Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 14, Problem 13DQ
To determine
The
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Monopoly: Work It Out
Earlier we mentioned the special case of a monopoly where MC = 0. Let’s find the firm’s best choice when more goods can be produced at no extra cost. Since so much e‑commerce is close to this model—where the fixed cost of inventing the product and satisfying government regulators is the only cost that matters—the MC = 0 case will be more important in the future than it was in the past. For each demand curve, calculate the profit-maximizing level of output and price as well as the monopolist's profit.
a. ?=200−?P=200−Q, fixed cost = 1,000.
Profit‑maximizing output Q =
Profit‑maximizing price P = $
Monopolist's profit: $
b. ?=4,000−?P=4,000−Q, fixed cost = 900,000 (Driving the point home from part a)
Profit‑maximizing output Q =
Profit‑maximizing price P = $
Monopolist's profit: $
c. ?=120−12?P=120−12Q, fixed cost = 1,000…
The Justice Department sued several universities for collectively setting the size of scholarships offered. Explain why the alleged price fixing on the part of universities might be harmful to students.
Being the only producer in a monopoly market, can a monopolist charge a very high price to maximize profit? Why, or why not?From a societal point of view, can we claim that perfect competition and monopoly are equally efficient? Why, or why not? Explain.
Chapter 14 Solutions
Economics: Principles & Policy
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- Using the Monopoly model, show using diagrams how a monopolist may sustain abnormal profits for the indefinite future. Should the competition commission litigate against firms who have a dominant market position? In your answer, make sure you use a diagram, list the assumptions for the model, and give examples of real world markets that may be dominated by monopolists. The diagram used should be your own and not taken from another source.arrow_forwardIs the creation of a monopoly power due to the absence of government intervention in the market? If so whyarrow_forwardThe ultimate determinant of monopoly power is the firm’s elasticity of demand. What three factors determine a firm’s elasticity of demand? The ultimate determinant of monopoly power is the firm’s elasticity of demand. What three factors determine a firm’s elasticity of demand?arrow_forward
- If Google is a monopoly, how would breaking up affect the market price and market quantity? How do we test these hypotheses?arrow_forwardGive an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain. Define natural monopoly. What does the size of a market have to do with whether an industry is a natural monopoly? Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy. What are the three reasons that a market might have a monopoly? Give two examples of monopolies and explain the reason for each.arrow_forwardConsider that there is a continuum of consumers having different valuations for a motorcycle that are summarized by a demand curve = 125 -2. In addition, assume that consumers live for two periods t = 1,2, and a monopoly sells motorcycles that lasts for two periods. The marginal cost of motorcycle is $5. Answer the following questions. a) What is the profit for a renting monopoly? b) What is the profit for a selling monopoly?arrow_forward
- Note: This is an economics question. Based on the attached case: *What are the pros and cons of the creation of a medical marijuana monopoly? *What are the pros and cons of the legalization of medical marijuana by the Canadian government in terms of the price the users pay, the quantity of medical marijuana produced, and resource allocation efficiency during regulation and after its legalization?arrow_forwardSince the monopolist is a “price maker” and sets the price of his output, he will always charge the highest price. True or False? Why?arrow_forwardA monopolist sells boat insurance policies linked to their registrations in two states, and resales between the two states is not allowed, as the registrations are in line with the rules set in each state. The demand curves for car insurance policies in the two states are: P1 = 200 – Q1 P2 = 150 – Q2 The monopoly's marginal cost is $50. a. Find the equilibrium quantity and price charged in each state. b. How would change the outcome if the monopolist’s marginal cost increases from $50 to $70 only in the first state for the company being able to discriminate prices between states? c. What would be the outcome if the government applies a tax of $30 per insurance (unit) to the latest scenario presented in b)? d. Present a graphical representation of this case study and discuss about the profit maximising output under the different scenarios presented above. Does the government have other alternatives to intervene this market?arrow_forward
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