ECN 104 Lecture Notes - Marginal Revenue, Marginal Cost, Demand Curve

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greyherring517

19 Mar 2013

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Draw a graph that illustrates the dilemma of regulation for a natural monopoly. On the graph, show the: (a) socially optimal price; (b) fair-return price; and (c) profit-maximizing price for the unregulated monopolist. The socially optimal price is shown where price is determined by the intersection of the demand curve and mc. This low price will produce the most output but results in economic loss. The unregulated monopolist will produce at the level of output determined by the intersection of mr and mc. The price will be higher in this case and output will be less. The fair-return price is set at the output level where atc intersects the demand curve. This output level is less than the one for the socially optimal price, and the price is higher, but the output level is greater and price is lower than in the unregulated case.

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A firm is producing where its marginal costs are at the lowest level. What can one most likely infer from this? a. there is either lost opportunity for further profits by producing more, or the firm should shut-down if it is competitive and price is at that low level. b. It is a price-taker who is producing too much. c. It is a monopolist who is producing the socially optimal quantity. d. The firm is producing rationally.

6. A single-price monopolist sets price a. where MR=demand. b. where supply=demand c. from the demand curve at the quantity for which MC=MR. d. where MR=MC.

7. Assume that the Law of Diminishing Marginal Product applies at the current output level of a competitive firm. The price is $20 and, at the current output level, marginal cost is $16 and average total cost is $20. To maximize profits the firm should: a. produce the current output level, since average revenue (price) = average cost. b. produce more since marginal revenue exceeds marginal cost at current output. c. produce less since marginal revenue is always below average revenue. d. any of the above is possible, without further information.

8. Which of the following statements is true? (i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. a. (i) only b. (iii) only c. (i) and (ii) d. (ii) and (iii)

9. If a firm in a competitive market triples the number of units of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. All of the above are potentially true.

10. When a competitive firm makes a decision to shut down, it is most likely that a. marginal cost is above average variable cost. b. marginal cost is above average total cost. c. price is below the minimum of average variable cost. d. fixed costs exceed variable costs.

Suppose a monopolist faces a demand curve for its output of P = 300âQ. This means that the marginal revenue curve of the monopolist is M R = 300 â 2Q. Assume that the marginal cost of production is constant and equal to $40.

a) Write down an expression for the monopolists profit, as a function of the quantity of output it produces.

b) If the monopolist must charge the same price for all units of output that it sells (that is, if the monopolist is a single price monopolist), what level of output will maximise the monopolists profit? What price will the monopolist charge? What is its level of profit?

c) If this were a competitive market instead of a monopoly, what level of output would be produced and what price would be charged? What is the level of profit for firms if it were perfectly competitive?

d) Draw a diagram of demand, marginal revenue, and marginal cost that illustrates your answer to part b). From this work out consumer surplus and producer surplus.

e) Draw the same diagram but for your answer to c), the case of the competitive market. From this work out consumer surplus and producer surplus. How much deadweight loss is there from the monopoly? Why?

sangriapug675

State whether you agree or disagree with each of the followingstatements. Using appropriate diagrams and or equations, explainyour response.

a. Producing output where MC=MR does guarantee that a firm willmake a profit.
b. A profit maximizing monopolist must operate on the elasticportion of the demand curve.
c. Since a monopoly is a âbadâ thing for consumers but a âgoodâthing for producers, on balance, we cannot be sure that monopoly isresponsible for any loos in economic efficiency.
d. A price-discriminating monopolist will charge a higher price inthe market where demand is less elastic.

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ECN 104 Lecture Notes - Marginal Revenue, Marginal Cost, Demand Curve

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