1. a) Draw demand, marginal-revenue, average-total-cost, and marginal-cost curves for a monopolist. Demonstrate profit-maximizing price and amount of profit.
b) On this graph, demonstrate the deadweight loss.
2. A publisher faces the following demand schedule for next novel from one of its popular authors:
Price Quantity demanded
$100 0 novels
90 100,000
80 200,000
70 300,000
60 400,000
50 500,000
40 600,000
30 700,000
20 800,000
10 900,000
0 1,000,000
The author is paid $2 million to write the book, and the marginal cost of publishing the book is a constant $10 per book.
b. Compute marginal revenue. How does marginal revenue compare to price? Describe.
c. Graph the marginal-revenue, marginal-cost and demand curves. At what quantity do the marginal-revenue and marginal-cost curves cross? What does this signify?
d. In your graph, shade in the deadweight loss. Describe in words what this means.
e. If the author were paid $3 million instead of $2 million for the book, how will this affect the publisher’s decision regarding what price to charge? Describe.
f. Assume that the publisher was not profit-maximizing but was concerned with maximizing economic efficiency. What price will it charge for the book? How much profit will it make at this price?
3.a) Give two examples of price discrimination. Identify what type of price discrimination each example is (i.e. perfect, 2nd degree or 3rd degree).
b) Name and explain the three conditions that must hold in order for a firm to be able to price discriminate.
4.
Larry and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Moe wants to make the largest possible profits. Using the graph below (you can re-draw it on your own paper or print this out), show the price and quantity of favored by each person.
Extra credit: Curly wants to maximize revenue. Show his favored price and quantity.
5. Based on market research, a film production company in Ectenia obtains the following information about the demand and production costs of its new DVD:
Price Quantity Total cost
1000 0 1000
950 5 1125
900 10 1500
850 15 2250
800 20 3500
750 25 5250
700 30 7500
650 35 10250
600 40 13500
550 45 17250
500 50 21500
a. Determine the price and quantity which maximizes the company’s profit.
b. Compute and graph demand, marginal revenue and marginal cost.
c. Illustrate the price and quantity that would maximize social welfare and the deadweight loss.