University of Toronto ECO101: Principles of Microeconomics

Department of Economics Robert Gazzale, PhD

Solved Problems: Single-Price Monopolist

Version Without Solutions

1. Ghirmay is a profit-maximizing monopolist constrained to charging the same price for each
unit sold. He is also constrained to integer quantities. His fixed cost of production is $10 per
period, and he faces a marginal cost of $2 for each unit he produces. Assume that all benefits
accrue to the buyer and all costs are borne by Ghirmay.

Quantity Price Total Producer

Q P Effect Effect MR 1 Revenue MR 2 Surplus
1 $9.00

2 $8.00

3 $7.00

4 $6.00

5 $5.00

6 $4.00

7 $3.00

8 $2.00

9 $1.00

10 $0.00

Table 1: The demand schedule Ghirmay faces. You get to fill in the rest.

(a) Table 1 gives the demand schedule facing Ghirmay’s firm. Complete the rest of the
table. Calculate MR 1 (Marginal Revenue 1) by summing up the quantity and price
effects. Calculate MR 2 (Marginal Revenue 2) by calculating the change in total
revenue from selling one more unit.
(b) What price does Ghirmay charge?
(c) What are Ghirmay’s profits at the price that maximizes total surplus? Briefly explain.
(d) You are in charge of regulating Ghirmay’s monopoly. Your goal is to get as much
total surplus as possible under the constraint that Ghirmay’s profits are non-negative.
Assuming prices must be in whole dollars, what is the maximal price you allow Ghirmay
to charge? Briefly explain.

2. Demand characterized by P (Q) = M W T P (Q) = 200 − 2Q, quantities need not be integers.
For each of the following, calculate marginal revenue, and decompose marginal revenue into
price and quantity effects.

(a) Q = 25 for the single-price monopolist.

(b) Q = 50 for the single-price monopolist.

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University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

(c) Q = 75 for the single-price monopolist.

(d) Explain the relationship between quantity and size of the price effect for the single-price
monopolist.
(e) Assume total cost given by T C(q) = F + 40q. Calculate the following under the assump-
tion of a monopolist constrained to charge the same price for each unit:
• elasticity of demand at the profit-maximizing price;
• the largest F where this monopoly is profitable;
• consumer surplus; and
• deadweight loss (assuming assumption BIG).
(f) Assume instead that M C = 20 + Q2 . Calculate the following under the assumption of a
monopolist constrained to charge the same price for each unit:
• consumer surplus;
• producer surplus; and
• deadweight loss (assuming assumption BIG).

3. Assume quantities must be integers. Demand schedule given by Figure 3, with marginal cost
of production equal to $8 per unit.

Q 1 2 3 4 5 6 7 8 9 10 11
P $32 $29 $27 $23 $21 $19 $17 $14 $11 $7 $3

Table 3: Demand schedule.

(a) Assume a profit-maximizing monopolist constrained to charging the same price for each
unit. For each unit from 1 to 11, calculate the quantity effect, the price effect and the
marginal revenue.
(b) Assume a profit-maximizing monopolist constrained to charging the same price for each
unit. For each unit from 1 to 11, calculate the total revenue received from selling exactly
that many units. Using this calculation, calculate marginal revenue again.
(c) Assume a profit-maximizing monopolist constrained to charging the same price for each
unit. Calculate PS, CS, TS and DWL. (Assume for any unit transacted, all societal
benefits are captured by the consumer and all societal costs are borne by the producer.)

4. You are a monopolist facing a demand curve given by M W T P (Q) = 36 − 4Q. Your cost
function is C(Q) = F + 4Q, where F is a per-period fixed cost. Assume that quantities need
not be integers.

(a) In dollars, what is your marginal cost? (Hint: What are your total costs if you produce
0 units? What are your total costs if you produce 1 unit? The marginal cost is the
difference between these two numbers.)
(b) Assuming that you produce and are constrained to charging the same price to all cus-
tomers, what quantity do you produce (QM ) and what price do you charge P M ?
(c) Hopefully, you have found that price is above marginal cost for all QM units. This is
good. Hopefully it will be enough to cover those fixed costs! (Clearly, if fixed costs are
really small, you will want to produce. Likewise, if fixed costs are super huge, you will

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University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

not want to enter this market even though you have a monopoly.) Assuming that you
are constrained to charging the same price to all consumers, what is the maximum F at
which your firm can make an economic profit?
(d) In a graph, depict:
• the demand curve,
• the marginal revenue curve, and
• the marginal cost curve;
and identify
• the efficient quantity (labelled Qeffic ),
• the quantity selected by the monopolist (labelled QM ),
• the price charged by the monopolist (labelled P M ), and
• the deadweight loss (labelled DWL).
(e) If you were setting a price to maximize total surplus as opposed to firm profits, how
much more surplus could you create?
Q
5. Assume MWTP for the a Graphing Calculator iPhone app is M W T P (Q) = 10 − 10,000 . As-
suming that Apple has already provided sufficient bandwidth for the App Store, the marginal
cost of producing one more unit is $0.00.

(a) What is the price that maximizes producer surplus?

(b) What is elasticity of demand at the price that maximizes monopolist profits? (Use the
“calculus” method to calculate elasticity at a particular point.)
(c) Given that the Graphing Calculator app has already been written, what is the price that
maximizes Total Surplus?
(d) Instead of the price that maximizes producer surplus, the actual price is P = 1. What
is the exact deadweight loss with a price of $1?
(e) Suppose Apple announced that starting today and continuing forever, the price of all
iPhone apps will the the price you identified 5c, and this in no way affects marginal
costs. Argue that this policy may not, in fact, maximize Total Surplus. (Hint: Think in
the long run.)
(f) Explain why with M C = 0, the single-price monopolist chooses the price where demand
is unit elastic, whereas with M C > 0, the single-price monopolist chooses a price where
demand is elastic.

