Chapter 9 Monopoly, Oligopoly, and Monopolistic Competition Odd-numbered Qs
Problem #1, Chapter 9 •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?
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
•Why Volvo’s average cost is only half of Saab’s even if they actually face the same fixed and marginal costs?
Problem #3, Chapter 9 • 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
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)
Solution to Problem #3 (3) • D) False • A monopoly maximizes the total profit instead • It actually produces at a level where marginal revenue is equal to marginal cost • E) False, as only C is proven to be a true statement
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