Ch15Solutions - Homework 8 Chapter15 Solutions 1 a We would expect that prices for food and drink would be higher in a stadium because the stadium

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Homework 8 Chapter15 Solutions 1. a) We would expect that prices for food and drink would be higher in a stadium because the stadium has a monopoly in these goods while people are inside of it. This is consistent with the table. b) Prices are higher inside a stadium, because the stadium’s owners monopolize the market for food and drinks at the event inside the stadium. When a monopoly exists, the monopolist can charge a higher price because they have market power and the ability to prohibit entry into the market. In the case of a stadium, market power is the ability of the stadium owners to charge whatever price they wish for food and drinks, and the barrier to entry is the stadium owners’ ability to restrict vendors. We know from our discussion of demand in previous chapters that when prices rise, the quantity demanded falls; therefore, when a monopolist charges a higher price, they produce a smaller quantity compared to the competitive outcome. c) If a grocery store charged the same price, then consumers would buy less food from the grocery store and substitute to other food sources. This is because we expect the demand for food and drinks to be more elastic outside of the stadium because of the greater variety of food and drink sellers (ex. restaurants, wholesale stores, mini-marts). 10. a) In table 10a, we calculate total revenue and then use total revenue to calculate marginal revenue by: MR = Δ TR Δ Q The demand curve is graphed using the price information from the table above. Both demand and marginal revenue are graphed in figure 10a. Marginal revenue is downward sloping because the additional revenue from lowering the price by a fixed amount will fall as the demand curve becomes less elastic (i.e. as we move downward along a linear demand curve) and will become negative when demand becomes price inelastic (at this point the marginal revenue is negative). Recall from the text that when MR=0, total revenue is maximized. Marginal revenue is below the demand curve because a decrease in price causes a gain in revenue due to more units being produced and sold, but also causes a decrease in revenue because all the units being sold are sold at the lower price. As price continues to fall, the gain from lowering the price become small while the loss becomes larger.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Price per carat ($) Quantity of Diamonds (thousands) Total Revenue Marginal Revenue 10,000 75 750000 - 9,000 125 1125000 7500 8,000 175 1400000 5500 7,000 225 1575000 3500 6,000 275 1650000 1500 5,000 325 1625000 -500 4,000 375 1500000 -2500 Table 10a b) The revenue maximizing quantity is determined where marginal revenue is equal to zero. In the graph above, this corresponds to approximately 288,000 diamonds. At a quantity of 288,000 diamonds, consumers are willing to pay a price of approximately $5,250. In the table produced in part (a), we observe that this is close to the price of $6,000, which corresponds to the greatest revenue in the table. As the monopoly sells more diamonds, say over 288,000, then the marginal revenue becomes negative, implying that revenue begins to fall. This is because the gains from selling more diamonds do not offset the revenue losses from charging a lower price. We observe
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/16/2012 for the course ECON 101 taught by Professor Gerson during the Fall '08 term at University of Michigan.

Page1 / 12

Ch15Solutions - Homework 8 Chapter15 Solutions 1 a We would expect that prices for food and drink would be higher in a stadium because the stadium

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online