1 . Why is marginal revenue always less than the price for a monopolist but equa
ID: 1190984 • Letter: 1
Question
1. Why is marginal revenue always less than the price for a monopolist but equal to the price for a perfectly competitive firm?
2. Explain how a monopolist can use price discrimination to transfer part or all of total economic surplus to itself.
3. State whether the following statements are true or false, and explain why.
a. In a perfectly competitive industry, the industry demand curve is horizontal whereas for a monopoly it is downwards sloping.
b. Perfectly competitive firms have no control over the price they charge for their product.
c. For a natural monopoly, average cost declines as the number of units produced increases over the relevant output range.
4. Tots Poses Inc., a profit maximizing business, is the only photography business in town that specializes in portraits of small children. Sven, who owns and runs Tots Poses, expects to encounter an average of 8 customers per day. Each with a reservation price shown in the following table:
a. If the marginal cost of each photo is $12, how much will Sven charge if he must charge a single price to all customers and still maximize profits? At this price, how many portraits will Sven produce each day? What will be his economic profit?
b. How much consumer surplus is generated each day at this price?
c. What is the number of portraits that maximizes total economic surplus?
d. Sven is very experienced in the business and knows the reservation price of each of his customers. If he is allowed to charge any price he likes to any customer, how many portraits will he produce each day, and what will his economic profit be?
e. In this case, how much consumer surplus is generated each day?
f. Supposed Sven is permitted to charge two prices. He knows that customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them. At what level will Sven set the list price of a portrait? At what level will he set the discount price? How many photos will he sell at each price?
g. In this case, what is Sven's economic profit, and how much consumer surplus is generated each day?
5. Suppose you are a monopolist in the market for a specific video game. Your demand curve is given by P=8-Q/2 and your marginal cost curve is MC=10. Your fixed costs equal $400.
a. Graph the demand and marginal cost curve.
b. Derive and graph the marginal revenue curve.
c. Calculate and indicate on the graph the monopoly price and quantity.
d. What is your profit?
e. What is the level of consumer surplus?
Customer Reservation Price ($/photo) A 50 B 46 C 42 D 38 E 34 F 30 G 26 H 22Explanation / Answer
Multiple questions asked.
Q1 is answered below.
A monopolist is the single-most producer and seller in the market which operates with the purpose of earning profits.
A perfectly competitive firm on the other hand works in a serious competitive environment and thus does not earn profits and sells for social welfare.
Since the minimum point at which a firm must sell its products is its mc, a perfectly competitive firm produces at the point P=MC while a monopolist sells at the point where MR=MC, thereby making its P>MC, since only a price higher than its MC will allow the monopolist to earn profits.
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