Monopoly’s Output and Price Decision

• Lessons 13, 14, and 15

1. Monopoly’s Output and Price Decision (15 points, 5 points each)
Minnie’s Mineral Springs, a single-price monopoly, faces the following market demand and total cost schedule:
Price ($ per bottle) Quantity Demanded (bottles per hour) Total Cost ($)
10 0 1
8 1 3
6 2 7
4 3 13
2 4 21
0 5 31
A. Calculate Minnie’s total and marginal revenue schedules (See Figure 13.2 for guidance). Why is Minnie’s
marginal revenue less than the price?
B. Calculate Minnie’s marginal cost schedule. What is Minnie’s profit-maximizing output and price? (Hint: you
need to set MR = MC)
C. Calculate the economic profit.

2. Monopolies and Price Discrimination
Bob, Sue, and Katie go out every week and spend whatever money they have left from the week on a dinner at
Burger Bart’s, the only restaurant in town. The amount of cash they have at the end of the week is the most
they will pay, but if there’s anything left over after dinner, then they will also play video games. Bob
always has $7, Sue always has $8, Katie always has $15, and Burger Bart knows this. His marginal cost of
providing a meal is constant at $5 no matter how many meals he makes.
A. If Bart can only charge one price to the group, what price will he charge? How many meals will be
sold? How much is the producer surplus? the consumer surplus?

B. If Bart can perfectly price discriminate, what prices will he charge? How many meals will he sell? How much
will the producer and consumer surplus be now?

C.How would this be different if there were another restaurant in town? many restaurants in town?

D. What must be true for the results to hold for the competitive market?

3. Monopoly Pricing
Name a company or industry which practices price discrimination. Would consumer surplus be less or more
without price discrimination? Would consumers pay less or more without price discrimination?
4. Product Bundling (5 points)
Some firms practice product bundling, in which you pay a lower per-item price if you buy a large package of
the good. For example, you can often get a “meal deal” for a hamburger, fries, and a drink for only a small
amount more than the cost of a hamburger alone, while each separately would cost you much more. What explains
this product bundling? Are firms more likely to bundle goods if demand is elastic or inelastic?

5. Oligopoly
Firms A and B can conduct research and development (R&D) or not conduct it. R&D is costly but can increase the
quality of the product and increase sales. The payoff matrix is the economic profits of the two firms and is
given below, where the numbers are millions of dollars.
Firm A
R&D No R&D
Firm B R&D A: $25
B: $15 A: -$3
B: $60
No R&D A: $60
B: -$3 A: $50
B: $35

What is the Nash equilibrium of the game?

6. Demand for a Factor of Production
Suppose that labor is the only input used by a perfectly competitive firm that can hire workers for $50 per
day. The firm’s daily production function is as follows:
Quantity of Labor Total Product
0 0
1 7
2 13
3 18
4 22
5 25
6 26

A. Calculate the marginal product of each additional worker (See Table 18.1 for guidance).

B. Each unit of output sells for $10. Calculate the value of the marginal product of each worker.

C. How many workers should the firm hire? (Hint: you need to set the value of the marginal product of labor =
wage)

7. Government Response to an Externality (10 points, 5 points each)
A. List ways the government can respond to an externality. Which are economically best?

B. Give an example of two goods , one with a positive externality and one with a negative externality. Explain
clearly which aspects of the benefit of the good are private and which are public.

8. The Tragedy of the Commons (10 points)
What is the tragedy of the commons? Give two examples, including one from your state / country (Bahrain)

 

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