Principles of Microeconomics
Solutions
Principles of Microeconomics
Based on market research, a film production company in Ectenia obtains the following information about the demand and production costs of its new DVD:
Demand: P = 1,000 - 10Q
Total Revenue: TR =1,000Q - 10Q2
Marginal Revenue: MR = 1,000 - 20Q
Marginal Cost: MC = 100 + 10Q,
where Q indicates the number of copies sold and P is the price in Ectenian dollars.
a. Find the price and quantity that maximize the company’s profit.
b. Find the price and quantity that would maximize social welfare.
c. Calculate the deadweight loss from monopoly.
d. Suppose, in addition to the costs above, the director of the film has to be paid. The company is considering four options:
i. a flat fee of 2,000 Ectenian dollars.
ii. 50 percent of the profits.
iii. 150 Ectenian dollars per unit sold.
iv. 50 percent of the revenue.
For each option, calculate the profit-maximizing price and quantity. Which, if any, of these compensation schemes would alter the deadweight loss from monopoly? Explain.
Subpart (a):
Figure 1 illustrates the equilibrium position in the market.
Figure 1 depicts the demand, marginal revenue and marginal cost curves. The horizontal axis in figure 1 represents the quantity whereas the vertical axis represents the price.
The profit maximizing quantity can be calculated as follows.
Subpart (b):
Subpart (c):
Subpart (d):
Chapter 15 Solutions
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