6. Currently, patents in the U.S. and Canada last 20 years from the date on which the application
for a patent is filed. The effective patent on a new prescription drug is about 8 years, as it
takes about 12 years to test a new drug for safety and efficacy and get approval from the U.S.
Food and Drug Administration or Health Canada. When the patent on a drug expires, any
approved manufacturer can produce and sell the drug. (In general, when a drug comes off
patent, there are many manufacturers who are approved to sell a generic version. You can
assume a competitive market after the drug comes of patent.) True, False, or Uncertain:
A policy that increased the length of patents for new drugs from 20 to 32 years would result
in a decrease in Total Surplus.

7. While riding the subway in NYC recently, I noticed that there were some advertisement
locations where there no advertisements. While it might be the case that these advertisements

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University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

were stolen by passengers looking for cheap home decorating, let us assume that the quantity
of advertisements the MTA3 sold was less than the total space for advertising. True, False
or Uncertain: The MTA could have increased profits by selling more advertisements.

8. At P = 10, the monopolist sells 100 units. At P = 9, the monopolist sells 115 units. TFU:
If the profit-maximizing monopolist must choose either P = 10 or P = 9, she chooses P = 9.

9. At P = 10, the monopolist sells 100 units. At P = 11, the monopolist sells 95 units. TFU: If
the profit-maximizing monopolist must choose either P = 10 or P = 11, she chooses P = 11.

10. You know two things: 1) you are a single-price monopolist; and 2) demand is characterized
Q
by P (Q) = 200 − 1000 . Your pricing manager suggests setting P = $75. TFU: You should
fire your pricing manager.

11. A monopolist constrained to charging the same price for each unit has T C(Q) = 250 + 2Q
and faces demand M W T P (Q) = 12 − Q8 . Assuming it is required to pay its fixed costs, what
are its economic profits?
Hint you will not get on a term test: Each time you increase quantity by one unit, but
how much does total cost increase? This sounds conspicuously like marginal cost.

12. While constant MC (i.e., a natural monopoly) will usually lead to a monopoly, a monopolist
can have increasing marginal cost.
A monopolist constrained to charging the same price for each unit has M C(Q) = 40 + Q4 and
faces demand M W T P (Q) = 100 − Q8 .

(a) Find the profit-maximizing quantity and price. (Note that because marginal cost is
not constant, we can not use our shortcuts to find either the monopolist’s price or
quantity.)
(b) At what per-period fixed cost does this monopolist earn zero economic profits.

13. Table 5 shows the supply and demand schedules in a particular labour market. Assume all
benefits accrue to the buyer and all costs are borne by the supplier. There are two possible
assumptions about the market.

Assumption 1 Table 5 depicts the supply and demand schedules resulting from eight work-
ers each willing to supply up to one unit of labour and eight firms each of which demands
up to one unit of labour.
Assumption 2 Table 5 depicts the supply and demand schedules resulting from eight work-
ers each willing to supply up to one unit of labour and one firm demanding up to eight
units of labour. The firm must pay each worker it hires the same wage.

Q 1 2 3 4 5 6 7 8
MWTP $35.5 $30.5 $27.5 $25.5 $23.5 $21.5 $19.5 $17.5
MC $11 $12 $14 $16 $18 $20 $23 $26

Table 5: A labour market.

3
The Metropolitan Transportation Authority, the agency that runs the NYC subways.

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University of Toronto ECO101: Principles of Microeconomics
Department of Economics Robert Gazzale, PhD

(a) If Assumption 1 holds, what is the efficient quantity?

(b) If Assumption 1 holds, what is an equilibrium wage?
(c) If Assumption 1 holds, what is the largest equilibrium consumer surplus?
(d) If Assumption 1 holds, what is the equilibrium deadweight loss?
(e) If Assumption 2 holds, what is the efficient quantity?
(f) If Assumption 2 holds, what is the equilibrium wage?
(g) If Assumption 2 holds, what is the largest equilibrium consumer surplus?
(h) If Assumption 2 holds, what is the equilibrium deadweight loss?
(i) If under either Assumption 1 or 2 there is equilibrium deadweight loss, what price control
maximizes total surplus?

14. You manage a software development firm that currently has 100 computer programmers,
each of whom earns $100 per hour. A client offers you a project. Your only cost would be
programmers. With 1000 hours of programmer time you will certainly complete it, and upon
completion the client will pay you $125,000. Elvis say, “Even if you need to hire additional
programmers, doing the project will be profitable.” Agree, Disagree or It Depends.

15. You manage a software development firm that develops software for financial services firms.
Assume your only cost is wages for computer programmers. You currently hire 20 computer
programmers, paying each $200,000 per year. If you start to develop software for healthcare
firms, you would need to hire 10 programmers, paying each $225,000 per year. Healthcare
software development guarantees you revenues of $2,500,000 per year. True, False or Un-
certain: It is profitable to enter the market for healthcare software development.

16. Tigist works a total of 40 hours each each week. She can work as many hours as she likes as
a programmer earning $40 per hour. She also does personal training, with demand for her
services given by Q(P ) = 60 − P2 . For her personal training business, she rents a studio for
$100 per week, but does not pay herself a wage. That is, each week she gets all of the personal
training revenue left over after paying for the studio plus her earnings as a programmer.

(a) Assume that Tigist incorrectly uses only explicit costs in calculating her optimal hourly
rate for personal training. How much money does she make each week from all sources?
(b) Assume that Tigist correctly calculates her optimal hourly rate for personal training.
How much money does she make each week from all sources?
(c) What is the most that she is willing to pay each week to rent a studio for her personal-
training side hustle?

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