Concept explainers
a.
To explain: The level of output which is to be produced by monopolist in order for entrant to face the residual demand curve.
a.
Answer to Problem 1CACQ
The monopolist firm has to produce 16units of output.
Explanation of Solution
It shall be noted that under limit pricing, the horizontal difference between the entrant's residual demand curve
It shall be noted that under limit pricing, the horizontal difference between the entrant's residual demand curve
b.
To explain: The amounts of profit will the monopolist earn.
b.
Answer to Problem 1CACQ
The amounts of profit will the monopolist earn is
Explanation of Solution
The profit is,
Here, the price is
Thus, the amounts of profit will the monopolist earn is
The profit is,
Here, the profit is
c.
To explain: Whether monopolist profitably deter entry by committing to a different level of output.
c.
Answer to Problem 1CACQ
The monopoly firm could produce & supply output greater than 16 units that will fetch it higher profits and yet deter entry of new firms in the market.
Explanation of Solution
It shall be noted that under the limit pricing strategy, the monopoly firm should produce a minimum of 16 units of output to prevent entry of new firms in the market. The monopoly firm could increase profits by producing a level of output greater than 16 units and yet prevent the entry of new firms. To supply the quantity greater than 16 units, the monopoly firm would charge lower price as demand curve faced by it is downward sloping. A lower price would be large enough for the potential entrant to meet their costs and hence would drive them away from the very thought of entering the market. With lowering price and increasing supply beyond 16 units, the monopoly firm would increase profits but the profit would remain below the profit when it were charging monopoly price. Thus, the monopoly firm could produce & supply output greater than 16 units that will fetch it higher profits and yet deter entry of new firms in the market.
To explain: Whether monopolist profitably deter entry by committing to a different level of output.
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Chapter 13 Solutions
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