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Tutorial+9+Solutions - Eco1010f Tut assignment 9 Due date...

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Eco1010f Tut assignment 9 Due date: week beginning 19 April 2010 Think about (and be prepared to explain) the following key issues before going to your tut. a) What is a single price monopolist (as opposed to a price discriminating monopolist)? A MONOPOLIST WHO CHARGES EVERYONE THE SAME PRICE. b) Why is a single price monopolist’s marginal revenue twice as steep as his demand curve? TO SELL MORE HE HAS TO LOWER THE PRICE. SINCE HE IS NOT JUST LOWERING THE PRICE ON THE LAST YUNIT SOLD, BUT ON ALL THE OTHERS HE WAS SELLING BEFOREHAND TOO, HIS REVENUE CAN’T INCREASE BY THE PRICE OF THE ITEM. EG YOU ARE SELLING 10 ITEMS AT R20 EACH. => TR = R200 TO SELL ONE MORE YOU LOWER THE PRICE TO R19. YOU MAY GET R19 FOR THE MARGINAL UNIT, BUT YOU ALSO LOSE R1 ON EACH OF THE 10 YOU WERE SELLING BEFORE => TR ONLY RISES BY R9 CHECK:- TR NOW IS 19 x 11 = R209 ANOTHER WAY FORWARD: MR = P(1 - 1 ) ON THE TOP HALF OF DEMAND ELAST ( η) > 1 => MR IS POSITIVE, BUT LESS THAN P c) Identify the fallacy in the comment, “Monopoly is bad because if demand is inelastic a monopoly can just increase its profits by raising prices” (assume a straight line demand curve). AS YOU SAW ABOVE, A MONOPOLIST ALWAYS PRODUCES ON THE ELASTIC SECTION OF DEMAND! ... TO MAXIMIZE PROFITS PRODUCE WHERE MC=MR. MC MUST BE POSITIVE, SO MR MUYST BE POSITIVE, => YOU MUST BE ON THE TOP HALF OF THE DEMAND CURVE. d) Natural monopolies have often been taken over by governments. Such nationalization is often accompanied by a shift from profits to losses. Explain why this is not necessarily due to managerial incompetence (assume gov’t wants the firm to be a welfare maximizer).
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