ECON101 Lecture Notes - Lecture 22: Marginal Product, Marginal Cost, Consumer Behaviour

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indigomouse415

23 Apr 2017

School

University of Alberta

Department

Economics

Course

ECON101

Professor

Gordon Lee

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ECON101 Full Course Notes

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A pure monopoly exists when: (sources of monopoly power) As long as mr > mc, then producing another unit will pro ts. (pro t maximizing quantity) When mr = mc, the monopolist looks to the demand curve to see what price that corresponds to. At that point, pro t is maximized: there is one seller in the mkt for some commodity/service and there are no close substitutes for this good/service, the seller has considerable control over the price. A monopolist is a price maker or a price searcher: there are barriers to entry that protect the monopolist from potential competitors. (prevent other companies to enter mkt) Barriers to entry include: economies of scale large rm has per unit lower cost than a smaller rm (ave cost decreases as more goods are produced/supplied) Natural monopoly (companies that provide public utilities, ie: natural gas (company not legally liable, it just got bigger: legal restrictions: patents and copyrights.

Related Questions

100 word answer needed from the question and artile below.

Question:

Explain whether, and if so how, you would expect laws that prohibit the buying and selling of organs to affect the overall wellbeing of society.

Article: "Should there be a market in organs?"

Some years ago, a Boston newspaper reported the story of Susan Stephens, a woman whose son needed a kidney transplant. When the doctor learned that the mother's kidney was not compatible, he proposed a novel solution: If Stephens donated one of her kidneys to a stranger, her son would move to the top of the kidney waiting list. The mother accepted the deal and soon two patients had the transplant they were waiting for.

The ingenuity of the doctor's proposal and the nobility of the mother's act cannot be doubted. But the story raises many intriguing questions. If the mother could trade a kidney, would the hospital allow her to trade a kidney for an expensive, experimental cancer treatment that she could not afford otherwise? Should she be allowed to exchange her kidney for free tuition for her son at the hospital's mediacal school? Should she be able to sell her kidney so she can use the cash to trade in her old Toyota for a new Lexus?

In many countries, including Australia, it is illegal for a person to sell their organs. In essence, in the market for organs the government has imposed a price ceiling of zero. The result, as with any binding price ceiling, is the shortage of the good. The deal in the Stephens case did not fall under this prohibition because no cash exchanged hands.

Some countries, however, have illicit markets in organs. The World Health Organizations estimates that 10% of all organ transplants, including arount 15 000 kidneys each year, involve a patient from a rich country buying an illegal organ from a citizen of a poorer nation. The temptation to the world's poorest people to sell their 'spare' organs in high. A kidney can sell for around $1500 or more in the illegal trade. This may not sounds like much to you or me. But it can be many years income to a person living in dire poverty.

Some economists believe that there would be large benefits to allowing a free market in organs. People are born with two kidneys but they usually need only one. Meanwhile, a few people suffer from illnesses that leave them wiithout any working kidneys. Despite the obvious gains from trade, the current situation is dire. In Ausralia, the average wait for a kidney transplant is 3.8 years and there are up to 50 deaths a year from people on the waiting list because a kidney cannot be found. In Europe, on average, 12 people die each day waiting for an organ transplant. If those needing a kidney were allowed to buy one from those who have two, the price would rise to balance supply and demand. Sellers would be better off with the extra cash in their pockets. Buyers would be better off with the rgan they need to save their lives. The shortage of kidneys would disappear.

Such a market would lear to an efficient allocation of resources, but critics of this plan worry about fairness. A market for organs, they argue, would benefit the rich at the expense of the oor, because organs would then be allocated to those most willing and able to pay. But you can also question the fairness of the current system.Now, most of us walk around with an etra organ that we don't really need, while some of our fellow citizens are dying to get one. Is that fair?

Suppose that there are two firms competing in the market for taxi services. Big Ben Taxis has the marginal cost MCB = $9 per trip, and the fixed cost FCB = $3,000,000. While Whitehall Taxis has the marginal cost MCW = $15 per trip, and the fixed cost FCW = $1,000,000. Inverse demand for taxi trips in the market is given by the function, P = 75 â Q/10,000 . In this equation, P is the price of a taxi trip, and Q is the total quantity of taxi trips supplied by the two taxi companies.

Question 1: Find the equilibrium price and quantities for the case in which the two taxi companies engage in Cournot (quantity) competition. What profits will Big Ben Taxis and Whitehall Taxis earn. (11 Marks)

Question 2: Using your answers to question 1, determine which firm has the greater market power. (4 Marks)

Question 3: Now suppose that a firm can only supply taxi services if it purchases a licence from the government. What is the highest fee that the government can charge for a license, if the government wants both Big Ben Taxis and Whitehall Taxis to purchase a license? (Note: A licence does not place a limit on the number of taxi trips a company can supply. You should assume that both firms are charged the same fee.) (2 Marks)

Question 4: If, instead, the government wants to maximise the revenue it receives from taxi license fees, how many licenses should it sell, and what fee should it charge? (8 Marks)

Q1 and Q2 answered, can anyone help with Q3 and Q4?

