MICROECONOMICS (CUSTOMIZED CHAPTERS + C
21st Edition
ISBN: 9781307215267
Author: McConnell
Publisher: MCG CUSTOM
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Chapter 21, Problem 5RQ
To determine
Whether the statement about the marginal benefit and cost is true or false.
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Use the accompanying graph to answer the questions that follow. (LO1, LO2) a. Suppose this monopolist is unregulated. (1) What price will the firm charge to maximize its profits? (2) What is the level of consumer surplus at this price? b. Suppose the firm’s price is regulated at $80. (1) What is the firm’s marginal revenue if it produces 7 units? (2) If the firm is able to cover its variable costs at the regulated price, how much output will the firm produce in the short run to maximize its profits? (3) In the long run, how much output will this firm produce if the price remains regulated at $80?
4. You are the manager of a monopoly, and your demand and cost functions are given by P = 300 − 3Q and C(Q) = 1,500 + 2Q2, respectively. (LO3, LO4)
a. What price–quantity combination maximizes your firm’s profits?
b. Calculate the maximum profits.
c. Is demand elastic, inelastic, or unit elastic at the profit-maximizing price–quantity combination?
d. What price–quantity combination maximizes revenue?
e. Calculate the maximum revenues.
f. Is demand elastic, inelastic, or unit elastic at the revenue-maximizing price–quantity combination?
6. The accompanying diagram shows the demand, marginal revenue, and marginal cost of a monopolist. (LO1, LO3, LO5)
a. Determine the profit-maximizing output and price.
b. What price and output would prevail if this firm’s product were sold by price-taking
firms in a perfectly competitive market?
c. Calculate the deadweight loss of this monopoly.
8. The elasticity of demand for a firm’s product is –2.5 and its advertising elasticity of demand is 0.2.…
In view of the problems involved in regulating natural monopolies, compare socially optimal (marginal-cost) pricing and fair-return pricing by referring again to Figure 12.9. Assuming that a government subsidy might be used to cover any loss resulting from marginal-cost pricing, which pricing policy would you favor? Why? What problems might such a subsidy entail?
Chapter 21 Solutions
MICROECONOMICS (CUSTOMIZED CHAPTERS + C
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- 4. Suppose this market has a single monopoly seller facing the entire market demand Q= 120 – 2P and cost curve C(Q)= 10Q. Now, Suppose the government imposes a unit tax of 4. a) What is the ad valorem tax which will generate the same quantity distortion? b) What is the tax revenue from the ad valorem tax calculated in part a? c) If the government’s objective is to reduce deadweight loss, should they implement a tax? d) If the government is going to implement either a unit tax of 4 or the ad valorem tax you calculated in part a., which one should they chose for the highest tax revenue?arrow_forward7) Without regulation, an industry that is a natural monopoly will tend to have:a. higher prices than is efficient, especially if demand is elastic.b. higher prices than is efficient, especially if demand is inelastic.C. higher consumpton than is efficient, especially if demand is elastic.d. higher consumption than is efficient, especially if demand is inelastic.arrow_forwardQuestion 1.Assume there are only two art auction companies who account for 100% of all the sales of 19thCentury impressionist master work paintings in the world. Assume that each company buys thiskind of painting and then resells the paintings at monthly auctions. Ignoring the question of anylaws that might apply, describe what economic arrangement would maximize the twocompanies’ total profits? Show with supply and demand curves what profit they would makefrom this arrangement and what societal welfare loss, if any, results from it.arrow_forward
- As the manager of a monopoly, you face potential government regulation. Your inversedemand is P = 40 − 2Q, and your costs are C(Q) = 8Q. (LO1, LO2, LO6)a. Determine the monopoly price and output.arrow_forwardLet the demand and cost curves for a monopolist be If the government imposes a price ceiling of $100 on the monopolist's price, what is the profit earned by the monopolist without and with the price ceiling? O No ceiling: $10,000 Ceiling: $0 O No ceiling: $10,000 Ceiling: $10,000 O No ceiling: $20,000 Ceiling: $10,000 Q = 1000 - 4P 20000 + 50Q TC O No ceiling: $20,000 Ceiling: $0arrow_forward5. Indicate whether each of the following statements is true or false, and explain your answer.A. If a monoplist is producing a level of output at which demand is inelastic, the firm is not maximizing profits and increasing output will decrease total revenu.B. When a monopolist maximizes profits, the price is greater than the marginal cost of producing the output. This means that consumers are willing to pay more for additional units of the product than these additional units of the produce. Thus, the monopolist should produce and sell addional units of output.C.A monopolistically competitive firm produces a level of output at which price equals $80, marginal revenue equals $40, average total cost equals $100, marginal cost equals $40 , and average fixed cost equals $10. To maximize profit, the firm should produce a smaller output and sell it at a higher price.D. In a monopolistically competitive market, a firm has market power because it produces a differentiated product. This means…arrow_forward
