Continuing with the equations: P = 80 - 23Q MC = 20 + 3Q Note: MR = 80 - 4/3Q = 80 – 4Q – ½Q = P – Q = P- (dP/dQ)Q = P(1 – 1/ED) %3D %3D Setting MC = MR yields the profit-maximizing markup over marginal cost: %3D MC = P(1 - 1/ED) P = MC[1/(1 – 1/ED)] %3D (P - MC)/P = 1/ED %3D %3D a. Assume the market is monopolized. Find Q*, P*, and the elasticity of demand ED at the profit- maximizing point and verify that the markup equation is satisfied: Q* = %3D P* = ED = %3D (P- MC)/P = %3D b. Assume the market is monopsonized. Using the procedure in (a), which found MR as a function of P and ED, find a formula for marginal expenditure (ME) as a function of P and Es.

Continuing with the equations: P = 80 - 23Q MC = 20 + 3Q Note: MR = 80 - 4/3Q = 80 – 4Q – ½Q = P – Q = P- (dP/dQ)Q = P(1 – 1/ED) %3D %3D Setting MC = MR yields the profit-maximizing markup over marginal cost: %3D MC = P(1 - 1/ED) P = MC[1/(1 – 1/ED)] %3D (P - MC)/P = 1/ED %3D %3D a. Assume the market is monopolized. Find Q, P, and the elasticity of demand ED at the profit- maximizing point and verify that the markup equation is satisfied: Q* = %3D P* = ED = %3D (P- MC)/P = %3D b. Assume the market is monopsonized. Using the procedure in (a), which found MR as a function of P and ED, find a formula for marginal expenditure (ME) as a function of P and Es.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter23: Managing Vertical Relationships

Section: Chapter Questions

Problem 4MC

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