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EC1301 Principles of Economics

Semester

TUTORIAL 4 14-18 September 2009 Monoply and Price Discrimination

1.

A. B. C. D.

When a firm operates under conditions of a monopoly, its price is constrained by marginal cost. constrained by demand. constrained only by its social agenda. not constrained.
2.

What is the monopolist's profit under the following conditions? The profitmaximizing price charged for goods produced is $16. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $8. Average cost for 10 units of output is $6.

$80 $100 $160 $10 In the long run, the main reason that a monopolist can earn positive economic profits while a perfectly competitive firm cannot is monopolists enjoy greater economies of scale. there are no barriers to entry in a perfectly competitive market. the monopolist faces an inelastic demand for its product. perfectly competitive firms face greater opportunity costs.
3. 4.

A. B. C. D.

What is the most likely reason that snack foods sold in vending machines is so much more expensive than the snack foods sold in grocery stores? A. Snack foods sold in vending machines come in smaller packages, so the per-package costs are higher.

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EC1301 Principles of Economics

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B.

Grocery stores buy in bulk, while vending machine companies tend to buy in smaller quantities. C. People who purchase snack foods from vending machines tend to have less elastic demand for snack foods D. Owners of vending machine companies are greedier than owners of grocery stores.

5.

Rent-seeking behavior A. consumes resources. B. may cause the government to become the tool of the rent seeker and further worsen the allocation of resources. C. Both of the above D. None of the above Consider a restaurant in Orchard Road that charges $10 for all you can eat and had 30 customers at this price. The slope of the demand curve is $0.10 per meal, and the marginal cost of providing a meal is $3. What price will satisfy the marginal principle and maximize the restaurants profit? Answer: To maximize profit, the restaurant will pick the quantity at which marginal revenue equals marginal cost. Using the marginal-revenue formula, we can compute the marginal revenue at each price and quantity:

6.

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EC1301 Principles of Economics

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Price Quantity

$10 30

$9 40

$8 50

$7 60

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EC1301 Principles of Economics

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Marginal revenue

$7

$5

$3

$1

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EC1301 Principles of Economics

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Slope = $0.10, ie, for every $1 decrease in price, quantity demanded increase by 10 When the slope is small (ie. $0.10 versus say 2), the difference between new and old quantity can be ignored, ie. use approximates: eg. At a price of $9, old quantity could be 39 or 40. MR = New Price + (slope * old quantity) = $9 + (-0.01 * 40) = $9 4 = $5, therefore Q= 40 When price is $8, MR = $8 + (-0.01 * 50) = 3, Q = 50 Marginal revenue equals marginal cost at a price of $8 and a quantity of 50 meals. Or when old quantity = 39, At a price of $9, MR = New Price + (slope * old quantity) = $9 + (-0.01 * 39) = $9 3.9 = $5.1, approximate 5, therefore Q= 40 When price is $8, MR = $8 + (-0.01 * 49) = 3.1, approximate 3, Q = 50 Answer questions 7 through 9 based on the following information: Consider the Singapore Slappers, a hockey team that plays in an arena with 8,000 seats. The only cost associated with staging a hockey game is a fixed cost of $6,000: The team incurs this cost regardless of how many people attend a game. The demand curve for hockey tickets has a slope of $0.001 per ticket ($1 divided by 1,000 tickets): Each $1 increase in price decreases the number of tickets sold by 1,000.For example, here are some combinations of price and quantity:

Price per ticket

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$4

$5

$6

$7

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EC1301 Principles of Economics

Semester

Quantity of tickets

8,000

7,000

6,000

5,000

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EC1301 Principles of Economics

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The owners objective is to maximize the profit per hockey game (total revenue minus the $6,000 fixed cost).
7.

What price will maximize profit? Answer: Marginal cost is zero. Thus the goal is to maximize revenue. This occurs at the point where MR is equal to zero, which is at a price of $6 and a quantity of 6,000 seats. If the owner picks the price that maximizes profit, how many seats in the arena will be empty? Answer: There will be 2,000 empty seats. Is it rational to leave some seats empty? Answer: This is rational since profits would actually be lower if all seats were sold at a price of $4. loss. TRUE or FALSE

8.

9.

10. Because the monopolist is the sole producer of a good, it can never incur a

Market Entry and Monopolistic Competition

11. The demand curve facing the monopolistically competitive firm is

A. B. C. D.

horizontal at the going market price. downward sloping and below the market demand curve. downward sloping and above the market demand curve. the same as the market demand curve.
12. The "competition" in monopolistically competitive markets is most likely a

A. B. C. D.

result of free entry. product differentiation. strategic interactions among sellers. facing a downward sloping demand curve.
13. Monopolistically competitive markets are like perfectly competitive markets

A. B. C. D.

because in both markets firms have some control over price. face substantial barriers to entry. face a large number of competitors. have no control over price.

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14. When a second firm enters a monopolists market,

A. the previous monopolists average cost increases as its output level decreases. B. the demand curve facing the previous monopolist shifts to the right. C. the market price rises as the average cost increases. D. None of the above
15. Monopolistically competitive markets are like monopoly markets because in

A. B. C. D.

both markets firms have some control over price. face substantial barriers to entry. face a large number of competitors. have no control over price.

16. As new firms enter a monopolistically competitive market, profits of existing

firms decline and product diversity in the market decreases. rise and product diversity in the market decreases. rise and product diversity in the market increases. decline and product diversity in the market increases. When advertising is used to strengthen brand loyalty, A. consumers become less sensitive to price differences among similar goods. B. demand for the product becomes more elastic. C. firms should lower price to increase revenue. D. consumer demand for related products is typically unaffected.
18. If you were thinking of entering the ice cream business would you make a

product that is just like the one that is already being produced? Explain. Answer: If there is a new type of ice cream that is currently earning positive economic profits then you might. Otherwise you would try to find a new type of ice cream that would allow you to earn positive economic profits until the other firms in the industry copied your innovation.
19. Department stores are monopolistically competitive because stores differ in

the amount of customer service they provide. TRUE or FALSE

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20. Monopolistically competitive firms use advertising exclusively to inform

customers about the real differences between their products and their competitors products. TRUE or FALSE

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