- 20-4. Suppose that every driver faces a 1% probability of an automobile accident every year. An accident will, on average, cost each driver $10,000. Suppose there are two types of individuals: those with $60,000 in he bank those with $5,000 in the bank declare bankruptcy if they get in a accident. In bankruptcy, creditors receive only what individuals have in the bank . What is the actuarily fair price insurance? What price individuals wit $5,000 in the bank willing to pay or the insurance? Will those with $5,000 in the bank voluntarily purchase insurance? What is the effect of state law forcing individuals to purchase auto liability insurance?arrow_forward1. Recall the regulation model where legislators apply regulations to garner votes. Votes are a function of producer utility (UR ) and consumer utility (UC ). The legislator’s vote/utility function is V = V(UR , UC ). If U R = R, and U C = K – R – L, where K is a constant and R and L are the typical monopoly versus competitive market outcome below. Obviously, both U R and U C are affected by the eventual price (P) set by the legislator because both R and L are affected by that price. (a) Now suppose the demand equation is given by P = 100 - Q , and MC = $20. Write R as a function of the price and show that the price that maximizes producer utility is $60. (b) Given the MC and demand equation above, find the maximum possible consumer surplus (hint: this will be when the market is competitive). (c) Now suppose that (in addition to the information in parts d and e), the legislator gets votes according to V (U R, U C ) = 3U R + U C . Find the price that maximizes the legislator’s votes.arrow_forwardThe courts have ruled that it is reasonable restraint of trade (and therefore permissible) for the owner of a business to sell his business & a contract with the new owner saying that he will not compete with her within a vicinity of, say, 100 miles , for a period of, five years. if this type of contract is a reasonable restraint of trade, you can give an example of what you would consider an unreasonable restraint of trade? explain how you decide what is a reasonable restraint of trade and what is not.arrow_forward
- 42. To ensure that utilities receive a normal rate-of-return, regulators set price equal to:a. Marginal costsb. Short-run average variable costsc. Long-run average variable costsd. Demand43. Which of the following statements about electricity is correct?a. Electricity is a primary source of energy.b. There are two stages – generation and transmission- necessary to get the electricityfrom the utility provider to the final customer.c. A unique aspect of electricity is that demand must equal supply at each instant.d. Regulated utilities do not maintain excess generating capacity.44. Why does the rate of return (RoR) regulation stimulate more than the efficient level ofcapital investment from the regulated utilities companies?a. A state government directly subsidies capital investments.b. The capture effect rewards capital investment more than other types of investment.c. The RoR is applied to the rate base, which includes capital but not operating costs.d. Regulator salaries increase as…arrow_forwardAt these levels of output the marginal revenue in the manufactured items market is and the marginal revenue in the semimanufactured raw materials market is . At these prices, the price elasticity of demand in the manufactured items market is and the the price elasticity of demand in the semimanufactured raw materials market is . (Hint: ED=PMR−P��=�MR−�) What are the total profits if the company is effectively able to charge different prices in the two markets? . If the company is required by law to charge the same per-ton rate to all users, the new profit-maximizing level of price and output are per ton and tons respectively. The total profits in this situation is .arrow_forwardQuestion 3 A firm may be deemed a monopolist, even though it is not the only seller in a market, because what matters is size in relation to the market. True 5 pts O Falsearrow_forward
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