Welker s Wikinomics practice activities. Unit 1.5 Theory of the Firm Pure Monopoly

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Clifford Eaton
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1 Unit 1.5 Theory of the Firm Pure Monopoly 1. Assume that Welcorp is a purely monopolistic publisher of Economics textbooks. All econ texts available are published by the firm. The table below shows the quantity of textbooks the firm expects to sell at a range of prices. Calculate Total Revenue P*Q and Marginal Revenue at each level of output, filling in the blank boxes in the table. Price Quantity in textbooks Total Revenue in dollars Marginal Revenue ΔTR ΔQ a. Derive a demand equation for Welcorp s Economics textbooks. video lesson on deriving demand equations from data can be viewed here b. Explain the relationship between the price of textbooks and Welcorp s marginal revenue at different levels of output.

2 2. Welcorp s short run costs of production are shown on the table below. Calculate and fill in the boxes for the firm s total cost TC, marginal cost MC and average total cost ATC. Quantity in thousands Total Variable Cost in thousands of dollars Total Fixed Cost in thousands of dollars Total Cost in dollars TVC+TFC Marginal Cost ΔTC ΔQ Average Total Cost TC Q Plot Welcorp s Demand and Marginal Revenue curves, and its Marginal Cost and Average Total Cost curves on the graph below:

3 a. Identify Welcorp s profit maximizing quantity and price on the graph above. Explain how you determined this quantity and price. b. Shade the area representing the firm s economic profit or loss. Indicate whether Welcorp is earning profits, losses or breaking even. c. Calculate the firm s economic profit or loss show your calculation: 4. What will happen to Welcorp s profits or losses in the long run, assuming demand for Economics textbooks remains constant? Explain.

4 5. Now assume that a new firm, Maley Inc, begins publishing Economics textbooks. The new competition causes demand for Welcorp s texts falls by 2,000 books at every price. Assume Welcorp s costs remain unchanged. Create a new demand schedule for Welcorp, and calculate the firm s total and marginal revenues: Price Quantity in textbooks Total Revenue in dollars Marginal Revenue ΔTR ΔQ Plot Welcorp s new Demand and Marginal Revenue curves, and its Marginal Cost and Average Total Cost curves on the graph below:

5 a. Identify Welcorp s new profit maximizing quantity and price on the graph above. How did they change compared to the firm s original quantity and price? b. Shade the area representing the firm s new level of economic profit or loss. Indicate whether the firm is earning profits, losses or breaking even. c. Calculate the firm s new economic profit or loss show your calculation:

6 7. Assume that Maley Inc is forced to shut down due to a corruption scandal involving its CEO. Demand returns to its original level for Welcorp s textbooks. In addition, Welcorp has acquired new printing technology that reduces its total costs including its fixed costs by half at every level of output. Create a new cost table for Welcorp reflecting the firm s new total, marginal and average total costs. Quantity in textbooks Total Cost in dollars Marginal Cost ΔTC ΔQ Average Total Cost TC Q Plot Welcorp s Demand and Marginal Revenue curves, along with its new Marginal Cost and Average Total Cost curves on the graph below:

7 a. Identify Welcorp s new profit maximizing quantity and price on the graph above. How did they change compared to the firm s original quantity and price? b. Shade the area representing the firm s new level of economic profit or loss. Indicate whether the firm is earning profits, losses or breaking even. c. Calculate the firm s new economic profit or loss show your calculation: 9. Using the graph you drew for number 8, explain whether or not the market for Economics textbooks is allocatively efficient.

8 10. Using the graph you drew for number 10, explain whether or not Welcorp, the monopolistic textbook publisher, is achieving productive efficiency. 11. A new application comes out which allows anyone to publish their own digital, e textbook and to sell it in an online market for $15 or less. The large profits earned by Welco lead hundreds of profit seeking Economics teachers to write their own e texts and to put them for sale in the online market. On the graph below, show the effect of the entrance of hundreds of new textbook authors into the market on the demand, marginal revenue, and economic profits earned by Welcorp. Assume the equilibrium price in the market for textbooks falls to $15 but the firm s costs remain constant.

9 12. At the equilibrium price of $15, will Welcorp be earning economic profits, losses, or breaking even? Explain. 13. How will the entrance of new Economics textbooks into the market affect Welcorp in the long run assuming its costs of production remain constant? 14. How will the entrance of new Economics textbooks into the market affect: a. allocative efficiency in the market for Economics texts? b. productive efficiency among the publishers of Economics texts? c. Perfect competition is always a more desirable market structure than monopoly Provide three arguments for this claim and three arguments against this claim. Arguments for: d. #1:

10 e. #2: f. #3: Arguments against: a. #1: b. #2: c. #3:

Monopoly. 3 Microeconomics LESSON 5. Introduction and Description. Time Required. Materials

Monopoly. 3 Microeconomics LESSON 5. Introduction and Description. Time Required. Materials LESSON 5 Monopoly Introduction and Description Lesson 5 extends the theory of the firm to the model of a Students will see that the profit-maximization rules for the monopoly are the same as they were