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What quantity will the monopoly choose to produce

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What quantity will the monopoly choose to produce?

Quantity will be chosen when MC=MR

Quantity=700

  1. What price will the monopoly charge?

Price will be chosen by checking the demand curve that faces MC=MR

Price=$14

  1. What will be the monopolies profits or losses?

Profit =total revenue-total cost

Total revenue =price of monopoly *quantity produced

Total cost = quantity produced*ATC of the quantity

Total revenue =700*$14=$9800

Total cost=700*$12=$8400

Profit=$9800-$8400=$1400

  1. What is the value of the dead weight loss?

Dead weight loss= loss to consumer surplus +loss to producer surplus

Loss to Consumer surplus=1/2 (base*height) =1/2*100*$2=$100

Loss to producer surplus=1/2 (base*height) = ½ *100*$2=$100

Dead weight loss =$100+$100=$200

What quantity will the monopoly choose to produce

How is a monopoly created?

A monopoly is created through: regulation, subsidies, nationalizations, tariffs and intellectual property.

Describe the difference between the perceived demand curves of the perfectly competitive firm, the monopoly, and the monopolistic firm.

A perfectly competitive firm perceives the demand curve that it faces to be flat that is a horizontal line. The flat shape means that the firm can sell either a low quantity or a high quantity at exactly the same price.

A monopolist perceives the demand curve that it faces to be the same as the market demand curve, which for most goods is downward-sloping. Thus, if the monopolist chooses a high level of output, it can charge only a relatively low price; conversely, if the monopolist chooses a low level of output, it can then charge a higher price.

The monopoly firm perceived demand curve is downward slopping that is by producing less you will sell less but at a higher price; conversely producing more you will sell more but a lower price.

 

P Q TC MC ATC TR MR Profit
25 0 130 0   0 0 0
24 10 275 14.5   240 24 9.5
23 20 435 16   460 23 7
22.50 30 610 17.5   675 22.50 5
22 40 800 19   880 22 3
21.60 50 1005 20.5   1080 21.60 1.10
21.20 60 1225 22   1272 21.20 -0.80

Above is a table for a monopolistic firm. Use it to answer the following three questions.

  1. Using the marginal approach, what quantity will this firm choose to produce?

Quantity to be produced is 10

First find marginal cost and marginal revenue and choose the quantity where marginal revenue is higher than marginal cost.

  1. What price will they charge?

Price charged is 24

First find marginal cost and marginal revenue and choose the price at which marginal revenue is higher than marginal cost.

What quantity will the monopoly choose to produce

  1. What are the firm’s profits?

Profit of the firm =the sum of differences between the marginal revenue and marginal cost

Profit of the firm =9.5+7+5+3+1.10-0.8= 24.8

 

Describe the entry and exit decisions of a monopolistic firm and how it leads to zero economic profits in the long-run.

Entry and exit to and from the market are the driving forces behind a process that—in the long run—pushes the price down to minimum average total costs so that all firms are earning a zero economic profit.

 

Consider a market where there is an oligopoly consisting of a large firm and a small firm that produce most of goods for that market. Each firm can choose to produce either a low output (and charge a high price) or a high output (which will cause the price to fall). The firms face the payoffs in the matrix below.

  1. What is the Nash equilibrium of this game?

Large firms play high and small firms play high

 

How do you know it is the equilibrium?

Check whether each player would change their strategy given that the other player is playing her best strategy

What if the large firm offered to pay the small firm 400 out of her earnings to produce at a low output? (Draw a new matrix that shows the change in the payoffs.) Hint: think about how the offer will change both firms’ payoffs when the small firm chooses a low output. What would the new equilibrium be?

Large play high and small play low

What type of collusion is this type of agreement called?

Explicit collusion-what quantity will the monopoly choose to produce

Do they need to strike a verbal agreement to collude? Explain.

No. Firms can offer a price match guarantee that lets the other firm know if they play Low then they will both play low but if the other firm plays high then they will both play high. This is perfectly legal.

Microsoft and Apple both provide most of the operating systems for computers. They can charge either a high price of $400 or a low price of $250. Their payoffs of doing so are represented in the matrix below. There are two equilibriums to this game.

What are they?

They choose both$400 and they both choose $250.

If there was collusion, what equilibrium would we most likely see?

They both choose $400

You are in charge of regulating this market. How large of a fine would you need to charge each firm to keep them from both choosing the price $400?

Give them any fine greater than 60 if you observe both choose $400 and they will never choose it. Actually, they will both choose $250 if you do.

Hint: Charging a fine for choosing a certain action reduces the payoff for choosing that action.What quantity will the monopoly choose to produce