Topside Tiles, which produces roofing tiles, is a local monopoly. Its inverse demand function is p=140-20, and its constant marginal cost is 10. The owner has delegated the decision of how much output to produce to the plant manager. The manager's income, Y, is 5% of revenue: Y=0.05R. Show that a manager who wishes to maximize income, Y, will choose an output that exceeds the profit-maximizing level. Is there a conflict of interest between the owner and manager? Is this situation an agency problem? (Hint: This problem can be solved using a graph, by using calculus, or by using the rule that the MR curve has twice the slope of the demand curve.) The output that maximizes profit is (Enter your response rounded to one decimal place.) units.
Topside Tiles, which produces roofing tiles, is a local monopoly. Its inverse demand function is p=140-20, and its constant marginal cost is 10. The owner has delegated the decision of how much output to produce to the plant manager. The manager's income, Y, is 5% of revenue: Y=0.05R. Show that a manager who wishes to maximize income, Y, will choose an output that exceeds the profit-maximizing level. Is there a conflict of interest between the owner and manager? Is this situation an agency problem? (Hint: This problem can be solved using a graph, by using calculus, or by using the rule that the MR curve has twice the slope of the demand curve.) The output that maximizes profit is (Enter your response rounded to one decimal place.) units.
Chapter8: Monopoly
Section: Chapter Questions
Problem 15SQ
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Transcribed Image Text:Topside Tiles, which produces roofing tiles, is a local monopoly. Its inverse demand function is
p=140-2Q,
and its constant marginal cost is 10. The owner has delegated the decision of how much output to produce to the plant manager. The
manager's income, Y, is 5% of revenue:
Y=0.05R.
Show that a manager who wishes to maximize income, Y, will choose an output that exceeds the profit-maximizing level. Is there a conflict
of interest between the owner and manager? Is this situation an agency problem? (Hint: This problem can be solved using a graph, by
using calculus, or by using the rule that the MR curve has twice the slope of the demand curve.)
The output that maximizes profit is
(Enter your response rounded to one decimal place.)
units.
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