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ME Tutorial 15 ME Tutorial 15

Q1. Consider the monopolist that faces the following Q1. Consider the monopolist that faces the following
market demand and total cost function: market demand and total cost function:
Q = 22 P/5 Q = 22 P/5
TC = 100 10Q + Q2 TC = 100 10Q + Q2
a) Find the profit-maximizing price (Pm) and output a) Find the profit-maximizing price (Pm) and output
(Qm) for this firm. At this pricequantity (Qm) for this firm. At this pricequantity
combination, how much is consumer surplus? combination, how much is consumer surplus?
b) Calculate monopolys economic profit? b) Calculate monopolys economic profit?
c) Suppose that government regulators required c) Suppose that government regulators required
the monopolist to set the selling price at the long- the monopolist to set the selling price at the long-
run, perfectly competitive rate. At this price, what is run, perfectly competitive rate. At this price, what is
consumer surplus? consumer surplus?
d) Relative to the perfectly competitive long-run d) Relative to the perfectly competitive long-run
equilibrium price, what is the deadweight loss to equilibrium price, what is the deadweight loss to
society at Pm? society at Pm?

Q2. XYZ Ltd., a monopolist, aims at profit maximization. Q2. XYZ Ltd., a monopolist, aims at profit maximization.
The fixed cost of the firm is Rs 200 and its AVC is The fixed cost of the firm is Rs 200 and its AVC is
constant at Rs 30 per unit. XYZ Ltd. sells goods in constant at Rs 30 per unit. XYZ Ltd. sells goods in
Karnataka and Andhra Pradesh. The estimated Karnataka and Andhra Pradesh. The estimated
demand functions for the good in Karnataka and demand functions for the good in Karnataka and
Andhra Pradesh are: Andhra Pradesh are:
PK = 40 - 2.5QK PK = 40 - 2.5QK
PA = 120 - 10QA PA = 120 - 10QA
a. If price discrimination is not practiced, what is the a. If price discrimination is not practiced, what is the
output produced by XYZ Ltd. to maximize revenue. output produced by XYZ Ltd. to maximize revenue.
b. If price discrimination is practiced by XYZ Ltd., what b. If price discrimination is practiced by XYZ Ltd., what
is the profit maximizing output? is the profit maximizing output?

Q3. A typical firm in a monopolistically competitive Q3. A typical firm in a monopolistically competitive
industry faces the following demand and total cost industry faces the following demand and total cost
equations for its product. equations for its product.

a. What is the firms short-run, profit-maximizing a. What is the firms short-run, profit-maximizing
price and output level? price and output level?
b. What is the firms economic profit? Diagram your b. What is the firms economic profit? Diagram your
answers. answers.

Q4. Suppose that International Dynamo is a contractor in Q4. Suppose that International Dynamo is a contractor in
the oligopolistic aerospace industry. International the oligopolistic aerospace industry. International
Dynamo faces a kinked demand curve for its Dynamo faces a kinked demand curve for its
product, which is defined by the equations product, which is defined by the equations
Q1 = 200 2P; Q1 = 200 2P;
Q2 = 60 0.4P Q2 = 60 0.4P
Suppose further that International Dynamo has a Suppose further that International Dynamo has a
constant marginal cost MC = $50. constant marginal cost MC = $50.
a. Give the price and output level for International a. Give the price and output level for International
Dynamos product. Calculate profit as well. Dynamos product. Calculate profit as well.
b. Determine the range of values within which b. Determine the range of values within which
marginal cost may vary without affecting the marginal cost may vary without affecting the
prevailing market price & output level. prevailing market price & output level.
c. Diagram your answers to parts a, b, and c. c. Diagram your answers to parts a, b, and c.
Solutions:
Q1.

c. The perfectly competitive long-run equilibrium price is defined as


P = MC = ATCmin

d.
Q2.
a) When price discrimination is not practiced by the monopolist , PK =PA = P
PK = 40-2.5QK
QK = 16-0.4PK
PA = 120 10QA
QA = 12- 0.1PA
Total output sold by the monopolist = Q= QA + QK
Q= 28-0.5P
TR=28P-0.5P2
d(TR)/dQ = 0; will give P=28,
Q= 28-0.5(28) = 14 Units
b) When price discrimination is practiced,
MRK = MC; MRA =MC
When PK= 40-2.5QK
TRK=40QK - 2.5QK2
MRK = 40-5QK
Thus, profit maximizing output in Karnataka:
40-5QK = 30; QK = 2
TRA = 120QA- 10Q2A
MRA = 120-20QA
Thus, profit maximizing output in Andhra Pradesh
120 20QA = 30
QA = 4.5
Profit maximizing total output for the monopolist = 2+4.5 = 6.5

Q3.
a) Use MR = MC,
60-6Q = -5 + 2Q
Q = 8.125, P = 35.625
b) Profit = TR TC = 164.0625

Q4.