Compared with the mayor’s plan, who is better off with this admission fee

Compared with the mayor’s plan, who is better off with this admission fee

Policymakers can respond to the inefficiency of monopoly behavior in four ways. They can use the antitrust laws to try to make the industry more competitive. They can regulate the prices that the monopoly charges. They can turn the monopolist into a government-run enterprise. Or if the market failure is deemed small compared to the jnevitable imperfections of policies, they can do nothing at all.

  1. In your diagram from the previous question, show the level of output that maximizes total surplus. Show the deadweight loss from the monopoly. Explain your answer.
  2. Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy.
  3. What gives the government the power to regulate mergers between firms? From the standpoint of the welfare of society, give a good reason and a bad reason that two firms might want to merge.
  4. Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost.

The author is paid $2 million to write the book, and the marginal cost of publishing the book is a constant $10 per book. a. Compute total revenue, total cost, and profit

at each quantity. What quantity would a profit-maximizing publisher choose? What price would it charge?

b. Compute marginal revenue. (Recall that MR = A.TR/ A.Q.) How does marginal revenue compare to the price? Explain.

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?

326 PARTV FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY

d. In your graph, shade in the deadweight loss. Explain in words what this means.

e. If the author were paid $3 million instead of $2 million to write the book, how would this affect the publisher’s decision regarding what price to charge? Explain.

f. Suppose the publisher was not profit- maximizing but was concerned with maxi- mizing economic efficiency. What price would it charge for the book? How much profit would it make at this price?

  1. A small town is served by many competing supermarkets, which have the same constant marginal cost. a. Using a diagram of the market for groceries,

show the consumer surplus, producer surplus, and total surplus.

b. Now suppose that the independent super- markets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss?

  1. Johnny Rockabilly has just finished recording his latest CD. His record company’s marketing department determines that the demand for the CD is as follows:

Price Number of CDs

$24 10,000 22 20,000 20 30,000 18 40,000 16 50,000 14 60,000

The company can produce the CD with no fixed cost and a variable cost of $5 per CD. a. Find total revenue for quantity equal to

10,000, 20,000, and so on. What is the marginal revenue· for each 10,000 increase in the quantity sold?

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