms that BYOB would break even If it dld thls. FIII In the following table to determine whether Dmitri Is oorrect. PHD?- Quantltv Demanded Total Revenue Total Cost Economic Proﬂt (P) (Cans per month) (TR) (7;) {4.} or Lm {_) 2.?5 2,000 5,500 5,000 -EDU m v « Given the above information, Dmltrl is not 9' corrEct In his assertlon that BYOB should charge \$3.00 per can. Explanation: Close A IIr BYOB charges \$3.00 per can of been then quantltv demanded Is only 1.600 cans per month, as gIUEn by the market demand curve. At this qLJantlty, total revenue Is prlce timEs qUantity, or \$4,300 per month, and total cost is quantity times average total cost (\$3.50 per can), or \$5,500 per month. This rasults In a loss of \$800 per month, compared with a loss of \$500 per month when prodUclng 2,000 cans per month and charging \$2.35. Therefore, the losses suffered are greater if BYOB chooses to sell a can of beer at \$3.00 rather than \$2.35. Dmltri ls incorrect. 5.0 MonopolvDutcome 5"] MC .4». M0 5.5 V ‘l 5.5 5.5 5.5 ‘Loss 55 i, i, v' 5.5 5.5 5.5 p H 2.5 ‘ m V: 2.5 <> 0 2.5 2.5 1.5 1.5 1.5 1.5 5.5 5.5 5.5 5.5 5 5 5 12 15 25 25 25 52 35 55 5 5 5 12 15 25 25 25 52 55 55 u55N111Y11555 of cans per month] QUANTITY 11555 51 cans per month] Explanation: Close A The proﬁt-maxlmlzlng quantltv occurs where marginal revenue eqUaIs marglnal cost. Hence, the proﬁt-maxlmlzing quantity for BYOB Is 2,000 cans of beer per month. BYOB wants to charge the highest price (P) possible at whlch it can sell all 2,000 cans. BYOB will charge a price on the demand curve that oorresponds to the polnt at whlch the quantltv {Q} demanded equals 2,000 cans. Hence, BYOB Iwill set its price at \$235 per can, the mavlmum amount that consumers are wiIIIng and able to pay. Economlc profit is total revenue mInLIs total cost: Economic Proflt Total Revenue (TR) — Total Cost {TC} = {P}: Q} — {ATEXQ} [P—ATC) HQ Therefore, you should have shaded in the area bath-dean \$2.25 and \$235 and war to 2,000 cans. BacaLJse the average total cost (\$2.25 per can) is less than the price {\$2.35 per can} at the profIt-mammIzing quantity, BYOB Is makan a proflt. Answer PRICE [Dollars per hot dog] PRICE [Dollars per hot dog] 5-D PC Outcome 5-” as + 15.5 t0 t0 CSunderPC 3.5 ‘L ‘ J 3.5 3.0 3.0 2-5 PSunderPC 2-5 «0 o 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 0 20 :10 00 00 100 120 1w 100 100 200 0 20 \$0 00 00 100 no no 100 100 200 QUANTITY IHot dogs per day] E E QUANTITY IHot dogs per day] Thls moostrv will prodUce a total of 50 J hot page per day at the purer competitive price of \$2.5ﬂ 1! Each. Explanation: Close A Under pore competition, the market equlllbrlun'l prlee is \$2.50 per hot dog and the market equlllbrlum quantity Is 50 hot dogs per day. Consumer surplus is the dlfferenoe between the price consumers are willing to pay and what they actually pay for a good‘ Graphicallyr consumer surplus Is the area bounded from above by the demand curve and from below by the edulllbrlurn pnoe. Producer surplus Is the differenoe between the lowest prlee a producer Is wllling to aocept for a good and the price the producer actuallyl receives Graphically, producer surplus Is the area bounded from above by the equilibrium price and from below by the supva {marginal cost) curve. Moreover, resources are allocated efﬂclently. Hub" Ifl PRICE AND COSTS IDollars per hotdog] PRICE AND BEETS IDollars per hot dog] 5-” MC MonopolyDutcome 5-D MC as + as an an '35 u rider Honopol 3.5 ‘ ‘L 3.5 in 1|] 2'5 F'Sundert-‘Ipnupol 2.5 O Q 2.D 2.0 1.5 : Efficiency Loss '15 l - - 1.El . "LEI IJ.E : [LE . MR o MR n D.D D.D El 20 M] an El] 100 120 1M] loll IBIJ ZEID I] 2|] ﬁll an an Hill] 120 HI] 1150 13B 200 QUANTITY IHut dogs per day] pumle lHut dogs per day] Based on the graph you lost plotted above, as a pure monopollst, the hot dog vendor maximizes eoonomlc proﬁt by produdng 40 J hot dogs per day at a prlce of \$3.0ﬂ J each. Explanation: Close A The hot dog stand will produce the level of output at whlch lts marglnal revenue ls equal to Its marginal cost; this ooours at 40 hot dogs per day. It will charge a monopolist‘s prlce of \$3.00, the maylmum amount oonsumers are wllling to pay at this output level (as determlned by the demand curve]. Consumer surplus is the difference between the price consumers are wllling to pay and what they actually pay for a good. Graphicallyl oonsumer surplus ls the trlangular area bounded from above by the demand curve and from below by the monopollst's prloe of \$3.00. Producer surplus ls the difference between the lowest price a producer ls willing to aooept for a good and the price the produoer actually receives Thereforer producer surplus Is the area bounded from above by the monopolist‘s prloe of \$3300, from below by the marginal cost curve, and from the rlght by the quantlty of hot dogs produced. ...
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## This document was uploaded on 11/02/2011 for the course ECONOMIC ec 202 at Montgomery.

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