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Ajax, Inc. is a monopolist. The estimated demand function for its product is Qd = 120 - 0.8P + 12Y + 4A

Where Qd denotes quantity demanded, P denotes price, Y denotes personal income (in thousands of dollars), and A denotes advertising expenditures in hundreds of dollars.

Ajax's marginal cost function is given as MC = 21 + 4Q

Assume Y equals 3 and A equals 3 and fixed costs equal $1000

a. What is the inverse demand function?

b. What is the profit-maximizing price and quantity of output for Ajax, assuming it is an unregulated monopoly? What are their profits?

 

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Yusra Anees
Yusra AneesLv10
28 Sep 2019

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Problem 2: Exporting vs FDI: The Proximity €Concentration Trade-€Off.

Your firm wants to sell its product in each of several foreign countries, and you must decide whether to do so by exporting or by producing locally for that market through FDI. Suppose that in each country the demand for the product is the same, and is given by:

P = 15 - Q,

Where P is the price your firm charges in that country in dollars and Q is the quantity sold there. In addition, the marginal cost of production in any country is the same and is equal to $4 per unit. Wherever you choose to produce, your firm is a monopolist. To produce in a foreign country, your firm must incur a fixed cost equal to $21. On the other hand, to produce here and export to a country that is d miles away requires a transport cost of (d/1000) dollars per unit shipped.

a. If you export to a given country located at a distance d, what would the quantity sold, the price charged, and the profits be? (all as a function of distance)

b. If you sell in a given country by setting up a subsidiary, what would the quantity sold, the price charged, and the profits be?

c. For what values of d will your profit-maximizing decision be the export option? The FDI option?

1. Alice lives in a town with only one movie rental store. Suppose Alice's demand for movie rentals per month is Q = 16 - 2P. The movie store currently charges $5 per movie but is thinking of adding a flat monthly cardholder fee and dropping the price to $2 per rental. At this new price, what is the largest cardholder fee that Alice will pay? If the rental store has a constant marginal cost of $2, which strategy is more profitable?

2. A monopolist faces a demand curve given by,

Y = 100 -  P

with the inverse demand curve equal to,

P = 100- y and MR = 100- 2y.

The monopolist's total and marginal cost functions are,

TC = 700 + 20y and MC = 20.

a) Calculate the monopoly output level, the monopoly price, and the profits of the firm.

b) Draw a diagram to illustrate your answers to part a). Calculate the deadweight loss from this monopoly. [Hint: you need to work out the perfectly competitive quantity and price. The diagram will help you work out how to calculate the DW L using the simple geometry of triangles and rectangles.]

c) Explain why this market might be considered to be a natural monopoly.

d) Illustrate and explain the problem that emerges when the government regulates the monopolist by imposing marginal cost pricing.

e) If the government regulates the monopolist by imposing average cost pricing, what will be the monopolist's price and quantity? Draw a diagram to illustrate your answers. Explain the problem that exists with this average cost pricing. [Note: this is a trickier part than the others, so don't worry if you can't do it. If this question came up in the exam, I would miss out e) and have a)-d), making you feel a bit better! To answer it, you have to set p = AC and solve for output. It requires solving a quadratic equation with 2 potential output levels and working out which output level is the one the monopolist would produce. The quadratic equation is a simple one, but if you are not comfortable with maths, even its mention probably sounds like a nightmare.

 

 

1. All of the following are characteristics of long-run equilibrium for firms in a monopolistically competitive market except:

A. price equals marginal cost.

B. price equals average total cost.

C. price exceeds the minimum of the average total cost.

D. marginal cost equals marginal revenue.

2. All of the following are strategies a firm with market power can adopt to increase its profits over time except:

A. erecting barriers to entry.

B. setting price equal to the marginal costs of production.

C. mergers with, and acquisitions of, competing firms.

D. influencing the regulatory process.

3. Assume that for a particular firm's output price = $80, marginal cost = $30, average total cost = $25. Based on this information, the firm's Lerner Index is equal to:

A. 0.313.

B. 0.625.

C. 0.6.

D. 0.375.

4. Assume that when the price is $20, the quantity demanded is 9 units, and when the price is $19, the quantity demanded is 10 units. Based on this information, what is the marginal revenue resulting from an increase in output from 9 units to 10 units?

A. $10

B. $1

C. $19

D. $20

5. Because firms produce a differentiated product, each of the firms in a monopolistically competitive market faces a demand curve that is:

A. perfectly elastic.

B. downward sloping.

C. perfectly inelastic.

D. perfectly elastic or perfectly inelastic depending on whether the firm's output is a luxury or a necessity.

6. Suppose a monopolist is producing a level of output such that MR > MC. What should the firm do to maximize its profits?

A. The firm should increase output.

B. The firm should increase the price.

C. The firm should do nothing - it wants to maximize the difference between MR and MC in order to maximize its profits.

D. The firm should hire less labor.

7. Suppose the firms in a monopolistically competitive market are earning positive economic profits. What will happen to move the market to its long-run equilibrium?

A. The demand curves faced by firms in the market will shift to the right.

B. The firms' demand curves will become less elastic.

C. More close substitutes will appear in the market.

D. Some firms will exit the market if they can't cover all of their fixed and variable costs.

8. The Lerner Index is a measure of market power that focuses on:

A. the difference between a firm's product price and its marginal costs of production.

B. the share of the market controlled by the X largest firms in the market.

C. the ratio of the price of a firm's product to the price elasticity of demand for the product.

D. the sum of the squares of the market share of each firm in an industry.

9. The measure of market power that focuses on the share of the market controlled by the X largest firms in the market is known as:

A. the Lerner Index.

B. the Herfindahl-Hirschman Index.

C. the Minimum-Efficient Scale Index.

D. a concentration ratio.

10. The monopoly characteristic of monopolistically competitive firms ensures that such firms will earn positive economic profits over the long-run.

a. True

b. False

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