)P = 75 - (Q / 10,000) = 75 - [(QB + QW) / 10,000] (

QB, QW: Quantity of Big Ben & Whitehall respectively)

Total revenue, Big Ben, TRB = P x QB = 75QB - [(QB2 + QW.QB) / 10,000]

Marginal revenue, Big Ben, MRB = dTRB / dQB = 75 - [(2QB + QW) / 10,000]

Equating MRB with MCB, 75 - [(2QB + QW) / 10,000] = 9 750,000 - 2QB - QW = 90,000 2QB + QW = 660,000 .......(1) [Reaction function of Big Ben]

Total revenue, Whitewall, TRW = P x QW = 75QW - [(QW.QB + QW2) / 10,000]

Marginal revenue, Whitehall, MRW = dTRW / dQW = 75 - [(QB + 2QW) / 10,000]

Equating with MCW, 75 - [(QB + 2QW) / 10,000] = 15 750,000 - QB - 2QW = 150,000 QB + 2QW = 600,000 .....(2) [Reaction function of Whitehall]

Cournot equilibrium is obtained by solving (1) and (2).

2QB + QW = 660,000 .......(1) (2) x 2 results: 2QB + 4QW = 1,200,000 ...(3)

(3) - (1) yields:

3QW = 540,000 QW = 180,000 QB = 600,000 - 2QW = 600,000 - (2 x 180,000) = 600,000 - 360,000 = 240,000

Q = QW + QB = 180,000 + 240,000 = 420,000 P = 75 - (420,000 / 10,000) = 75 - 42 = 33

Profit = Total revenue - Total cost = (P x Q) - [FC + (MC x Q)] = Q x (P - MC) - FC [FC: Fixed cost]

Profit, Big Ben = [240,000 x (33 - 9)] - 3,000,000 = (240,000 x 24) - 3,000,000 = 5,760,000 - 3,000,000 = 2,760,000

Profit, Whitehall = [180,000 x (33 - 15) - 1,000,000 = (180,000 x 18) - 1,000,000 = 3,240,000 - 1,000,000 = 2,240,000 (3)

The fixed fee charged by government is equal to consumer surplus (CS) for each company, where CS is the area between demand curve and market price.

From demand curve, When Q = 0, P = 75 [Reservation price] For Big Ben, CS = (1/2) x $(75 - 33) x 240,000 = (1/2) x $42 x 240,000 = $5,040,000

This is the maximum license fee for Big Ben. For Whitehall, CS= (1/2) x $(75 - 33) x 180,000 = (1/2) x $42 x 180,000 = $3,780,000

This is the maximum license fee for Whitehall. (4) Revenue is maximized when marginal revenue is zero.

Marginal revenue, Big Ben, MRB = dTRB / dQB = 75 - [(2QB + QW) / 10,000] So, 75 - [(2QB + QW) / 10,000] = 0 750,000 - 2QB - QW = 0 2QB + QW = 750,000 ......(4)

Marginal revenue, Whitehall, MRW = dTRW / dQW = 75 - [(QB + 2QW) / 10,000] So, 75 - [(QB + 2QW) / 10,000] = 0 750,000 - QB - 2QW = 0 QB + 2QW = 750,000 ....(5) Multiplying (5) by 2, 2QB + 4QW = 1,500,000 ......(6) 2QB + QW = 750,000 ...... (4) (6) - (4) gives: 3QW = 750,000 QW = 250,000 QB = 750,000 - (2 x 250,000) = 750,000 - 500,000 = 250,000 Q = QB + QW = 250,000 + 250,000 = 500,000 P = 75 - (500,000 / 10,000) = 75 - 50 = $25

ceriseeel551

1. 10 consumers, ranked by their value for a network product v = 1...10, are deciding whether to connect to the network. If there are n people on the network, including oneself, then a consumer's willingness to pay equals n x v.

a. What is the highest price at which 4 people connect to the network? (2 points) (Hint: the person with v = 9 joins if the price is no higher than 18, since that would mean 2 people in the network: v=9 & v=10.)

b. What is the highest price at which 9 people connect to the network? (1 points)

2. The demand function for the Msgr social network is related to perceived market share s and actual market share n by the equation: p = 512s(1-n).

Calculate the highest equilibrium price at which Msgr could sustain a market share of 75%. (2 points) (Hint: in equilibrium, perceived & actual market share will be the same.)

3. A firm in a perfectly competitive market has the following cost function: c(y) = 4y2 + 450.

a. If the market price of their product is $200, how many units should they produce, and what will their profits be? Should they shut down or exit the market? (2 points)

b. If the market price falls to $50, how many units should they produce, and what will their profits be? Should they shut down or exit the market? (3 points)

That is all informations I have. It comes stright out from tescher's questions.

ECON101 Lecture Notes - Lecture 22: Marginal Product, Marginal Cost, Consumer Behaviour

ECON101 Full Course Notes

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