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The Plymouth Software Company has the following demand curve with MC = $10 and P = 100 - Q with MR = 100 - 2Q.

The Plymouth Software Company has the following demand curve with MC = $10 and P = 100 – Q with MR = 100 – 2Q. Here it is assumed that monopoly demand curve is identical with market demand curve of perfectly competitive market (i.e., they share the same demand curve)

a.Compute profit maximizing price and output under perfectly competitive market and under monopoly and compare P’s and Q’s of pure competition and monopoly. In which case more output is produced at lower price and why. Hint: P = MC for pure competition and MR = MC for monopoly.

b.Compare (and compute if you can) consumer surplus under perfect (or pure) competition and monopoly and which one is greater and why.

c.Explain why the case of monopoly as opposed to pure competition is not Pareto’s optimal from a societal point of view in terms of consumer surplus you got in (b)

d.Many amusement parks charge entrance fee and then separate fees for each ride. In view of the above discussion, what do you think is the reason for it? Hint: consider consumer surplus.

e.What is the advantage for duopoly (two oligopoly firms) with equal size sharing the identical demand to behave as one monopolist and split the profit afterward rather than behave as two different firms under oligopoly? Under duopoly, each duopoly firm would be able sell 30 units each at $40. Under duo-poly, demand curve for each firm becomes P = 50 – Q, which is one half of P = 100 – Q, industry demand curve. Compute profits for the two situations; monopoly and duopoly to answer this question. For simplicity, it is assumed that there is no fixed cost.

f.Based upon your answer in (e), why is it better to behave as one and then split profit in half than as duo-poly? Present your arguments clearly with quantitative support for your answer.

g.Suppose that the two firms under the above duopoly have now two different demand curves, not one identical market demand curve; one is more elastic than the other. Would it be still advantageous for them to behave as one monopolist or not? Why or why not. No numerical answer is required for this question.

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511916_ECO_sol_complete.doc

The Plymouth Software Company has the following demand curve with MC = $10 and
P = 100 – Q with MR = 100 – 2Q. Here it is assumed that monopoly demand curve is
identical with market demand...

Sign up to view the full answer

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