Chapter 9 Questions & Solutions

1Plot the marginal revenue curve associated with the following demand curve faced by a monopolistic competitor.

D

P

80 Q

1P

80 Q40MR D

2 Use the graph on the next slide to answer the following questions.

A. What price is charged by the monopolistic in order to maximize profits?

B. Calculate the total revenue accruing to the monopolist at the profit maximizing output.

C. Calculate the total cost to the monopolist at the profit-maximizing output.

D. Calculate the profit for the monopolist.

E. Calculate the total variable and fixed costs of the monopolist at the profit-maximizing output.

F. Now assume the MC curve represents market supply for a perfectly competitive market. What would the equilibrium price and quantity be for perfect competition? Are consumers better off or worse off with perfect competition or monopoly?

2Cont. MC

ATC

AVC

DMR 20 25 28 50 Q

P

20

13

1615

12

2 (a) MR = MC Q = 20; P = $20

(b) TR = PQ = $400

(c) ATC when Q = 20 ATC = $15 TC = (ATC)(Q) = ($25)(20) = $300

(d) Profit = TR - TC = $400 - $300 = $100

(e) AVC when Q = 20 AVC = $12 TVC = (AVC)(Q) = ($12)(20) = $240 TFC = TC - TVC = $300 - $240 = $60

(f) P = $16 Q = 28 Consumer better off with Perfect Competition Lower Price, more quantity

3 List differences and similarities among monopolies, oligopolies, and monopolistic competition. Be prepared to give examples of each form of imperfect competition on the selling side.

3 See Notes

4 Units of Total Cost of Marginal InputVariable Input Price/Unit Input Cost

1 2 2 2.5 3 3 4 4.5 5 6

A. Calculate the total input cost and the marginal input cost.

B. If the marginal value or marginal revenue products were 4, what would be the profit maximizing level of input?

4 Units of Total Cost of Marginal InputVariable Input Price/Unit Input Cost

1 2 $2 --- 2 2.5 $5 $3 3 3 $9 $4 5 4.5 $22.5 $6.75 8 6 $48 $8.5

Rule MVP (or MRP) = MIC

4 = MIC

Profit maximizing level of input is 3 units

5A. Find the equilibrium price and quantity for a monopsonist in the graph below.

B. Find the equilibrium price and quantity under perfect competition in the graph below.

C. What is the magnitude of monopsonistic exploitation?

MVP or MRP

Supply of Input

MIC

10 15

Quantity per unit of time

8

5

3

$/un

it

5 (a) MIC = MVP Under monopsony 10 units of input @ $3/unit (b) Under perfect competition 15 units of input @ $5/unit (c) Magnitude of monopsonistic exploitation Difference in price of input under perfect competition versus monopoly $5 - $3 = $2

6Explain the significance of the following acts:

A. Clayton Act

B. Capper-Volstead Act

C. Packers and Stockyards Act

6 See Notes

7List and explain the various measures that may be employed to counteract possible adverse effects of imperfect competition in the marketplace.

7 See Notes

8On the following graph, show the effect of a lump-sum tax on a monopolist.

Quantity per unit of time

MC

ATC

MR D

$/un

it

8Upward shift of ATC Curve No effect on price charged by the monopolist No effect on quantity produced by the monopolist But a reduction in profit occurs

9Using the graph below, answer questions a through d.

A. What are the profit-maximizing price and quantity levels for the monopolist?

B. Calculate profit.

C. Suppose the government imposes a price ceiling of $40. Now what is the optimal price and quantity combination?

D. Calculate the new level of profit.

ATC

P

MC

D

50

403835

25 MR 34 Q

9 (a) MR = MC P = $50 Q = 25

(b) TR = PQ = ($50)(25) = $1250 ATC when Q = 25 TC = ATC)(Q) = ($38)(25) = $950 Profit = TR - TC = $300

(c ) MR = MC P = $40 Q = 34

(d) TR = PQ = ($40)(34) = $1360 ATC when Q = 34 ATC still $38 TC = (ATC)(Q) = ($38)(34) = $1292 Profit = TR - TC = $1360-$1292=$68